Morning, everybody. My name is John Hartwell, I'd like to welcome you to the 2014 Investor Day. Just to give you a little bit of the logistics, we're going to have presentations by our CEO, Olof Persson, Jan Gurander, our CFO. We're going to take a little break, go into the other room, have a little bite to eat, and we're going to come back. We're going to have presentations by the EVP of Truck Sales Marketing, Dennis Slagle, and EVP Construction Equipment, Martin Weissburg, then we'll go into Q&A. The one thing I ask for Q&A is wait for me to hand you a microphone, because this is being recorded for webcast. As far as the Wi-Fi, St. Regis Meeting Rooms, passcode V2014. With that, I will turn it over to Olof.
Thank you so much. Almost welcome to this Capital Markets Day here in New York as a tradition this time of the year. It's good to see that so many of you have had a possibility to come here. What I would like during the next 45 minutes talk a little bit is about coming back to the transformation story and the phasing that we're doing, the activities that we're doing, and how we are working very actively on position ourselves, going from one phase of the company historically to another, and touching on those issues that you see on the screen. Many of you have seen this slide, I do come back to it because I think it's fundamental to what we're trying to do.
Talking about the 1999 to 2011 acquisition-driven growth that took us from being a niche player in many markets, actually to becoming the global player in not only the trucks, but also in construction and equipment and in buses. Driving revenues from the SEK 100 billion sizes up to the SEK 300 billion sizes, which we have seen them. Adding on all those brands and acquisitions that we did. During that period of phase, we should also remember that, as you can see, there was a very hectic and very active period in the company's growth. Of course, you're adding on companies, you're adding on complexity, you're adding on issues around efficiency and how we drive things.
When I came on board in 2011, we said that now we have had this 10 year of expansion phase, we need now to make sure that we take care of, and also utilizing what we then call the full potential of the group. That means that we need to focus the next years on integration, on cost efficiency, and on making sure that we take care of the asset of the group in terms of brands and the investments we have done. Therefore, we are now in the midst of what we call transformation. To me, there is a big difference between change, organizational change or focus change, and transformation. We really want to change much more than just organization or the way of working.
It is a mental set, it is a mindset in order to prepare ourselves going into 2016 and onwards in a better shape than we have been before in terms of profitability and effectiveness. In order to do transformation, we need to, I think, both externally and internally, making sure that we have a structure. Transformation doesn't happen by itself. It's a lot of hard work. It's a lot of engagement that you need from the organization, from the customers and others. Therefore, we decided early on to make sure that we broke down the transition period into focus areas by calendar years. Here you can see then the 2012, 2013, 2014, and 2015, which are then the main focus that we do have during this transformation period.
2012 feels like a long time ago on one hand, and on other hand, it feels like it was yesterday, basically. If I look what we did in 2012, and it's good to go back sometimes and look at the aspects of the changes that we are going through, you can divide 2012 into three major blocks. One was the reorganization. The reorganization by itself actually broke with a 30-year principle or history in the group, where you actually had a very business area by business area, company by company approach. An organization, I should say, that served very well during the expansion phase, because it was easy to add on extra business just by adding a new business line or a new business area to the organization by itself.
It didn't really combine the dots when it comes to the efficiency, when it comes to the coordination across the group. Having that kind of organization also drove another thing, and that is, of course, the speed. Company by company by company meant also that we had a structure over the years that was very board driven, internal board driven. Each and every one of the company had their own internal board. The board, as you know, met once a quarter. You had that kind of rhythm in the company was very much based on a rhythm of quarter by quarter board meeting by board meeting. My personal belief is that if you really want a transformation and if you want to make a difference, you need to increase the pace in the decision-making.
You need to increase the pace in the organization, regardless if it's a large or small organization. Therefore, we also attacked or tried to change very much during 2012 the culture of this board meeting by board meeting culture into much more speedy operational culture and decision-making. Basically running on a weekly basis, a monthly basis, making sure that everyone is up to speed on that rhythm. The organization itself then turned from being a business area to a traditional functional organization. My philosophy when it comes to organization is that you need to have it as simple as possible, and you shouldn't work with more than two dimensions. When you have matrix with up to two or three, four dimensions, it becomes very complicated and also in some aspects, inefficient.
We're working with one-dimensional organization chart, a traditional functional organization, and the second dimension that glues this together is then our global processes. To set the scene really for the transformation work that we needed to do, we needed to build a certain foundation for all our employees around in the group. That we did by utilizing the strategic tool. Basically we redefined the whole strategy in 2012. We put out the targets where we wanted to be. We clarified the key focus areas. We clarified the strategic objectives. We put numbers to it. We put in a monitoring system to it, and went basically again from a half-year follow-up on strategy, now looking on strategy on a monthly basis, the progress on the strategic objectives on a monthly basis.
Again, they're a higher speed when it comes to following up measure and making sure things are moving in the right direction. We broke down the truck strategy into 20 strategic objectives. Then we decided in the 25th of September in 2012 to actually go out and utilize the same information internally, also externally. We did that on the capital markets day, where we then presented our 20 strategic objectives and the targets for those in terms of financial improvement up until the end of 2015. Transparency is one of the key words during this. We should put the pressure on ourselves to achieve what we want to achieve, and we should then also making sure that you, as a community of shareholders and others, are aware of and also know what we are doing, and can measure ourselves what we're doing against that yardstick.
This I've talked a lot about, I think most of you have heard it. What I would like to focus a few minutes on this slide, is actually to the very right, the brand. For an outsider looking in, this might not be seen as a big change. It is a very big change in the way we're treating our brand asset and the portfolio. Going from a brand-by-brand distinction, where the brand themselves had a very good large liberty on deciding on the positioning, the market, the market access, the market attack, the way and product and so on and so forth. We took in 2012 as that this is a corporate asset. Okay?
The product portfolio is a corporate asset. We from a corporate then take a portfolio view on where we should launch and how we should treat the different brands in the Volvo Group. Coming up with a brand positioning work that we did during 2012 also presented a number of times, where we now have an alignment step-by-step with the product plans going forward with this position of the brand position. Here, I think if you look at the assets we have, we have enormous amount of assets in the Volvo Group, but this is one of the key, the brands and the brand values, and also now having brand values really distinctively allocated to the certain segments that we want to make sure that those are covering. Which means that we have over time, by doing this, expanded our potential market quite substantially.
The medium and the value basic segments, the value and the basic segments are segments that we traditionally not have been, but it's huge segments. With this strategy now, we're moving in step by step. I will come back to that a little bit later. The foundation and the platform for actually taking the change, that was during 2012. Looking at complexity in terms of doing transformation, you have to make sure that you do this right. You need to have a solid foundation to move forward, because if this starts to shake, then you basically are not getting the traction you want to do in the change going forward. Moving into last year, 2013. Jan will come back on the financials a little bit later on the 2013. Heading basic costly, but definitely successful.
I think that when we look back on 2013 in five years' time, we will consider it being a very special year because we are in the midst of the transformation. In midst of that transformation, we added on the complexity of also having the largest product launch in the Group's history when it comes to renewing the full Volvo Trucks segment and product, and the full renewal of the Renault Trucks. We launched the Quester truck in August in 2013. On top of that, we also got the Eicher new line coming out from India. That's not all. We also had new products and engines coming out from Volvo Construction Equipment. We came out with hybrid buses, plug-in buses for buses. We also worked on new engine technology for Volvo Penta.
That means that 2013, from an activity point of view in the company, was extremely elevated because having these kind of launches coming into one and the same year means that is, of course you have the sales cost going up. Of course you have the R&D going up. It's also impacting the whole company. There is no one single person in the company that doesn't get affected by this because it drives so much activity. What we said very clearly during these launches, we'll not spoil many years and SEK billions in investment by failing doing something bad when it comes to launching this. We saw that on the Volvo Trucks side that the launches were received very well. As I said in the Q4 report, the momentum in terms of market shares with the new product is definitely there.
I will come back a little bit later on that as well. That is extremely important because coming into 2014, we wanted to really make sure that we had a positive momentum on the market and the market share side in order to be well prepared on the volume side coming into 2014. Again, a very special year, 2013. We have talked about this a lot. There is actually one dimension that we haven't talked so much about. That is our Asian puzzle, and how that actually during 2013 came into being not a puzzle with missing pieces, but actually a puzzle that ended up being a full coverage.
We do have now with the joint venture we have in Eicher, which the new launches of their new truck line end of December, a company which is the third largest commercial vehicle producer in India. We're very well established both on the truck side, but also on the bus side when it comes to India. We have made substantial investments in Eicher. The company itself has made substantial investments, the joint venture, in state-of-the-art facilities like engine factories, production upgrades, and other things in order to make sure we get a good productivity. Of course, as I've said a number of times now, the new Pro series is then the life of Volvo and Renault, the product that Eicher now going to thrive from going forward in the India market. Moving on to China.
We got now the approvals from NDRC when it comes to forming the strategic alliance, we are on track to do that by mid-year. This gives us, of course, a position in China on the truck side, which is very, very good. Having that, being one of the absolute largest producer of trucks in China means that we can utilize that huge market in many ways, both in terms of driving business and taking more market share for the strategic alliance and the joint venture, but also looking into how can we over time making sure that we can tap into the supplier base of this huge company and the volume aspect we have on many of our components that are then volume dependent. Finally, on the right-hand side is the Quester and the launch of the Quester, which has been received very well from the market.
Our challenge right now is actually not so much the sales, it's more about ramping up production, this new industrial systems that we have in Thailand, we're going to continue then to invest to produce in India and also then also in China. This gives us the overview, next slide I think will show you why this is so important in terms of actually being a player in the growing Asian market. This slide shows how the market looks like. The red bars there are Japanese producer. The yellowish is the Indian, then you have the grayish, which is then Chinese. Then you have the markets on the other side. On the bold, you can see our approach into that.
I don't know how many is actually aware of that in the Southeast Asian market, 88% of the truck market is actually driven by Japanese producer. That's Japanese brands that have it. You can see then that the market side from the European and also from the Chinese is about 11%, 12%. Then you can go to Japan, which I think everyone knows is a heavily Japanese market, of course. India, you can see that the 99.5% is actually Indian-produced trucks. Then if you go to China, 97% is. In order to be a really player in the Asian market, you need to be local. For us, that means local. The segment, which is the old, I would say, call it traditional Western European importing, or the Western European segment in general, is about 2% of the total market.
This is a huge market in these four regions together. We feel very good about that we now have sort of not only done the puzzle in order to be present, but we're actually present with the right brand, and thereby also making sure that we have the opportunity and the possibility to attack the market with a local product and with the right brands. Another very important part of the transformation and the program is, of course, all the changes we want to implement. We said, and I said quite from the beginning, that there are no secret or sacred corners in the company. We need to attack everything that we see we need to do in order to improve the efficiency, in order to meet the targets that we want to achieve by 2016.
Therefore, we went through in 2012 a lot of different activities in order to identify what is it internally that we need to do in order to make sure that we reach the target. Because some of these have long lead times. Some of the structure changes that we have to do does take implementation, it takes some investment, and then we're going to see the effect of it. Therefore, 2013 was also a very important year of keeping the pace on taking decisions, internal restructuring decisions. We have a couple of them. You can mention, for instance, the reduction of the white collar and the staff functions. Jan will come back to that a little bit, but our benchmarking clearly show that over the years we have built ourselves very large in staff and support functions.
If we compare to competitors or benchmarks in the industry, we were simply too heavy on that side, so we needed to do something. Hence the program that we launched in 2013 coming out in October, November, I think it was, when we talked about that. We also saw that when in general on the white collar efficiency, we also had a deficiency in the way that we actually are the number of white collar, and therefore we have this total 4,400 program that we launched in September as a program and with the numbers in connection with the Q4 report. That's one way. If you look on the very bottom right, you can see something we don't talk too much about, and that is the enormous transformation that our Japanese organization has gone through.
You can see all the activities that we have put in place in Japan, which we have executed or are about to execute in order to get the Japanese operations up to speed with the market, up to speed with its new role, and up to speed with efficiency and profitability that we want to have out of that market as well. These are the activities that we have done. We're also making sure that we are looking at the products and where we are and where we should not be. One example of that is UD in the U.S. We've been there for years and years with that product, but small volumes, not really profitable, and we took the decision, and we exit UD from the American market. Those kind of decisions is something that we're looking at all the time.
If you look at the European production system, we have talked about that as well. You are looking at the structure of production, where we then have, before we had the Renault Trucks production system, and we had the Volvo Trucks production system. Now that is one production system, and by merging these two together, we could see that we actually could reduce the number of production lines, we could streamline the production of the medium duty, and we can move certain things around in the system as well. We thereby get a much better, more efficient European production system than we had before. That is something that is implementing as we speak and will be implemented. The European distribution channel. Another huge change. Where we looked at the Renault Trucks and the Renault Trucks distribution coverage in certain markets, we definitely saw that it was suboptimal and not very profitable.
How could you address that? Well, we had a big asset with Volvo, which has a larger scale network in certain markets, and therefore we decided to merge the dealer networks in terms of back office, in terms of service, not in terms of sales. I want to make clear that sales is still very much separate. Thereby increasing the touch points for the Renault Trucks customers with up to 40%. That is also under implementation and a lot of activities has been done there as well. You can see that we have done a number of other activities as well, and I will not go through all of them. Time will not permit to that.
In general, you can say that we are not afraid for taking the necessary decisions, but we also have to make sure that we take them in order to make sure that they were implemented and can be fully effective during the strategic period we are talking about. All of these will be that going forward. 2013 is much more than just the product launches. It is the product launches definitely, but it is also, as you can see here, a year when we took heavy decisions and started also to organize the organization going forward. What is then 2014? Well, we have called it a year of efficiency, and this is now sort of two sides of this year.
One is, of course, to make sure that we continue to keep the good momentum that we have seen in the truck market in particular, but also on the CE side when it comes to our organic growth. The key with this strategy is that we, instead of going by purchasing companies, that we now take this asset and grow organically. That is the key thing. It is good to see that we ended last year with a good momentum. We just received the registration statistics for Europe, and the momentum seems to continue. If you look at Volvo and Renault Trucks together, in January, we had a market share of 30.1%, I think it was, which is, I know it is one month, but the momentum is definitely there. Volvo is on 20% market share in Europe.
We still see positive development in Brazil and the U.S., we'll come back and talk about that. The momentum continues into January as well, and that is extremely important because that's the left-hand side of this slide. We need to make sure that we don't lose sight of that during the year of efficiency. We will still have some structural things that we have to take care of, in particular when it comes to the European production system, where we have been running now with double production line, both the old line and the new line for quite some time now in the European production system, meaning that we have inefficiency and extra cost on it.
Week 11, which is just around the corner, we will then cease the production of the old FH in the European system, and from there on, it will only be the new FH and the new line that we will be producing. In mid-year, we will do the same when we talk about Renault. On the efficiency side, we are divided into three parts basically. It is what we normally talk about the cost efficiency, and our task now as a management is actually to go from this very elevated activity level that we had during 2013, during this special year, and come down to a more normal activity level and cool the whole system down when it comes to activity. All those activities are driving a lot of cost resources, and we need to make sure that we land that in a good way.
When I talk about the white collar and the white collar reduction, the 4,400 is not based on any cycle in the business. That is structural. That is reorganization, that is redesigning how we work with HR, how we work with IS/IT, how we work with finance in order to structurally reduce the cost structure. Of course, we need to come from the elevated levels when it comes to R&D and S&MA cost in order to come down to a level where it's more sustainable from the elevated level we had last year. We're also looking at the capital efficiency, Jan will come back to that later on when we talk about the working capital and also what we're looking at investments.
Finally, even if it's last on this slide, it's one of the key success factors, and that is now to really making sure that the cost is driven out by world-class global, local, and regional processes. That is the kit in the functional organization that has to work, and that is something we're going to keep a very high focus on this year. It is something that coming from a company by company structure and culture is something new. We need to work across the globe, but also across the different functions in a good way. It is where we're going to keep on having continuous improvements. Not going to be from the organization chart, the boxes. It's going to be that we are world-class processes from everything we do and all the different aspects of doing the business.
There we have a huge amount of activities ongoing as well. Having executed that should then lead us into 2015, where we have major part of the cost structure in place. We have continued to utilize the good momentum of the new products. We are going to have also in 2015 to finalize some of the more long lead items that we have in the more structural changes, particularly in the production system that will take more than one year to execute. We're going to do that during 2015. Of course, we're going to continue to focus on the different strategic objectives like the reduced product cost, which is a important part, where we're then looking at how we're going to reduce product cost in purchasing and manufacturing. As I said before, we are not finished with the efficiency.
The efficiency on the white collar side will continue to do, we will keep on focus on that also during 2015. By doing that and putting this all in place, we are then looking at going out of 2015, meeting the financial improvements that we have committed to in our strategic plan, with the SEK 9 billion improvements compared to 2012 including then the headwind and all of that you are well aware of, that we have communicated so many times. Basically then we are wrapping up saying that is the strategic plan. Moving into the year after the strategic plan with the new products in place, not only in place, but also established, really established, because it takes some time to establish the new products on the market.
Of course, we have been off to a very good start, but we need to continue that to make sure that we are continuing with that. We have then worked two years basically, or this year in particular, but also next year in efficiency, first reducing the cost and then using that cost as efficient as possible so we get as much output as possible from that, meaning that we're efficient group. As I showed you, then taking the final steps then both with the Dongfeng strategic alliance, establishing the Quester really on the Southeast Asia market, but also in India and in China, and thereby making sure that we are participating in that large market, which is on the lower side of the product scale, if you turn on basic and value products, which we then have a full coverage of.
With that in place, we then move in to 2016, and a new strategic period going forward. That was basically my comments and presentation on this opening. Now we're going to continue with Jan, who's going to talk a little bit more of the financials.
Thank you, Olof. As Olof mentioned before, this is a year when we will definitely focus on balancing or rebalancing this company when it comes to our cost structure after the very hectic and busy year that we had in 2013. We will also have to rebalance the company when it comes to our capital efficiency, which is also an area where we have room for improvement and where we need to go back to levels that we have seen that Volvo have achieved in the past. Before going into these two areas and dig a little bit deeper into what we do there, I will do a little bit quick wrap up on the year 2013, and build a little bit of bridge also between 2013 and the year 2012.
Of course, the year 2013 was not the year that we were overly happy and satisfied with the results. Coming in with SEK 7.1 billion and just 2.5% of EBIT margin. While we at the year 2012 had SEK 18 billion in operating income, yielding something like 6% of operating margin. The main explanations for this downturn in result comes first and foremost out of the fact that we have SEK 27 billion less of sales, and that gives us something like SEK 7 billion less of operating income. We also have a few one-time factors as well. You know that we sold Volvo Rents in 2013, which yielded us a loss of SEK 1.5 billion. In the year of 2012, Volvo Aero was included in the group for something like nine months, and also there was a capital gain end of the year.
These two effects together was a positive SEK 1.4 billion in 2012, which then yielded us a negative in 2013. We see also the effects of that we have, over the last couple of years, invested a lot in R&D. By doing that, you know that we capitalize quite a lot in our balance sheet. During 2013, the activities gradually came down. The net effect of our capitalization and amortization of R&D is actually something like a little bit more than SEK 1 billion between these two years. At the same time, the cash paid out on R&D was actually improving. It was SEK half a billion lower. You could already see during 2013 compared to 2012, some lower activity levels in our R&D.
Due to the fact that we launched a lot of products during the course of 2013, we had an increase of the selling expense, a little bit more than SEK 1 billion compared to the year before. We also then see the restructuring charges, which was actually higher in 2012 than they were in 2013. All in all, these are the explanations, approximately SEK 11 billion between these two years. We have also talked about the currency effects. The currency effects, they show up on all of these lines, basically, most of it in the first line, the change in gross incomes. All in all, they added up to SEK 3.5 billion negative for the group. Looking into the operating cash flow, which was a negative of approximately SEK 4.5 billion in 2012. We see that it was a positive of SEK 1.5 billion in 2013, absolutely not on an acceptable level.
We could see some positive effects between the years. Investments, both in tangibles and intangibles, were a little bit lower in 2013 than they were in 2012. When it comes to the working capital, not at all satisfied, but nevertheless, slightly, I don't know if you'd call it better, but at least not as bad as it was in 2012. It was especially the accounts payables that did a big swing in 2013 compared to 2012. Looking a little bit more into what we are planning for this year. When we look upon the R&D, we see that we are in a high level with a clear intention to now come back to a more normalized level. What will we do then?
We have to finalize our product renewal, as you know, we are gradually still putting some new features and so on out in the market here for the first half of 2014. We also need to review our product portfolio. That's something that you always have to do in a company like this. This is not about closing down any brands or anything like that, but you could imagine after these 10, 15 years of acquisition, acquiring brands and so on, different sizes, different applications, and so on, there's always a need and a possibility to streamline that portfolio a bit without hurting sales. There is always a tail that you can take out that will not hurt sales. Salespeople will always complain. I have my colleague here, so I'll be careful with what I'm saying.
They always complain and say, "I need to have that kind of feature because then I can sell X hundreds or a thousand trucks more." I always tell these guys, "If you have what you have, you will sell more of what you have." You can always take out this tail, and the sales guy, they will focus on what they have. I'm not overly worried about these kind of things. You can actually streamline your portfolio quite a bit. That goes also when it comes to models and variants, it's the same kind of reasoning. After years and years, also streamline very efficient companies, they end up in situations where they suddenly find out that of that axle combination, we sell 10 globally. Then you can imagine the cost that that drives. It's not big things that you do.
It's only about making it more and more efficient the way you work. R&D is, of course, the area that will be influenced from a positive point of view. Then, of course, the work we do continuously in an organization like R&D is to work with productivity or efficiency to get out more products with the same cost or a lower cost. We don't talk so much about that, but there are programs ongoing in Volvo where we actually make our organization better, higher output with the same or less people. Of course, as Olof mentioned before, we have the structural reductions of white collars in R&D. If we then move to the selling expenses, quite obviously, the most obvious reason why we see this increase is of course, due to the fact that we have the launch cost during 2013.
Apart from that, the work we do when it comes to our sales network, and that's mainly, I would say, in Europe, EMEA. We actually now combine our, what you call wholesale for the two brands in Europe, Volvo and Renault. Back office-wise, that gives quite an efficiency. As you also know, now we merge our, to some extent, not everywhere, but approximately 300 dealer points are getting reduced. We merged also workshops for Volvo and Renault. That also drives out costs when it comes to selling expenses. I think it's extremely important to notice at the same time, when it comes to the selling forces, we keep them absolutely separate. We want Volvo people to sell the Volvo trucks, and we want Renault people to sell the Renault trucks. That is the trick we do on that side.
The back office will be quite reduced here, and that will positively influence the selling expenses. Here is an area where we can see when it comes to administrative expenses that actually improved a little bit over the years, when it comes to as a percentage of sales. We saw that it increased a little bit during 2013 in absolute numbers, and this is what Olof talked about before. The fact that we were so busy during 2013 drives a lot of activities, and it's not only in R&D, it's not only in selling, it goes also among administrative people as a whole as well. This is also something now that we need to bring back this trend to continue to bring down the administrative cost. I think there's a possibility to drive it down also as a percentage in the long term of net sales.
IS/IT. It is actually a little bit of a similar work you have to do with IS/IT as you do within R&D. You could imagine how many IS/IT applications you have within a company that has been so big, acquired companies over 10 to 15 years. Before we have harmonized processes and support these harmonized processes with good IT solutions, we are of course, highly inefficient here. That doesn't mean that we can do a big bang today or tomorrow. I can tell you that will be quite costly. This is a continuous work with improvements. You will also here find applications. I can tell you, I've seen in my previous lives, examples of applications that's been run and used maybe by two people in big organizations. This is, of course, not efficient.
There are many ways that you now have to take out this tail of small applications that are not crucial to the company, and you can by that taking out cost quite a bit. Of course, we do the efficiency work also here, taking out layers organization-wise and also to improve the efficiency on IT. As you will see on the next page, it is quite a lot of people that we talk about when it comes to headcount reductions, both in white collar and consultants on IT. It's 1,200 that we talk about. To come up to this 4,400, we talk about something like 800 from manufacturing, 800 R&D and purchasing, that's mainly R&D. Sales and marketing Europe, 700 due to the restructures that I talked about before.
When it comes to the back office function or administrative functions, finance, HR, and other staff functions, all in all 900. The vast majority there is finance. All in all, we come up to 4,400. This is loaded towards the end of the year, and some of it, tiny part of it will drop into the beginning of 2015. This is the program that we've been talking about now since, I would say, September last year, for the Volvo Group. Looking into the capital efficiency, and we start with the working capital. Since I'm new in the company, I can tell you from the outside, I've always been impressed by the way that Volvo has been working with its working capital. Measuring CCC days since I think more than 15 years back.
This is an area where we need to come back to this being world leading when it comes to working capital, which is actually what Volvo has been. As you can see here, the two focus areas that we have to work more with is our inventory, and it is also to some extent our receivables. I would say mainly our inventory. One of the main reasons structurally that we have a problem with our inventory is of course, due to the fact that during 2013 we have been working with parallel production and these kind of things. That drives inefficiencies when it comes to working capital as well. When we phase that one out, we can become a little bit better there.
Of course, also to improve and maybe come back a little bit to the ways of working that we had before this big change and product launches that we had during 2013. We need to improve on our sales and production process or come back to the normalized way of working there. As always, there are room for improvements when it comes to spare part logistics. Especially, of course, if you talk about a company like Volvo with SEK 300 billion in sales for many different brands. This is always an area where we can improve. On the investments, you can see here that we have been on a fairly high level during 2011 and 2012. It came down during 2013.
You see the dark blue thing here, that's investment because it's accounted like that we had in Volvo Rents that is now taken out and we will not have any at all significant assets coming in or investments coming in through rental activities. It will be virtually zero. Of course, we have to keep an eye on, I think it's important to communicate also, and that you understand the way it works when it comes to capitalization and amortization of R&D, and have to create the right expectations going forward there. Of course, we have been in a heavy phase when we capitalize a lot, that swings into less capitalization, and of course, we will start to amortize, going forward. Of course, as always, there are also room for improvements when it comes to investments and prioritizations as well.
I think we'll come into that phase now, 2013, similarly as we will do when it comes to R&D projects and IS/IT projects as well. There's also things that you can take out here which will not harm anything when it comes to sales or potential growth going forward. To end my presentation, we need to catch up in cost efficiency, and as you understand from the end of my presentation, also when it comes to capital efficiency.
My name is Denny Slagle. I'm the EVP for the Volvo Truck group in the Americas sales and marketing. I'm going to talk to you about a couple of things today. First of all, the market in the region, more importantly, the actions we've been taking to build a competitive infrastructure so that we can exploit the growth and profitability in this region. Let me just lay out the region first. The Americas represents roughly a third of the truck business for Volvo. We have the market shaped out to be about 400,000 truck market, roughly split 250,000 in North America and 150,000 in Latin America. We have 822 sales and service outlets, mostly independent. The active truck population is 550,000, but growing very rapidly, as you'll see, in Latin America.
We also, in this region, obviously it's Volvo and Mack in North America, all four brands in South America. Looking first at Latin America, obviously there, Brazil is the very important market, sort of the engine for growth there and has been for several years. It's where Volvo has been particularly good and diligent in its growth. We've been in Brazil since the early 70s with manufacturing, we have ridden the ups and downs throughout that period of time, more recently enjoyed its rapid growth. This year we'll be, as you can see from the graph, we'll be setting a record level for market share in Brazil. What you've got to appreciate is that good, steady growth through some volatile markets there you see in the graph to the bottom left.
Important thing here, is Volvo is seen, and it was recently cited as being the number one truck company as far as image in Brazil. That's throughout Latin America, we're one, two, or three in all the regions for the Volvo brand. The Mack brand is actually, we also do quite well in some of the countries that we do business with Mack. We have two very strong brands going into Latin America. Back to Brazil, though, you see that steady growth up to 20%. That's a combination of doing a lot of things right. We've invested not only in the industrial side, the dealers are probably the strongest distribution network in Latin America, we see steady growth there, as you'll see in some pictures later. The really important thing that we're focusing on as well, apart from the whole goods, is the aftermarket opportunity.
If you look at the slide at the bottom right, you see that the running population has almost doubled in the last five years. That's going to keep growing because it was only 10 years ago that Brazil was a 12,000, 15,000 truck market. It's 105 now, so you can imagine the exponential growth that's happening and the demand for aftermarket parts and service. What we're doing is building this infrastructure, not just in Brazil, but throughout Latin America. You see there on the pictures, brand new facilities, state-of-the-art, that we built in Chile, that we just opened. Olof and I were there last fall to help open that facility. In Peru, again, a tremendous investment in a state-of-the-art facility, and also there in Ecuador. In Brazil, though, it's where really a high level of activity is going on, and necessarily so for the reasons I cited earlier.
Outlets up by 28% since 2010. Service pays up 75%, and technicians up 80%. More importantly, we've got 35 projects ready to come on board of new facilities being opened over the next 18 months in Brazil. That pace of meeting the demands of the market is ongoing, and we'd like to think we're building a very good fortress to handle the new competition that's coming into Brazil. Moving to North America, our official estimate is 250,000. You can see here, I hope, a very stable market. It feels like, particularly if you look at the recent order figures, you see a market that's really firming up nicely. If anything, there's upward pressure. On that 250 market call for North America, we only really look at things every quarter, so we'll be re-looking at that as we report on the first quarter.
You see here, not only the stabilizing economy, you see a highly disciplined customer base, construction rebounding even, factoring in the terrible winter. We see a lot of activity around concrete, mixers, pumpers, and that's a good, pardon the pun, but good foundation, an indicator for a steady growth in that sector. Highway volume, still driven largely by replacement. Some expansion, but that replacement is overdue. You would think that we would've seen more of a market by now with the replacement numbers, but again, a highly disciplined customer base, stretching out the productivity of their trucks. It's okay. We can deal with that kind of stability. Importantly, as we think the market beyond 2014 should be a pretty stable market, given the types of indicators we're looking at.
We see, of course, also supporting that growing confidence in the customers and the way they're looking at the business. If you look at North America, again, the Mack and Volvo combined share in the U.S. and Canada, you see what I hope is a disciplined approach to the market, again, dealing with the fundamentals that support a growing business in the Americas. Distribution, product coverage, improvement in the way we cover and monitor and track our progress. You have, in focus there, are the fundamentals of a distribution network, aftermarket leadership, captive or proprietary components. The natural gas market, I'll talk about a bit. Then finally, the revitalization of the iconic Mack brand. Starting first with distribution. Similar to South America, a lot of investment in distribution. We had another record year last year as far as the overall profitability of our distribution network.
Thankfully, they've taken those profits and that cash and reinvested with confidence in expanding the network. Very impressive numbers, not just quantitatively, but qualitatively when you see things like 150% increase in what we call master technicians. It means people that are at the highest level of training in the service base. Again, building that infrastructure to produce the best customer experience possible, and that's what's going to keep us, in the long run, growing in the North American market. Again, very impressive results. Those are a couple pictures of the recent additions. That's Nacarato in Nashville, Tennessee. Just an amazing facility right off the highway. And that's the sort of things that's going on repeatedly around the country, the investment in both Mack and Volvo distribution.
We're quite proud, and I think objectively speaking, the industry would cite us as a benchmark for aftermarket, particularly in the area of uptime and connected trucks. If you were here last year, you heard me talk about some of this connected truck activities. It's basically not just putting the black box in the truck and showing a fault code and dealing with fault code. Through our 24/7 services for both Mack and Volvo now, we monitor the truck as it's moving. We have an excellent dynamic system, Virtual Technician sort of thing, where the owner can speak to the mechanic, our people can speak to them, and we coordinate things in a good way.
When we see a fault that's indicating a potential downtime event, we get in touch with the driver or the owner, tell them that we have this event happening, and tell them not just that it's happening, but that we've caught ahead, we've got an open bay, we've got the parts on the shelf, and the dealer already knows what the problem is. We'll get them in and out as quickly as possible. Very much working very well. Another aspect of that is where, I think I mentioned last year, we have a geo-fence built around all of our dealer networks, so when a disabled truck comes in, we can measure the time it's taking to get them back out. Sometimes it's our fault, but what you measure, you can manage. We're very much focused on the uptime. You see a reference there, Uptime Center.
We're building a three-story building in Greensboro. The first floor will be dedicated, bringing all the people that can get somebody that's down time and get them back up. We very much have switched the gear from being reactive to downtime to being proactive to maintain uptime. That's the message, and we're putting all the tools in place in a very good and rapid way. Overall, we're expanding parts sales. We've got great activities around parts marketing. We're also pushing the warranty and service contracts, particularly as they relate to leasing. All of that is growing. Leasing is one of the top customers in the industry now, the Mack and Volvo leasing system. That has grown quite nicely, too. These are the slides, again, supporting not just market share, but that aftermarket activity.
When you get a big turbo boost in terms of aftermarket activity, if you're running your own engine, of course. Your own transmission. These two slides, I want to talk just a little bit about the I-Shift, probably the most interesting and hottest feature offered in the trucking business today. The I-Shift is an automated manual transmission, essentially an automatic transmission. Not only does it give you a better ride and better safety and better fuel economy, but it also widens the driver base. Right now, I'm sure you realize there's a shortage of drivers out there. As you can imagine, automatic transmissions are easier to drive than a manual. In effect, it provides that intangible of a wider base to pull drivers into. We see that both with the Volvo engine in the top graph moving from 36%, 37%, right up to 86%.
Really the preference around the Volvo engine is growing. Then we made the announcement last year, last spring, that we would make the I-Shift on the Volvo standard. As a result of that, we've seen almost 60% for the year, but the pace leaving the year was much higher. On the Mack side, from a standing start in 2010, we're up to 40% of the take is what we call mDRIVE on the Mack side. Those two things are adding in, again, the aftermarket is populated so that we can harvest the parts and service business later, through us and our dealers. That has produced in the dynamics, all I've talked about the last couple of slides, produced a very promising graph there.
If you look at since 2009, although the population, although our running population has been flat, and that's the blue line on the bottom, and you can imagine that's obviously driven by the very weak years we had in 2008, 2009, that despite that, our sales per vehicle in operation has increased 18% year-over-year. That's given us, again, a much higher take. You can see, obviously, contributing to that has been the higher engine penetration and the I-Shift. Good news there. The business keeps going and there's still room to grow there. On the natural gas side, I made the comment during the break that I can't sit down with a customer for more than 10 minutes without tripping on the subject of natural gas. That noise level has not been matched by the actual buying activity.
The final numbers for 2013 heavy-duty trucks was about 2% of the business ended up buying natural gas. Of that 2%, a large bit of that or almost half of it was refuse trucks. Refuse is undoubtedly with CNG, a very, very good application for natural gas. As we leave that corner of the segment that can do the slow fill and doesn't need necessarily torque and range, it becomes more difficult for natural gas to get traction. We are embracing all of it. We're a bit agnostic on that. We are ready for whatever emerges on the natural gas side, and we were lucky enough last year to secure EPS, for a large order they placed for running LNG with a spark-ignited engine. We're there. We're one of the leaders.
Of that 2%, we were one of the two, very, very close to one of our competitors as being the leader in the market. We'll watch that. We'll be ready for it when it comes. We also like to point them in other directions. We're doing some experimentation with things like DME, et cetera, but we'll see how this market emerges in the future and stay with it. Finally, we just came back from Las Vegas earlier this week where Mack introduced its bold new logo, its brand. It's more than just a logo change, obviously. Here, we see this as a catalyst for change, for modernization, for a new feeling, and a new look for the iconic Mack brand in North America or around the world, in fact, where we are reiterating the brand promise that it's the American truck that you can count on.
We've been around for 110 years. We've been in America. We've sort of followed the same path as you could say, American industry and the American story. This is one where I think it's time to wrap various looks and strap lines, et cetera, over in the future around a very, very modern, bold-looking, new logo. That will be going up in front of all of our dealerships. Obviously everything from business cards to service literature will be updated with this thing. That change, I think is a healthy change for our distribution to get on board and move forward. Very confident that Mack's best years are actually in front of us. We, of course, will always honor and relish our past as well. With that, I will complete my end.
I'd be anxious to take any questions you have for the Americas. Thank you very much. I'll turn it over to Martin.
Thank you, Denny. Thank you for taking the coveted presentation slot immediately following lunch. My name's Martin Weissburg. I'm responsible for Volvo Construction Equipment. I think you'll hear from me a very similar theme that you've heard from my colleagues, which is Volvo CE, not pleased with recent financial performance, but confident that the worst of these times are behind us. Now we're very focused on driving efficiency, improving productivity, focused on process excellence and efficiency, really leveraging the investments already made. You can reference the solid foundation that we have in place, our core product range, a very solid distribution footprint with a global range over 215 different dealer ownerships. Then the locations, many multiples of that. Market position leadership in China, which I'll talk about, again, the global industrial footprint.
To give you a feel, we're about just shy of 17,000 employees, over about 200 products, distinct products in our product range, doing business in about 125 different countries and growing. From this foundation, what's in focus is to grow the business and to grow it profitably, to gain share and to gain margin at the same time. Also, I'll be addressing later in this presentation our pending acquisition scheduled for next quarter of the Terex truck business, the rigid trucks and articulated haulers. As my colleagues have spoken about, the focus is on rigorous expense reduction, high focus on product cost reduction. This holds true with the CE product portfolio as well. I'll show you in a few slides the reallocation and further continued focus of R&D dollars on product costs, and again, system flexibility, both operational and industrial efficiency.
Not new, our multi-brand strategy been in place and successful for a few years now, we're fortunate at Volvo CE, much like on the truck side with the brand portfolio, to have the very strong premium Volvo Construction Equipment brand and also the SDLG brand, I'll share more details as we come. We're working on and continue to develop what we call almost like more of a Volvo brick brand. That right now is more of a Volvo branded for Chinese domestic sales and consumption, still in early stages. I'll be addressing shortly, soon after the acquisition has closed, we'll be welcoming the Terex brand into this brand family as well, I'll explain how and where that fits in, but much more so in the value segment compared to the Volvo brand.
Again, part of this foundation is our products that we are experts in and have market leadership in. This is heritage of excellence that we will continue and have continued to invest in, protect, defend, and grow. Those three main products, not our only product, are of course the excavators, the articulated haulers, where we are the industry pioneers, having started that product, and the wheel loaders. Just for your information and trivia, this year, we celebrate our 60th year in the manufacturing of wheel loader business. It's a big point of excitement and pride for us.
The main point being this very strong foundation, which is then supported by or supports further the road equipment and the compact equipment and the utility equipment, which makes us a very competitive, full-line manufacturer and really allows us to drive good developments throughout distribution and helping them grow their business as well. In order to support and grow and maintain our leadership position, of course, we've made significant investments over many years in engine compliance and engine technology. Without going into the detail here, of course, this is regulated marketplaces. If you take the combination of the Volvo core values, our technological expertise, our focus on innovation, all this has come together, I'll show you shortly, it was launched at ConExpo as well, the new engine products we have.
The point being is they're not just good because they're compliant. They're good because it creates greater operating efficiency, and we see already that in most of the models and the most applications, total cost of ownership actually comes down over time. Again, our industry-leading position is really allowing us to drive this. Fortunately, as we are launching and developing over years Tier 4 Interim and then Tier 4 Final, we've had the benefit of the knowledge and experience within other parts of the Volvo Group, namely with the SCR technology in our truck business, over 1 million units in operation already on the road since 2005. At Volvo CE, we're able to take those learnings and take that technology and adapt it to our engines and applications and whatnot. It's really been a significant benefit.
Again, industry-leading position in engine technology, significant investments required to get this launched, so far quite successful. At lunch and at the breaks and before, I was able to have good conversations with some of you about ConExpo, which is going on this week, which Denny mentioned. For those of you who don't know, ConExpo is the large construction aggregate exposition, the large trade show for the construction equipment and related product industry, held every three years for many, many decades, for many generations. All of us just returned from that or got here just yesterday from that. Many of you did. I heard some of you actually took the red-eye to get here. We appreciate you doing that. The energy, the industry energy, not just for Volvo CE and Mack, but the industry energy at ConExpo this year was impressive.
I was actually somewhat surprised, in a very positive way. We knew that attendance would be good, but over 130,000 people attending, and we know at the Volvo CE inside stand alone, probably 25,000 visitors. How and when this translates into unit sales aren't so easy to quantify, but from an industry standpoint and from a Volvo Group standpoint, Mack, Volvo Penta and Volvo CE, significant energy and interest. At ConExpo, for those of you who are at our stand for Volvo CE, significant product introductions and displays, including the Tier 4 compliant versions of these products, the grader, the new loader series, excavator series, and the articulated hauler. Let's talk about product cost. It's been a consistent theme again, a very important theme as we're driving increased performance in the group and including in Volvo CE.
The purpose of this slide is to show, without obviously specific detail, of total R&D spend. How much of this over time has been for compliance, regulatory related type things, and the significant investments that global manufacturing firms that serve many regulated markets spend as we must. The point here is not so much on the regulatory spend, it's on the other. We are going to continue to take those R&D dollars and drive it into product cost reduction, which in turn will help drive our increased performance over time. This is not a new path. This is a continuous path that we're on. When we talk about product cost reductions, taking R&D dollars and innovating the existing product and new variants of our products to drive down cost, not to make it cheaper, but to make it less expensive.
We do so using innovation, advanced engineering techniques, et cetera, making sure we are keeping, in fact, improving durability, reliability, quality and safety. That's really the balancer. We're more and more driving our allocation of spend that way. It's not something that happens overnight. It's not something that we started last night, it's a continuous journey that we will stay on to continue invest and again, drive this activity. We are already well invested to capture growth as it comes back. Let me talk about this a little more. It doesn't mean that we won't continue to invest. In fact, we'll talk about the Terex acquisition shortly. I just mentioned about continual R&D spend, significant in the product cost reduction. That's part of our strategic focus to drive increased performance.
If you look at the growth lines, later I'll show you our view of more by geographic segment, you see how it's kind of flattened out, both emerging markets and developing markets. The point is this, we're not waiting for growth to return at a faster pace or relying on growth to drive our performance improvements. Our performance improvements are coming from the same things that my colleagues have said and that I showed you at the beginning and throughout. Expense reduction, greater efficiency, process orientation, product cost improvements, flexibility in our industrial setting. If you think about why do I say to you today that we're already well invested, to go back 2007, 2008, significant acquisitions made in China with SDLG joint venture, with Ingersoll Rand, outstanding acquisitions before then as well.
From 2008 almost through the current day with the regulatory spend on engine, et cetera. 2010, 2011, plus or minus on investments made in industrial capacity, especially in some of the developing markets in response to demand then and growth potential. We're well invested. Now our focus and fortunately, our ability from a funding standpoint is to leverage those investments, put it into product cost reduction, take out the expenses, knowing that we have already a very stable footprint from an industrial standpoint, et cetera. Thus, as the market does start to come back, the growth leverage that we'll get from that should be very much to our advantage. Now though, the increased focus is really on efficiency and driving down the break even. Now some more of the commercial aspects.
This is all good, we have to sell more product and bring in more customers. This is back to our brand strategy, our dual brand strategy. As a reminder, SDLG is absolutely the number one position China domestic wheel loader. What we have been doing successfully, early days, successfully, is in addition, exporting that product to other markets. Fulfilling that dual brand strategy. Just within the last four months, we have SDLG products that are just being launched in North America. Very early days, not conclusive yet, again, the response we are getting from both dealers and customers are surprising. Our SDLG brand and our investment in that JV, industrial and distribution, will continue to bear fruit over time. I'll add also that SDLG globally is supportive of financial results, both on the export basis and on, obviously, China domestic.
Not only is this an important strategy for market coverage to make sure we are touching more customers, but it is a good strategy from a results standpoint. Briefly, the SDLG products themselves, again, wheel loader, number one share, commanding share in Chinese domestic and exports continuing, and the excavator side, SDLG brand plus a Volvo brand, leading position in China. Focus on growth, continue to develop the export business, leverage the investments already made, and driving that dual brand strategy. Before we speak about Terex, because it is an important subject, although we have not closed on the acquisition, we wanted to frame the industry segments and how that fits in. I am going to start with this, and I will show you how it applies to Volvo CE.
If you look at the industry in general, about 50% is what we call, in our nomenclature, call it earthmoving, road building and infrastructure. That is the blue. About 25% is mining, quote unquote. Of that 25%, say 20%, which is the brown, is heavy mining. The blue, we call that light mining. Light mining, quarry, and aggregate. The other are, let us say, it says concrete equipment, cranes. How do we fit into this? Volvo CE does not have products that directly serves the other. On heavy mining, we really do not build products of that size or scale for that market. Very little on a support side, on an indirect side. Light mining, quarry, and aggregate, absolutely, and that is where Terex fits in. On the big 50% of the pie there, earthmoving, infrastructure, road building, et cetera, very much our sweet spot. This is 2013.
To your right-hand side, 78%, 80% of, and this is a percent of revenue split from last year, is the earthmoving. Earthmoving, construction, heavy infrastructure, road building. A small slice, the brown for us, is heavy mining. Again, we define heavy mining, as you see on the slide, of above 100 tons. While we do not make equipment that big, we still supply equipment in support of heavy mining. Most of what we do in the mining is what we call light mining, which is 100 ton and less, as defined here. Light mining, quarry, and aggregate. I will explain in the next few slides, this is where Terex fits in. We wanted to frame for you the order of magnitude about what this means and why. The industry view, the Volvo's CE view.
If you compare 2013, which was not, from an industry standpoint, as strong of a year for total unit sales as, say, 2011 or the first half of 2012, the 17% for last year for us, which was light mining, quarry, and aggregate, you can compare that to 2011, which was a good year, and that was more like 25% in 2011. That was, of course, on total revenues 2011 for 2013 of much different levels, but SEK 63 billion versus SEK 53 billion last year. As we look at what has the things, and this has been presented previously, that has impacted, everyone knows that mining has impacted everyone in the industry. What we are trying to do here is frame loosely what that means for us.
Not only was it the size of the total revenues, but the relative percentage that light mining, quarry, and aggregate represented. Right? Within that, if you compare 2011 to 2013, and just look at that one light blue slice of the pie, light mining was about 60%, quarry and aggregate 40%, I'm putting a lot of numbers at you, versus more about 50/50 in 2013. Okay? You combine that, it being smaller overall, along with, as you probably are all aware, an equipment size mix. In prior years, there was more large machines that frankly carry higher margins. There has absolutely been the shift as the market has come down to a new normal or otherwise of a larger number of smaller machines that on an industry basis, ourselves included, have lower margins. Just to frame the mix for you. Why Terex?
We haven't closed yet, but we look forward to it. Terex produces equipment that fills that gap for us in that segment of light mining and quarry. Five models of Rigid haulers from between 35 and 100 tons. Three models of articulated haulers, 25, 30, 40 tons. Very strong position in China. A core Volvo market, a core Volvo CE market where we already have significant market leadership. This further enhances our market leadership in China on the rigids, where the part of Terex we're acquiring has ownership in a joint venture, North Hauler Limited, which in turn has number 1 share in the rigid market in China. Good business for us. Of the Terex branded outside of China, good existing population. More of a value brand compared to the Volvo brand. Good existing population with a very good parts business that will continue.
Without getting to the details now, closing expected next quarter, looking forward to onboarding those employees and really driving it forward. This product then, the Terex rigids and articulated haulers, fit into that segment, which is important to us. Okay? We're not big, nor do we choose to be, nor are we in the heavy mining. We are in the light mining quarry and aggregate. These products fill a gap that we had there and allow us then to sell even more and cross-sell the existing products we have there. Good segment. Light mining, quarry, and aggregate. It's a good product. We feel it's very good timing and a very good acquisition that we plan to close next quarter. Focus on profitability and efficiency, drive share, but not at the expense of margin.
We got to balance both, grow organically and continue to drive our price realization. We're not sitting on our heels waiting for the tailwinds of market growth to do this for us. It's got to be rigorous expense reduction that my colleagues have already addressed, significant continued investment in product cost reduction, but not at the expense of product quality, durability, or reliability, because the Volvo CE product is a premium product, and that is a key aspect of us getting that higher value proposition and the pricing we need. Continuing to surround that product with customer solutions, great aftermarket support, very significant focus on process efficiency in all parts of the organization, industrial footprint and for all of our activities. We're disappointed in the recent results. It's not just the one quarter.
If you take out the Q2 of last year, it's been a string of quarters, and we're not going to wait for growth to fix this. We've been fixing it ourselves, and we'll continue to fix this with aggressive cost reduction. How do we feel about the markets? There it is. We don't see it. By the way, even if we saw it all pointing up to the upper right-hand corner, there's systemic issues we'd be fixing either way, as Olof said, taking down cost. Our view of the market, very consistent from the Q4 release. China from flat to +10%. EMEA, flat to +10%. North America, -5% to +5%. Latin America, same. Rest of Asia, absent China, the same. As the markets do come back, we'll be extremely well-positioned to leverage investments already made.
In conclusion then, profit improvements in sight, margin and share, process efficiency and reducing our break-even across the point, focused on welcoming the Terex truck business into our product family and those good employees into the Volvo Group family of employees, and continuing to drive our performance based on all these attributes and activities. Thank you very much. With that, I hand it back over to John and my colleagues.
We ask our presenters to take a seat. Christer, you have a microphone coming to you. Just to reiterate, please wait for us to hand you the microphone because it's being audiotaped, and we don't want anybody to miss anything. Linda's over on that side of the room. I'm here. If you just raise your hand, we'll get you the mic, and you can ask your question anytime. Hi, Christian.
Yeah. Hi. A question on South American trucks. Christian Friis from TA Associates here. You showed that the install base, i.e., the population of trucks, rose very sharply over the last decade, I guess, in Latin America. Wouldn't this imply that replacement demand will be somewhat depressed over the coming years? Then just wondering how that squares away with your flat forecast on sales.
The first thing is just looking forward at the growth. I think most economists, most people who watch South America would agree that we've got further growth, not only in Brazil, but the rest of Brazil, Chile, Ecuador, Peru. Argentina and Venezuela are having its issues right now. In the long term, the forecast is for actually continued growth. With middle class moving up, would drive even more need for freight movement.
All right. Hans Engler, Handelsbanken. I'll ask you three questions. I take them in a row and then. First, just starting off, more on the European business side. We're seeing the Scania MAN date probably coming through. I would be interested in what kind of opportunities do you see for this year and maybe next year on the back of that? Another question related to that is your consolidation part of your European business between Renault and Volvo. Why have you changed your view on cannibalization risk when you also have improved the Renault product significantly? The last question is on the 300 basis points in margin improvement. I think you earlier said that looking at the 500 basis points, there was a 60% of that related to revenue synergies and a 40% to the cost synergies.
I guess my question is on the net side, is that more cost synergies in the 300 basis points compared to 500 basis points? Thank you.
Could you just, I didn't catch the last part of your second question.
Yeah, it was related to, you had the Renault and Volvo business for quite a while in Europe, now you're consolidating part of it and you're sharing distribution. Earlier when we discussed maybe a couple of years ago, there was a cannibalization risk former management was talking about. Now we have improved the Renault product so significantly, you apparently changed this view, and I would be interested to hear more about that. Thanks.
When it comes to competitors, I do not comment upon it. We do have in Europe and elsewhere, a number of competitors and what we try to do and what we stay focused on is not to speculate too much about that, but making sure that we having a very aggressive and good strategy in order to move forward in the plans that we do have. Therefore, I wouldn't comment upon that. It's a good point you're bringing up with this, Renault, and I think one aspect that was not in place a couple of years ago was actually the clear brand definition. The brand definition, what I always said is that you need to find spaces where you can say that 80% of the business is not cannibalizing, that you need to define it.
You will have cannibalization or where the segments will meet around the 20%, and you have to sort that out. It is important that you do that. Shifting position on a brand is nothing you do from a Monday to Friday or not even in one year. This is a long period of time. You need to roll it into a product. You need to roll it into features. Step by step, we're doing that. We didn't start from a blank sheet of paper when we did the new vehicles. They are focusing on different segments. There are differences in them that do have different feature levels, and they are addressing different segments in the market. There is a differentiation built in already.
On the 300 basis point cost and sales, if you just take a look at the column 1.1 to 1.5, you can see that there is a number of cost-related activities of which the product cost reduction, which I talked about and also Martin talked about, is a major part, and we're driving that forward. I would say that if you look at the 2014, and I think that was when we also showed this periodization in between, the curve going up to the SEK 9 billion, we had a heading of that saying it is a lot of cost and cost efficiency during this year. It is definitely also that this guy and the other sales and marketing guys have their individual yearly target on the gross margin improvement going forward.
It's all timed, it's good occasion for me perhaps also to reiterate that we are following this up as it was a profit and loss monthly review. We go through the margin improvements activities that we're doing. Everyone has a yearly target in order to achieve the SEK 9 billion.
Thank you.
Thanks. Alexander Virgo, Berenberg. Just wondering if you could talk a little bit more about what the revitalization of the Mack brand actually means. You obviously mentioned it at the beginning, but beginning of what? The second question on Quester. What sort of costs should we think about in terms of producing in India and China incrementally from where we are today and timeframe?
Well, I think the group has a fantastic asset in the Mack brand. I think all of us that are in America understand the iconic nature and how important it's been to the trucking industry for 100 years. You try to be very careful when you're approaching the brand and what it means and trying to identify. We've done quite a bit of work. This didn't come up in the last couple of weeks. This has been six months of research and trying to absolutely find the right combination of recognizing the past and honoring the past, also modernizing the brand, which I think is very important. We're using this, as I said, not just as a kind of new look, but also as a change catalyst in the organization, particularly with our dealers and indeed our customers.
We have an exciting product, a very competitive product. We want to build on the brand. We think the new brand, the new logo looks very bold. It's keeping that iconic bulldog on the front. Again, lining up much better with what actually how we brand the trucks themselves. If you look at it, I think, and the consistency that we'll drive throughout the network, I believe it's going to be one of the things that bring Mack back, and we just launched it, so I wanted to talk about it here.
Just let me build on that. Also, Mack is not the only brand that has gone through. A part of the work of actually the brand position is to go through not only the theoretical position, but also making sure that we have a brand promise and a lineup in the organization that fits to that. We have done that with Quester, we have done it with Renault, with Volvo and the Mack. Actually, it's part of a larger job we have done. I must say, the energy down in Vegas when we released it and when I talked to dealers, it was quite amazing to see. Those kind of things are important, to get brands moving. We should also mention that we are coming from a past in the Mack brand situation, where it's been a little bit all over the place.
Now we're really focusing it and get it in. When it comes to the Quester, you should think about that when we do the cost and the production setups, we are looking at making sure that we are not only competitive on the price side, but also profitable. One of my absolute beliefs, and I've learned that through the SDLG, I've learned it through the other activities we have done in the emerging markets, is that if you do that correctly, if you get your cost structure right, if you have the feature level right, and if you do the design and sourcing right, you can actually make good money and good profitability on whatever you are in the segment level. That's the main focus right now.
We don't comment upon the cost level per se, I can assure you that we are making sure that as in all other introductions, that we come in on a competitive price level, which actually are also giving us a good margin.
Yes. Hi, Klas Bergelind from Citi. We all sort of come straight from ConExpo, one of the sort of key features and discussion points was when we met Caterpillar said that this time we're going to focus more on sort of market share gains, working harder with the dealers, improving sort of the dealers not performing well. Also actually to go after market shares in terms of pricing. The thinking, Martin, in terms of your respond to that and what you're seeing in the market currently.
Thank you. Their approach, and others, is not new. It's been going on for a while in perhaps buying share. It is competitive out there. There's no doubt right now, especially as ones who are more dependent on maybe let's say the resource side, have to be very that much more maybe aggressive on the other side. This has been the competitive playing field for a while. We are not of the position to go out and buy share for the sake of it. What we're doing is continuing to wrap a complete offering around our hard product and being very targeted to make sure that we maintain and grow share, but also improve profitability. Again, profitability is going to come not just on the top line, but by driving down the expenses as well.
I think the dynamic that all of us are facing is the significant, and use North America as an example, also a big theme at ConExpo, was the significant increase in dealer rental as an activity versus retail. This is where the strength of a well-capitalized, strong, good performing captive finance company really helps us drive those initiatives. How we're competing with this is that packaging the complete solutions, aftermarket products, financing, hard product, leases, dealer rental or other. That's becoming a much more important part of the commercial approach, if you will, as opposed to just pure pricing. If we make it just a pricing game, it's not so good. We're actually making it with a multi sources of revenue.
Okay. Just one follow-up on your outlook, ±5%, +5%, the flattish midpoint. We're coming from ConExpo, a lot of bullish comments, you mentioned as well that obviously, the why bounce there was pretty positive. When you look at your guidance, it sort of feels also when you look at Komatsu talking about 5% and plus Deere talking about 10% growth this year in North America, it seems like upside to that guidance.
We look forward to coming back to you with our Q1 release. Right now, we hold to our guidance.
Thank you.
David Mack from J. Goldman. In terms of North America on highway, orders have been very strong for the last few months. Can you talk to us a little bit about your production schedule, what you would need to see to increase it, and also if you have some views on industry build cycle, if you would expect the industry to start increasing production levels?
First of all, we watched with great enthusiasm the level of orders the last three months on averaging near or over 30,000 trucks for each of the last three months. Annualize that, you end up with a big number. We think at this point, that's just firming up the forecast and again, putting some upward pressure on it. We will respond with additional production when we're confident of that. At this stage, I'd say it's mid-year, we will begin to ramp up to meet this additional demand in the marketplace.
Are you worried or not so, that any competitors might jump the gun and start ramping up production before mid-year then?
I can't comment on what they do other than There is a lead time to train people, recruit them, and then make sure they do quality work on the line.
Also some lead time to get the whole sub-supply system up and running.
Yes, the whole system.
The whole system on a high pace.
On the existing platform that you have, what type of production increase do you have with current manpower and facilities? What would you need to do?
There's a certain amount of flexibility we can accomplish with overtime and the weekends, et cetera, so that we can handle in the short term. We're seeing strong enough demand to actually build in the structure for a higher line rate.
Thanks.
David Leiker at Robert W. Baird. Two questions. One, as you look at your investment in R&D after the product refresh, the engine changes, that number has an opportunity to come down. Could you just balance for us over the next couple of years how much of that shows up in profit margins, how much of it goes into cost reduction actions or into other activities? The second item here is, do you feel a need on your construction equipment side that your product portfolio is in place now, or are there opportunities there for further product extensions?
You're talking about the group R&D now, not the construction. If we look at the group R&D in particular, I think that first of all, the level of R&D, and we have been very clear and transparent on that, is that our commitment to the market is that by end of 2015, we should see a zero impact on the negative impact on capitalization and amortization that we do have since we're now launching all those major products that we have. We will adapt the R&D in order to meet that. At the end of the day, the cash R&D will be adapted to meet that. When it comes to structure of our R&D, I'm looking at Christer to see or if we give any guidance on that.
I just want to make clear that we are a group that have been and will be technology leaders in many areas. We will not come into a position where we all of a sudden starting to leave that. What the difference is, of course, that we have had a big hump of R&D that we have to take care of, and we're now coming back to more normal levels. The second one is that every R&D, krona, dollar, or whatever spent needs to be more efficient. We need to get more R&D out of that resource we're putting in, and we work in that in the efficiency program. We will continue to do all of what you just said. We will do a focus on product cost reduction, quality. We will do issues on new technology.
We're looking at the very interesting field in buses, for instance, when it comes to electrification and hybridization, which is something that we are a world leader in, and we will continue to invest in that. It will be on a sustainable and a level that allows us to reach the profitability level that we want to do. That balance is going to be made.
And then-
Yeah, sorry. There was one more.
Yeah. To answer your question on the CE side, I would say that, of course, we don't discuss necessarily new product introductions until we're ready to introduce them. We're very pleased with the breadth and size of our product offering today. Keep in mind, we have not yet closed on the Terex Hauler business, which is not a small acquisition with some onboarding and integration activities that will require over time some investment. I think what I would tell you is we have a very solid and broad offering, and again, more and more of our spend will be going to making sure that we are maintaining industry leadership position in the existing product, driving down the product cost, driving up even more so the reliability and the operator efficiency. Quite pleased with our product portfolio today.
Thanks. Hans Engler again. Just one question for Martin. Are you looking into, and what can you do about your cost situation in South Korea if you compare that with Hitachi and Komatsu being in Japan, of course, having a very big advantage?
Well, from a currency standpoint, generally speaking, I'd say as is known, both in Korea and in Sweden both. What we're focused on, what we have been doing is more localization, more supply focus, more component localization in the U.S., in Brazil, and in China. These things take time. This is not overnight, but this has been in process for a while. Obviously a topic we're very focused on. With investments made recently and prospectively in those three markets for that purpose.
Also, this is a strategy that we started in 2008, 2009, where we have had a number of investment decision of actually trying to going forward and reduce and create natural hedges in the high volume markets and the high volume products we didn't see some. We continue that process, and that's really the only answer you can have to those kind of swings that comes either positive or negative, and you have to deal with it. Luckily enough, we have already started and we are on a good way on it.
Thanks. Also the additional question on going back to fourth quarter, you had a very good order number in South America and Brazil in particular. If you compare that to your competitors, it was even better. Analyzing those numbers from where you are now, can you maybe talk a little bit about this market share gains and how do you see that going forward?
I don't think we talk about that. We can just conclude, I think, in the statistics that comes out, that we continue our positive movements when it comes to the market and the market shares. We also combine that with the total market forecast that we do, which we're now looking at each and every quarter. I think very much what it is, what Dennis was alluding to, we have made investments over the years. We have been in Brazil since 1972. We have built up the distribution, the production, localization, and we have year-over-year built up the awareness of the Volvo brand among our customers and in the market.
Much so that we now have moved into a position where we actually then are the most respected and the number 1 brand in the trucking industry, which is, of course, the result of many years of work. The Brazilian market, like any other market, is a market that you really have to work on. That positive momentum, it's very important for us and that we continue, and I know the guys are doing a great job in actually doing that together with the investments we do see also on the dealer side, which is also very important.
Thank you.
Hi, it's Laura from Morgan Stanley. I have three questions, please. The first one, more as a clarification around your strategic plan and how to interpret the targets, because I think on one of your slides, you're saying that you aim to achieve the 3 percentage improvement by the end of 2015. Now, I know this has been discussed a lot, but just once and for all, does this mean that you will achieve this margin improvement, let's say, by the end of 2015, for example, the Q4 run rate will have that improvement? Or are you trying to say that the real impact on a full year basis will only be visible in 2016? That's my first question.
The second one, I think part of your plan also refers to a 50 basis point margin improvement on the IT side, and I'm just wondering if you could remind us exactly what you're doing. Is that actually an SAP integration maybe that you're doing here? Then lastly, if you could give us any color on how Q1 order intake is actually shaping up on the truck side. Thank you.
Okay. Let take the last one first. Christer, you are the one who gives that kind of guidance information.
It's P&L impact, SEK 9 billion.
No, we're starting with the order intake.
Oh, the order intake.
Yeah. I just confused my team here, so we start from there.
Okay. If we go across the world, I would say that Japan is strong, but that's partly because we have a pre-buying going on in Japan ahead of the VAT increase. We are expecting, you can say, a slowdown in the second quarter. In Europe, it's still, I would say, soft as expected. We had the pre-buy end of last year. We said we will have a slow start of this year and then a gradual pickup with a stronger second half, and that's actually what we're seeing. Here in the U.S., you have the ACT data. You have seen that orders have been strong both in January and February. In Brazil, I would say it's still a good market and no reason to assume anything else other than the 105,000 trucks that we're forecasting.
You have the emerging markets out in Southeast Asia, India, et cetera, where I would say it's continuing to be fairly weak.
Okay. Thank you. Jan, you might want to expand on the IS/IT activities we're doing.
I can assure you it's not a big bang on SAP, because that would not pay off, I would guess I was about to say before I retire, but almost. I think what we're working with here is basically changing the way we are working within IT, taking off layers, reorganizing ourselves, becoming more efficient. As Olof said before, we establish global processes. Within the existing IT environment that we work within, we can also work more efficient when we have harmonized global processes as well. That's what it's all about to come to that target within our strategic objectives. I can assure you, it's not a big SAP thing.
It's on all levels and all aspects, projects and everything else. When it comes to the 3%, Christer, you started, why don't you conclude at that as well? If we continue that.
It's like we said, it's 3 steps. We said we want to achieve roughly SEK 2 billion in P&L impact 2013. We said another SEK 4 billion in 2014 and the remaining in 2015. Keeping in mind that it's back-end loaded in these years. We have the 4,400 headcount reduction for 2014. Most of it is, you can say, coming out towards the end of the year because there's a lead time when you have to take out people in France, in Sweden, in Japan, et cetera. The 2nd phase is coming from the industrial reorganization in Japan and Europe and cost reduction efforts. Very often you have to do these type of reorganizations in the industrial system during summer vacations because you can't stop production, that's where big moves will take place in the summer of 2015.
You get the P&L impact in the rest of the year, so to say.
Yeah. Hi, this is for Martin. At ConExpo, everyone claimed to have the best Tier 4 solution. I'm wondering if, based on what you're seeing now, and by the way, I think you and Cat were the loudest about making that claim. Based on what you see now, do you think we might see someone stumble with Tier 4? Could this be an opportunity to take share? Also, if you could walk me through the economics of Tier 4, both for customers and for yourself. Thank you.
Sure. Can I start it by the way, saying we absolutely have the best Tier 4 solution in the industry. I don't think it's fair or right for me to say, do I think someone else is going to stumble? Whenever there's a multi-year technological investment in an engine advancement like that, there's always an opportunity for bumps in the road. We're not immune to that ourselves either. The issue is how does any OEM supplier support customers and dealers by being able to react quickly as new products are rolled out. It's not just the technology itself, but how we stand behind the product as we go. Relative to our competitors, I can't speak for them.
As we will find, I hope this answers your question, for the Tier 4 Final, as with the Tier 4 Interim, that we're able to pass those costs along to the customers and getting the return we need. Again, it's not just the engine. There's a lot of complete machine rework that's done on this. Again, it's early stages. We're just now getting these out into the marketplace. From, again, lots and lots of testing, we're able to quantify, in many situations, not just the increase in machine efficiency, fuel efficiency, not just engine efficiency, but machine efficiency, and then further quantify over time how that really drives lower product life cycle costs for the operators.
As we get more and more of these into the field and get the real-time experience and data from dealers and customers, it'll allow us that much more then to merchandise these benefits. Early stages, investments made. Now it's to deliver it and make sure we give excellent aftermarket support. I think that's where we'll really be able to shine and maybe outshine some of our competitors.
Yeah. Hi, Tim from Deutsche Bank. I would also have three questions, please. The first one refers to the U.S. market. Historically, always a bit of a weaker profitability. Is it still, now you've done a lot of work on the captive engine and transmission side, obviously. Is it still fair to assume a bit of a lower operational gearing compared to the rest of the truck group, or is that by now pretty much the average? Secondly, you already said, Christer, that Europe still remains a bit soft on the truck order intake side. How does it look like on the pricing side?
As a last point, just on Brazilian trucks, we have just heard from one of your competitors last week that there are some issues with the FINAME program, not just the increased interest rates, but also in the application process, some delays opening up again and closing down again. If you could just quickly touch on that, please. Thank you.
If we start with the American, and I think we stopped in terms of guidance and disclosure, saying that the old belief that you cannot make money in North America, it is, in our view, definitely not true. We are not where we should be, but we have steadily improved the profitability here in the U.S. over the years, and in particular, I would say in the last two years, but we will continue that road. I do not think, Christer, we go in any comparison in that respect. When it comes to Brazil and South America.
The FINAME-
The FINAME.
Yeah, the FINAME situation was off to a rough start. Of course, it was Denatran late last year where there was some absence of information, then it came out of the box pretty rough. There is a FINAME process. It's not as fast or smooth as it was last year, but it's working. At this stage, we'd say it's not impacting us much.
There was one third question.
Pricing in Europe.
Pricing in Europe. Yeah. I would say, first of all, I think both on the new products that we are launching, I would like to state and reinstate that the cost increases both of the Euro 6 and the cost increases coming from the new features and the trucks. We are passing that on, we are actually getting that in terms of pricing. In general, you can say that the pricing environment in Europe is okay. I think it's very difficult to exactly sort of pinpoint, but in general, it's okay.
Hi. Jeff Morris from the ISI Group. Just wonder if you could talk a little bit more about the rollout of the SDLG. What would be the pricing differential between the Volvo and the SDLG product? Is this going to be more of a rental end customer focus, and do you have any share targets there?
I'll look at you also, Christer, to see what we disclose here, but I'll tell you, it's very early days, maybe 200 units on North American soil. The critical mass is not just there. Without getting into price differentiation, although I'll tell you this, it's not going to compete head to head with the Volvo premium brand. There's enough of a space there that we're not worried about cannibalization. Rental, yes, as it develops potentially, but even more so positioned against Used low-hour domestic competitors. More so in support applications as opposed to in production applications, just to give you a flavor. It's a new machine with great distribution support that really can compete head-to-head with brand X and brand Y used, and how that then folds into the rental business, quite frankly.
We don't have enough units in the country to really be driving that yet. I wouldn't be surprised if it drives through that as well.
Thank you. Benjamin Maslen from Bank of America. Martin, just a quick question on what you're seeing in the Chinese construction equipment market at the moment. I think industry data's running ahead of your guidance at the moment. What are you baking in for the second half of the year in terms of comps or maybe the impact of tighter financing conditions on the market? Thank you.
Again, we don't give forward guidance on how we see the marketplace developing.
Well, I think we can say that the spring season seems to be coming in quite decent, in line what we saw last year, at least. We'll see the remaining part of the year. It's too early to say, the spring season is shaping up, you can say, reasonably well.
Thank you.
In terms of financing and those kind of things?
I think the industry wide, right? Not just for the sale of construction equipment, but the fact that the government and other entities have a closer eye on the growth of credit has had some impact, but not huge impact yet. I think long term, that's a good thing for the market as the market matures and there's more transparency in that area. For us, it hasn't impacted sales yet because of our good captive solutions and the good, strong relationships that our dealers have with external financing sources, and the conservative approaches taken there. I haven't seen that as a reason for lost sales. It's more of an overview, I think.
Thank you.
Hi, it's Jim Irwin at Moon Capital. Two questions. First, on your captive component strategy has momentum chart. You're not going to answer this directly, but maybe just you can give us some sense of scale. The European business, the service component of Europe and that structural profitability contribution versus North America, and you already kind of touched upon North America profitability, but what are we looking at in terms of basis points? Are we looking at 100-200 basis points of structural margin improvement if someday North America were to evolve to near the vertical integration, that service business that follows? I don't have a good sense from this chart, just in terms of the bottom line impact, but that 18% growth you're projecting is going to bring to the bottom line.
You're starting off your question by assuming that I should not answer it. I think your assumption was quite. You find that assumption being quite accurate. The reason is not that we don't know, don't get me wrong, but there are so many moving parts in this. Generally, what we are focusing on, and Martin touched upon it also on a question around how you build a really good total product where the truck is one, the service and the service agreement is the second, and the third one is then the financing and the captive financing. That sort of triangle of components, you need to have and you need to manage that in a very good way in order to get the enterprise profitability on the correct level.
That's where I think where we're looking at Brazil and South America, it's so important that you get that business going, you get to build that relationship, and you start really utilizing those three components in one. That's where you're going to see the totality of it, and that's what we're going to drive. We are more advanced in certain markets than others, but we have the knowledge and we have the systems. That is very important. We have the knowledge, we have the system, and we have the processes, and we have the sales knowledge, how to attack that. That is, of course, something Dan is utilizing heavily, where we now start to expand into connectivity, for instance, or into other parts in the service, which we have already experienced from Europe.
It is fair to say it's a big part of your SEK 9 billion of improvement over the next three to four years. It's a meaningful factor in that number.
I think that if you look at what we are looking at, the SEK 9 billion, if you look at the gross margin improvement, that is on the new vehicles. If you look at the cost reduction, has nothing to do with that, even if we are going to work on cost reduction spare parts as well. Basically, the SEK 9 billion is two parts, as was alluded to before. One is the gross margin improvement of the other 3%, which is basically price management, mix, getting out of unprofitable business, and thereby increasing the gross margin. Then you have the cost focus, which we have on the other items.
It's structural upside then, in addition to the SEK 9 billion.
We have strategic objectives dealing with vehicles and operations as well as absorption.
You have the design from it.
Yes.
Second question is China. You mentioned the margins collapsed in the Construction Equipment business in China. It's coming off the bottom. We're seeing some signs of life, but nobody's gone out of business. Nobody's really dramatically shutting down capacity. They're mothballing it temporarily, it looks like. Some of these marginal players are being kept alive. Structurally, two, three years from now versus the peak. What do you think happens in China? Do you think it's a mid to single-digit margin business now for the next three, four years, or do you think structurally it can be better than that?
Because of the excess capacity-
Yeah, the competition is fierce.
Competition's fierce. I'm going to speak around the edges here, because I'm not going to. Some of the lesser domestic manufacturers are having significant challenges right now. The ones that were second tier or third tier, and I would compare them to SDLG, which is top tier domestic. With top tier like our SDLG comes strong distribution. It's not just at the OEM, but those OEMs that may be struggling, that means that their dealers are struggling. As their dealers struggle, then there's a lot of ability for the other OEMs and their dealers to start picking off territories and bringing people in.
I think there's going to be a little bit more of, I don't know if it's consolidation or culling of the herd, but I don't think everyone's going to survive for I'm not sure I completely buy the premise that it's going to be okay, that they're going to be just limping along forever. I think there's going to be some rationalization because even their distribution networks can't survive.
Just as a follow-up on your earlier question, is the export strategy part of your improvement in the China operation? Are you going to basically be doing those local production, build where you sell CKD, what have you? Are you going to actually export out of China, as you kind of roll that brand out?
Yeah, no, we're doing that today already.
Exporting.
Exporting.
That part of your turnaround there is utilizing those facilities.
I don't know if it's part of our turnaround. It's an important part of the continuation of our dual brand strategy in place for many years. SDLG leadership position domestic, and for many years now, the export of that SDLG loader, we've been doing that for a while, just recently into North America. Other parts of the globe, Brazil notably, Australia, parts of Europe. Europe, in fact, is starting to take off nicely with that. It's very much a focus and that is a good business. As we continue to do that and our other initiatives, that should only be positive for our improved performance.
Let me build on that. The SDLG export business is not diluting to the overall business. It's good business, and we're going to continue that. One thing about the capacity in China, and I've been going back to that many times, is one thing is, of course, the theoretical assembly capacity, which is whatever number it is. Then, of course, we can go up and down there. If we take our facility in Shanghai, for instance, on the excavator side, we can go up and down immensely in capacity because it's a final assembly. The issue is going to be on the supplier side.
The issue is about component, about the quality. The final assembly part, as we know, you can go up and down quite substantially, and it can sort of have good numbers with a low break even in a factory. Okay?
Just to follow up a little bit on China, and then maybe we can talk about the rest of the world. If you look at the inventory situation, because that was a big problem in a lot of the construction equipment in China. Beyond just the capacity situation, how does the inventory situation look for sort of everybody? Because that'll drive how things progress, especially given the fact that the Chinese government seems to want to slow things down a little bit. Then just worldwide, how do inventories look and feel to you?
You're talking about construction equipment now, or?
Construction equipment. You could go through truck too, though.
No, in trucks in China, we don't have much there right now. It's kind of we don't think. Construction equipment, definitely, yeah.
At normalized and acceptable levels, especially coming into the spring selling season right now, for us, both on the Volvo brand and on SDLG. Rest of industry, I can't speak to, I think, I don't know if others have knowledge.
I would say what I hear, it's quite normal levels. That big overhang we had, since 2011, 2012, the bubble there, that's gone, basically.
When it comes to the truck side, apart from China there and looking elsewhere, I must say that we have worked very hard on the inventory situation end of last year. As Jan presented before, inventory management is key focus. When I look at the numbers around the world, we are where we should be in terms of inventory, be able to meet the demand and the production rate that we do have. It's not a big issue.
Okay, just one quick question on natural gas. I know it's quite small right now. On the natural gas side, did I hear you say that you were agnostic between CNG and LNG? Or do you have a dog in that fight?
Yeah. Basically, we'd love to see some scale come to this side of the business so we can plan and we can adjust our product development. Yeah. We're watching it very close, studying it. My kid, Olof, said I'm about to get my PhD in natural gas. We talk about it so much. For now, and there are potential game changes. Politically, there could be incentives, there could be somebody that comes up with the right solution and it gets traction. All I'd say right now, CNG, again, you see some organic growth. You see some traction down in that corner of where range and horsepower are not so demanding. When you start moving out that scale, you start getting less traction, everybody's working on solutions.
Look at the global scene you frame the natural gas under the alternative fuel kind of umbrella. There is, of course, a lot of development going on in different parts of the world with different angle to it. What we have decided, and we decided quite early, is that we don't pick a winner in this. We go in our R&D, even if it's perhaps not the most efficient way of doing it, we don't want to lose out if something really takes off. We go very wide in terms of making sure that we cover up electrification part. We're looking at biogas, we're looking at all the kind of different fuels that we see on the horizon, then we're going to narrow it down once we see scale and when we can see something more of a call it winner or whatever.
The issue is I believe that we're going to see regional differences in this, where you're going to have a lot of focus on natural gas here in the U.S., North America. Various in Asia, in China, also parts of Europe, you're going to have electrification much more in terms of that. You're going to have hybrid solution and those kind of stuff. You're also going to look into bio kind of solutions as well. It's not an easy pick there yet, we're on it. I've also learned everything I know about natural gas from Dennis.
I'm now allowed to have a discussion with him.
[Eric], Winter City. You talked about capital efficiency. If you talk about the capital structure, maybe this is a question to Jan. Obviously, your ratings have been under some pressure, some four to six months ago, both S&P and Moody's put you on negative outlook. Are you hoping to be bailed out by the 300 basis points program here, or are you going to do something more proactive around the capital structure? That's question one. Question two is the recent changes to or increases of some of your shareholders and their shareholdings, one, the more industrial one and the other activist one. If you have any comments on that.
Starting off with the rating, as you correctly said, rating-wise, we are not in a position where we would like to be long-term, goes without saying. I think when we look upon it, you all know the credit metrics that the rating agencies are using. By improving profitability, by working with our cash flow, that will cure the situation. Hopefully quickly enough, if I put it that way. That's what we're planning to do. I don't know when you talk about the rest of our balance sheet. I know there's been a lot of rumors about some of our activities, there are no plans to sell any major activities of this group, that's not what we are planning to do. We are looking into some non-core real estate assets in Sweden, not of any major significant size, but that's what we're planning to do.
That's more out of an operational perspective or it's actually not non-core business, then it will help our balance sheet as well. Otherwise, we look more into, as I talked about a couple of times before earlier today, is that having had this long period of acquisitions, of course, there are bits and pieces that are non-core to us that we can potentially divest, don't expect that to bring any enormous amounts of money into our balance sheet. That what we have to trust in is that we have a good, solid, sound operating activity in Volvo that will generate good EBIT and EBITDA and everything, also then that the cash flow will support end of the day our balance sheet and that we will have a good rating, the rating that Volvo deserves.
In order to support that, I don't know, we have put a plan together between 2012 and 2015. You're spot on there. Seriously, the whole thing is about, of course, getting the operation profitability up where we want it to be. I would like you to recognize that when we talk about efficiency, we talk about all the three: cost, capital, and process. This is the theme for this year, and Jan is very much more on that. When it comes to the shareholder side, that's a question for the shareholders and so on and so forth. What is important to me is, of course, that everyone is supporting this plan because this is a plan that I believe my management team, the company believes is necessary, is the right thing to do. It is a transformation. It is a three-year plan.
We need to make sure that we fulfill the plan and that we do the things that we said we've done. So far we have done it. We have executed on the things we have said, and we're going to continue to do that. That is also the, if you look at the shareholder in general, something that everyone wants. There is actually a very good alignment is that we want to achieve the same thing, all of us, and that is a much more profitable and prosperous Volvo Group. There is a plan for it, and the board is behind it, the management team is behind it. It's just about execution.
I'd like to thank our five gentlemen on stage. I'd like to thank the audience, and I'd like to wish everyone safe travels and a wonderful weekend. Thank you for coming.
Have a nice weekend. Thank you for coming.