So very welcome, everyone. My name is Kristi Johansson. I'm heading up Investor Relations at the Volvo Group. I'm glad to see that we have so many coming in for our Investor Day here in New York, and I'm also glad that we have a lot of participating people on the webcast. Today, we will, you can say, go through basically 2 main topics.
We will start with today's business and all the work we are doing to fine tune it and optimize the existing business and look at the performance of that. And then we have a second, you can say, focus area after the coffee break. We're going to do a deep dive into our U. S. Truck business, our Financial Services business.
And then we're going to round off and let you know a bit where we are in the advancement of the new technologies and automation and electrification. So with that, I actually leave the stage to the CEO, Martin Lundstedt. Please, Martin.
Thank you, Christa. I don't need the mic. You don't need that one, but you need
that one.
Yes. So also from my side, most welcome to this Investor Day. Good to see so many people here. And I hope also that you will find this day equally interesting as we are doing. Maybe we are a little bit biased towards this business, but for us, it's really 20 fourseven topic.
We were sitting yesterday night with a key customer and we always say that we don't have a bad conscience about being out and having a good dinner together because we're discussing from when we are coming into the door and where we're leaving the restaurant, we're talking about how we can improve things together. So great to be here and great to be in America. A lot of dynamics happen in North America, obviously, when it comes to logistics and transportation infrastructure. And therefore, also we found a very good moment in time for the Volvo Group also to have the Investor Day this year in New York. Strong lineup, I have to say.
I think the best KPI ever is Staunton and colleagues. Okay, you can have this cash flow and things like that. That is results. But standing colleagues is the best KPI if you really want to achieve good results for tomorrow. And my standing colleagues here on the first floor that you will see is Lars Denkries, who is the Chief Technology Officer of the Volvo Group.
He will come back later and tell you looking to sneak pre sneak a little bit into the future. We have Jan Graanda, the Deputy CEO and CFO. We have Kina Wilke, who is the EVP for Communications and Corporate Relations. Dennis Leggen, our President of Mack Trucks and also the President of Group North America. And on boarding soon in this role also, Marty Weisberg.
And you know Marty from maybe some of you I know that some of you guys were in Eskilstuna last year. And during that event, Marty had a capacity of President of Volvo Construction Equipment. And now he has over that duty to the next fellow here and that is Melki Jernberg, who is the President of Volvo Construction Equipment since the 1st January. And as you know, Marti then will take the role after Danny here, Estrom Sommer. So and then Helena is my assistant also and then obviously the whole team.
So just take the opportunity to network and to take the opportunity to really discuss different topics together with the team here today. Okay. So just to get started with why we are into an interesting time. Logistics has always been the driver of prosperity, obviously. But as we speak, there are a lot of dynamics happening.
Rapid global population growth, you know that, and not at least in emerging markets, and we will come back to why that is important for us. Rapid urbanization, as you know, and not at least also then in our emerging countries such as China, India, Southeast Asia, but also Africa emerging very rapidly now. And as you can see here, the development not at least between today and up to 2,030 will take place in those areas. Middle class growth, very important. As from 2,005 to 2,030, more than 1,500,000,000 people in the world actually will come into the middle class in terms of consumption patterns, etcetera.
And that is driving logistics, both of goods and people. And then obviously, e commerce that is driving new patterns of transportation and that will also be changed. But what is more important is that all these four factors is also coming together when it comes to sustainability and the CO2 noise and other type of emission targets for the future. And there we see not only legislative demands, but also a lot of demands from consumers, from customers and from customers' customers. And when you look at these different factors, you see another type of dynamic also for the future.
What is important to remember is that logistics can also be one of the main KPIs to see how developed countries when it comes to the GDP, etcetera. And as more advanced you are, the more efficient the logistics are. You see the Nordic countries, very efficient logistics and 6%, 7%, 8% of GDP is logistics. And as you move up, so to speak, you see the potential. China, for example, 18% means that and we have discussed that before.
1st and foremost, what has happened in China is obviously that when it comes to the different parts of the supply chain, T1, T2, T3 in different production flows, a lot of things have happened in automation, in investments, etcetera, but still the logistical systems are lagging. Then obviously, you have a big manufacturing footprint in China. That is also playing a part. But our calculations and also what we see is that this is a drag for China of approximately 5% or 6% when it comes to efficiency, and they will, of course, close that gap. You see India, interesting, 13%.
And the reason is that they have not been making the efficiency in the different parts of the value chain yet. When that will happen, actually, the percentage point here will increase and then it will go down again. So we will see in the coming years India moving to 15%, 16%, 18%, etcetera. And then as India will address logistics as one of the factors for a better GDP distribution, that will come down as well. But this is showing a great potential for our type of solutions because when you are addressing these imperfections in the logistical system, you need more of a TCU and life cycle analysis of logistics.
And there, you are starting to think about mileage, uptime, fuel consumption and total cost of operation, obviously. So we see that now, not at least in China, very rapid development into more advanced logistical systems. But even in countries like in Western Europe, where you have 8%, 9% share of GDP as of logistics, you have a lot of imperfection obviously. And the reason of that is that logistics are very fragmented, a lot of different stakeholders. It has still been very transactional, purchasing, selling, sitting and negotiating the 1 2 percentage point of price, which in reality is just a waste of time.
Because if you're really working together, then you can take out maybe 20%, 25% of the cost. And therefore, one of the key things for us now, not at least with connectivity that we'll come back to, is to drive the opportunities that you have also in very advanced logistical chains. You see 25% of the time, even in the B2B business, we are selling production equipment and it's only used 25% of the time. I mean, if you are running a production line, it is unheard of to use it only 25%. And this, those are production lines.
50% of the available load capacity is not utilized over the life cycle. You see how much of the total fuel consumption is really used when you do the full calculation of doing the actual work of moving goods or people. And then also, of course, infrastructure utilization, etcetera. So enormous potential and also linked to the challenges that we have of urbanization, of CO2 targeting, sustainability, etcetera. So here, the whole business and that's the reason why so many are into it also, start ups, of also traditional industries moving into logistics and to infrastructure because the potential is enormous obviously.
So for us and you have heard that since we started the new strategy for Volvo in 2016 that driving prosperity through transport solutions is our mission, and it's very well connected both to our mission as a group to make a profitable growth, but also to drive society in the right direction and to be truly sustainable. We are very proud of that and find and we find a lot of energy working with this mission together actually. Having said that, coming in a little bit where we are right now and why this journey will continue. 10 years of acquisitions, geographical reach, getting scale and synergies up to 2011, you know that. I think when it comes to geographical reach and when it comes to the scales we are there, there are still quite some things to do on the synergies even with, so to speak, the traditional areas, but we are working very close on that and to find the right levels of synergies in relation to agility and speed.
Then a couple of years, very important for the group, closing the gap, so to speak, take out overlaps in distraction after all the acquisitions, launching, not at least in Europe, new products, cost efficiency programs, etcetera. And since then, almost 2 years now, the next step for the group, even more customer centric, decentralized organization, P and L and brand responsibility and thereby using also all the assets that we have been invested into. And I will go through some of the most important assets for the future and why that makes sense for the Volvo Group here. 1st and foremost, and that is that we have a good position already today when it comes to market shares. Here you see the truck market shares globally for and also region by region for the group and our different brands.
And as you can see, we are north of 15% in most of the regions and also good combination of Volvo Trucks as a global brand, but also very strong regional brands that make sense also in our business we have, not at least when it comes to trust, relations, working closely together. And we will hear more of that, for example, here in North America than with Mack. Dan is always referring to that, that we have the delta between the full potential and where we are today. And I think we are on our way to close that. We'll see that later.
But also what is important, as you can see here, is that we also have already today invested in a very, very strong geographical coverage when it comes to service points. Often, we are getting the question what will happen with dealers, how will the value chain look like in the future with new solutions. And obviously, that will change over time with connectivity, with automation, electromobility, what is the scope of service, etcetera. But what will not change is that we have a close relation with our customers in their daily operations, be it in a confined area like New York, for example, for waste collection or in different types of more global flows like long haulage. To have services close to that operation will continue to be a determining factor.
And there, we have a very good and strong footprint, not only when it comes to the coverage, already made investments, but we also have a lot of really committed partners in our, so to speak, franchise agreements that are living and breathing our different brands and are ready to invest even more. And you will see some great examples of that later. Then we will reveal some of those happening in North America. Also on the Construction Equipment side, you see the same type of picture. What has one of the key things that we have been discussing is that often you have seen that we have discussed, okay, where are we in terms of position in the yellow machinery space.
But you can measure that to your own advantage. And if you combine everything to a big cocktail, maybe we are number 3, you're 4 or something like that, but it's completely relevant to measure like that. You must make sure that you have the relevant position in the main segments. And our 3 main segments obviously is articulated dump trucks. I mean, that was invented by Volvo and we are ADTs.
But also, obviously, other type of heavy equipment, excavators, wheel loaders, where we already have strong position. But as you can see, the biggest potential that we have and also the biggest gap between actual performance of our equipment and market share is excavators. And we are continuing to address that both with SDLG obviously and with the Volvo brand, and we are doing so very successfully. Having said that, also when it comes to sales and service points, well invested, strong partners and partners ready to continue to invest into this business. Other important factor for us moving forward, not at least when we are talking about how to use the new technologies, new innovation, new business models for the future, it's not only that you're getting hold of that and you can control those technologies, it's also to understand the different industrial verticals.
Because the nature of our business is that, yes, obviously, we're building from a modular system in a smart way combining different components, parts in order to make different applications. But it starts with what industry are you serving, what is the logic of that industry and how can we bring value by combining a smart modular product system together with a smart modular service system and thereby creating a tailor made solution for these industrial verticals. And as you can see here, many of these industrial verticals like ports, quarries, mines, cities, urban transportation will fit very well when it comes to taking step by step onboarding of new technologies, such as automation in different steps, etcetera. And at the same time also, by mastering the industrial knowledge in these verticals, we can also combine different strengths of the group. Just take we had that discussion yesterday, for example, when it comes to waste collection with one very important customer for us.
They say, how can Volvo be even better serving us with the full scope? And here, we also have the potential really working with that. But well invested, we know our customers in the different industrial verticals. This will be super important asset when new technologies should be applied. It will not only be a say, okay, we are putting a new product into the market with X and Y batteries.
It's about how do we apply it. And having said that, coming to the next level of that is the application excellence, understanding how does the cost and revenue chart look like for different geographies, for different maturity levels or logistical systems, for different applications, industry verticals, etcetera. And by knowing this by heart, then we can create true value out of innovation, both when it comes to services and to products. And as you can see here, it is completely different pictures if you are in mining in Indonesia, where you can see, for example, that vehicle is a pretty big investment given the fact that salaries are different than you talk to drivers in Europe, for example. Repair and maintenance over the life cycle in mining, completely different if you're driving normal long haul, it's 40 tonne in U.
S. Or in Europe, for example. So knowing and starting from this side and not at least using the fact that we have the Volvo Financial system also into this system is super important to get the starting point. So segmented application excellence, we have it. We need to continue to build on it.
We need to combine that between products and services. And we are also well invested when it comes to, so to speak, where are the markets heading. And if you see the unit sales today in the world, unit, not value, because then you have I mean, the value tools of these 2, 50%, 50% here is completely different, obviously, so far. But in unit sales, you see that 50% in China and India together and 50% is rest of the world in number of units. And in that 50% India and China, we are today well positioned and working very actively.
Obviously, with strong partnerships of Dongfeng in China, strong partnership with Aiger in India way down the road and also very strong partnership and market presence with SDLG also obviously for Volvo Construction Equipment. When we look into the situation where we are now talking about being relevant, and obviously, we are complementing that also with Volvo Trucks. Dongfeng in China today, number 4. We have a lot of focus today on actually driving also Dongfeng together when it comes to tractors, when it comes to more advanced logistics because we see a big shift in China when it comes to logistics. Also when it comes to the profitability levels, creating necessary maneuverability, we are well on our way.
Lots of good things are happening here. Eicher, number 3 in India and also very strong position on medium duty, and we are continuing to drive the heavy duty development. Also good financial performance. And SDLG, obviously, when it comes to wheel over China, for example, number 2, but also good development in other segments and a strong operating margin also for investing into the future. So good developments in the 50 percent of the unit sales in the world, complementing that, as I said, also with both the UD and Volvo Trucks primarily brands.
Well invested, and I will always, when we meet, come back to the cost system, our modular approach and the importance of continuing to build on this. What this is all about is that we are using together different type of component systems in a smart way so we can combine that 4 different brands, obviously, when it comes to the truck side, but also for different business areas. The most long lasting history of the car system within Volvo is the SBN Powertrain, even though that we have still work to do there on the medium duty, as you know now, we are introducing the medium duty for both Volvo Construction Equipment and for Volvo Penta in steps, but also when it comes to other systems here. And not at least when we will come to the future technologies where we are building a strong modular backbone investments for both automation, connectivity and electromobility, and Lars will address that much more in detail later on today here. But very, very important, we have invested more than 15 years to get to the level where we are in the car system.
I should say that we are on a very advanced level that we can leverage much more of that also into the future and thereby also keeping the right balance of R and D investments and also making sure that we have a leading position when it comes to the technological development because that is often a question we get from investors with good reasons. What does it take for you guys to continue to invest in the technologies that you need to do, the well known, but also to add on electromobility, automation and connectivity. And then obviously, you need to combine the scale that we have in a smart way, so you can, so to speak, get more out of what you have, so to speak. And here, I think the 15 years of development of the cost system has made us to a level where we foresee that we can continue more or less on the same R and D level as we have, but redirect much more of those money into the new technologies, thanks to the work that has been done in our organization over the last 10, 15 years here in the engineering organization.
Just to show an example, what is cost? How does it work? And this is, of course, very simplified, but I think it could be important to show that. Obviously, it starts, maybe not the best pedagogical, but it starts from the bottom. And that is what need does a customer have?
What need does a customer have when it comes to geographies, segments, applications? And there, no compromises. If we cannot make the tailor made solution for each application and geography, we will be out. So it starts with not compromising on the customer needs, obviously. But once you have defined that, how can you, in a smart way, combine different type of components, systems in order to gain scale, gain technology sharing, competence, knowledge in different geographies without compromising the different segments.
And it works basically like this then. Depending on what geography, what application, you can have different combinations and still get the variation needed in order to have the best specific application for each customer. This is something that we are working extremely hard with. It requires discipline. But once you have that discipline in place, it gives a lot of maneuverability, both when it comes to investments, but also when it comes to using, so to speak, technology and our engineering resources and competence in the best possible way.
Very proud that we are in this position, and we will continue to drive this way even more into the future, as I said. And we have a number of examples later on here. So we're invested for the future. As I said, I will just end this first session on these notes. Strong customer base and rolling fleet, super important for the future.
The future means that you need to work much more in an integrated fashion with your customers in order to gain all the values that you can get out from the new technologies, connectivity, etcetera. We have a well performing sales and service network up and running, engaged, motivated and ready to invest into the future, both our own captive network, but also all our partners around the globe, very proud of that. Well invested in industrial backbone, as Webb said. We foresee now that the PPE levels in terms of CapEx in relation to depreciation can be much more aligned, 1 to 1, than it has been historically because we have been investing a lot and we can grow from where we are. As I've talked about, 15 years of investment in the car system gives us also a very good and strong platform to grow from.
Segmented application excellence, even more important now when solutions will be even more integrated. Product services, but also operational factors will play in a very important And here, we have also the base for the future, not at least in the different industrial verticals, as we have said. And scale where it matters. Scale is, as always, one of the most overrated awards. It's easy to calculate on an Excel sheet, But if you're not getting scale right, it will destroy you.
So you need to define where scale matters and where scale doesn't matter, where agility, speed, closeness, entrepreneurship, the owner's mentality matters. And that is what we're working with. And then people and talent, stunning colleagues is the number one KPI. I'm very proud to have my line up here and the whole organization where we're heading. So with that, I will leave the word to one of the guys, and that is no one less than Mr.
Jan Gerander, our Deputy CEO and CFO.
Thank you, Martin.
Thank you.
What would the Capital Markets Day be without some financial figures? So that would be nothing, I guess. I don't think it's the key purpose I should talk about financial. You're pretty well informed about that, and we do it every quarter. So but a little bit to talk about where we are in terms of our transformation.
And Martin talked about it before the different phases that we as a company have been through and that we are into today. And if we then focus on the transformation program or the transformation period that we had somewhere between 20122015. You can see that, that was a lot of hard work in terms of basically rightsizing, you can say, of our cost level, which basically was wrong. Rightsizing, you can say, of our cost level, which basically was wrong. Far too high compared to competitors and so on and basically rightsizing a calibration of where we should be.
Today, we can see that we are not best in class, but we are kind of on average where our competitors are. As you can see here that during that period, our profitability started to increase from basically being low single digit numbers in terms of EBIT margin started actually to come further. Then of course, it's a little bit tricky and especially if you are CFO in the company to go from that restructuring in a very centralized structure, a very steep structure to go into the continuous improvement phase, which started then you can say year end 2015, 2016. Start with decentralization, P and L responsibilities, take it further down in the organization, work with continuous improvements instead of restructurings and of course, then a little bit betting on the fact that the journey would continue with improved profitability. And I think we can be quite happy now after almost 2 years into this phase that we can see that the profitability has been continuing to increase and we are starting to approach a level of approximately 10% in EBIT margin.
So you can say the journey is on the right way, 13 consecutive quarters with improved profitability year over year. Are we happy with the situation we still have today? No. As you know from the quarterly reports, we have had challenges over the last couple of quarters in terms of the supply chain, both our own, but also from our suppliers, which actually is a pretty big drag. So that is an area that we obviously should become much better.
So all other things being equal, we should be on a higher level than what we are today. Just to mention one thing. And of course, obviously, we have a clear intention to continue this year in terms of increased profitability. Return on capital is a top metric that we don't talk so much about actually, but you can see here with the discipline we actually have had in terms of how we spend the capital, but also working capital, we can see here that we get an improvement also on return on capital, obviously coming from profitability improvements, but also discipline on the capital side, up to close to 35%. So Martin mentioned also the R and D expenses.
And I must say, it is a little bit of a challenge that we do have in front of us. I think we have the toolbox in terms of the car system, which is a prerequisite for us actually to be able to manage both the well known technologies and also the new technologies. And we are increasing also the share of our R and D spending into the new technologies, obviously. But having said that, it is also a challenge to keep it on the level we have. You can see we took it down quite a bit from 2013, 2014.
We have been pretty stable over the years. This year, we will be a little bit higher compared to what we had last year, obviously, where you get inflation into the system and so on. But I think the foundation is there to be able to manage both old or well known technologies and the new technologies. When it comes to capital expenditures, the group was on a totally wrong level in terms of relationship between investments and depreciations. We were up to 130% or something like that, and that's far too high.
So basically what we have done now, a little bit used assets that we have, and you can see today that we have a much better balance in terms of depreciation and capital expenditures. And this is also then, of course, reflected in the return on capital that we see for the company. Also then as a consequence of the strong underlying performance that we have in terms of operating results, but also due to the fact that we have, as I said before, discipline in capital, also in the working capital, pretty okay, can be a little bit better, but nevertheless, we see also that the cash flow is coming through in the company as well. So we are today more or less actually delivering the same cash flow as we have in operating income. We see also then that we are strengthening our financial position coming from a situation where we were pretty heavily indebted from my taste once again being a pretty conservative CFO, far too indebted, not very nice.
But then, of course, with the cash flow that we have, you can see that we have turned into a cash position again, which I think is absolutely a prerequisite for a company like Volvo. It is due to the fact that we are in a cyclical industry. It is a capital intensive industry as well with huge swings, as I said before, and we are also having a financial services arm as well that we need to be able to fund in a good way. So this is actually a thing that goes absolutely in the right direction of where we should be as a company. So dig a little bit deeper into the I think this is the 3rd year or something like that that we show, We call it the parking place with the colors to indicate a little bit where we are in terms of profitability for our different business areas.
And here we have the truck business areas. And we have never disclosed what green means and yellow means and red means, but we use the same kind of metrics ever. So it's a very systematic way of showing it to you. But you can see that it is turning more and more green, if I put it like that. And we see a pretty it is actually a widespread improvement in all our business areas in the truck operations that we have.
Obviously, Volvo, green. A little bit when it comes to North America, obviously, with the market that was down now coming back, more, I would say, market phenomenon that is yellow than it is green actually and actually should now with the strong markets that we have in North America turn greener, if I put it like that. We can see Renault is actually turning from red to yellow. So the turnaround is continuing on the Renault side. We have Mack also then obviously influenced last year by a market that was on the downturn, also now coming back.
And we can see here UD, actually it is a little bit of pity UD actually because it is red, but it is so close to the yellow. But I mean, we have to have some integrity. So we couldn't just make it yellow. So we it is red, but it's very close to yellow. You are an engineer.
I'm a little bit more kind of an artist actually, but even I had a problem with that actually. So it is very close to that. And as you know, we have talked about it. It is about when it comes to the priorities, it's about making the turnaround of our brands, the regional brands, Mack, Renault and UD. The development in UD for Japan that Joakim is working on is absolutely on track and also the work that we do with what we call Group Trucks Asia also pretty heavy turnaround program which HOKA Karlsson is working with is giving effect as well.
Moving over to Volvo Construction Equipment. And we can see here that from time to time, people say, yes, but Volvo Construction Equipment, this is all about Asia now when Asia China comes back. And Lee, I think some people are a little bit worried. Are we then in a situation like we were in 2010, when kind of the fantastic performance in Asia was kind of overshadowing everything else? And then when the Asian market went down, we were sitting with a huge problem.
I think today, we have a much, much better base. And due to all the hard work that's been done in Volvo Sea from, I mean, Mark and his team, we can see today in terms of sales, Asia, yes, accounts for 1 third, a little bit more than 1 third, Europe same, North America approximately 20%. But you can see here also from a profitability point of view, more or less the same share. So today, we have a very, very healthy business in terms of geographical spread profit wise. And we also when we look into the 3 strong product groups that we have, the ones that Martin talked about before, also they're a very, very, you can say, same kind of balance in terms of sales and also in terms of profitability.
So Volvo Construction Equipment today is a much, much more stable company than what we have seen before. Obviously, then gaining from transformation programs that has been done, but then also, of course, getting now the volumes into a system that is right sized. And so far also managed very well when it comes to the increasing sales and managing potential bottlenecks and so on. So this is the situation in Volvo Construction Equipment. This is a famous slide, and I know that some of you want us to say tell you which one are the entities that are red or which ones are the yellow one.
There are no nothing like that. This is more to show a methodology of how we work. And it is not rocket science. You don't need to spend 4 years in the university studying finance to do this. It is about 1st and foremost measure the profitability performance from different points of view on products, on markets, basically down to variance or measure a business area.
If you don't have that transparency, you cannot act on it. So that is the foundation. When you then see the performance, then you can of course, the green ones continue to develop like the Volvo FH, make sure that it continue to be the cash flow of the company. And that's not you cannot take that forgiven that the green one will always stay green. So you need to nurture that and make sure that it's there.
Yellow ones, make sure that they do the turnaround and come up and becomes a green one. And the red ones end of day, if you have tried 1 or 2 times, don't be afraid of exit some things. And we have put some, as you see, some examples here on the slide, what we have done in terms and I think historically we have more examples of that. But it is a very disciplined way of working. And this is not a thing that we work with only from a group culture in a decentralized organization.
Head of a market company in trucks in Europe, Germany should evaluate its own performance in different kind of segments and applications and so on and work in the same way. So it is a way of working and it's also a cultural thing that we want to have here. Extremely important, sounds easy and it is actually pretty easy, but it's just to get it going in an organization and there to evaluate, there to take action. So the financial targets well known to you more than 10% over a business cycle and we are not there today. We have gaps and we are not there today.
We are still on this improvement journey. And given where we see the markets today and everything, we should obviously have a higher profitability than what we have. But this is the journey that we are on. But the long term target over a business cycle is there, and it can be delivered. The potential is in the company.
This is for us to test the eyes of you. Yes, you're right. We have to have that in our, what do you call it, evaluation discussion, Christa, afterwards. So then we so that is about operating income for the group. Then we have 12% to 15% for our Financial Services return on equity.
We will come back to Financial Services a bit later, so I will not talk so much about that. And then that the company should be in a net cash position. This is something that we have shown before as well. It is about 1st and foremost to improve the profitability in the group, the journey that we are on and that we will continue to do. Secondly, it's about reducing volatility in earnings, historically been too high.
We can say that we cannot be very proud of some of the downturns and we have managed that historically. Now we have some recently some good examples where I think we have become better. I think the downturn in Brazil, which was pretty heavy one from 114,000 trucks total market down to below 30,000, 28,000, something like that. And doing that downturn, making money in Latin America as a whole to start with, never in red figures, actually pretty okay profitability. And if we only look into Brazil, which was the market that there we were never in red figures, we managed to be at a breakeven level.
Shows a little bit that the way the team in Latin America managed it was very good. 2nd example, North America from the peak 2015, the downturn may from 300,000, it was 5,000 trucks, whatever it was, down to 230,000,000 something like that, also in a good way managed all the time in black figures, actually pretty okay EBIT margin for both Mack and also for Waller to capture the good markets as well. So this with managing the downturns, it's one thing obviously very good, but I think we need now also to become better in actually capturing the good markets. We have, as I said before, the leverage in the organization is good enough. So still work to do.
We are not done yet. Disciplining in capital allocation, if you see that we are actually even though we have had focus on the investments on working capital, you will see us focusing more and more on return on capital and also on how we allocate the capital in the group. So that even though we have started it, you will see even more focus on that one.
And then of course,
we need to have a profitable company to be able to invest in the future. Profitability is not only for the shareholders, but is also to create a strong company going forward, so we can invest in that. And that is, as we have said before, it is about innovation in the existing technologies. The diesel engine will not go away for the next 10 years. So we need to continue to invest in that one and the demands on the diesel or combustion engines will not decrease either.
So we cannot stop doing innovation on that one. And then we have to also do new technologies as they come up. And that is something, but you need to have a strong company to be able to do these things. So with that, you look great on this picture. Where do you have the tie?
Yes. Yes. Reality is not always so good, but we have to live with it. Thank you, Jan. Just one comment on the slide with the dots, obviously, to add to what Johan said.
I mean, when you think about the yellow dots, obviously, when you have so far maybe lower operating income profitability, low volumes, it's also about the new technologies obviously. So what we like with that methodology is that we are creating, so to speak, a very good visibility for our different type of projects, and we are running that in a very accountable way from the start. We understand, obviously, that for investing in the future, it will take some time to get to the volumes and operating income, but we need to follow it, have milestones, requirement, demands and also let it go if it's not flying. So you are continuing to drive, so to speak, this culture already from the start when you're creating new progates that you have a very strong accountability of the innovation driven projects that we are running. And I think that methodology has been working really fine actually.
We have a number next we will stay here for 1 week now in North America and work with our North American organization. Next week, we have I can we have a super interesting project that we will take a look at 1. That makes me waking up and think, but I just want to see it. I just want to see it. But that is I think that yes, sorry.
Let's see where we are here.
Here, okay? Coming in a little bit to the operational update also, the improved and the improving and the potential of the operational performance. Jan has been into, obviously, the figures, what is driving what and how do we do it. But I will come in a little bit to what are we doing in the different brands, business areas, etcetera. And as you remember, 2 years ago when we had the first capital market update in London, we showed these strategic priorities that we have been working now with for 2, 2.5 years.
We are sticking to them. It's working fine for us. And I will just go through a number of the specific items in those seven areas, what is happening and why is it happening. First, obviously, when it comes to the developed markets, we continue to reinforce Volvo, but also to drive performance in our 3 other main brands. Starting with North America, obviously, we have seen a good development over the last 2, 3 years.
There is more to do, obviously. And now we are creating the next level of platform, very well received new truck platform both for Volvo with the VNL and the VNR. And now the latest addition, the Mack Anthem, and we have very strong reception. Markets are strong obviously, but also very strong reception of our products. Uptime Excellence through connectivity, North America has been leading and driving that for the group.
And we also have a leading position. And Danley will come back to that area more in detail after the break here. We have a strong and good financial services operation. Also in that area, we will have a specific update. Our colleague here, President of Volvo Financial Services, Scott Rekken, should have been here today.
He turned yield. So he will today be replaced by the Chairman of Volvo Financial Services, Jan Gerander, to make that part. But that is also a very important piece obviously. And the networking expansion investments is also something that we are proud of, that we feel that our main partners in North America, given the nature of the business, is also investing a lot. And also in that area, you will see some examples later on here.
When it comes to Renault Trucks, Jan was into it. We have seen a very good, so to speak, turnaround. And I think here, as well as with UD and with Mac, you see the engagement for the brand, the ownership of the organization, the moving back of the headquarter and the brand to where it belongs in Lyon has really proven to be a successful journey for us. That goes obviously with good introduction of the new TC and K series for Renault. And the key item for us now has to be to place those products into the market and not compromising price and even more important residual value and really get out the full value potential of that great truck here.
And the organization is doing a great job. And the reason is simple. Many questions for me is coming, but do you have the right do you have enough volume for Renault? And the answer is yes, because the trick or the tail here is that you need to have the critical mass market by market, so you can afford to have the right network, the right investments, the right sales and service force, the right financial services, part distribution, etcetera. That scale we have in the relevant markets for Renault.
And then you obviously need to have the right scale in the industrial backbone. And through our cost and production and global system working together, we have that. So don't hunt volume that is not adding to the profitability. Forget about marginal contribution and things like that. Every unit should come into Renault, UD and Match and Volvo and all brands based on that unit's individual marriage.
That is how we are building a great company, and that we see here in Renault now. Strong engagement for the brand. I can just say that when I mean, you're always welcome, obviously, to come to our different sites. When you come to Lyon, when you come to Agui or to Greensboro, you feel that engagement and the pride of actually representing the different brands. And as a consequence, as I said, improved financial performance here.
When it comes to UDI Trucks, a pretty similar story actually. In the same way, we took the deliberate decision to make UD trucks into 2 business areas for the time being, obviously, to focus the premium part of UD to get that done in a good and consistent way. Japan and some of the key export markets like Australia, New Zealand, South Africa and some selected markets in Southeast Asia, very well on track. And I have to say just to repeat what Jan said, so close, so close from orange to yellow. But we have to stick to the game, need to be consistent, but really see a good development here.
Driving retail excellence. We have more than 140 service points. The majority of the service points in Japan, for example, owned by us, great asset, drive service penetration even further. That is happening as we speak. Very well received reception of the new Kwon range.
We have also taken some very bold steps when it comes to how you specify a product in Japan. For example, disc brakes, sounds obvious, but it has been traditionally drum brakes. We are driving that development now well received. And also, obviously, we are taking a number of bold actions also when it comes to new technologies, but Lars will come back to that later on here. Also in this area, we have the volumes.
Don't stress us about driving the wrong type of volumes. We have the volumes. We can build on what we have and then we can create profitable organic growth out from there. And we see that also in the improved performance. Engagement for the brand and the pride is fantastic also coming to AgiYO and to Japan to see that.
So well on our way here. When then area number 2, as I said, we took a decision that we really need to have one business area in the group concentrating on the emerging markets and the different assets that we have. And that's the reason why we created what we call Group Trucks Asia and Joint Ventures headed by Hakan Carlson, where we are driving the UD part of the merging and the more value based trucks, together with Donsfeng Joint Venture and Volvoike Joint Venture. And the reason for that is obviously that we can combine in a smart way in the cost system the same type of performance steps needed for these markets when it comes to powertrain, when it comes to axle configurations, etcetera. And what is interesting, obviously, when we are building that, now we see rapid development in China, in India, in Southeast Asia, of course, emission levels.
CN5 and CN6 is coming in China. We see the same development in the coming years for India. And then we have, so to speak, the modular platform to install those different performance steps into the different brands in a smart way, giving scale, giving synergies, but also giving the flexibility, thanks to the car system. For more specifically for the brands here, what we see is strong upgrade now with the product offering for Dongfeng, not at least when it comes, as I said before, to the tractor segment. As always, when you have a developing logistical market, you are shifting from rigid and more regional haulage type of solution into long haulage And then you have tractor trailer combinations.
And here, the traditional stronghold of Dongfeng has been into rigids, but we are doing a lot of things together in a very good cooperation also when it comes to tractors. And obviously, for all these three brands, also working with the service content and the service presence. Volvija, also very positive development when it comes to market share. Medium beauty and light duty been strong for a number of years, but also good development now into heavy duty. And we are also happy to see that we can leverage the platform that we have created in India for carrying backhauls of both technologies and components into the global system and exporting both selected components and full vehicle, so to speak.
And then in ranges for the 2 brands, we're prepared, as I said, for the latest also emission steps here. And for GTA, GluKrax Asia, now we have completed the rollout from light beauty with the UD Cruiser through UD kroner for medium duty up to UD krester. We are building now step by step in Southeast Asia, selected markets in Africa, in South America. We are building population step by step and also leveraging our existing presence in those markets from the group. And we are doing a very, very good and focused job also in reducing product cost by really working together in this combination.
Because one of the things, when you are a premium manufacturer and you want really to go into the value space, it tends to be a little bit too good and a little bit too expensive. It is an art to be frugal. It is an art to be focused how do you actually get to the product cost. And here, I think we have a very good cooperation with our partners, and we are learning a lot as well from our colleagues and partners in India and China, for example. Number 4, very important for us and that goes to what Jan said.
To continue to build a very robust and efficient system in what we have. We are well invested, as we have said. And how do we continue to leverage from, so to speak, the footprint that we have is through good leadership using Volvo Production System. Flow thinking, step by step, continuous improvements. I should say, I'm very proud to say that we have a number of facilities, not only factories, but also the leasing areas, where I should humbly be saying that we are world class when it comes to quality and efficiency, etcetera.
But still, the gap is too wide, and we can learn from each other. We must continue to drive stability. We need to be even closer to our supply chain and to work together. And here, we have a lot of things ongoing and still fantastic potential. On the right side, you see a number of very important areas for us.
In order to reach what Jan talked about, better resilience over the cycle, I think we have been proven now in a number of cases that we are becoming gradually better, but there is more to do. The right balance between volume flexibility, but not losing out the opportunities when they exist, but not sitting locked in when the market, for example, is going down is a key aspect for us. So the flexibility as such in the production system, but also to balancing with even more services that I will come back to. The car system is the base not only for the product definition and the smart way of working in our engineering system, but it's also a way of actually combining the whole global industrial footprint. And also in that area, now we are leveraging our different regional value chains, obviously, for the regional need market need, but also to support in a better way also other parts of the world depending on the market situation.
And here is also potential that we have started to see, but we can use much more than we have done historically. That is part of the strategy why we can be pretty clear on the one to one relation between CapEx and depreciation. Use what we have, use it more, let it sweat. Sweat in a smart way. Continuous introductions.
Kost is the platform for that. By having cost, you can introduce innovation step by step, not taking big risks, quicker time to market, agility, less risk on quality that is number 4 here and so to speak, not letting customers wait for having a new platform update, for example. Then obviously, from time to time, you need to do a platform update as well. But in the majority of cases, introduce it when it's ready and in a good interaction with the customers. And then obviously, we are one of the few companies in our business, both for transportation solutions and also for infrastructure that has a truly global footprint.
Use that in order to be close to the regional customers, shorten lead times, quicker to the market, etcetera. And here, we are already. It might be so that we need to look upon, for example, China for installation in the coming 3 to 5 years. But otherwise, we have the right footprint as we speak and continue to build on the different places where we are today. Very important, making progress, but still a wonderful potential to build upon.
Number 5, my favorite subject, something that we are driving really, really hard in the group and also encouraging to see good results coming through. On the left side, you see the picture that I'm normally showing that our industry is fantastic of measuring market shares of the hardware. I mean, if you ask whoever in the organization, you're going to say, okay, what is our market share in Karlstad or in Kans? And we will say, okay, €15,200,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 share of parts? And then it's okay, but it's a little bit more, around 60%.
Now I mean, what is it? I mean, if you have an installed fleet, you want to know what is the real market share, what is the potential, how can you build on it. That I think we are doing in a very good way now, step by step, looking through the potential of the installed base, what is our market share of parts, of workshop hours, of financing insurance, uptime services, what have you, and what is, so to speak, the potential that we still have already in the installed fleet, huge. This is important. And you can see, for example, there you have just one example of European average is 100% when it comes to purchase per vehicle.
You see the different markets. Obviously, it depends on what applications you are serving, what are the legislations, but it's not only that. It's also a heritage in different markets, how are you connecting with the customers over the life cycle. And I'm really happy to see that this is high on the agenda in the different markets and regions, a lot of energy coming into this system. And one example is that and why is this important?
Because in the future, we are often talking about transport solutions, integrated services. Then you need to drive a service culture. And it starts with using what we have in services. To start to connect with the customers, that is the best feedback. If they want to work with us in this type of service ladder, that is the best feedback that we are moving into the service ladder.
And I really feel that, that is happening as we speak here. That obviously, we should build the base also. I mean, it doesn't necessarily need to be 15.2% in cost. That could be 25% as well. So it doesn't hurt as well.
Some examples what is happening. In just take the service contract portfolio for Volvo Trucks in Europe. Say that we had a level of 100 in 2014. And we as you see, we have grown that with 45% since. So it shows that focus to feedback, to follow-up, to discuss and to drive this is working.
And we are very happy to see that this is that we have this very, very positive development. Obviously, most of these contracts has not yet started to come into place when it comes to the revenues because the first one to 2 years is during the warranty period, and then obviously, it is coming into place. So this is very important for us. And also, you'll see the base for it. We continue to grow then the number of connected units, both vehicles, but also machines and buses.
So we are a little bit more than 700,000 units and that is obviously continued to grow. So there we have a fantastic platform to drive uptime and to drive much more of a proactive way of working together with the customers. And I have to say very successfully happening as we speak here. Then when it comes to how do we actually use what we have also in our non truck business areas. Jan has been into it.
We've had a very successful journey now the last couple of years for Volvo Construction Equipment. And I actually wrote down some because it has happened so many things here. What is important when we look at this slide, obviously, a lot of you, with good reasons, we think this is thanks to a better market. It is true. I should say that 50% of this development in improving operating margin and better operating results is thanks to a stronger market.
In Asia, We are enjoying a strong market in Europe, etcetera. But it is also so that to enjoy a strong market, you need to get the leverage out. If anything, the last 2 or 3 quarters, we have been struggling with that on the truck side to get the true leverage out of the increased volumes. We are getting that step by step, but here we have seen that coming through. And the other 50% is truly pure self help in the organization, taking down breakeven, take out complexity.
In a smart way identify what is scale, what is not scale, what should be group assets to use, what is not something that we should use from the group because that is only creating complexity, etcetera, has been done in a fantastic way and a very focused way. And what makes me most proud is that it has brought enormous amount tons of energy into the organization, And it continues to be, so I'm looking both at Melkyr and Markle here. Very proud to see that. And as we have already heard from Jan, we see a number of areas where we can still grow this potential in a very good way. So I think Volvo Construction Equipment is a very good example of the two principles that I often talk about with a decentralized leadership.
Principle number 1, every business area, the 10 business areas that we have responsible for their customer satisfaction, volume and profitability. Principle number 2, use whatever you like in the Volvo Group to improve number 1. You don't have a much more complicated operating model than that. But if you have that, you create pull instead of push that we are coming from headquarters saying you need to use this and that and blah, blah, blah. But it's too expensive.
But it's good for the group. It doesn't work like that. It should be good for each business area. If they don't think it's good enough, then we have not explained why we are bringing value. And I think that is a good example of what we see here.
The same thing for Volvo Penta. Very positive development, obviously, started from a good level already as you've seen in quarter 1 here 2016. But I mean already before, we have seen gradual improvements. What I think has been very good is combining continuous investments in new segments, compounding growth for us, not at least in the industrial area, what we call industrial all speed, where we are serving industrial customers in material handling, in ports, agriculture, etcetera, where we historically didn't have the position that we should have because those areas is where our powertrain are perfectly to fit, where you're using the full range of power, torque, response, emission levels and all the technology content that we have developed both for trucks, buses and construction equipment. And that is the area growing quickest.
We have invested a lot, meaning that we have in that area still a drag when it comes to profitability. But still Penta has been able to increase profitability, thanks to super strong performance in the other areas and investing for the future in industrial. So here is also a huge and good potential that we are seeing coming through. And obviously, on the industrial side, for Volo Panta, that will compound further services as since those are segments where the engines are used even more. Even if we are super proud that when you go to Miami Boat Show, I have to make a sacrifice to be there this year.
And in the class where Penta is operating, over 40 feet up to 100, 120 feet, 75% of the crafts were equipped with Penta. So in terms of market share, fantastic. In terms of utilization of those boats, it's not necessarily the same utilization as material handling equipment in the port of Rotterdam, if I put it like that. So going to the industrial segment, obviously, would drive also services into the next level here, but also very good example. Then when it comes to buses, here we have a high focus now on increasing profitability.
After a strong yearning since 2012, 'thirteen, coming up to a more steady ground in black figures, we have flattened out here. And therefore, we are running now a number of very prioritized activities with high focus. If you look into the return on capital, we have a good capital efficiency, obviously, in buses. So when you look to that, you are much closer between buses and other areas. But having said that, you cannot have such a tiny profitability over time because then you are too vulnerable even if, I mean, you have a good capital efficiency.
So that is the main focus. And just to mention a number of activities we are working with. Number 1 is to use what we have again, higher commonality between buses and trucks when it comes to the modular platform. There we have not been focused enough, just to be fair, and we have a good potential then to use that. And that is the key area where Hakan and the team is working.
Also to even better leverage the service network and the sales network for markets where buses are under critical together with trucks. That is happening as we speak. To exit platforms, that will not be I mean, there are some red dots here. And that we should not be, so to speak, we should not be afraid of exiting that and that is also some decisions that we are taking and to prune the portfolio overall actually. Having said that, buses are very important for us.
The main investments that we have done in buses on electromobility is serving us fantastically now as we speak. As you have seen and Lars will talk a little bit about that now when we will see the Avalanche in the coming years of rolling out electromobility for different application and brands, etcetera. That modular system is based on what we have built in buses since 2005, 'six, etcetera. So without that, we shouldn't be in the favorable position that we are as we speak here. And number 7, that is not the last, maybe the most important, but we deliberately put it here because that's the platform for the whole group.
And that is continue to drive the development and the revitalization of the culture and the performance culture, not the least. We are working with 5 values. I will not go through them, but I really like that. Straightforward, it starts with customer success. In a big group, it's always very important to remind ourselves that money is not falling down from heaven.
Money is coming from customers that want to work with the Volvo Group. And the more customers that want to do so, the more successful we'll be. It starts and ends with the customers and that customer focused organization. And it ends as a result if you do that well with good performance in terms of in monetary terms, but also when it comes to engagement and thereby also performance over the long run. And in the middle, it is about building a transparent, trustworthy, and agile organization based on common values and strong beliefs in what we are doing.
The cost and the modular system is one example. The fact that we will work with continuous improvement, that we should be technology leaders but applying that in a very smart and simple way, that we should build structure that where accountability, ownership counts. And as we say, I mean, it's more fun to be good. It is like that. So I mean, often when I talk about, oh, how should we work with engagement, etcetera, I say, let's be better.
That is driving engagement, I can tell you. You know how it is. It's more fun to be good. So I think we are driving that. And here is, for me, the most important part of our strategy update is to continue to dare to drive decentralization, simplicity.
In some areas, we are finding a hicks in the curve. Don't be afraid of that. We need to have this belief. This is the way forward to capture the new technologies and to really drive the new business models that will happen in both mobility and infrastructure development. So summary, the 7 strategic priorities serves us well.
We are working with that pragmatically. That serves us for here and now, driving operational performance, but also serves us for making sure that we are investing for the future. And it also serves us because we see that profit and cash generation has had a positive development, and we have a super focus that we will continue to see that development to continue, both to investment to invest in the future technologies, in R and D, but also in the business models, in our sales and services networks for that. But also obviously, there will be good room also for shareholder returns given that business model. That is our belief and conviction.
So with that, we end, so to speak, the first update on the strategy, the operational performance, the outside in view, and we take a short break. And after that, we will continue then with the block on North America led by Dennis Leggel. Jan Gerander will give the update on Volvo Financial Services and how that adds. And then we will finalize also with insight of the new technologies with Larsenkvist and then obviously Q and A. So thank you so far, and we will have some coffee and refreshments outside.
Thank you.
You want to drive? Yeah. You can ride with me first.
Have you ever thought about mighty machines and what's powering them? Involvementa's YouTube series, Mighty Jobs, will be travelling all over the world, visiting spectacular places and reporting on hard working machines and their operators.
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Hard work, innovation, a better tomorrow. This is the America we grew up in. These are the values we don't close. We made trucks before there were trucks. We build them right here in America.
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You want to drive? Yeah.
You could
ride with me first.
Have you ever thought about mighty machines and what's powering them? In Volvo Penta's YouTube series, Mighty Jobs, we'll be traveling all over the world, visiting spectacular places and reporting on hardworking machines and their operators.
So let's see. It's a long time when I drove last night.
Excellent. I feel so safe. We'll show you technological marvels and the people that drive them, building and shaping our future. What machines help extract ore from our mines, can handle loads over 200 tonnes and supply us with the greatest building material on earth, and what makes them truly mighty? All these questions and more will be answered in our Mighty Jobs series, powered by Volvo Penta.
Hard work, close. We made trucks before there were trucks. And we build them right here in America. It's 115 years of knowledge that gives us the passion to shape what's next, to build the best, the most durable. The food you eat, The home you build.
Your city streets, the roads you travel. We are there. We are proud to be there, to build, clean,
Hi. Hi.
You want to drive? Yeah. You can ride with me first.
Have you ever thought about mighty machines and what's powering them? Involve Penta's YouTube series, Mighty Jobs, will be traveling all over the world, visiting spectacular places and reporting on hard working machines and their operators.
So let's see, it's a long time when I drove last
year. Excellent. I feel so safe. We'll show you technological marvels and the people that drive them, building and shaping our future. What machines help extract ore from our mines can handle loads over 200 tons and supply us with the greatest building material on earth?
And what makes them truly mighty? All these questions and more will be answered in our Mighty Jobs series, powered by Volvo Pentecost.
Hard work, innovation, a better tomorrow. This is the America we grew up in. These are the values we hold close. You know, we made trucks before there were trucks. We build them right here in America.
The 115 years of knowledge that gives us the passion to shape what's next, to build the best, the most durable. The food the food you eat, the home you build, your city streets, the roads you travel, we are there. We are proud to be there, to build, clean, and move America.
Hi.
Hi. You want to drive? Yeah. Camera. You could ride with me first.
Have you ever thought about mighty machines and what's powering them? Involve O Penta's YouTube series, Mighty Jobs, will be traveling all over the world, visiting spectacular places and recording on hard working machines and their operators. We'll show you technological marvels and the people that drive them, building and shaping our future. What machines help extract ore from our mines, can handle loads over 200 tons and supply us with the greatest building material on earth, and what makes them
Hard work, innovation, a better tomorrow. This is the America we grew up in. These are the values we hold close. We made trucks before there were trucks. And we build them right here in America.
The 115 years of knowledge that gives us the passion to shape what's next, to build the best, the most durable. The food you eat, the home you build, Your city streets. The roads you travel.
So ladies and gentlemen, welcome back to the 2nd session. So then we will continue first with Dennis Lejell on how we continue to build a strong business here in North America, more detailed update on that and journey and the way forward. As I said, unfortunately, Scott, the revenues in today. Peter, we got a great leader and they have done a great job, but Jan will take that piece today, Have some experience, the founding father also of Volvo Financial Services as a matter of fact. So I think that is more very relevant as well obviously.
And then Lars, Stenqvist on the tech piece and technology part, so and then Q and A. So most welcome back and then start with Dennis Leggel of North America.
I hope you were able to catch the Born Ready song there. That was a song we commissioned for the launch of the Anthem. It was there to as a tribute to truck drivers more than just a commercial for Mac and it's gone very well. In fact, the singer Steve Moakler is now calling his tour Born Ready and recently went on Spotify over a 1000000 plays. So this is really good.
I was not quite expecting that kind of strength. Anyway, I'm Denny Slagle and I'm part of the exec board team and I have a couple of roles in North America. First, obviously, Global President for MAC North America, but also my role in North America is to lead the development of the regional value chain and Marty will continue that later. In that role, let me just get forward here. In that role, I started in trucking 10 years ago and I was that's 2,008 by the way and I don't have to tell you what was going on in 2,008.
Prior to that, I'd actually spent 25 years in construction equipment. So I was thrilled to be asked to come into the Mac business, something I grew up with. But today, I'm going to try to convince you on 2 things. First of all, that we have built a strong foundation for growth and profitability in North America. The second thing, which is a little selfish, is I want to prove to you that not only we've done this, but we've led the industry in directions it wouldn't have gone without us.
And if you take just these planks, which were important strategic priorities in the development of our overall plan and go back to 2,008, I'd like to just talk about each of them for a second. Proprietary driveline, 2000 and seven-two thousand and eight, about 2 thirds, maybe more of the trucking industry was supplied by vendor engines. Almost all of it was supplied almost all of the transmissions and axles were supplied by vendors. That of course led to distribution doing, let's say, far less of the work that you would think an OEM distributor would be doing. In fact, 80% of the service business was done outside of the OEM facility as far as back in 2,008.
And the rest was being done by not only independent repair facilities, but also the very vendor outlets that supplied and of course customers felt the need to build bricks and mortar going deep, not just turnaround oil and lube types things, but very sophisticated facility bricks and mortar. None of that was is really typical in Europe. So you could say what we adopted a European model, but I would hesitate and or ask you to hesitate and remember that Mack Truck always from the very beginning was proprietary was and pushed its engine, its powertrain. So this was somewhat inspired from Europe, but also from Mack, what you'll see there. Strengthening dealer network, if you were selling against macro Volvo, particularly Volvo in 2,008, you would talk about the weakness in some parts of our distribution chain compared to competition and you'll see what we've done there.
Used trucks, when it came to the trucking business in 2,008, you had to wait to a peak valley, a peak trough cycle to figure out how much you really made on a truck because you did the business in 2,005 and 2,006, there was a tremendous pre buy type of volumes, but then the guesswork on what they were valued when they came back in 2,008 And you can imagine the droves of trucks that came back in 2,008 into the industry and into the laps of usually the OEMs. Uptime and connectivity, because it was a vendor based supply system, most of the focus from OEM standpoint was on fuel economy, particularly given the emissions things that were happening with emissions was on fuel economy and aerodynamics. It was a time when the long and tall trucks were starting to fade off and all the OEMs really talked about what they could control, which was the aerodynamic dynamics of the truck. So uptime although was very important to the customers wasn't, let's say, at the top of the emphasis from OEMs. Coming from construction equipment, I knew what happened when a paver went down, you had 80 trucks and 110 people that leaning on shovels.
So it was more natural for me to look at the uptime dimension as well as particularly given the bias I had towards proprietary driveline. So we'll see what happened there. And then of course new products, 2,008 and 4 years after that, most of the R and D oxygen was taken up by emissions. So we had to buckle down in tough markets and meet emissions and then we had to develop what would be hopefully world beating products and again, you'll see there. So this is the talk and there was a lot of other things we've done as far as the strategy.
We've consistently invested in our factories, we've consistently developed our people, etcetera in our organization. But let's just focus on these for a second. This is a result of hard work, stick to it, a good plan and execute. We not only did we lead the competition know they proudly report how much of their sales are their own engines today, PACCAR, International and Daimler all make it part of what they talk about. We began talking about in 2,008, 2009 and you can see that on the Volvo side, and again, our Mack was always proprietary.
On the Volvo side, we moved to 94% penetration, which means the rest of it really is for specialty applications, gas, etcetera. Look at the Volvo I Shift and here is where again the industry was led by Volvo Mack North America because we were the first to take what pretty bold risk of calling our EMT, the I Shift and N Drive standard. And that went against the grain of a lot of sort of supply arrangements, etcetera, which may had underlying requirements to be the standard if you were the vendor had to be standard in order to get the price. So we broke out of that. And I have to tell you that now there was an article in transport topics about sort of the death of gear grinding, because I Shift makes so much sense.
I mean they're easier to operate, they're safer, particularly with the driver community here and the driver shortage we have today, people need to drive with automated manual transmission. So you see what's happening on the Volvo side, 90% of their business is I Shift and on the MAX side for highway, it's 87%. The focus on proprietary wasn't helped of course people come back to the dealers to get their parts and service done, but equally and Martin referred to this in 0.5 of our strategic priorities, we recognize there's a whole bunch of opportunity out there for our dealers that was really not being tapped in the right way. Things like Reman and Brown Box and All Makes products were there for us, but they but it took a separate focus from our service organization, the way we organized ourselves. A lot of times you put the service area under the sales guy and the sales guy thinks truck, truck, trucks and how do we do them parts.
We created a separate organization with separate folks. They woke up every day thinking how they could sell another part and that has really created that kind of move upward on parts vehicle operation. I will say, even in 2009, Mack had the highest sales per vehicle in operation in the industry because it had been doing it for 100 years. And now Volvo is almost catching up with Mac on its sales per vehicle operation and again together with a smart part sales organization. Look at now I told you that you sold against Volvo and you talk about distribution, just cast this since 2010.
Our dealers responded in an incredible way, aligning ourselves, understanding the need to improve and understanding and it became less us pushing development and more the big and the good guys saying I can't tolerate a bad or underperforming dealer in my network. I'll help you get where you have to go. So it swelled up in a very, very impressive way and you see the types of capacity and expertise and quality coming into our network in the last 7 or 8 years. This is really incredible, but also back to that 20% of the industry, only 20% comes back to the OEMs. We are terribly under capacity for the OEMs.
So we have to invest on these things. And what we're finding as soon as a dealer opens a shop, it's full the next day because the more preferable place to take it is there, particularly if you're a customer now looking at your asset allocation to put it in service or to put it put in what I do best, which is logistics. So the customers want that and we are responding in a good way. How good a way? Look at this thing.
This is Fontana, California. It's more or less the end of the line for truckers going out to California. So the opportune time for them to get serviced, etcetera. Up in the right hand corner is a relatively clean picture of their existing facility because usually it's just swamp. They work 3 shifts all night to get trucks service.
So what they do, look at this and we just got the certificate of occupancy yesterday, they'll be moving in to a facility with 200,000 square feet. I think that's 4 football fields and a $25,000,000 investment and they have space for 400 trucks to park. So that is going to be a machine and it's going to increase the satisfaction and really change the way customers operate in California. And I think I've been dealing with competition or in distribution for 37 years. I've never seen anything like it.
This blows the mind. So we're very excited about that. Now he's setting new standards, not only for competition, but for our other dealers. I mentioned the used truck side. When we found Arrow, it was still an effective sales organization, but it was let's say we had mishandled it a bit.
We made it more important to operate to group standards than we did to be a player in the marketplace. And what we did is basically very fundamentally with the aero truck is we made it a separate entity. We manage it as if it's we don't own it. We have an internal board that runs things, but we let them be aero. And that means selling all makes, that means servicing the customers who need used trucks, but you also get now what those bullet points show, 18 profitable locations, we have the capacity to handle large trades.
The dynamics of Arrow actually helps build the dealer competence on use because one thing we don't swamp the dealers every 5 years with bunches of trucks because a lot of the cream has been taken off with aero involved. So they see now more clearly the used truck opportunity rather than the used truck problem. So you have that and the secret sauce for Arrow is actually the in house financing where we get the highest level rates. And yes, it's high level, but also high return, high risk in some cases, but we're very good at going and solving delinquency problems and the delinquency of the performance of that is no worse than any other portfolio you'll find. So it's excellently done.
It optimized retail. They know how to do it. It's part of the process that they do. Now we have just recently, I don't know all the details about this guys, but I understand we have announced that we're moving this concept to Europe and hopefully sort of replicate some of the same things there. Uptime and connectivity, I mentioned uptime was not deemphasized again, very important to customers.
The customers measured it, understood it, whatever. OEMs, it was a bit more fuzzy. We were the 1st to create a separate building, staffed it with everybody that can put a truck back on the road in the same geographic area and we created an incredible ecosystem where again the focus on just uptime creates gets the mind going on how we can use telematics and how we can use other technology as well as just plain sweat to get a truck minimizing downtime. One of the things we did was create certified uptime centers. This is a success story because we couldn't do it alone in the uptime center.
We had to have dealers falling in line and following some of the basic processes and logistics and working to in a way that produce speed through the system. So in that 143 dealers that have earned the certified uptime center logo, 70% reduced diagnostic time by 70%, reduced repair time by 21%. So dealers know that we're darn serious about this. So the 143 have earned it and they have to keep it. And it's renewed every year and there are people that we've taken away and they will fall to get back up to do it.
So that's expanding at a very measured pace. So it's about a third of our dealers qualify now and obviously we hope that rises and rises to 100%. The other thing, we considered ourselves leaders in the not just the concept of reading that you had a yellow lamp on your dash and sending an email to the customer saying you have a yellow lamp on your dash. We were a leader in saying this means this, this means that you are probably going to have a breakdown within the next few miles or this is okay to let it go till the next service problem. And we put that into the system, that proactive call, then we said to the guys, if you it does look like you have a problem, we've already called the dealer, we've already know he has the part in the base space open, go there and we'll minimize your downtime and you get back on the road.
That we led there, but the next evolution of that is something again we're leading. So since October, we have been working with software and sensors and all these are still the number one downtime the thing that creates the most downtime for the customers. Usually very quick, all you have to do is plug in, get a download and drive off. But it still takes 3 days to go to the dealer and wait for it to get through the shop and then pick it up again. What we're doing now is driving the typical sort of Tesla way where you get the vehicle ready to receive a download, then at the time is convenient to you, lunchtime and then we send down the software and they're up and running in 20 minutes.
They're back on the road. Now obviously, there's a lot of things to think about here and we have we're touching all the bases, so we're rolling it out very carefully. So since October, we have fleets with 6,000 trucks that have signed up for this. We performed 600 updates, again, very measured, very at the in the early stages, very there's a person online doing this. The average time download time is 23 minutes, but the more recent ones are less than 15 minutes.
We've saved by a conservative calculation 500 days of downtime and we're getting of course tremendous feedback on that. So again, leading the industry here that we won't be the last to do it. My competition who I respect mightily have been fast followers in almost everything I've talked about. So it gets a little confusing on who's the lead because when one of them stands up and says, I have a uptime command center that really the best compliment we can get is imitation. So yes, and here is the Zinger.
We need it. We need it fresh enough. We had a great powertrain. We have great performance and pretty good trucks to compete with, but both needed that refresh and upgrade. Look at those trucks, you've got the thing I think if you're a dealer that's selling both trucks, look at the distinction between the two brands.
You've got an elegant, sleek Volvo and a bold, strong, badass Mac. And what Lanthan has done as Steve Moakler said, we really put Mac back in highway. I can't I mean, these are getting sold as soon as we hit the lot. They are the coolest truck and particularly again with the driver shortage and you want to recruit drivers, they want to it helps to have the coolest truck on the market. So those things are all going out in precious few quantities now.
You're going to see more and more on the road. I'm getting emails every day, I saw 1, but fantastic reception by the market. We're getting them out as fast as we can. And then in the middle there, of course, is where we're strongest with the vocational and there's been great work done there, particularly with the interior of that truck upgraded. So we feel very, very good about where we stand, that foundation that we talked about, the foundation for profitability and growth, I think we're in good shape and I'm throwing the keys over to Marty to take it to the next level.
Thank you very much.
So you see Scott there, proud President of Volvo Financial Services. He's sitting in Greensboro now being pretty angry actually. He was looking forward so much to be here today and talk about his Volvo Financial Services, a fantastic high performing organization led by a very energetic guy called Scott Raskin, and rather good looking as well. I'm then the proud Chairman of VFS, and I will do my best now to present it. I've also promised Scott that he will have the opportunity to meet you in the coming Capital Markets Day, but just looking forward to do that.
In the meantime, Volvo Financial Services, what is it all about? It is about creating solutions for our customers through financing. We have a strong position in terms of how we cover the group. As you can see here on the map, it is actually we are covering countries that have sales of more than 90% of the group, so close to 100%. And we do that in different ways.
One is, of course, that we have our captive finance companies. And as you can see, we have 46 of them today. That's one way of doing it. The other way is doing it through cross border leasing, I. E.
That you have a finance company in one country and do it cross border into another country, not necessarily having people in that country. And then we can do it through different types of vendor programs or partnerships as well. We can see here that we serve all the business entities within the group. So it is Volvo Financial Services, but there is a MAC financing, branded for MAC. There is one for Renault.
And then, of course, we use the backbone for that. We do it for Volvo Construction Equipment, we do it for buses and we do it for everything basically. It is we are approximately and I will come back to that a little bit later, financing 1 quarter of the sales globally per year, what we call the finance penetration. And all in all, we are approximately 1400 employees doing this around the globe. Market expansions, as you see, when you're close to 90%, it's not that many obvious new markets that you can enter.
We are right now about to enter into 2 new markets and that is Korea and it's also into Peru as well. But there can come up a few other opportunities going forward as well. A little bit of development, you can say since the financial crisis, we were at that point in time approximately SEK85 1,000,000,000 in assets up to today, which is north of SEK 130,000,000,000. The growth is coming from a few things. One is the geographic expansion, SEK 3,000,000,000 approximately, coming then from countries like the Baltics, India, which is quite recent establishment that we've done, and also South Africa.
One important area that we have, and it's especially here in North America, is the wholesale financing, floor planning. Basically, that will fund the dealers and their, you can say, their working capital. And here, you can see that, that's the technique that we use very much in North America, not so much in the rest of the world, partly in the U. K. And here we get another SEK 4 1,000,000,000 in growth.
Then we have the organic retail growth that we have. And it's coming basically from increased sales from the sales organizations. It comes also from greater penetration. And then also, of course, that we do have a certain, you can say, inflation in the figures as well. Syndication, we do not carry all on.
Actually have if you add back the SEK 12,000,000,000 here, we have under asset under management is more than SEK 132,000,000,000 is closer to SEK 150,000,000,000. So we do syndication as well and we do asset backed securities as well. With this growth, we have actually pretty high productivity in the organization, which is one of the drivers for the increased profitability that we see. Obviously, when you can keep the back office slim and you are all working in the banking industry, so you know how it works. And the more asset decker that you could put in, then of course you get the very, very good productivity here.
Supporting sales with profitable growth, we have had now 4 years in a row with increased profitability. We are above SEK2 1,000,000,000 in EBIT on this. Return on equity, as you saw before, the target for that is to be between 12% 15%. In the cycle where we are right now, good strong portfolio, pretty sizable, good low credit risks or credit losses, we should be actually very close to the 15% where we are right now. So this is exactly the spot we should be.
Here, of course, we have also the balancing thing. Do you want to take it closer to 20% or not? The risk if we do that is that we do not support the sales of the if it's too high demands here, maybe we go out of deals that we should actually support the sales with. So the 12% to 15% band is there, and that's what we should keep. In a downturn, we should then be not below the 12% on return on equity.
During this period of time when we have gained profitability over the years, we have been through actually some pretty nasty downturns in difficult countries. Talk about Brazil as one example. I mentioned it before when the market came down there. I can tell you the portfolio was a lot of hard work to take down of that downturn. And VFS in Brazil locally made profit the whole time actually and not close to 0 either, pretty healthy.
So well done, taken care of a downturn in the cycle. Russia is another example. The downturn that we have there a couple of years ago also managed well through also with profitability. And then obviously also some difficulties in China that we have also taken care of. So looks as though the resilience is there.
We are pretty we are getting better in managing basically the business cycles over time. You should never be happy. We talked about the penetration around 25%, and this is an area where we see that we have some potential. The 25% is obviously an average all over the world. And when you take the average of everything, you will find that we have some markets maybe we are down so low as to 10% in penetration, and we have some markets where we are actually about 50% in penetration.
And it is really about evaluating what can we do then to increase the penetration in the markets where we are very low. And we need to be relevant as a finance company in each We need to be relevant for the customers. We need to be relevant for the other business areas to be there. Otherwise, we should not be there. So here we see actually potential to improve the penetration going forward.
And we need also to then to improve our commercial effectiveness going into new markets and then also then secure that we continue to have the operational leverage that we have in the organization. So there is still room for improvement in the financial services world. Then we everybody knows what this is? Money, commodity, U. S.
Dollars, euros, Swedish crowns, this is what these guys work with, it's a commodity. And the price for the commodity is interest rates. And we start with a disadvantage. We found ourselves more expensive than the banks. So how on earth can you do that?
You have to be very good at servicing your customers, doing solution sales, taking care of the total cost of ownership. This means that the guys working for VFS, they have every day they work with not they don't have a spare part, they don't have a product, they have this money. So they have to be very innovative to be able to run a business and make money out of that. As I said, starting with a actual disadvantage. So this the Volvo Financial Services, we see it very much as a driver to continue to develop the service country in the group.
We see them spearheading a lot of things here. We need them to when it comes to how we approach our customers, it can be a dealer, it can be an end customer as well. We need to have an integrated approach how we approach the customers. We can be a little bit too fragmented from time to time. The customer goes more and more for total solutions.
That means that we need to be more coordinated and integrated in our support for the customers. We need to be earlier in the sales process. That's one way to do it. So already when you have a prospect coming in, if the financial services guys come in too late, we don't have the chance to offer a good thing, a financing or a package solutions. So there are different ways that we can do it, but this is extremely important to continue to develop that going forward.
You can see here also some metrics that we have an 88% overall customer satisfactions for the customers funding with VFS, 85% retention, that means that 85 out of 100 customers that use the financing from Volvo Financial Services, they buy a new product from the Volvo Group. And that is higher compared to the ones who are financing with other leasing companies. So here you see a value coming into the Group through the actually higher retention. And then you can see also 83% of the customers actually recommend at the 3% recommend VFS, so very high. So this is the way we bring value to the customers, but also to the group, not only as a profitability, but also as a broader thing how we do services for the group, but also different other types of synergies.
We are also then advancing as in FinTech, digital innovation. Some pretty interesting things that we do there for the time being, how we can use actually also Synodys within the group. Danny talked about the uptime centers. There we also do the geofencing at the dealers as well. Here we then here we can actually see where the trucks are.
So when you do floor planning, you know, floor planning, you're always a little bit afraid that that the trucks that you finance, are they still there or have they been SOT ed, I mean, so a lot of trust. So from time to time, you do audits. So you go out to the dealers, check if they're there. If a dealer has a problem, you even put your hand on the hood. This is a pretty takes some time to do this.
Here we have the opportunity actually to see on a map where all the trucks are because they're connected and since they're geo fenced. If you see it that the trucks they are with the dealer, all of them fine. We maybe not even need to go there, it's okay. Maybe suddenly you see that you have some trucks outside of the dealer premises, then you can see, okay, where is it is there? Could be a body builder, fine.
Or if it is placed there where we don't want it to be, then we go out and do it. By doing this, we actually save we can potentially save 50% of the time that we spend on deal rollers on the floor planning. So here you see how we can use the techniques in the Group for VFS and become more efficient. Another way we can do it when we work with the artificial intelligence is actually to become better in predicting residual values. And not only on the portfolio level, but actually go down on the specific vehicle because we know how far distances they drive, we know when they've been serviced.
So we can actually become much better and predict what is the residual value going to be 3 years, 2, 3 years from now. We can also act on it. Do we want to prolong the lease? Do we want to take it back earlier? And we do it down to the actually, as I said, on the truck individual level.
Also pretty cool actually. Then we have the emerging payments and how we can combine our systems with WeChat. WeChat is basically a payment thing in China. 100 of 1,000,000 people use that. Owner operators in China sitting there working in their hallway every day, maybe it was just owned this, for them to be able to use V SHAT, get the invoicing, pay with their cell phone is just a fantastic thing.
So once again, an area that we are developing for China using the V Jet, but also our own platforms together. And then also that we got actually this award, Digital Edge 50 Awards, and it's basically our origination system that makes it easier for our salespeople and the customers to write a contract. And by doing that, actually we save something like 50% of the time that it takes. This is a European thing that we're working with. So I see a lot of areas that we are developing into when it comes to new technologies, not only when it comes to the trucks, autonomous driving and so on, but also here on the FinTech side.
So basically, as I said before, this is a service organization It's basically should be our center of expertise when it comes to delivering, what do you call it, solution sales. And our customers are asking more and more for that. It's not the only question buying a truck, financing it, getting a contract on services. It also can be everything from that we guarantee uptime and everything. So here we see a huge asset in having financial services.
And then we can see that we get the higher loyalty from our customers. As I said before, high customer retention on the customers that we have in our portfolio in Financial Services. And then we also see that we will continue to have a focus on the profitable growth and the commercial performance in Volvo Financial Services. So by that and I would suggest we have another guy who knows pretty much about the Financial Services here. Mark, you were the President there some years ago.
Did I manage your?
You're very welcome.
Thank you. Okay. So with that, I think I leave the word to Lars.
Wow, great to be here. And I can tell you that it's great to be an engineer right now in our industry. Fascinating times, we are looking at 3 very strong technology trends. We're talking about automation, electrification and connectivity, of course. They will help us really to transform transport.
Each one of these three trends, they really have the possibility to impact both transport of goods and people. And to be honest, I dare to say that they can when, not if, but when they converge, they will give us possibilities to reshape cities and societies as we know them today. We don't know how fast this transformation will come. And we know that in many cases, it will be a combination of the new technologies combined with what I call the well known technologies. And if you think about it, vehicles will still consist of a lot of well known technologies and then you add some of the new ones on top of it, meaning that for some of the newcomers, the well known technologies will be their challenge going forward.
For that reason, we will continue to combine our R and D efforts into well known technologies and to the new ones. And let me start a little bit with the well known technologies. We will continue to improve our combustion engines. There is new legislation coming up all across the globe with tougher demands on, for example, CO2 emissions, And we will continue to invest into that kind of technologies. We will continue to invest in aerodynamics, in rolling resistance, in cab comfort.
Those technologies will be the base for our company for many years to come. Sometimes those technologies will stand alone and sometimes they will be combined with the new technologies as well. We have some really good examples from last year's. For example, on this slide, you see the turbo compound engines that we launched in North America last year. You also see one good engineering example in the middle, the wave piston.
I mean, a piston is a rather simple design element in a combustion engine that has been in use for more than 150 years. It should have been perfect already, of course. But when you give a task to splendid engineers, when you ask them, hey, come up with ideas, how could we improve combustion? And if you add these waves, then we will get an even better mix of fuel and air. And by that, we will optimize the combustion.
We can reduce the soot created, and we can improve the fuel consumption with up to 2%. And when my engineers say that they have an idea whether they are going to reduce fuel consumption with 2%, in my world, it's very close to Nobel Price. And that's on a very simple design element that has been in use for more than 150 years. So there's still a lot of potential in what I call the well known technologies. Another good example here is our new LNG truck, the gas truck that we just have launched in Europe.
It will immediately cut CO2 emissions with 20%. And if you can use renewable gas, B and E, then you will cut it with a more or less up to 100%. Martin has been into our modular product system, our cost system, where we managed to create synergies in the development of the main components since we use them in a multi brand environment. And that means that we have been able and are able to free up resources that we can reallocate into the area of the new technologies. And I can tell you there are exciting times ahead of us.
I'm traveling a lot, and wherever I go, whoever I meet, doesn't matter if it's customers or if it's representatives or different stakeholders of society, I feel that they have enormous expectations on us as engineers right now. On us as engineers to come up with solutions for environmental impact of transport, to solve problems with congestion, to improve road safety. And I can say that expectations are fair today because today, there are so much possibilities with technology that simply didn't exist if you just go back 5 or 10 years. So let me show you now one example of what infrastructure and transport solutions can look like in the future.
The world is changing fast. Cities are growing and urban population is rising. The need for transport of people and goods are increasing, but so is congestion, air pollution, road accidents and climate change. We need more mobility, but we have to do it in a smarter way. This is our scenario for the future.
Outside the city, vehicles and autonomous trailers are operating within safe and confined areas. Electric vehicles are charged while goods are loaded. A driver enters to lead the connected convoy onto the public roads where dedicated bus lanes should be used if possible. Autonomous connected trailers create safe, modular and flexible vehicle convoys adapting to transportation needs. Adjusting to schedule updates, the flexible convoy switching goods along the way, a mobile consolidation center.
The transport system is enabled through an integrated cloud platform, connecting vehicles, people, infrastructure and logistic partners. In the city, the sensors of the autonomous refuse truck detect all movements in the vicinity of the environment and reacts automatically to any potential incidents, making sure citizens are safe and preventing accidents before they happen. Bus platooning will improve efficiency and capacity in city public transportation. With silent emission free buses, we can bring public transport closer to people and even drive inside of buildings. This opens up completely new opportunities for city planning.
Fast and efficient way of charging from the electric The future is electric. Zero emission and low noise gives the electric compact excavator access to environmental zones in the city. Imagine a silent and emission free city. Imagine a cleaner, safer and more resource efficient world without compromising our everyday life and health. The future is now, and we are ready.
Well, this is one scenario of how it can look. When we are combining these new technologies for enhanced road safety to reduce environmental impact and definitely reduce congestion and increase the productivity for our customers. Martin was already into what we call the KAUST, common architecture and shared technology, our modular system. And this is more true than ever when it comes to the new technologies, the outer circles of this illustration. And in all these areas, it's clear that it's software, electrics and electronics that will be the competitive edge.
So let's have a look at the 3 new technologies, and let's start with electrification. I believe that electrification in transport will fundamentally change the way we look at city planning. And you saw in the film examples, I mean, indoor bus stops at hospitals, airports or shopping malls, nighttime deliveries from, in principle, silent distribution trucks. This is already a game changer in the bus industry. In Volvo, we have a leading position when it comes to electrified buses.
Already 2012 in Europe, we decided to stop selling buses with only combustion engine. So from then on, we started the electrification journey on buses. And today, we have sold more than 4,000 buses with hybrid solutions or full electric buses. The strength for us as a group now is that we are reusing all that experience that we have built in the bus area, experience from an engineering perspective, but also experience in designing components and also the real physical components are reused when we now are entering into the electrification of trucks. And let's have a look at the most recent member of our product family.
That was the April launch of the medium duty Volvo FL full electric truck. And last week, we launched the 2nd model in the Volvo truck range. It was the FE full electric truck, somewhat heavier applications up to 27 tonne for distribution and also refuse applications. I guess we are, of course, very proud of this. It's the first time we are entering into full electric trucks.
And this is very much the kick off for us when it comes to commercialization of offering for trucks will be on sales from next year. But it's not just the Volvo brand that has ambitions in the area of electrification. We have already been out with the news around all the truck brands and their ambitions when it comes to electrification. And that goes for Volvo Buses as well, taking steps into more and more application as well as for Volvo Construction Equipment. And all this is possible through our modular approach.
We drive a continuous development of all the components needed to electrify the vehicles. We talk about the electrical motors. We talk about the power inverters of the batteries, of course, charging devices. Where needed, we are developing several performance steps, and then you are combining the different performance steps from the different components a little bit like a LEGO system. In order to meet exactly the needs of the customers for different applications for different brands in different regions.
Firstly, we will start to focus on urban applications. It's relatively logic. Range and charging possibilities is easier to fix in city environments. 0 tailpipe emissions, low noise levels and possibilities to run at off peak hours is very much valued in urban applications. And that's also where we believe that you will get more and more incentives in different parts of the world.
But electromobility solutions will also be used, as in the center of this illustration, in construction sites where you have a more geographically controlled situation, meaning that you can have charging infrastructure at the construction site, for example. But that also goes for hub to hub transport. And we see that charging infrastructure will be very important for the next coming of years. But in parallel, we see a fast development of batteries or even an enormously fast development of batteries. I am in constant dialogue with my experts in this area, the battery experts.
And we are sitting down. We are having reviews. We are making plans for the years to come, and we decide what to do. And I remember a couple of weeks ago when we were sitting down and halfway through the discussion, I then tried to summarize where we were right then in the discussion. And then I said, and as we decided last time, meaning that means that we will go in this direction, am I correct?
And then they said to me, but Lars, you are so much week 13. And I love that expression. I mean, your stone age you're still with a knowledge base of week 13. Since then, this has happened, Lars, meaning that you have to revise your truth. You have to revise what you believe in because now we're going to go in this direction.
It is really going that fast. So battery development is going enormously fast, both when it comes to energy density and when it comes to cost. And that's a necessity when we come to long haul applications because there we need more batteries and we need more range, of course. But for long haul applications, most likely, we will also have hybrid solutions as a possibility to gain efficiency, but also, and I think that's even more important in long haul applications, to give the customers the possibilities to ride 0 emission in, let's say, those circumstances when it's needed, a limited range to be able to go to full electric when you come to your customer, just to unload or load your goods in a port, for example, to go electric where it matters. Electromobility products all over the range will help us to fulfill the tougher CO2 legislations all over the world.
You can see that in the U. S. Legislation, you can see it in the upcoming European legislation that these kind of vehicles, they will help you. In many cases, you can you will be able to count them as 2, 3, 4 or 5 vehicles when you make your calculations on your average CO2 emissions. Electrification is thrilling.
And besides what I have been talking about now, we also have programs for fuel cells, for hydrogen, for electrified roads in our advanced engineering projects. And by that, I think we can leave electrification, we can jump into automation. Another area that really will reshape society and reshape our industry and in many cases, reshape the business of our customers. It will create benefits for our customers and for society in safety. And there I sometimes end up in very strange conversations at seminars and interviews where people talk about automation versus safety, and it can never be like that.
It will be automation to create or increase safety. We will never ever release anything, but we cannot guarantee the safety from that kind of solution. So safety, reduced environmental impact and a lot of productivity increased possibilities for our customers. To us, vehicle automation is much more than just self driving autonomous vehicles. And normally, it's illustrated with this automation stairway.
And you are already experts on the lower levels where we add, for example, cruise control, which we are used to in our passenger cars, more advanced features if you go after the next level to keep the lane, etcetera. And then the top levels, there you have then more or less fully autonomous vehicles, in some cases, even without drivers. The ideal level of automation is different for different customers, different applications, and that means that we are going to work on both ends of the automation stairway. For us, it's extremely important to involve the customers in this kind of development. You remember my battery story about the week 13.
The same goes for automation. The development pace is enormous. And when it comes to automation, then it's not a small shift or an incremental change of what we have today. Here, it's paradigm shifts when it comes to vehicles and also business models for our customers. And that means that we want to have the customers on board as early as possible to get their input on our ideas to see are we heading in the right direction because here you're really gambling because no one really knows what it will look like exactly in a number of years.
So our idea here is to bring close to the heart to the Volvo Group, and close to the heart to the Volvo Group, and we have worked with features as brakes, suspensions and other features for a long time. And if you combine that with the gearbox that Danny was into, I would dare to say the best automated gearbox in the world. And if you add another very important piece to the puzzle, we call it the Volvo Dynamic Steering. Its principle is steer by wire. If you add this all together, then we already today have the possibility to electronically control the complete vehicle.
And that's really the base for automation. We have during last years presented several different vehicles for different solutions when it comes to automation. We are testing them right now together with customers to learn more. High levels of automation will begin in confined areas. And why?
It's very simple. I think you will understand it. It's much simpler to control that kind of environment when it comes to safety. We have shown fully automated vehicles for those kind of environments, such as mines, And our idea is simple. We are going to learn from those kind of cases, from those environments, and we are going to take that learning when we develop solutions for on road applications.
Next step of the confined areas will be low speed applications on open and public roads. I often talk about semi confined areas. If you think about it, hub to hub in a port, for example, also relatively easy to control. But if you think about it, also highways, public highways. You don't have to talk about all highways.
Let's talk about one highway. Let's talk about one entrance, Entrance 24, Exit 37, just the right lane, perhaps even a dedicated lane, then you're relatively close to a confined area or at least, as I call it, semi confined area. You can control the narrative in a very good way. One use case in automation is platooning, and we have shown a lot in platooning all across the globe. Platooning is very much about safety.
You connect the vehicles, they are connected with direct communication, not through any satellites or any telematics. They're sharing information in real time, breaking at exactly the same time. I'm going to tell you now how fast activation is in between the vehicles. If you're sitting in the 2nd or the 3rd vehicle in the platoon, then the first vehicle is braking, let's state that as an example. The first vehicle is braking, he's sending a message, instant message to the second, third and fourth vehicle, I'm braking right now.
And if you're sitting in the second or third vehicle, then you will actually feel that the second or third vehicle is braking before you see the brake lights going on, on the first vehicle. And that's true. And why is that? Because the speed of the messaging between the vehicles and the activation of the brakes for the second and third vehicle, those actions are so much faster than the well known technology to light the bulb in the rear in the brake lights of the first vehicle. So we're talking about extremely fast communication to enhance safety.
And that, of course, gives us possibility to drive extremely close to each other and by that, save fuel. You know everything about how the guys in Euro D'Italia and Tour de France, how they are doing it. And it's the same principle, of course, to reduce air drag. You can save a lot of fuel. We did a test a couple of years ago, the so called European Truck Platooning Challenge, average savings 7%, and then we were not really driving that close.
If you close the distance, easy 10%. Successful tests here in U. S, both in California and Virginia. In Japan, we had a really good experience a couple of weeks ago. It was a multi brand platooning where we participated with UD trucks.
Another area for automation, as I was in, to Eastern Confined Areas. And top on this slide is our autonomous battery electric load carrier from Construction Equipment. It's a prototype machine that we right now are testing together with customers, reducing CO2 emissions with up to 95% and reducing operating costs for our customers up to 25%. We have also presented a truck, an FMX truck for mining applications, testing it together with the mining customer up in the northern part of Sweden, Boliden. Truck is controlled by 2 extremely powerful computers, is equipped with 6 LIDARs, laser radar system, and can operate 24 hours a day down in that mine and can operate also, for example, directly after blasting or in other conditions where you really don't want to have your crew out there in the mine.
So you just think about the possibilities when it comes to productivity in such an environment. Low speed applications. One really good example is the yellow refuse truck, a project we are running together with the refuse customer called the Renova. It's a normal truck. You couldn't see the difference if you stepped into the cab.
And in the morning, the idea is that the operator steps into the truck, He drives out to the suburban area where he is going to collect the garbage. Then he steps out of the vehicle, push a button. The vehicle goes into autonomous mode. The operator goes to the next garbage bin. The vehicle follows is following him down to the garbage bin, emptying the bin, pushing the button again, walking down the street to the next bin.
And then I normally say that the vehicle then is following the operator down the road as if it was his dog to the next bin, to the next bin. And then when he's ready, he's jumping into the vehicle again, driving to the next street. That's also a very good example of this. Will it be full autonomous? Will we don't have drivers in the future?
We will go in automation mode where it makes sense. And this is what we are learning together with the customers. On the top of this slide, you have another very nice example. It's from Brazil. It's a Volvo VN truck used for sugarcane harvesting.
We're developing that together with Usina Santa Terracina, a customer in Brazil, and it's a prime example of how to think in order to optimize the customer benefits. Previously, when you have a harvester and you have a truck, then you were demolishing a lot, let's say, when driving out on that field. You were compacting, you were destroying a lot on the field, meaning that you would lose out in the next year's harvest. Today, we are using intelligence. So the driver is controlling the gas and the brakes of the vehicle, but the vehicle is steering on its own and it's following exactly in the footprint of the harvester in order not to destroy anything in the ground.
And by that, we're increasing productivity for the farmers. Here, we have already started and started to deliver these kind of vehicles to customers in real operation. And then on road, we have a really exciting cooperation in Singapore when it comes to buses, together with Nanyang Technological University in Singapore, where they really want to develop the future public transport system, including autonomous city bus transports. It's a part of the ambition of the Singapore authorities to create really the future public transport system. We are participating with a fully electric bus or even 2 fully electric buses.
It's normal buses, the kind of buses we are selling all over today. And we equip them with our automation platform and we develop the interface to the system of Singapore together with the university. Last year, we also showed a Volvo FH truck that will be used for hub to hub transportation in full autonomous mode, also to be tested with customers. And when it comes to automation, we are thinking exactly in the same way as for electrification. We are thinking about using a modular toolkit, developing the components that we then can combine because as you understood from my former slide, these different customers, they have really different demands on us.
We are talking about, for example, sensors and sensor fusion. We are talking about perception system. Cybersecurity is definitely key when it comes to automation. But fleet and mission management systems will be super vital. Combination of this is definitely depending on exactly what application the customer wants to use the vehicle in.
Here, we also need to be extremely open to collaboration with different kind of partners. Automation is an area where no one will be able to do everything in house. And we are defining exactly the interfaces and with whom we want to work. So this is an area where you need to be extremely clear on your interfaces. And then another word that is extremely important in automation is redundancy.
If you
think about it, you are all
redundant you are the redundancy today in your passenger cars. If something stops to work, then you take care and you are the redundant factor. But if you aim to go for driverless applications, then you need to make sure that the vehicle has the redundant capacity, at least for vital systems, steering, braking and power supply. And we are developing this, of course, because that's the basis. And we call that normally, as you see down right here, we talk about the redundant vehicle with the automation interface.
And Martin hates me when I give in this presentation because he says, you are so boring, you engineers. How can you call something so beautiful, something so boring as a redundant base vehicle? And of course, he's right there. But this is the basis for automation. And then you add the autonomous stack on top of it.
And here, you can think about it. Normally then, when I'm talking about what we are going to do, then we are going to add our solutions on top of it. But you can also think about situations where we are going to sell a redundant base vehicle to someone else. In certain industrial verticals where we do not have the expertise, so we don't have the intention to compete, there we can definitely think about selling just redundant base vehicle to someone else. It's a little bit if you compare it to Volvo Penta business model today.
That's how we view this development going forward. As I said, we will start with automation in confined areas, then semi confined and then later going on to lanes on highways. City environments, I mean here, Downtown New York, it's extremely complex. And I can tell you, I am not telling my engineers to spend much time onto that. If that ever be far into the future, and that's definitely not anything we are prioritizing at all today.
But in parallel, as I said, if you remember the automation stairway, we are also putting a lot of effort into the more systems, more from a driver support angle. So we're working in both directions on automation stairway. Jumping over to connectivity. Martin has been into connectivity, Danny has been into connectivity, Jan has been into connectivity. It's a very wide area.
It gives a lot of opportunities. We have 700,000 connected vehicles. It's a fantastic asset. And one important area as Danube already have been into is to help our customers to increase the uptime, and we are taking big leaps there already now. But it also has the potential to increase the efficiency in the logistical chain, to improve the flows, better utilize both infrastructure and create new business models for logistics.
But another area for connectivity is also safety. When vehicles are connected, they can talk to each other, they can warn each other. Last week, we launched one feature that we have developed. It's a unique cloud based service, we call it connected safety, where all Volvo trucks and all Volvo cars, they are talking to each other through this cloud based service, and they are warning each other for dangerous situations on the roads. So you will get the warning when you come driving with a Volvo truck or a Volvo car.
You will not know exactly what kind of dangerous situation it is, but you will get the warning message, hey, watch out. 1 of the other guys has just sent out some kind of alert here. That's thanks to pioneering collaboration and a very good example of an ecosystem in this area because here you will see new alliances and new partnerships opening up in order to enhance safety and productivity. So to wrap up, electrification, automation and connectivity will reshape how we look at transport today. We will see a highly efficient and highly integrated transport system when these three trends converge.
For us, it's very much about safety. It's very much about sustainability, but we see also that customer productivity will be key in this. And this illustration here is a cool example. This comes from the friends of Volvo Construction Equipment. We are working together with a key customer Skanska.
It's called the electric site and it's really thrilling and electrifying to bonus. This concept is underway, and we dare to say that we are fully convinced that we will show possibilities to reduce CO2 emission from such a site with 95%, and the ambition is to show that it's possible to lower the operating costs with up to 25%. We will do that by electrifying the complete site and all operations inside the site. Many of the vehicles will be autonomous in different degrees. And of course, I don't think I need to say it, everything will be connected.
For me, it's a very good example of transport and transport development. Transport is the lifeblood of society as we see it, but it must be much more sustainable than today. As an engineer, I'm proud to say that I dare to say that technology can radically change transport. And by that, it will change our industry. It will change the business for many of our customers.
To be the CTO of such a group means that I have the privilege to work a lot with the future, and I'm using the word future a lot, I know that. But the future is not that far away. And with all this development in these areas, I dare to say, and that's how I normally end my presentations, I dare to say that the future is closer than ever. As a matter of fact, it's 34 minutes closer compared to when I started this presentation. Martin, some closing remarks from your side?
Thank you, Lars. And I started this presentation this morning by saying that the best KPI of the group is Stanley and colleagues. I have to say that I'm extremely proud of listening to Danny and to Jan and to Lars about what we're doing in these different fields. And the ending remark of Lars on the electric side, which, by the way, is a little bit misleading because it's not only about electrification, it's really converging the different technologies now into a system thinking because logistics and infrastructural development would be, as we have seen in automation for industries for many, many years. We have learned where are the right levels of automation in factories.
I mean, even in our most automated parts of the value chain, for example, cab manufacturing, volume wide production, etcetera, you still have the right balance where does automation matter, where does electrification matter, etcetera. And this application excellence will continue to be the key. And super exciting to see that now with Skanska. We have not revealed where, but we will start operation during this during this summer, as a matter of fact, the starting Melkhen and Lars. And we hope to have you somewhere in the world next time seeing that in real life also together with our partners.
I got a question during the break here. How do you know where you are in terms of the technology raise? You never know that. Should be very humble that you are investing correct amounts, not only in money, but also when it comes to resources competence. But we found maybe the most important way of looking at that is that we are working very close with leading actors in the different industrial verticals, our customers, all customers' customers.
Because the day they say, okay, we're not interested to work with you anymore, then think that's a sign that someone else is doing better here. So tomorrow means that interaction and much more of an iterative way of working will continue to take place. And I think that is also one of the key spots when we are talking about, okay, what will happen with the service market, with parts business, for example, when you move from combustion into electrification, how will that influence your total business, etcetera? And that is obviously relevant. We know quite a lot of that given the fact that we have more than 4,000 buses out, that we've had a way of working with an integrated business model.
And what we see is that not only for electrification, but also for these other type of more advanced solutions, we are getting a customer dialogue where they want us to be much more integrated over the life cycle. So in some cases, you will actually lose on the traditional part sales, but you will win so much more of working closer together. So the sum of the parts that is, by the way, popular to talk about from time to time, but sum of the parts is when we look at that, that we have a positive outcome because you're coming so much closer and you're working over the life cycle in a completely different way.
So
I will not try to summarize more than our intention with this day has been to make the combination of how do we continue to progress here and now operationally, on the different markets, in the different business areas. And most important, with our way you're working, the development of the culture and the drive within the group and also our strong belief in having a clearly decentralized organization with strong entrepreneurship and accountability, but at the same time combining that with smart scale, scale where it matters, not at least in technology and competence and modularity for the future. As a matter of fact, history, I saw that, that I think on our circle on the cost system, I think for Penta, we are only showing engines. But if you think about the IPS system and the whole propulsion that has been super successful when it comes to I mean, no one can have a boat without the IPS system today, obviously. And that is transmissions.
It's transmission technology big time coming out from Sherping actually. So it's showing there are so many different aspects of this when it comes to gearing technology for some gears. Hope that we have shown also that we are well positioned when it comes to investments. Now it's up to us how do we utilize this. How do we continue to build on the strong asset base that we have that is actually I mean, takes a lot of both investments and time to build up?
But I think we are there now in a good way. Network, we were talking about also in the break, a big, big asset that we can continue to build on that will be even more important for the future also with this solution way of thinking. And also well invested obviously in the product and services, the regional footprint, etcetera. Still big potentials, as we have talked about. Important that we continue to drive now underlying step by step profitability growth, continue to work with high attention to flexibility over the cycle, broad resilience, grow services, increased flexibility when it comes to the buildup of the product and really, really focus now because probably it will be during the Q and A, we're all in the cycle.
Who knows? The most important is that be ready, be agile and continue to work. Harvest when you can, continue to harvest also in rainy days with the service business that we are driving. And then obviously, what is super important, and we hope that and maybe some more questions on that also later on here, but the leading technology innovation. Now with the core system as a strong platform, we can continue to actually invest with good levels, but also to drive and to be leading in innovation.
I hope that you got the same thrilling and exciting feeling that I got when I listened to last year. And again, also showing a volume of financial services for us was a very important piece, obviously, for the business and the important and the retention, but also as actually driver of the service and the service mindset and the solution mindset in the whole organization. So that by that, I would like actually to invite Jan and Lars and Dernje up on stage. And we open up for questions and answers or maybe questions to talk with, and then we try to answer.
Thank you. Is it working? Yes. Klas at Citi. I have three questions, please.
Firstly, I want to ask on duty trucks. It's the thing that stands out when I look at the slides, obviously, in terms of profitability. You have launched a new heavy duty range. You're working on service excellence. You are lowering product cost.
You are outsourcing medium duty production in Japan. Out of these actions, where do you feel that you have made most progress so far? And where can we see more progress, so to speak? And then thinking about profitability, I suspect Japan is doing better than value in UD currently. But is it a low single digit margin overall?
And is the modern ambition to get back to the 10% that we had at Nissan Diesel at the peak? Just to understand a little bit about the moving parts.
First of all, I think you're into maybe the 3, 4 main areas that we're working on. And to start with, I think that all our time business areas last year actually contributed positively. And I think that is an important message and very important also for the performance culture as such. That and that's the whole idea also by the decentralized situation. You need to deliver on your own merits in order to be part of the group.
We have been clear about that. If anything, we are ahead of our internal, so to speak, plans and aspirations when it comes to UD. I think, as we said, I mean, the carve out of the UD truck brand was important because we were exactly in the phase where we needed continue to drive, so to speak, the efficiency and to use what we have in UD. The corn, well received. A little bit early, yet to say, I mean, how big the port had worked, but well received, good reception, reflecting good order intake.
We are now adding a number of very important performance steps step by step in the coming years, but working according to plan. And also, I think that the technology shifts we have been doing, that's also well received. So ticking the box so far. To your point, the service piece, I feel it has so far been the most important driving factor apart from, I mean, the efficiency program that we already made before, so to speak, going well, better penetration, etcetera, and using what we have. Then obviously, when it comes to UD overall, of several reasons, you are correct that, I mean, we have a better performance for the premium products.
But having said that, there are two reasons. The first reason, obviously, is that that is a more mature product. We have more rolling fleet and therefore also better, so to speak, mix between services and vehicles. And we are still building population of the value truck. I mean, Questor is now starting to get the rolling population, but Kroner is still a new kid on the block, so to speak, in Southeast Asia.
I think also when it comes to the cost reduction program and the openness working together with our other brands has also, in my opinion, surprised positively the pace and the speed and the openness of working and show Wing also that we must be humble as a group that we have partners that actually have knowledge that we don't have when it comes to frugality, when it comes to agility, when it comes to supply chain knowledge, for example, in India and China. And I think we have done fantastic progress in that. So I think there are different areas contributing positively.
Thank you. Then a question to Lars on long haul. It seems like cost of ownership on parity with diesel is more a 2,030 thing when we read about this and our own calculations. But in some cases, we could start to see ramp by 2023. When you look at sort of midday charging, some operators want to go green.
So they're basically saying that the payload issue, yes, we have a payload issue, but we actually want to populate the fleet with electric long haul. And also you have platooning, which can change the ownership calculation. Thinking then about long haul and your ramp when you think production and R and D, so CapEx and R and D, do we need separate lines if we're going for a full long haul EV solution or because you say right now that PPE and R and D will be relatively stable and you will sort of use the R and D capability you have today. But on the long haul range, I suspect it will be a bit different. So if you could talk about the timing on cost and production lines.
It's a very good but rather complex question. And as I said, the timing, we don't dare to give any really firm dates on timing because it's very much dependent on, as I said, the fast development of batteries. I think that's why you also see those kind of dates, fluctuations from 2023 to 2,030, who knows, definitely. Then let's say how much you need to change your vehicle configuration is also something that we are looking very much into. We have different alternatives going forward, but we are really confident in the setup that we have and that we have now shown with the first two vehicles that we have launched.
So this is the strategy we have chosen for to continue to develop those components. And of course, if you talk about a more heavy vehicle, then you will need more heavy components. We need to add some performance steps. When it comes to batteries, the idea is that you use the same batteries, but you use more battery packs if you need to increase the range. By that, you also then gain the scale of economy.
You get some higher volumes on the batteries. But for example, electrical motors, most likely for a more heavy vehicle, then you need to add another performance step. So this is we are following right now, and we believe very much in it for the years to come.
But I think, yes, to answer what you said also about the factories. I mean, if you think about it, I mean, on the powertrain side, how do you work with the powertrain today in a final assembly workshop is that you have a prefitting line for combustion engines, for example, when you're doing the marriage between the engine and the gearboxes and preparing that to drop for the engine drop, so to speak, on zone 8, I think it is. That means you will have the same type of setup that you have a pre preparation where you have another type of configuration that you already have in a chassis workshop since you have not one single more or less not one single truck is the same. So I mean this is the big difference obviously between us and the automotive and the car side that we are already geared for the variety, so to speak, because you need to be geared for that in the final assembly. So I think you should think about it like a pre assembly, but in a separate manner.
Then often people say, okay, but then you can make a different configuration of the chassis, etcetera. But you can and that we will do where it matters. But there is also a reason why you have frames because I mean there is a reason why you need also to actually be able to cope with the dynamics of, so to speak, how the road is looking like, etcetera. And that will not change because you're running on diesel or electric. It will still be the same, so to speak, road induction coming into the vehicle, something.
I have two questions, if I may. Rob Wertheimer, Melius Research. The first is just on OEM value capture in electric platforms versus standard. So I want to
know if there's more margin capture or
value capture or less versus all the investment you've made in making world class engines and transmissions. You're buying batteries, you're buying motors, is it a lesser opportunity or is a system integration big enough that you can't purchase that in from a supplier?
No. If I saw as I said, I mean, our experience so far, and that obviously will depend on what type of application we are talking about. But to really get the benefit of electromobility in the long run, not at least in many of the applications that we will see first, Yes, it is true that, I mean, like for like operation, it will probably be a little bit less consumption per vehicle depending on the how, so to speak, the complexity is looking like, etcetera. Then because you have then because you are changing the diesel engine or the combustion engine to an electric motor, it does mean that you will not have transmission. So that you will not have, so to speak, a different type of mechanical system.
So it's not that you're completely, so to speak, taking out the complexity. But on the other hand, as I said, that is what we see with the current update, not at least on buses. What we see is a much more profound, so to speak, relation with the customers. So that is, if anything, counterbalancing that in a positive way. But and that's the reason why the service piece and the service mindset is so important to continue to work on because it is by that partnership that you are taking out the true waste in the system that Lars was into.
I mean, with electric site, as we say, take out 95% of CO2, has big value, will have an increased value for the future, take out 25% of the operational costs, etcetera. And there, obviously, customers are more than willing to have that integrated system. So think about it more as a system.
I think it's also fair to say when it comes to industrial footprint, when it comes to these kind of components, it's a little bit too early to say what of these components will be real commodities going forward. Real commodities, more or less off the shelf components. And where will you really have the really true competitive edge. Where we are completely convinced is that when it comes to software and how you run the components, there you will have a competitive edge if you are really good in that. So that's a key strategic decision, say, that will be in house.
How you run a battery, for example, how you really run your charging cycles and your discharging cycles in order to optimize the life length or optimize the fuel savings or what you want to optimize. But it is, to be honest, a little bit too early to say what kind of components will be commodities and where will you have unique selling points.
Perfect. If I may. You didn't address this in great depth today, but you've been very successful in raising margins and returns and that generates a lot of cash, right? And I think in the past, you've sort of said we'll have a conservative position where in the down cycle we'll be well financed and we won't need to go. Is there a limit to that?
I mean, do you have plans down the road as you get more and more successful, more
and more margin? I mean,
is there a limit and what is your real thought process around how you redeploy the excess cash that you're generating? Thank you.
No, I think we take that as you know, we don't have a dividend policy or anything like that. We have said that we want to be in net cash. I think where we are today, yes, short of SEK 30,000,000,000. I don't see that as a problem. It's not a disturbing cash position.
Obviously, we address this every year with the Board and with the proposal to the AGM. And I've said it many times before, so you've heard it, we don't have the intention to be asset managers in the long run. And Randall, we think you are better on that one than we are. So there will come a point where we'll have to think about how to distribute whatever excess cash, how you define that and at what level. So we have to come back to that at that point in time.
And I think also, I mean, when it comes to what has been important for us is to communicate also, as Jon mentioned during his first presentation, around how do you think about the discipline around our capital allocation as such. So when it comes to PPE and when it comes to R and D, etcetera, we think and that with a good investment base that we have done and the assets that we have that we can yes, as we've communicated, have more of a one to 1 between CapEx and depreciation and that we also with the base of costs, etcetera, can continue more or less on the level that we are, but still doing the sufficient investments. That will change a little bit from year to year depending where you are in the cycle and some legislation may be coming up and coinciding, etcetera, but generally speaking. Then obviously, when it looks to the pipeline of the future where to be and should we bring on new things. I don't think we need that for I'm sure we don't need that for scale or geographical reasons.
But obviously, that we already are doing in small scale also, we are bringing on bits and pieces and either as partners or in some cases that we are actually investing or acquiring things. And there I think we will continue to peak, but still more on that level. So if you have those bits and pieces, I think you can reflect. Bjorn? Okay, sorry, Christa.
Christa Meiningold from DNB. Follow-up question on to Lars. Just to understand what you're thinking about the electric modular platform. What are you planning to produce in house? And what are you planning to outsource?
So the engine, batteries, etcetera.
As I said, we have not really firm decisions on exactly what to do in house and what to get from external partners. And it's exactly what I said before. It's also depending on, let's say, the development of these kind of components because you should, of course, focus on what is your unique selling points, your really competitive edge on those components. We don't think that we will be a really good commodity manufacturer of something where we principally would have much lower scale compared to others external ones. So there is no firm strategy that we can communicate regarding those kind of components, what will be in house and what is going to be purchased.
At the volumes that we're talking about now, they have a very good setup with the partners that we're working with. And some of the components, for example, the gearboxes that we're using in our fully electric vehicles, that's our own IP and it's manufactured in our gearbox and transmission plant in Koping, Sweden. So there we have already taken decision already for these low volumes that this is the right setup. And for example, transmission, Martin was into that. I had a talk with some of you during the coffee break and what is new technologies and what is well known and old technologies.
And for example, gears and shafts and transmissions is part of the future. That's really exciting technology and technology that will be on board on vehicles for many, many years to come. Some people believe that, that belongs to the past, but it does not.
And how big share of the market do you think would be addressable for EVs in, let's say, 5 years?
I mean, it depends on I mean, take buses just to be to take your current example. On city buses, the addressable market is 100%. And the share of electric vehicle is still very low. So I mean, the addressable market will be pretty big actually because, I mean, if you take now that we are introducing for waste, for distribution, for reading and haulage, for some of the confined areas like mines and quarries, etcetera. It's a pretty sizable piece of the cake.
How quick will the transition be? We don't know. And the important thing is that, again, we have the modularities. So we have the different product offers ready for the different brands, the different applications. And we also have the flexibility in the industrial system to cope with it.
So I think that is more because otherwise we can sit and do long term volume plans. And the only thing you know that they will be wrong. So flexibility and agility and speed here. And I think also another thing is that already today, I mean, 70%, 75% of the value into our trucks from a value chain perspective are purchased. But that's not the same thing as we are not, so to speak, owning the customer interface because we have the right parts availability, service presence, the full vehicle dynamics and interfaces, etcetera.
So that is what we need to continue to drive, the peace of mind relation with the customer. Then they will come to us and then so that will not be the determining factor of what is the industrial depth of our that we get hold of, so to speak, in the service business that we can do anyhow. It will be where does it make sense for us to be present on battery, for example. We will not do sales, I can tell you. But maybe we'll do some bits and pieces.
Let's see.
Just one more question on 2018. The operational leverage in Q1 for trucks was relatively low. Of course, you had the double production in North America and supply chain constraints. Going forward, volumes in North America should increase quite strongly, which means that there should potentially be supply chain constraints also in the future. And then you also have a mix effect with more vehicles and lower share of services throughout the year.
So just how should we think about the operational leverage when we look at the remaining of 2018 for trucks?
I think you almost gave the answer yourself a little bit, exactly how much it plays out. I mean, it depends a little bit. Obviously, the changeover is start with the service, that's there. I mean, obviously, you just can calculate it yourselves on how much you think the vehicles will grow compared to service. It's more of a mathematical effect.
The changeover in North America is done that we had in the Q1, maybe some minor effects in the Q2 that one is over. And then we just I think we have to see a little bit how it works with the debottlenecking with our suppliers. I think it's a bit difficult to say will it get more difficult or not due to the high volumes or in what pace can we and our suppliers actually do the debottlenecking. I think it's I think it's difficult to give any kind of forecast on that.
And maybe just to add to Jan, I think it's important to remind ourselves also that, I mean, when we started to discuss this in Q2 that now we feel that we are stressed in the supply chain. And then we have talked about that, that it continues. It is not the same bottlenecks. Obviously, when you have a book to bill that is positive, as we have had the last 3, 4 quarters, You always aim, obviously, to increase, but it's always a balance, how much to increase in relation to, so to speak, the possible risks of supply, but also the balance of how much, so to speak, cost should you take because it's also important that you're balancing that because the extra units that you get out is also good investments for the future with the rolling fleet and the service piece, etcetera. We will continue obviously to try to have a high level of output, but not to any price, so to speak.
So that is what we are discussing. But I think the organization has done a great job because from time to time it sounds like, okay, we have yes, we have bought them. It's not the same. I mean, we have developed that in a very good way, and we see that we will continue to drive that. Then quarter 1 was a big quarter for us with a keen cattle market and the finalization of Volvo, obviously.
It's Joe O'Dea of Vertical Research. First question on the construction side of things and talking about some of the targeted gains, I think in particular when we think about excavators and I think you noted some progress there. But could you talk about this is something that you identified a year ago at the Capital Markets Day, now revisiting it today. Can you talk about some of the progress that you've seen over the past 12 months and what you're looking at in terms of opportunities to really drive that share higher and kind of a time line around that?
Yes. Maybe I don't know, Melkki, if you would like to I'll try to start and then Melk, you can. No, but seriously speaking, we have made progress. If you look into the different parts of the excavator market, obviously, our stronghold is on the more heavy side. We have identified a number of gaps in the CMI heavy piece where we are working on that, so to speak, more on the product offering, but it's coming.
So I think from a strategy and focused activities working according to what we expect. But still, as you saw also, if you take the overall market share, there is probably the best potential when we talk about our 3 main areas, if I put it like that. But good progress and still work ongoing. I don't know if you would like to add something, Melkon, on that or
A little bit from the market side, but also on the product range. I think we have great products coming on board this year with a lot of these short swing models, etcetera, etcetera. So I think we're well positioned. And also in the cooperation with SDLG, we have
a lot to do.
So I mean, it's 52% of the markets. Of course, it's important for us.
Just on the EV side and the business model there
and how you go to market.
And so if you're going to have launches that are in production next year in medium duty in Europe, Is that a will the customer own those? Will you own those? I mean, how do you envision that just given some of the uncertainty and how quickly technology will develop?
And I think that is also something that we have obviously learned by the Volvo bus journey that we are offering different performance steps of that offering depending on what type of customer operation, what type of confidence the customer has in different ports. For example, battery management, we are offering everything from that you actually do the classical, you buy the whole packaging, the battery, etcetera, Up to that, you just lease, so to speak, the battery, and we are providing, so to speak, a cost per mile or per kilometer over the life cycle, etcetera. Same goes with infrastructure, loading capacity. It could be even up to traffic management surveillance. So we are building that with, so to speak, a modular setup of products, financing, service contracts all the way up to pretty advanced or very advanced full surveillance of the system.
And that is the same type of modularity we will offer also for refuse, for distribution, whatever it could be.
Stanzke. A question on Asian truck Davis and the profitability. Are you having the same ambitions very long term for those as you have for the group? And take you to higher levels, is that a question of the market becoming more advanced? Or is this a lot of internal work to be done as well?
Yes. As I said, I think it's a combination of both. We start with the profitability piece. Obviously, there is no reason, as we see it, why different or in the long run, it's not possible either. I mean that different regions should have different profitability levels.
And I think one good example of that, by the way, is SDLG, where we see that we are I mean, we are north of 10% and in a very competitive and, so to speak, value market. So when you have a good operation on that, we see that also in certain segments already today both with DFCV and VSCV. So there I think the answer is absolutely in order to be successfully in our financial targets over the long run, you cannot have different division levels. And there is no reason for that as well. Then having said on the growth rate, yes, part of it is with the more advanced logistics, we see the opportunity not at least for Volvo Trucks brand, but also for Volvo Construction Equipment with a more advanced solution, so to speak.
So yes, that is one piece. But also, I mean, and now with the scale that we have with both Eicher and DFCV and UD value also to continue to drive synergies and costs. And there we have ongoing program with good results. So we can also address and compete really in these more value markets with also with good profitability. So and that is the whole brand strategy that we can cover, so to speak of the different segments of the market.
It's possible to get a sense of where you are in the Dongfeng JV in terms of internal measures, product renewals?
I think this year is an important year, obviously, with a number of pretty big product launches for DFCV, as I said, not at least for on road and tractor and tractor trailer and these growing segments also continue to drive. And I think that our management team of DFC is doing a really good job when
it comes to the structural activities.
And now we're driving streamlining, for example, of the industrial footprint, but also very positively activities on the service and the commercial network. So I think good momentum, clear, so to speak, direction of improvement. And also, I have to say that I think we as a group has been better also to open eyes and ears and listen and learn from our partners in a good way. And I think that is obviously building confidence. So no, I don't know if you would like to add something on that.
All large. All large. All large. Perfect.
And the second question on full for large, I guess, on software development. And you're pretty clear that you're open for corporations in certain segments. Is that also related to software development, which I guess will be a core asset? Yes, absolutely. And it's more active safety primarily, but
Absolutely. And if you, for example, look into the area of automation, if you look into full autonomous vehicles, if you look into the full automation stack, you will have a lot of software that you need where you need to partner up with others. Otherwise, we will take only a too big chunk of work to do. So definitely, that's why it's so important to have good standardized interfaces and interactions than with other players. So definitely.
But as I said, parts of the software for these advanced vehicles will be extremely important to get your competitive edge. So it's very much about finding the areas where it will be super critical in order to be number 1 and then other areas where it's done just too big to do on your own, where you need to team up with someone else and where it is pure, let's say, commodity also from a software perspective where you can team up with someone. But definitely, partnership will be key going forward.
Thank you. Marc Zmidtermaj from UBS. Martin, you mentioned in your opening remarks sort of the impact of urbanization, middle class growth, e commerce. What's the assumption on sort of the normalized truck demand in North America and in Europe, sort of like if you look at sort of like a longer term sort of through the cycle period? And then secondly, on price realization on the new trucks that you have, so both on the Mac Anthem and on the Volvo side, can you just share some thoughts how that's developed over the last few months?
First question, if I understood, would be the what the business cycle looks like. And I think one of the things to stay grounded on the electromobility autonomy is that there is 3,800,000 heavy duty trucks registered in the U. S. Today. So that if we started taking 50% orders on autonomy or full, it would take still some time before that's soaked in.
So bottom line and the 400,000 that are in order backlog now are largely diesel, obviously are almost all diesel. So it's going to take time and I think all that you've heard today is very logical to stay close to fast fill opportunities and partnerships. I think all of that makes sense. Switching over to the pricing, obviously one would think with all the demand that the pricing is just going to zoom forward. I think you have to go to the customer though a little bit and see what that customer is facing today.
Driving the pay he is having to pay for his drivers is going up astronomically. You have oil, I think you topped out at $80 a barrel today. So these things are making it sort of congesting how much can be passed along. Having said all that, yes, we are doing okay on price realization, but it is also an opportunity for competition become somewhat predatory. Now they can almost afford to go in and grab a customer that's been yours for a long, long time.
So we have to defend these in isolated spots. Overall good, but it's perhaps not what one would think of as being boom times right now. We are also looking at the impact perhaps later of these tariffs or raw material inflation and how they will affect a long order bank. So all this means that we are we have raised prices. We have also been very, very careful on secondary discounts, but we have to defend our core segments and we have to be aware that the competition sees this as an opportunity as well to move share.
Then when it comes to the overall cycle, as you say, I mentioned that a little bit in quarter 1 also. It's obviously difficult to have an exact view on that. But if you think about, I mean, the population growth and the GDP growth is the most classical that we see, I mean, GDP and following them also how they install fleet and the order intake, etcetera. That will continue to be the basic driver obviously. But I think there are a couple of new pieces bringing a new dynamic that if anything is positive to the total demand.
And that is obviously e commerce. We see that, that has a positive effect for transport, meaning more transports. But we also see that when that is happening, not at least in big cities, there is also new requirements on how this should be done so it could be sustainable, which is also a good effect for us because those are the most more advanced, so to speak, full solutions that we are looking into. And that's the reason why we have a strong position, for example, for Volvo Trucks in China. So I should think about it that if anything, if we have said that midpoint historically is I don't know what is the midpoint, but I mean, if that is something like 200 just assume that at one point in the cycle then, it has been traditionally 275, percent.
I think one should think about adding a capital of percent, and I don't want to guess about that exactly. But since we have a new dynamic, that's for sure. Then having said, that is one thing. The other thing is obviously that the markets are continuing to shift as such. China should obviously not be 1,000,000 heavy duty and medium duty vehicles per year.
It should be 500,000 with the right type of equipment and with the right type of logistical setup. I think the good news for us there is when the market will go more into these type of volumes, it means also that the market will shift into the type of solutions that we are standing for. And that's the reason why we need to continue to invest in network, in the brand presence, both for DFCB and for Volvo, etcetera. So it's a little bit difficult to just but I think if anything, those trends will drive that. And then obviously, it will continue to have demand.
We see that now with the commission coming out with 2025 targets on CO2 and 2,030 targets. And obviously, that will continue to be a driver also, and that's the reason why we're investing in new technologies. We'll make the tool first, Claus, and then you're coming back to it.
Just a quick question on the new LNG truck. Are you seeing how are you seeing that ramp? And are you seeing it as an ability to take market share? And does it have any applications in other markets other than Europe? Do we start to?
I can start to say that we have been very successful so far with a lot of introduction events. We have had a lot of customers out to test driving it, and we see now ramp up of orders coming in. So far, it's just launched for Europe, but we're always keeping an eye on the ball and discussions with different parts of the world where you have where you will have the infrastructure because when it's LNG, you're completely dependent on that you have the infrastructure. So it must start with that you have some kind of cooperation with someone setting up an infrastructure, then it can be very interesting for other parts of the world as well. But so far, it's just launched for Europe.
And so far, we are happy with the sales.
Yes, we are happy with the sales. And we and when you have started such a product also, obviously, we're getting requests and discussions from other regions also. But again, as Sascha, the given right type of infrastructure, etcetera, we have it in the modular platform for the future. So one also interesting part in this Musa Iq of different powertrains and renewable fuels.
Thank you. Klas from Citi. Just to follow-up on pricing and thinking about the drop through into the second half. If lead times are extended, both in Europe and in North America, if we have the new VNL, VNR and the Mack Anthem, shouldn't pricing on the new orders compared to last year that are in for delivery early autumn be better, I. E.
Price cost all else equal in truck should be better in the second half versus the first half?
That's an interesting question. I think we are as, of course, ambitions when you come with the new truck, which we didn't have last year. So on the pricing side, obviously, we have ambitions. And as Steni said before, it goes actually according to the plans that we had in the project as a whole. Then what we have is that we have a little bit of a pressure also on the raw material side.
As we said before, I mean, that continues into this year. Then we see how much we can offset with commercial negotiations. Last year, we were flat on that one. This year, starting like that as well. So we'll see how it works out.
And I think also I mean, we commented that also during the quarter 1 call or conference. I mean, we said, I mean, if anything, we have seen in quarter 1, somewhat positive price realization both in Europe and U. S. And it remains a priority, obviously, both for the demand level as such, but also for the new launches.
It's Jim Irwin at Moon Capital. I wanted to follow-up on a comment you made in your opening comments that you're connecting the dynamic of you're dickering over a 1% or 2% price increase when in fact you can help that customer save significant operating costs over the total cost of ownership. And I want to tie that to your chart where you showed the number of connected trucks and the pretty significant growth over the last 5, 6 years up to 700,000 now. And then you mentioned the service contracts in Europe. And could you give us a sense of structurally over the next 3, 4 years as you continue to drive that connected truck and that customer total cost of ownership, can you give us a sense of the structural improvement in Volvo's profitability structurally as you basically are saving the customers money, which translates into your point about maybe getting better recognition of the value you bring to the product you're selling.
Now Europe, of course, has a much more vertically integrated distribution dealer network for you. So I don't want to say everything can move towards Europe profitability. But can you give us a sense of the magnitude of that opportunity in the next 3 years in terms of the structural improvement that your connected trucks and that total cost of ownership discussion can bring to the table?
First of all, I think as we said, I mean, and a little bit as I bought into with the potential of the installed fleet as such, I think already today with installed fleet and the future deliveries, we have significant potentials to be better in the one to 1, so to speak, 1 or to have a better or higher market share of wallet of the existing services. And one important piece of driving that that we showed with service contract is, as a matter of fact, the connectivity. So already to your point today, connectivity is supporting us to be better in order the existing services, more proactive, bring more clear value, showing also to the customers what that type of cooperation is giving. The uptime piece in North America is one other example where we see how that is driving things. So that upside is still big.
3 years is a relatively short period because, I mean, when you have the contracts, it take I mean, it's like the proprietary so I mean, it takes time because we are talking about the complete fleet. But I think if you think about it in the 3 years, we will continue to see that we are, so to speak, moving in the right direction that will continue to be extremely important for us. And it's already one of the key explanation why North America, for example, is much more resilient to the fluctuations is that we have been better in services already, but there is still more to go. So I fully support what you say that this has a very important piece of our structural, so to speak, resilience to and maybe most important is that in order to come to our financial targets over the long run, the service piece is obviously very important to manage the whole cycle. And their connectivity is the cornerstone for doing that.
So and that's the reason also why we try to disclose and show what is happening in that also because bringing that to the investors. And then to your point, maybe the most important is that we see when we are getting more relation with the customer, financing, insurance, connected solutions, service contracts, surveillance, etcetera. Loyalty retention, partnership discussions over time is on a completely different level And a 2, win win also. No, no. But I think I mean, in order to reach that step of I mean, our financial targets of the margin, there are 2 pieces, obviously.
That is, as you say, better resilience, so to speak, to the cycle, thereby narrowing, so to speak, the gap between ups and downs. And then the ongoing, as I think we have also been proving, even I mean in the quarter 1, as we said, I mean, we continue to drive, so to speak, the underlying profitability quarter by quarter, and this is important. So we're working with both here. Services, extremely important. High flexibility, as we've said, in the industrial footprint.
But also, I mean, in the whole system, so to speak. So and here, for me, decentralization and regional value chains are extremely important because you can act so much quicker when you're sitting as close as possible to the market.
Chris, you told me to have a short question. But so I only talk about Q1 then. Could you give us a sense of the impact from the U. S. Ramp versus the supplier constraints, so we get a sense of which one was the big one?
That's a short question. That's a short question.
I'm not
quite sure if I want to answer that one. We package it together and then we said that together it's the biggest explanation for the negative I mean on the negative side. But both of them are sizable actually. So from that point of view, yes.
Got it. Fifty-fifty.
You're not that far away then, but it's not correct.
Okay. I think that was the last question for today. We hope that you have found the day interesting. Obviously, we are to your disposal for further questions and comments. And you know the man, the music, the magic, Kristi Johansson and the whole team.
I would like also to take the opportunity to thank the whole team who has been working with this Market Day also. And thank you for coming, and thank you for believing in Volvo for the future. Thank you.