Olof Persson – President and Chief Executive Officer
Peter Karlsten – Executive Vice President Group Trucks Sales & Marketing EMEA
Patrick Olney – Executive Vice President Volvo Construction Equipment
Joachim Rosenberg – Executive Vice President Group Trucks Sales & Marketing APAC
Christer Johansson – Head of Investor Relations
Michael Tyndall – Barclays Capital
Fredric Stahl – UBS
Colin Gibson – HSBC
Laura Lembke – Morgan Stanley
Volvo Ab Cl B Adr # (OTCPK:VOLVY) Volvo Group Capital Market Day Call September 25, 2012 4:00 AM ET
Okay, welcome back. I hope you had a great experience looking into the overall big things with a new Volvo of fashion also and the smaller things that, the some of the smaller things also is very important when it comes to create something bigger. And again I happily announced that you all have passed the initial test to be a full-fledged salesperson for the new FH with all the different attributes that is needed to have there.
So welcome today’s afternoon. There will be a number of presentations, and I would like to start with talking about a strategic agenda, the 2013, 2015 strategic agenda for the Truck Group. But before doing that, I would like to do a little bit of a recap and we have some discussions over launch as well.
I think it’s important to realize the journey that we have had and the journey that we are still to some extent are on when it comes to actually the transformation of the Volvo Group going from a business area and business units focus to one group focus. The pace increase that I’ve talked to many of you before moving away from the Board meeting pace going into the weekly rhythm, which is now in place.
Brand by Brand looking into the total brand portfolio and Peter Karlsten will come back and talk more about the status we are there, and of course also going from the local processes to regional processes into global processes. And this is important, because this is one factor of two that I think is extremely important to get in place before you can start to implement and really drive a new strategy, new targets.
On the other side of the coin is the structure of the foundation, which is down the things that we have done, we said we were to be doing during this year and the things that we actually have implemented. And you can read on yourself we have discussed it before, we started off last year with a revised corporate vision, it goes down into the new management teams and new organization coming in with a new way of working. And for us in that, it seems like we have been doing this forever, but if you look at a calendar, we are talking about just about nine months since we actually launched the organization.
So we have first of all a lot of things during this period of time, and here is the point I want to make. But before this foundation is there, before the foundation really has dried, before the concrete has dried, it’s very difficult to start and implement a new strategy, because what you might risk into, or have a risk of doing is actually to get an organization that is starting to run in wet concrete. And there you don’t get attraction, you don’t really get what you want out of that.
So the focus has been and I know we have had this discussion with many of you during the last year about the 300 bps and the strategy how we’re going to do with that so far going forward. And this is really the message. I wanted to be really sure that before we started to take the next step that we have the solid foundation, where everyone use places, where their accountability was clear, where we could start actually to implement the changes that we really wanted to do.
The third area, which is very important is of course to engage in. And I have clearly said also over the last year that I want to have engagement in the new management team for the targets to changes and the activities that we want to do going forward. And we have worked on that quite diligently over the last year, where we of course already with the new management in place mighty we started to think about this in January.
As soon as we came into place when we started, when we have the new financial targets, we started to think about this and we started to formulate. Now, we created a truck management team and the executive management team and then we’ve continued to actually start to involve and commit and then we expanded it into the extended truck management team, a group of 50 odd people that we have worked through in parallel with actually having the concrete in the foundation to dry up, at the same time we were driving those kind of things.
And we have set a deadline as you all are aware of in terms of end of the third quarter to come to a conclusion of this and actually merging those activities done into what is the next lot you can step, and the next lot you, the steps now when we have the transformation, where we have the foundation that is sort of in place, we have the commitment and engagement from the people now is of course the right time then to launch and also to make sure that we start to implement a new strategy.
The focus of the new strategy, which I will be presenting to you today is about the two areas I have communicated very many times, that is about, this is not about a reorganization and its traditional firm. This is not about budget cuts kind of approach. This is a new way of working, and this is a new way we’re actually utilizing the full potentials that we have in the Group by driving the organic growth. At the same time of course doing that in this smartest possible world when it comes to profitability and when it comes to cost and processes and so on. So these two areas is of course something that has been very, very fundamental to us developing this new strategy.
When we started thinking how we’re going to structure this strategy, we said we need to have some sort of framework around the strategy, because I wanted to have it connected to our vision, to our wanted position, and also then all the way into this strategy for the next three years.
And then we started with a concept of focus areas, because we wanted to translate all the ambitions that we have and we wanted position into something more concrete, and we wanted them to grow in focus area. And after a lot of thinking and discussion, we ended up with these five focus areas.
And the first one is to secure number or two in profitability, quite obvious one. I mean, it’s clearly related to a link to which I think is very good to the board target that they have put on us to be number one or two in profitability among our peers. Number two, strengths and customer business partnership, and here is a lot of different aspects to this business of course, what you saw here today with a new FX, there is one way of strength in the business partnership.
But there are many others and in relation to this, it’s about the hard product, the soft product. It is to be able to capture the growth opportunity we have in our brand portfolio into real, dollar, pounds, Swedish krona in terms of revenue, and that is all when the accounts has strengthened the customer business partnership. Of course, captured profitable growth that’s an essence in our strategy and making sure that we are taking care of all the different opportunities we do have with our amazing brand portfolio, but also our global reach that we do have.
Number four, we had a discussion over launch about innovation, about fuel efficiency. We need to continue to drive fuel efficiency. We need to make sure that we are at the head and at the top of the development and that goes both for engine, but also for the whole system when it comes to trucks going forward.
And last but not least and perhaps one of the most important word now really take benefit of the fact that we have a truly global organization, a truly global reach and making sure that we are building the high-performing team around that organization. So then we talk this and then start to think about, we need to have very concrete targets and very targets that are easy to manage and also easy to follow up and easy to communicate.
Turned out to the 20 targets, so here they are. This is the targets that we are going to follow. This map or these 20 targets is our map for the next coming years. It indicates where we want to put our focus in the future. Each and every target is clearly identified. It’s measurable, that it has KPIs, KFIs and what have you in order to have a starting point and be able to track the progress going forward.
It has an owner, each and every target has a owner, and that owner is taking full responsibility for this target to be developed, and I will come back a little bit more later on, how we wanted to follow it more in detail. So once again, 20 targets, one sheet of A4 of text that is our roadmap for the next three years.
If you take a little bit more of a deep dive into the strategic targets, you can see that we have a number of the targets that are really dedicated to drive the revenue growth. We have the whole Section 3, which is then called the captured profitable growth opportunities, where we have clear targets about our market position in 3.1, optimizing brand assets become number one or two in combined Groups Trucks heavy duty market.
We want to have a real focus on APAC and Africa. As you can see, we both have a commercial target with a commercial presence in order to support the growth in those regions, but also taking their consequences, making sure that we have the OTB, which means basically not production, but everything that goes around order to delivering logistic services and so on and so forth, to make sure that we have a smooth and lean distribution and production in those areas in order to support that growth. And 3.4 focusing a lot of the increasing of the aftermarket and there again, really bring it back home to the people that is responsible by saying that we should increase aftermarket sales per unit in operation by 12%. So it’s a very tangible and straightforward target, which we can follow up.
Each brand rank number one on decide the brand attributes and on competitive sets. This is a natural step to really make sure that we are taking the full consequences of our brand portfolio thinking, and Peter will come back to that and describe a little bit later how we’re thinking there. But to make sure that we not rush in with all the brands into the same segment, but really making sure that we are distinguishing the brands from each other and making sure that they are addressing the rights population with a right competitive sets, and with a right features in there, when they all positioned at right place, they should be ranked number one.
Before going to commercialize alternative drive fuel technology by launching concepts of products in each region to make sure that we are following the trend by alternative fuel in the different regions. We are well aware about the gas, natural gas discussions in U.S. We’re well aware of the different technology selectification in China and so on and so forth. And we want to make sure that we stay on top of that and have a clear targets going forward.
So this is the revenue growth side of the 20 targets. And as I said before, you will get examples from Peter and Joachim later on how we are actually addressing those in that terms. Then of course we have the right profitability and the whole section 1, 1.1 to 1.6 is of course addressing that point when it comes to increasing our profitability to become the number one or two in the industry.
I have a slight feeling after my discussions during this year that is a quite and a lot of interest around this. So I intended to spend a few minutes on actually going through that and share with you and open up also how we see this will be reflecting into the profit and loss.
So what we try to do here is to start with a Group Trucks. You need to keep that in mind, this is a truck, this is now based on a 200, roughly $200 billion of sales. And what we then have is the different targets on the left side. It’s the impact on the operating margin that targets will have, and we then have some roadmap examples.
If we start with the top one, increase vehicle gross profit margin per region by 3%. And this is exactly what it says. It is the gross margin per region and it’s 3% and it’s an increase. Now, the way we’re going to do that is working very much with coordinating the brand and product positioning. And as I said before, Peter is going to come back to that with positioning on that.
We are announcing that we’re launching a new value truck, Joachim will come back and discuss and explain to you more in detail, what we want to do there. Of course, this also means that we need to optimize our pricing strategies and take the full advantage of our different brands in the different markets. And that means we’re working with very smart and intelligent pricing strategies around the globe that doesn’t mean only price increases, it can also mean price decreases, but in general, we want to have an optimized pricing around our brands.
And then of course exit on profitable products, which also part of bringing the profitability up. If we see that we do have products in markets that we don’t see long-term will make profit enough, then of course, we have to take the consequence of actually doing that. And as the first example, we’re announcing today then that we are exiting UD, we’re stopping production for UD Trucks in U.S., so that is one example where we then moving that.
The next target, that’s what I stand here, the large vehicle question is, of course why does 3% gross margin only give 2% in impact? Well, it is vehicle gross profit margin, it’s not spare parts. So this is the vehicle gross margin and thereby, we don’t, we get the 2% impact on the operating margin. The second one is to reduce the standard costs, and this is of course the whole, the standard cost compromise the whole cost structure for the product. And this one is a target, which is extremely important and we want to reduce that cost of sale for the current offer with 10%, excluding FX, volume, and raw material impact.
We will do that by really now focusing on the Volvo Production Systems. And you can imagine the force that we now start to see with the Volvo Production Systems, where we have it under one clear responsibility from a function point of view on the market we’re at in the group truck operations. And the rollout that we’re now going to do and the implementation, which is now on a day-to-day operational business into the different areas, and here we have a lot of very interesting activities ongoing to drive productivity and thereby reduce the cost, of course, we need to further optimize the sourcing.
We need to take the advantage of actually merging three purchasing organizations that we have before with the, in engineering, in Powertrain, and in non-automotive products, and we have merged this into one house, we need to further optimize that. And here we have a, of course also focus on the quality.
Now, for those of you who know the cost structure and anticipated you can say that why is 10% cost reduction of the current offer only generating 3% in operating margin? And the reason for that is that, this is a very complicated situation, where we actually have a number of feature increases, you have different kind of models, we have hundreds of different models.
And we have put up a number of sort of framework around this target to make it easy to access and easy to measure and we will not go into the details about that. We can just conclude the 10% cost reduction equals 3% in the trucks operating margin. Then we have two targets about selling, and the reason for having two targets about selling is quite obvious if you think about it, because having one target for selling expenses could give the wrong incentives basically, especially for us who have a mix between the own dealership and independent ownership, it could mean that you could actually haven’t drive very good investment by adding people into the dealer network was highly productive and selling service hours, but of course to add on to the sales costs and therefore the ratios.
What we have decided is to have this two, and that is focused on the wholesale the non-retail selling costs. And those are of course the back office system that is the whole organization around supporting the dealers and making sure that we have a dealer setup that goes into line, and there we are saying that we want to decrease those with 5% and that would give us a half a point of improvement. And this is of course very much streamlining. This is about looking at the processes making sure that we have a streamline currently in terms of systems, in terms of all other things. And a good example, which again we will come back to is the overall cost reduction in Japan that we also have announced today.
Then you come on the other side and that is on the dealer side. And there we’re looking at it from a different point of view, and that is how well is the dealer absorbing the total costs with its soft products, with the service. If the dealer has a 100% absorption rate, soft offer absorption rate, it’s actually covered the whole cost structure for the dealer, including building, salespeople, and everything.
And he makes a zero profit without selling one single new truck. Okay, if you are a 110% then he actually makes a profit without selling one new truck. And the reason why this is important is of course to make sure that we build up the stability and the strength of the dealership going forward, because this means that they can take ups and downs in a much better way than they could otherwise if they don’t have the appropriate soft offer absorption rate. And we want to increase that with 10%, which is translated into half a point as well.
And here we are looking at dealer efficiency of course, new soft products extremely important. We talked about the customer agreement for the new FH, and so on and so forth. So we will also, I think that’s important. We have a special focus on our second owners to make sure that we don’t lose truck, when the truck goes into a second owner, but keeping that also as a revenue generator for us going forward. So that will also be a targeted area.
And now we are talking about R&D and our reduced R&D expenses gross to 11.5 billion that we’ve continued to work with the R&D 13, which we have started of course, and we are in the midst of. Again, the same with VPS, it’s fully owned by the Group Trucks Technology organization and the implementation is coming there, even though we of course doing the implementation of R&D 13, all our BAs and activities around the Group.
Now, this would not give any immediate for these three years impact on the profitability. It will actually avoid us from having a negative impact, because of the higher amortization that we see going forward now in our R&D. So basically, if you then adding up this together, you will see on the 200 billion turnover, you will have a profit improvement of these targets with around six percentage points.
Now, if you then turned out into a Group of 300 billion, that translates into 4%, mathematically, so that is the 4% contribution that the truck is doing into the Group. Then on top of that, you have the business areas, the CE versus Penta and Governmental Sales who will contribute their share of the profitability improvement. Here of course, you have different starting points, we have taking a leap in CE, CE has moved already other business areas not on that and still has some work to be done, so this is a mix, but in around the half of percentage points going down.
And finally then the IT cost, which is always something, and here we have decided to put IT cost in relation to the Group’s total cost not to revenue. Of course, the revenue is somewhat you have time differences, you have other differences on the revenue. So we want to make sure that whenever we do a cost adjustment for one reason, or another, we need to follow very carefully with IT costs. So therefore we say that, we want to have an IT cost of the total Group costs of 2%, which will also give us a 0.5%.
So then transforming this mathematic calculations into 300 billion Group point of view, you then looking at a 5%, that going forward from here. Now, we all believe that the likelihood that we will have only sunny days and tailwinds over the next three years when it comes to all the factors in the word that we do have is very, or highly unlikely. So we have been very specific to my team, when I come up with those issues that I wanted to see a high bar in order to be able to mitigate, if we, by any chance would get a normal Göteborg November Tuesday, which is a little bit rain, or a little bit headwind coming at us.
So therefore, we say this headwind factor and now we would have the target at net improvement with 3%. So I just wanted to be very, very clear. And we said that in the press release, this strategy is a fundamental part in achieving our long-term objective of the 3%, or the 300 bps improvement that we see in front of us.
This doesn’t mean that by 31st of December 2015, we’re going to have that, because nobody knows what kind of market we’re going to have at that point in time and what other issues that we’re going to have on the 31st of December 2015. But it is a fundamental part and actually lining the organization now in order to focus on these issues, which we believe is fundamental to drive the profitability and also addressing the leverage curve that I have discussed with you many times.
Coming back to the whole implementation of this, you remember the five key focus areas turned into 20 strategic objectives are now underway, and we have already now a huge amount of roadmaps being drafted and also put in place in order to achieve this and that in turn will generate thousands of activities supporting this strategy going forward.
So this is a very funnel like process, where we would not have any sub strategies, we would not divided the strategy into any other sort of documents everything that we need to do now is going to be focused on these 20 targets and is going to be focused on allocating resources, making sure we have the roadmaps and making sure that we have the activity plans in place. And it will be as operational for me and my management team as the follow-up of the monthly results.
So we will have a once a month, a follow-up where we stand with a different targets, the owners will be presenting the status, the action plan, the resource need, what do we need to do, do we need to change roadmaps and so on and so forth. So that is something that we’re going to work very, very actively with in order to push this forward.
And by doing that you reach two things, one is of course, a commitment and also a ownership and the seriousness that we need to do it, but you achieve an enormous engagement, knowing that your target will be up to the management team once a month sort of it to be discussing. You don’t want to say it, I think about this as a long-term strategic target that you can look at, at the back half of 2014. You need to be updated on a monthly basis in order to see that we do progress and if there are issues, it has to be raised, we have to take it into management and then correct it.
So this structure of actually following it up will be extremely important. Openness and full disclosure to secure employee understanding and involvement. I’ve said many times, I don’t believe in strategies that are sitting in a binder behind a shelf secret documents, if a strategy is really going to work and if you’re going to see change, you need to really engage people around it, you need to rally people around it and everyone has to understand the full context of it, where we want to go, why we want to go there, and what are the measures to be doing it.
So we are as we speaking here today, we are rolling out is now completely as you see it to all the 80,000 people around the globe. There will be a huge program now put in place to go out and discuss with all employees to explain, to argue, and to make sure that everyone has to buy in. We had the final touch up of this in September 13, 14, here in Göteborg, where we collected a 120 top trucks managers, I really went through this into the detail and get their full commitment, engagements, and also a huge amount of can-do attitude in order to go out and address those issues.
So to me this openness and transparency is of course very important for me in order to rally everyone around it. And we have tough targets and we’re aware of it, and we’re fully committed, and we also believe that we have the means to do it and above all we start to really have the self confidence that we can do it.
So the next phase is stop talking, get into it, and start to deliver. And that is the theme for the rest of the afternoon, where I will now want to have Peter and Joachim and also Pat later on, now starting to talk about, what examples can we talk about and give to you?
And so you get a feeling for what are activities, what are the decisions that we’ve already taken, and of course, having a feel for the heading we’re going. So I assume that our, if not thousands of questions, quite a few questions, but there’ll be a Q&A session later, and I manage this in one minute and 46 seconds to pass. So I give that time to you, Peter as a very generous.
So first of all, I’m very pleased to be here and having this opportunity to share the work that we’re doing in this very, very exciting project, the brand positioning project. We have of course in this project as everything we do supporting, or this project is supporting several of the strategic objectives.
As you can see on this picture here and the brand positioning job is extremely important, because we’re taking the Volvo Group into complete new face of what we have been doing. And I think what is important here now when I’m talking, I’m only talking about trucks. It has nothing to do with buses, or construction equipment, we’re focusing only on trucks that can be good for you to remember.
The job we are doing here is to really go from a brand by brand strategy into a strategy where we’re focusing on the brand portfolio and take another completely different approach to the market. We have since we divested the passenger car revision and decided to focus on commercial vehicles, we have made several acquisitions and we have also formed a joint venture with Eicher Motors in India and we have built up a very strong portfolio of brands in the Group.
We have also during the last decade focusing very, very much on commonality see to that we really can leverage from the economy of scale that we have built up, because in our industry, it is extremely important to get the economies on scales. So we’re developing a new engine for Euro 6 is extremely costly, and you have to have a significant volume base to afford to do this, and that is what we have had our focus on over many, many years. So we have focused very much on building the technical platforms, to see to that we are utilizing the group components now in the volume base. So we have in the group, many different strategic assets. So we have the brands, we have the technology platforms that they will be focusing on. We have also done, of course our customer base that is very, very important of the strategic asset as well.
And then of course has a very important asset also that is of course the industrial footprint and always a big hurdle for many companies to take themselves into new market, because it is very heavy investment that is required. In many markets today, we have the huge requirements on local content. You need to build by the supplier base. There is a tax duties if you don’t produce locally and if you are not fulfilling those local contents, there is huge tax duties. So it’s a really a big, big hurdle. We have all of this in place. We all, all over the world with a very strong footprint and we can utilize this footprint in a very clever way going forward, in a much more clever way going forward.
Another thing that is also very expensive to develop, that is the distribution network. You cannot sell in the trucks, if you don’t service them. If you don’t have a service network, it is very, very difficult to get, so to say, a sustainable market share in the country. So to develop a service network, you need to have a running fleet, then if you don’t have a running fleet, you cannot develop the service network. So it’s also really a hurdle for a market and for many of our competitors.
But we in the Volvo Group, we have all this in place. We have all those five pillars in place all over the globe. We have this everywhere. And this is I think one of the most important assets that we can really leverage from. And this is what we’re going to do now, when we take this different approach, when we take the portfolio, the brand portfolio approach into the market instead of going brand-by-brand. So we have this in place and I must say that, I would like to say that, we are very unique in this respect in the trucking industry. We don’t find anybody else that is sitting on this fantastic asset as we are sitting on it.
And then taking this holistic view on things, we have to start to talk the same language. In the previous structure where we had different business areas, selling different brands for their business units. We had actually 17 different segmentation models. We had 17 different ways of looking upon the markets. And that was nothing wrong in itself, but now when we take this holistic view, when we are going to take a brand portfolio view, when we first of all to see to that we can start to talk the same language to understand each other in a better way.
So that was the first job that we have done that is to come to an agreement, this is the way we look upon the market. This is the segments we have in the market. We’re looking at from an industry segment point of view that mainly what kind of goods are transported. From an application point of view, how are the goods transported. We are looking at different technological platforms, cab-over-engine, conventional cabs, horsepowers, how many axles and so on, so a lot of different things going in there.
What they have done then of that is that we have in the group concluded? What is the size for each and every segment? What is our position in those segments? Is there a growth segment or is this segment shrinking? How difficult is it for us to come into a segment? What is the earning capability in each and every segment? So we have looked at all those things, and then we have decided and we have given priorities to certain segments. And of course in segments where we are very strong today, we have decided and if you see that there is a good potential in those segments going forward, we have decided this is a segment to defend. We are going to see sort of that we keep our very strong position that we have today also into the future.
Other segments, where we are all present today, but we also see that there is a good opportunity. We have decided, here we are going to build. We are going to grow significantly in those segments over the years to come. We are going to take market shares in those segments. We think that we have all conditions. We have everything that it takes to make ourselves growing in those segments.
And we have identified some segments where it can be a little bit more selective. We can find some very profitable applications or some niches where we could work. And then we have also said that there is actually segments that we probably should not be in at all. So this work is done. We have concluded this. We have this very, very clear for ourselves. And as you understand, I think our competitors would like love to have this kind of information that is the reason why we have shaded a little bit to it.
And I think that is all about that, and then the next thing here, this is the way we look upon the market. This is how we see the customers’ needs. We have divided the markets into four different market segments. One is the premium-end, one is high-end, one is value and one is basic. And on the Y-axis, you can see the price spend with the premium segment that is 95% to 100% of the price that is the highest price level that you can get on a market. Then you have a High-End expanding from 85% to 95%, and then you can see the value segment very, very wide, we’ve actually divided value segment into two valuing itself and value basic, and then you have the basics down in the bottom.
On the X-axis, you have down to the left a very, very basic truck, the cheapest truck that you can even imagine, and then yes, the customer the only thing he wants to know can I get the spare parts somewhere, so I can fix it wherever I want that is the need of that kind of customer. Then we have customers and we have operations that requires much more of a total transport solution, and that is then moving over to the right. And to the right extreme perhaps you can see customers they’re just really require trucks to be connected, they are requiring perhaps even a cost by mile and so on so, it’s a very much to that extreme.
We have also done in those segments slightly different customers behavior. I mean what is that of those customers are looking for. For example in the premium segment, you have image driven customers. They really would like to have something that they are proud to drive. They are really, really would like to have something that sticks out. They are looking for very good engine performance and those kinds of thing.
We have also customers that are technology driven. They really would like to have advanced technologies. They would really like to have features that suits their needs and so on. And we have customers that have a more holistic view. They are concerned about environment. They are concerned about the well-being of the drivers. They want the drivers to sleep good at night. They want the driver comfort to be very high and so on.
And then we have customers that are more looking at the operational costs. They would like to see that they have low operational cost when it comes to fuel, a good purchasing price, but also very high reselling value. So they can make the whole calculation and look at that in that way. Then you have customers that are network oriented. They have very good relationship with the network. They rely completely on the network that they carried on. They look at service availability everywhere, and if I have a problem in the network, they will fix it for me. So that is that kind of customers. And then for the basic truck, we have the customers that are just looking for the cheapest price. So we have this very much in place, and as I said this is our way of looking at the market and this is the way we are now. We are using now to positioning our brands.
And if you go back into history a little bit and then those acquisitions that we have made, we have mainly bought brands that are in the High-End or in the premium segment. And as you can see on this picture here, we are a little bit stacked up into the right corner of this short here. And then it is coming from that the previous position of the brands and the strategies that each and every brand had. And everybody when you are working alone perhaps you have the tendency to always go up into the right corner and try to become more and more premium. But now when we take the new approach and really look at the portfolio has a whole, this doesn’t hold up any longer. We have to reposition our brands and focusing the brands a little bit different going forward.
there is one thing also that is very interesting in this slide here and that is this purple ring here. There is a big hole here. There are great, great opportunity perhaps you should call it for Volvo Group that is the value segment. We are of course serving the value segment today, but then we are serving this segment with high-end products and that is of course, putting a lot of stress on the margin when they are doing that. So I will come back sort of value segment a little bit more, and then we have Eicher down there in the basic segment of value.
So in order to align the brands in the better way, you can see here that we can hover the whole chain from basic, the whole way up to premium in a very good way. We have Volvo, if we start it then up in the corner. The center of gravity for Volvo is between high-end and premium. We can stretch the Volvo brand up into premium with FH16 and so on. But we are also very, very strong into the high-end segment with the Volvo brand.
We have the Mack brand that when it comes to the vocational segment. They are very much premium, up on the road applications and Mack brand is in the high-end segment today. And if you think that is a very, very good positioning. The UD brand in Japan is definitely in the high-end, but the UD brand outside Japan is much, much more value brand today in Southeast Asia.
Renault today is positioned in the high-end, have had some ambitions to grow up into the premium, but we think it’s more important actually to try to concentrate the Renault brand in the high-end segment, and perhaps even go down into the value segment with that brand. The UD brand I have commented and I assure the aspiration then in the going forward. But Eicher has to go a little bit slightly up into the value segment.
Do you think that that’s definitely limit how much you can stretch your brand, but to go from two market segments is definitely possible, but go for much more is very, very difficult, because then you are stretching the brand a little bit too much. So this is of course, a completely different way of thinking and this is extremely important of course now for everything that we do. We have made up our mind that this is the way we are going to position our brands, then this will have enormous impact on everything that we do. it comes down from product development for service development and so on. And this kind of information and decision will of course impact nearly everybody that is working inside The Volvo Group.
We have of course to see to that we are staying competitive also. and to do that, we are going to use three different technical platforms. We have the premium platform today that is serving them both the premium and the high-end. We have a basic platform in Eicher that is serving the basic one, but we don’t have the platform yet in the value segment that is what we are working on. And this is the key to be competitive, because if you take the premium platform, let’s try to take that down into the value segment than we are not being cost competitive. So this is really, really the key for the success here that we have a value platform that where the cost level is suitable for this kind of price levels that we are seeing in the value segment, but this is very, very important.
So what does this mean then in real life? This is an example from Brazil. I have worked in Brazil myself, so I know this very much. in Brazil, you can see the market here is very much value market. this is heavy duty trucks only, but the premium and high-end segments represents around 25%. And back from 11, 12 years ago, we started to be very, very challenged from the Volkswagen Group. They came in with a value product that that’s really good enough for many customers to a price that was at least 50% of our price.
And for us then to compete, it was a very difficult than in order to maintain the price positioning of the Volvo FH, and the Volvo FM, we were suffering a lot. so what we did in Brazil was that we introduced a new product that is called VM. And that was just to secure that we could keep the position on the FH and FM. And that product is very unique, because we don’t have it in any other part of the world, but that was what we did at that time.
Now what we have seen in this job here is that we can really benefit, because now we believe we have stretched the Volvo brand as much as we can stretch it. The Volvo VMX is actually going down into the C segment. But we can see that there is still a big portion of this market where are not competing today. So we definitely see an opportunity to have a complementary brand sort of Volvo brand in Brazil because that can give us significantly more market share in the heavy duty market.
And then we have of course, the great opportunity now to leverage on the industrial footprints we have in Brazil, and also leverage on the supplier base. We have a very well developed supply base in Brazil that we can leverage on. We have also a network in Brazil that we can leverage on. So many of those big hurdles that many have to bring into new market, we can overcome rather easily and we can at a pretty low investment, add another brand into a market like Brazil. So I think this is a great opportunity here we are in the works to defining them, which brand we are going to take in for this market. And we are working on the business case just to finalize the last numbers before we can really make the final decision here, but it looks very, very promising.
Another real word that is Africa, an emerging continent with great opportunities for growth, it is a very, very special market, because there is no domestic manufacturers. So the new truck sales market is pretty small actually because the majority of the trucks sold in Africa are actually used truck imports coming from all over the place. And that is the reason why this market looks very strange when you look at it as this. This looks like the premium and the high-end market is huge. But that means the we are looking at the top of the iceberg so to say.
But we believe strongly that the value segment and the basic segment for new trucks in Africa will grow significantly going forward. And here we see of course a huge opportunities for the Volvo Group to leverage on what we have in the group. We can have an opportunity with the value truck in Africa, and we can definitely have opportunities with the basic truck also as Eicher in Africa. So we have good opportunities to do here what we have done in many other countries. And I will come back and talk a little bit more about Africa when I talk about EMEA later on.
So in the beginning, I talked about those strategic assets that we have the five assets, the brands, the technology platform, the distribution network, industrial footprint and so on. And this is what we are really going to do to make it happen. By aligning the brands, we are going to increase the market coverage as I showed that we are going to have a chance then to sell trucks to broader customer base and in all different segments. And of course by doing this increasing the market coverage, we will gain market share and we will sell much, much more trucks. So that is one very important thing.
The other thing is that we should buy positioning the brands in a more clever way. We will see to that what we are going just to fulfill the needs and the features that each and every customer wants and needs. So we are not over developing anything, because customers are not prepared to pay for anything that we doesn’t want to have. So that will also then make our margins improve, because we are offering the right thing, the right feature level and right specifications for each and every customer.
And by this new platform thinking with a three different platforms, we are then also going to be much more competitive. And we can further then leverage on our distribution network. In many countries, it will be rather easy to add another brand on an existing network base. We can also utilize our industrial footprint that we have very well developed all over the globe and we have a very well developed supply chain all over the globe that we can really benefit from. So we have fantastic opportunities here going forward than we have taken this new, how we go to market.
So where are we? We are now taken the decisions on the portfolio and how we are going to position the brands. And going forward now, we’ll go more into a phase when it comes to product strategies. What kind of features do we have that will be unique for each and every brand? What can be similar to others and what can be common and shared? And then, we are going to also define the service offers here going forward, and then later on we will see how this will also play into the R&D and the industrial set-up where we will also see great benefits.
So that was what I had when it comes to the brand positioning. As I said, great opportunities and it is extremely exciting to see what we really can do with what we have. And then this is nothing new, it’s just that we are changing the strategy. We have built up this very, very important assets over many, many years, and now it’s a fantastic time to take new direction and then new step forward, so good opportunities here for us.
Then I will go over and talk a little bit about Volvo Group trucks, sales and marketing, EMEA. And I just thought of to tell you a little bit about who we are. First of all, the responsibility is of course sales and marketing of all truck bands in Europe, Africa and Middle East. We have some 13,500 employees in EMEA; where of 8,000 are working in the retail network. So we are very much a retail organization, we are a very much focusing on our customers.
We are selling around 120,000 trucks a year, we have 320 workshops that we own ourselves and that has been a very successful strategy that we started some 10 years ago. We have 2,200 private workshops. So in total, we have some 2,500 workshops in EMEA. We have an active populations of 900 trucks, medium duty and heavy duty trucks circulating that is now serving as a source for revenue generation in the after market, a very important asset that we have.
We have significant growth opportunities. I think you have already seen some of them in the previous presentation here regarding the brand. We have products that we definitely can utilize in a better way, going forward you can take in other brands in certain markets. I would come back and touch a little bit about that. We have a segments and combination of brands. We are also working very much on operational excellence and really to develop sales and the after-market.
As we are a pure commercial organization, we have nothing else to do and to focus on our customers. And we are really going to work very, very hard to make our distribution network into state-of-the-art network that is our 100% focus in our organization and see to that we keep our customer very, very satisfied with the products and the services that we are offering. This is an interesting picture. This is showing the combined market share in Europe. On the Y-axis, you can see the total size of the market. So the German market is the biggest one in Europe. The size of the circle is our sales, how much we are selling and then the blue was Volvo and the red is Renault.
On the X-axis, you have the market share. You can see that we have a very, very strong market position in France. There we are having 45% market share combined. We have also very strong market potion in Nordic, Iberia and Eastern Europe. That is two countries or two markets, where we are underperforming, when it comes to market potion that is Germany and Turkey.
I will come back and talk a little bit more about Germany. But if I start with Turkey, Turkey is a market where we have a huge part of the market is actually Volvo trucks. And today, we have no chance to compete with a local produced Ford, Ford cargo the same as we are making in Brazil actually and we also have an older Mercedes version that is also highly localized in Turkey and we have made a problem to compete that. Here we’ll see great opportunity to take in a value product into this market. So we can then get better market coverage and by that we can sell more. And as I said, Germany I will come back to later on.
So of course, this is then also supporting the strategic objective here. And in Germany, we think there is three very, very important success factors. One is the renewal of the products. We have the new launch of the new FH. This product will be very, very suitable for the German market. We have also announced that we will have a new renewable for the Renault side. The launch will be in June next year, that will also very important for us.
So we feel that the product side, we will have under control here in one years time on both side and we will have a very good complementary product offering tool for Germany, so that is very good. But we have another thing that we really need to improve and that is the network. One thing is the network density. We have a lot of white spots in Germany. And in Germany, we are all actually going to combine our forces between Renault and Volvo that is the only way it can be in the network that is storng enough.
We have not been able to generate the resources to increase our distribution network in Germany. But now we have decided that this is the way we should grow. So we will really focus on improving the footprint in Germany, because that is what our customers are asking us to do. We are also going to focus very much in order to strengthen our retail confidence and see to that you really get the right people on board, so we can make an improvements on the market position in Germany. Very important and I think, we have everything that it takes now to make this happen. So that the important thing is the new products, but also see to that we strengthened the service network.
Next thing is Eastern Europe. In Eastern Europe, this is very much Volvo trucks. We entered very early in the 70s. We have a built an assembly plant in Kaluga, and then we built a plant, we also saw through that we have capability and capacity to build in old tracks. We have a built up an expansive network in Eastern Europe. We have 155 workshops and 65 with those workshops are owned by ourselves. And in Eastern Europe, we are actually controlling all sales of new vehicles by ourselves. So the network is the wonderful service and that has also been a very important success factor for our growth in this area. We have been able to build up a very large vehicle population, and we are leading (inaudible) Council to this region. And over the last couple of years, they are not stopped investments. We are continuously building more and more network or service points in Eastern Europe. So since 2010, we have added another 29 dealers.
This has taken us to a very, very strong position. As you can see, we number one and number two in all those countries here. And what we would like to do here is to really leverage, also what we have done on the Volvo side and really utilize the network in a more cleaver way going forward here to support also the other brand.
When it comes to Russia, as you know we have the factory in Kaluga, and the Russian market is doing pretty well. But this market also has domestic players that are very much in the value segment. So we can also see here that we have an opportunity to enter the value product into this market, so we can get the better market coverage and by that also selling more trucks.
We have although a very good competitive edge versus the westerners in this market, because of the local assembly we have a very high local concept already and we have taken decisions to increase that further on with a new investment in the cab production that we have in works so to say.
And that the Russian authorities have come up with a scrapping fee that is very, very significant for imported trucks, but we are exempted from that fee, because we have conceded a local manufacturer in Russia and that is very, very important, that gives us a very important competitive edge in Russia. And in Russia, we will also have a Group approach on the network in the bigger see this in Russia, it is extremely expensive. So to acquire land and build the dealership, so we’re going here also, so joint forces here in order to get the better service network and a better co-bridge in Russia.
Next one is Africa. It increased the revenue by 25%. In Africa, we have already, among the imported trucks, a very, very significant mall picture. We have actually 25% market share there in Africa. We have very strong presence by Renault in the Northern part of Africa. We have also very strong hold in Morocco for Volvo.
Duty Trucks is very strong in the Eastern part of Africa, but also in Southern Africa and Volvo Trucks very much in the Southern part of Africa as well. So we have a very, very good starting point. But as you understand from my brand positioning presentation, there is clearly great right opportunities here for taking a value brand, and also to add, I should into the brand portfolio.
We have actually today in Africa 114 different importers. When each and every brand went by themselves that we ended up with very many importers and of course going alone each and everybody becomes very, very slim. Now, when we take a brand portfolio approach straight instead, it would be much more exciting for a private importer to invest, because it can really start to get the business proposition, that is much more attractive, so he can he is prepared to invest more, because it’s a same thing here as everywhere, if you don’t build service network, you don’t sell any trucks.
And if you don’t have any trucks around, you cannot be the service network. So it is the hen and the egg situation here, very importance to, we’re able to develop the service network. So optimizing all the distribution channel is very important going forward, and there is definitely opportunities for more brands in this continent. And I think we can also play a very important role here, in order to change this buying behavior a little bit. I think we can replace a lot of this import of used trucks with new trucks in the Value segment and in the Basic segment.
So this is an objective that we’re going to support and deliver upon of course. So to summarize Group Trucks EMEA we have really great opportunities in our region to increase our market coverage and leverage on the total brand portfolio, we have a lot of things to optimize our distribution channel, we have very clear views, what we are going to do there and how we can do things in a much more efficient way, and a more clever way and then of course the project renewal that we have both on the Volvo side, on the Renault side what is coming, when it comes to value product if this really, really exciting and we think that we will have big, big opportunities and a lot of sales with those new products here. My colleague here (inaudible) I was talking before he said that we can probably reduce our sales forces, because the product will sell itself. I’m not 100% sure that we will try, so that was it, thank you very much.
Good afternoon, everyone, and again very well welcome to be here and there is two things I would like to talk about today. One is to give you an understanding of what is truck sales and marketing and JVs APAC. I’ve my understanding is that we have comprehensive knowledge most of you of the European markets and may be some of U.S markets, but may be some not so much about Asia. And the second one is to give an even more perhaps detailed flavor of what are we doing and what we’ll be doing in Asia-Pacific that then slots very nicely into the 20 strategic objectives that Olof was referring to before.
And let me start with the first one. What is APAC? An APAC today including our joint ventures then is about 16,000 people in the Asia-Pacific region. And we have chosen to organize this in four different areas. We have the India JV organization, the China JV organization, an organization for Japan, Japan sales, and an organization we call Asia Oceania sales, which basically covers the rest of the geographical scope except then China, India and Japan. Thus you can see maybe from the map the geographical boundary in the west starts with the Pakistan and of course it extends over down to Australia, New Zealand and so on.
In this region, we sell about 80,000 new trucks and buses annually, but as Peter emphasized many times, selling is one thing it’s very important also to serve the units that we have. And we have more than a 1,000 workshops to that purpose. We own roughly 200 over those 1,000 workshops in the Asia-Pacific region. The majority of which is in Japan 137. In those workshops that we own, we sell about three million service hours annually. And of course we also have a much higher number than that for the workshops that we don’t do. And the running population then for medium and heavy duty trucks is around 600,000 units.
In APAC, in addition to being responsible for the Group’s combined business across all brands for this geographical region, we also have the responsibility for the Eicher brand and for the UD brand. And similarly as Peter mentioned before, EMEA has the responsibility for the Volvo brand and the Renault brand, while the Americas organization has the responsibility for the Mack brand. So that is our starting point and we have a good foothold, as I think you can see from these numbers.
Going forward, we of course see a lot of growth opportunities in the Asia-Pacific region. It starts with of course the underlying growth of Asia-Pacific itself, the GDP growth and as we know truck sales is to some extent correlated with GDP and macroeconomic growth.
We also have untapped markets, there are markets in Asia where we are not present and there are markets where we’re not present at all to the extent we should be. In addition to that and then thinking about the brand positioning presentation that Peter talked about. We of course have a number of brand market segment combinations in this new portfolio thinking that we will be addressing going forward.
Furthermore, since we’re also talking about JVs, which is a complete value chain all the way from R&D to after sales. We are of course looking at operational excellence. And one very important piece of that being also centered on the commercial end is of course to be retail focus, their retail excellence. In Japan as one example, we have over 4,000 people in our wholly-owned dealership that is the largest in the Volvo Group and probably one of the largest, if not the largest in the commercial vehicle industry.
Now how will we take that starting point and those growth ambitions and how will that fit with the 20 strategic objectives that Olof was referring to. So what I’d like to do now is to give you a few examples of how specifically this fits in. And I’ll start with the first one, it’s from Japan and this example that I’m going to give you touches on both the cost side of the equation, which you can see on the left side of the screen to decrease the wholesale selling expenses to 5% of sales as well as the right hand side, which is about growth and growing 50% over the coming three years in the APAC region.
So in Japan, we announced last month on the left hand side that we are introducing a voluntary leave program. We do that because we want to right size the structure that we have to the business that we have. This will cut across both the industrial activities, as well as the commercial activities. We will complete this exercise before the end of this year and the ambition and the targets and from what I understand the tracking also is that we will reduce our cost base in Japan with 10%, it’s a quite ambitious number.
We will take a restructuring charge, which has been communicated in the press release two hours ago. And the payback of that is to be expected with in one year or roughly one year. That’s on the structural side and on the cost side. At the same time on the right-hand side, we will also be targeting to significantly increase performance. We will be doing that by regionalizing our domestic Japan sales organization into seven regions that will enable us to come much closer to the customer. In addition, we will be bringing the best of our Japanese operations to the Group of course but also the best of the Group to Japan. And we will be revamping the commercial operations in Japan.
And we’ll basically be replicating how we do truck business in other parts of the world be it on the vehicle side, be it on the aftermarket side, how we’ve managed people, HR, performance assistance et cetera. One very tangible example here is the introduction of the Volvo Group’s dealer inventory management system and this before this year is over we will have rolled that out to 120 of our 137 dealers in Japan.
You can say why is that important? Well it will raise the parts availability in the workshops with around 15 to 20 percentage points. And that increased availability will drive more sales. Because today or I would say yesterday there were too many times where the customer was coming to the workshop and we didn’t have the part to do the job. And that is of course a problem and we’re fixing that.
In addition, you see at the middle of retail purchasing process in Japan when we sell a truck, we normally unlike many other markets, sell it complete with a superstructure with a body it can be a wing van, it can be refrigeration unit, it can be a mixer, a dump truck or anything else.
And we will be working with Group’s approach to purchasing and that is a significant addressable spend that we will now target to decrease them. And we have already started to realize the first savings on that journey. And of course the ambition and the absolute target here is to drive customer satisfaction, customer loyalty and in the end that is what drives market share. So that is an example both on the cost side as well as the revenue side for Japan.
The next example, I would like to talk a bit about is from South Korea and here we talked earlier, all have talked earlier about becoming number one or number two in heavy duty trucks market share as well as of course growing the top-line in a APAC with 50%. Now in Korea, the Volvo Truck brand has a very strong position and we have had a local presence and owned local presence in Korea for many years since 1996 and already today the Volvo Truck brand is number one when it comes to brand image. It is number one when it comes to customer satisfaction and there by you can also conclude that we have a price premium over competition in South Korea.
In South Korea today into heavy-duty truck markets there are two local Korean players and there are five brands coming from Europe, if you take the five brands coming from Europe the Volvo Truck brand has 40% market share year-to-date in South Korea and it’s as you can see has been progressing fairly well over the time. We have been reaching that and we will also be reaching our future objectives by further broadening the product range the truck for instance that you’ve all tested today will of course also be introduced in Korea the new Volvo FH.
We’ll also continue to expand our dealer network, we have 25 dealer points today in South Korea three of which we own, and three, four years ago, we didn’t own any dealer points in Korea. And we only had 18 points most importantly actually is about the people in the network raising their competence. So that is the Volvo Trucks journey overtime. But being a premium brand in South Korea, there are limits to how much market share you can actually reach. And therefore, we have, last week introduced the UD Trucks brand into South Korea.
It was launched on September 19, as the first heavy-duty truck maker from Japan into South Korea for the last 20 years. We will be targeting segment, which represents roughly 40% of the markets. The six by four rigid segments that targets cargo transports, wing body, et cetera as you can read on the slide.
And since we now take this group approach and the brand portfolio approach, we will also be leveraging of course the current Volvo Trucks network to add them the UD Trucks into that network. That will provide synergies and efficiency on the cost side, while providing extra revenue on the top-line. And as you have seen in Peter’s brand presentation, there is today no overlap and there will be very marginal cannibalization in our opinion between a premium Volvo Truck and the UD Truck that is coming from Japan and South Korea, that’s why we’re introducing this.
In our estimation, we will need around 18% to 20% market share to reach the number two position. We are today number three then as the Volvo Group after the two local Korean makers. And we will reach that number two position by the end of 2015 then by continuing the Volvo Truck journey that will be reemphasized and strengthened by the new Volvo FH amongst others, as well as then adding the UD Truck brand to South Korea.
The next example is about the aftermarkets. The aftermarket is a very important part of our business. It provides stability over the business cycle, but very importantly, it also provides the interaction with the customer and we of course fundamentally believe that having a strong aftermarket means that you also have a strong relationship with the customer. And that can only provide good times, a good things overtime if you have that relationship.
So in this example, which is from Australia, we already have three of the Group’s brands. We have the Mack brand, the UD brand, and the Volvo Truck brand. And we have one dealer network today taking care of these three brands. So what we will be doing in Australia is to continue to build the density of our network. And we have a major dealer opening, a wholly-owned dealer that opening early next year in Sydney. We will of course be working as always with competence and making sure that we have the right people at the right place when the customer comes into visit us.
We will be working with further improving parts availability again a very key measurement of making sure that you drive parts and service sales, which are the fundamentals of the aftermarket business. If that is not in place, all the other services that we normally have with the customer probably will not happen. We have of course a very good penetration today with Volvo Trucks as you can see. We have 65% penetration, which essentially means that we have 65% market share of the potential of the spare parts that the trucks will consume over the life cycle, the economic life cycle and the technical life cycle.
In addition, we will broaden our aftermarket offering and we will introduce new service agreements. To make sure that we continue to drive the aftermarket top-line, as well as and again emphasizing that, building the relationship with the customer. And of course and perhaps obvious we will leverage these learnings across the Asia-Pacific region. Another growth focused topic is India. And as you may know in India, we have our joint venture then with Eicher Motors Limited, the VECV joint venture.
This graph illustrates the growth of the Indian market on the left side until the year 2011, but it also demonstrates the decline of the Indian market during this year. And in fact for the last six months, the Indian market has been declining month-by-month. But on the right hand side, you can see the Eicher market share for both the lights and medium-duty, for the heavy-duty, as well as for buses.
And you can see that despite the fact that the market is actually going down this year, we are continuing to take market share and in fact we are as a sum of those two things increasing volumes in India even though the market is decreasing. We had in particular I’d like to emphasize strong evolution on the bus side. We sell around 10,000 buses in India annually in this joint venture. And in August, we had 14.2% market share for the buses in India.
We’ve also of course sell Volvo trucks in India for specific segments. And if that is bit of a history until today outlook, this talks more about the future, more about what we will be doing. We will be starting up the engine production plants this quarter. We also have a new bus plant coming online in the joint venture in the middle of next year. We have as been announced already a strong pipeline of new products coming for the Eicher brand in India and beyond.
And of course this combination between the frugal engineering and the local expertise and let’s say low costs truck experience from the Eicher side coupled with the experience, the technology and the processes from the Volvo side makes a very, very good marriage manifested in the market share growth that I showed you on the past page. And of course by using these components and our excellent starting point, we would be driving the top-line in India, but we will also as Peter for instance talked about in Africa, we looking in aggressively into export opportunities for the Eicher brand.
The next example is perhaps what some of you have been waiting for it is about how we will be using these three truck platforms, the Premium, the Value and the Basic platform. And the benefit of course of doing that is going to be, as you can see both on the profit side increasing the margins, as well as of course the top-line and the growth.
Let me start with the icon, the reborn icon that you had witnessed today. It is of course so that we will be using this product also in the Asia-Pacific region. The launches of this product will start next year and main markets include amongst others than Australia and Korea. And of course this builds image for us, it builds image for Volvo trucks and of course it also supports the image as a whole for the Volvo Group. And of course volumes and margins et cetera are targeted to improve here, needless to say and I hope that you’re happy and pleased and a bit impressed with what you have seen today.
This is then the value truck and Peter mentioned before that we don’t have it launched, it’s not ready and that is perhaps true, it is not launched, but it’s also bit modest because what you are looking at is not computer graphics, it is real trucks and you will have to excuse that I’m taking away some of the excitement by dibbing parts of the picture there. But I can assure you that these trucks exist and they are very nice to drive.
The whole point then with this value truck heavy-duty platform is to balance the features and the product costs. This range will also be used in a variety and a very broad variety of applications going all the way from four by two to those of you who are more technically interested you can see that the lower picture is actually an eight by four. So the whole spectrum of truck applications will be covered by this heavy-duty truck platform.
In order to secure the awareness, the understanding, the knowledge as well as the cost this truck platform is developed and sourced in Asia-Pacific and we will of course market it across Asia-Pacific, be it in South Asia, be it in Southeast Asia, as well as the higher emission countries overtime, but also of course this is a game changer. It’s not only a game changer for us in Asia; it is a game changer for the Group. And therefore of course we will be selling this product in other markets globally, in Americas, in EMEA and of course then in APAC.
So, again an eight by four dump truck on the lower side and a long-haul version on top. Very importantly when you have such an ambitious targets and to get the cost right to make sure that we get those margins is of course to have an industrial system that is aligned to that ambition. And therefore, we will be producing this truck in Thailand, in Bangkok, in the Group’s plant there. We will using that production within the ASEAN trade zone for those products coming out from that plant, as well as the global exports will be coming from that plant. In addition, it will be produced in India for the Group’s plant in Bangalore and that is for the local Indian needs.
Finally, the discussions are to be finalized with our partner in the Hangzhou joint venture that we have with Dongfeng, but the plan from our side is also to introduce it then in China using the joint venture and then locally for the Chinese market. So, to summarize this part of the discussion, a new value truck heavy-duty platform, it is rolling, developed in Asia, sourced in Asia, manufactured in Asia, adapted to the Asian needs, as well as global needs, a real game changer.
So, we talked about Premium, we talked about Value. Let’s also talk about Basic. This even though it’s a bit mask, is the next generation Eicher truck and we have a strong pipeline now of Eicher trucks and buses underway. And you will be seeing those products hitting the markets in a not-too-distant future, again combining the technology and the processes and the strengths of the Volvo Group with frugal engineering and the low cost expertise from the Eicher side.
The features then compared to the current version will be of course on the fuel and fuel efficiency, on the reliability, on the durability, on the comfort, on the design and of course we’re adding in some options that are accessible to us from a Group perspective. So the idea here is of course then to broaden the addressable markets in Asia. Volvo truck for Premium, value trucks for the Value segments and the Basic Eicher brand for the basic customers, and that will give you as a much broader opportunity to drive the top-line, as well as the adapt and the cost structure to secure that we get those margins out, which is strategic objective number 1.1 in the material that you have.
I think that was what I wanted to share with you for now. Thank you.
Good afternoon everyone. I have the exciting challenge of being the last of among my colleagues to share information with you on a day when you’ve received so much exciting information about the new strategy of the Volvo Group, and of course not the least been able to see and experience the brand new range of FH trucks that you see behind me here. So it’s been a very interesting day I hope for you thus far, and I certainly hope to continue that trend of sharing some interesting news with you.
What I’d like to do is, talk briefly about a few key elements of the strategy for Volvo Construction Equipment and explain how they fit in to the overall Group’s strategy. You’ve heard a lot today about the red thread or the theme of the Group getting the most out of or realizing the full potential of its many excellent brands and that is a theme that I will touch on relative to Volvo Construction Equipment. But before I get into that, I want to just calibrate the starting point we have in Volvo CE. We are starting in this new strategic period with a broad, the broadest we’ve ever had and competitive product portfolio, which is positioned under our two brands Volvo and SDLG, a part of our joint venture company Lingong in China. We have committed and aligned distribution around the globe, the strongest it’s ever been. As I said, we are using a dual brand strategy now.
We have been successfully for several years and particularly in China, but now as I’ll come to it later extending further and further through the globe. We are achieving scale in both the premium end of our products, as well as the value end of the products in both development, as well as production. And we continue to maintain and build upon our number one position in China, which is achieved in the important excavator and wheel loader markets together between our two brands SDLG and Volvo.
So what’s ahead? I can’t just keep talking about number one position in China all the time, I think I have to tell you a little more about where we have the opportunities to grow and develop in the future. And the good news for us is we still have great opportunity to grow profitably in emerging markets, both with the Volvo brand, but as well as with the SDLG brand. We have the opportunity to further leverage our position in China with both of our brands. And of course growing SDLG share globally, profitably is a great opportunity for us as well. So I’m going to put a little more meat on those bones for you today then perhaps you’ve seen in the past.
As was explained to you earlier today, the Group has a new strategy for the next three years and of course Volvo Construction Equipment is an integrated part of that strategy and connected to it, which means that we are connected to the overall goals, targets and importantly revenue targets and operating margin improvement targets as well.
What I’m going to do today, recognizing I’m the last speaker and I should be very focused, yes, I’m going to focusing on three elements of our new strategy in Volvo Construction Equipment. We have nine objectives, five of them are oriented around driving profitable growth, three are oriented around driving improved efficiency, and one is around leadership and talent. I’m going to zoom in on three which are interconnected and very much related to the theme of getting the most out of our two brands. The first is to profitably grow SDLG globally.
With that, we are looking to significantly increase our share of the important excavator market in China. We are also looking to leveraging the infrastructure of Volvo; grow the export business of SDLG outside of China. In addition, we see great opportunity in the aftermarket soft offer if you will, we call customer solutions growing that business both in China and outside for SDLG and doing all of this of course in an accretive way to the bottom-line of the business.
Second, it’s to develop Volvo brand products for emerging markets. And you heard a lot about brand positioning today, it’s very important that we are relevant in these growth markets with the Volvo brand as well. And this is very much connected to how we position SDLG in these markets also. So I’m going to talk a little bit about that later on.
Third, its deploy CAST globally and then you could say how does this connect, it stands for common architecture and shared technology and it has to do with how we design and build the products. And this is an area where we see that we can help ourselves to leverage between the two brands using a lego-style modular approach, which I’ll talk a bit more about as well. So those are the three strategic objectives that I’m going to elaborate a little bit further on for you.
So let’s put some detail to it. Let’s start with the China market, it is the largest construction equipment market in the world, representing anywhere from 40% to 50% of the global unit market. Even though China has been slow for the last year, it still remains the largest construction equipment market and one of the great revenue growth potential for us.
We start with the SDLG brand. A brand that we acquired back in 2007, which at that time was fourth largest wheel loader manufacturer in China and that is the largest product market in the Chinese market, you see last year’s market 220,000 units. Last year’s market share for SDLG was just over 15%. Based on leveraging the strength of the Group and that respective it has been technology support to improve quality. The SDLG business has continued to grow share in a highly competitive market and you can see from the CCMA data, first half this year, they’ve grown share of full point over this 2011 figure and have moved into the top two players in the Chinese market in the competitive wheel loader business.
Where the opportunity for growth is looking forward is in the excavator business. SDLG did not have an excavator range when the Volvo Group bought them. And through a technology transfer in 2011, we launched four models of differentiated SDLG excavators and we’ve already begun to gain some traction.
Last year, you see here market share 2%, year-to-date mid year already around the 3.5% level, again in a very competitive market situation that we face. We have further room to grow here. we launched a 36 ton excavator under the SDLG brand just a couple of months ago. We continue to support the SDLG distribution in developing its sales, skills, and competence around excavators and we anticipate further growth in this important area of the market, so room for organic growth inside of China with SDLG.
About the Volvo brand in China, Volvo brand in China has built itself on the strength of the excavator business and has continued to develop share organically through a very strong distribution network with localized product in the market. We have an excellent brand image. We have a very good customer satisfaction in the Chinese market. and last year, we achieved 5.6% market share in a segment of the market with over 60 competitors. that share has continued to grow under difficult competitive conditions this year with the market softening. and in fact, it’s grown almost to full point year-to-date 2012.
We believe we still have organic room to develop the excavator share on the Volvo brand without sacrificing price positioning or credit terms in this market. and that’s really due to the strength of both our distribution and our product. But the big upside opportunity on the Volvo brand in China is in the wheel loader market, which up until now has been inaccessible to the premium brand Volvo due to the fact that it’s a highly cost competitive market dominated by local players. You see 0% share there. technically, it’s slightly more. I think we sell under a 100 units, so it just doesn’t make the single-digit rounding here. So honored to do list, has been to take the technology transfer the opposite direction from SDLG and find a way to bring a more cost competitive Volvo branded loader to the market.
So to talk a little bit about how this works and this is where the common architecture objective and aspect comes in. Using a lego-style approach and differentiating on key components, we, as I said before took technology from Volvo, differentiated and modified it for the SDLG brand positioning, launched four excavators last year and another one this year.
Next step, taking technology and know-how in the other direction from a cost competitive point of view, a localized point of view in China, we have now developed a loader, which is targeted to the upper end of the value segment in the China market where there are some volumes to be made and we are launching at the end of this year, going into 2013, a brand new 5-ton loader under the Volvo brand.
And I think it’s important for me to mention although I’ll come back to this product later that we don’t differentiate this product on quality. this is Volvo quality, Volvo reliability, and durability. The differentiation is being made on technology level, which is appropriately adapted to the needs of the customers in this segment.
Just to put this conceptually on the chart here and it’s not just about China. It spoke about the launch of this wheel loader in China under the Volvo brand, but we can then extend our imagination about the potential to other markets where we have customer base, which is sensitive to the cost of the product.
You can see the profile of the market for wheel loaders in the same format that you saw for trucks earlier on, looking at it from a basic, value, and premium point of view. You can see it’s a very different skew depending on the markets that we talk about, but there clearly is a lot of opportunity to be made in both the value and basic segments. And with the SDLG and Volvo brand, we have more opportunity to tap into that.
So how do we position those brands then? Taking a look at this on the same axis again that you saw for trucks, the positioning of price level on the Y-axis and then the solution requirement level on the X-axis, the SDLG brand positioned in the basic and I would say lower end of the value segment today. We have already the Volvo brand positioned in the premium segment and all the markets that we’re operating in around the world. And now as we bring this emerging market loader to market in 2013, it is the beginning of tapping into the opportunity at the upper end of the value segment with the Volvo brand. So this really represents an opportunity for incremental share growth for us in these fast growing markets.
So this, what we call affectionately inside the company BRIC loader, I know that really it should represent more markets, and it does than the initials BRIC indicate. This is the first example of us leveraging know-how and technology from STLG into the Group. And it really shows us that we can learn from each other in both directions and that’s been a really exciting project for all of us in Volvo CE. It’s going to help us improve the competitiveness of the Volvo dealer network in China, and as we extend the concept outside of China in other markets as well, because it allows our dealers to broaden the range and be more full line competitive players in the largest market in the world.
So now this product comes out in 2013, and we firmly believe with this product and others like it to come, we’re going to be able to attract new customers and drive share. And a really important point for me is, this allows us also to protect the positioning of our premium products and make sure that we are not in the position of selling down to attract these customers, but rather, we are appropriately positioning the products for what customers are prepared to pay. So lots of potential with this product, and others like it.
Then that’s to talk a little bit about the development of share in China and the Volvo share in the emerging markets. We also have a very exciting organic growth opportunity with the STLG brand outside of China. And that opportunity is to roll the STLG brand out in a number of markets, could say at this point non-regulated markets, so excluding EU and North America. And this is nothing different than we see the Chinese players doing today; many of them have aspirations globally. They are announcing new factories; they are announcing launches in various countries around the world.
We have the ambition to triple our export sales from STLG during the next strategic cycle. What’s the exciting part for me, the interesting part for me is the strategic advantage that Volvo have over the Chinese competitors and being able to capture this growth opportunity, because we have an established infrastructure to leverage and therefore are able to achieve this growth at a lower incremental cost than a number of our competitors who have to start from the ground up so to speak.
I talked already about the ability we have to leverage technology both directions between the two brands. We also have the opportunity of a fully global industrial footprint that is available to be used where it makes sense for the STLG brand in certain markets. We have a supplier network, which is proven around the world that’s able to be used by STLG, should we leverage the industrial system in place.
And of course, last but not least, we have a distribution network, which is well-developed, well-capitalized and able to, as we’ve done for example in Brazil, invest in facilities to start up promoting the STLG brand in other markets around the world. And in Brazil where we are the furthest along with that example, we’ve been able to using our dealer ownership groups in Volvo, but differentiated on the front end with separate STLG facilities develop the STLG loader to number one amongst the Chinese players in Brazil. So we have a number of competitive advantages that we can tap into as we expand the STLG brand around the world.
So a lot of organic growth opportunities and for me this continues the theme that we’ve been talking about all day, which is really realizing the potential of all of our brands, and in Volvo CE that is both of our brands around the globe. So what does Volvo CE look like in 2015, improve share for the Volvo brand in the important emerging markets, the high growth markets, stronger position in China even then we have today. There is rumors I showed you to grow with both brands in that market.
STLG product showing up in more and more markets as we roll that out around the world tap into that organic growth opportunity and of course the ability using smart modules to share architecture between our brands, but smartly differentiate them for the different customer bases as well, so a lot of exciting organic revenue and profit opportunities ahead for Volvo Construction Equipment. As promised, I was quite focused and that I think brings us to some updates from Olof here. Thank you very much.
We are going to have a quick market update that is not the fundamental to talk, speak of today, but we thought it would be give to – since you’re all here to give that kind of quick update as well. And then we will take Q&A, on top of that is that right, Karlsten looking at my boss today, and he’s nodding.
I start and talk about the American market and Americas with the North America to start with, where we then conclude that the retail deliveries remain strong. But the order in take into the industry has been weak. And then we see definitely that lack of confidence and also a dealer reducing stock activity is going on in the market. However, the spare parts volumes are good, the profitability of our customers are good, which means that the goods are moving and the fleets are moving. Then of course the used truck prices we see a flat and then giving of course the production overcapacity has the new vehicle pricing under on the pressure.
Moving over to the South America and Brazil, we all know about the slowdown in the economy growth year-to-date. We do see the incentive and the financing rates coming through, but it is still very tough pricing on Euro 5, but again as an in the North American side the fleets are moving and we see good spare parts – parts volume. And we also see sign of improving demands in Brazil, when you then talk about Chile, and Peru stable in Peru - in Chile, sorry but some weakening done due to mining in Peru.
So that was the short update on the Americas and Peter do you want to talk about the...
And in Europe, we have seen a very depressed market in the southern part of the Europe for a long time, and it continues to weaken even more. In the second quarter of this year, we also saw that a little bit of slowdown in France. And this weakening demand, we also now see that it starts to spread all over Europe and customers tends to be more hesitate to take the decision today.
When it comes to inventories, since the Renault brand it is very much dependent on the southern part of Europe and with a very, very strong home base in France. We have unfortunately see that inventory level for the Renault brand has gone up too high. And we have taken corrections now on the – in the programs to reduce this and come back in balance on new trucks, but also on the used truck we have too high levels on the Renault side.
On the Volvo, side though, more dependent on the northern part of Europe. The demand – mid demand has hold up much better; we have everything under balance both when it comes to new trucks and used trucks. The aftermarket is also slowing down, of course very much due to the depressed market in the south. But we are also seeing a very strong impact from 2008 and 2009 low volume sales, that is now coming into the age where we’ve started to sell aftermarket products, we have to say to them. So we see a slowdown also on the aftermarket side.
Prices continue to be competitive also - all the time, both on the new trucks and on the used trucks, but it’s still holding in quite okay. Demand in Russia is good, continue to be good and demand in Middle East is stable and continues to be stable. And then in Africa, we have seen some slowdown and weakening in the southern Africa, but the rest is quite stable.
So on the Asia-Pacific side, let me give you a few examples from the major markets. In Japan, we are seeing a softening in the market and that is following the removal of an incentive program that the government had in place which ended early July. And we see that the market is coming down following that. And of course also the economic slowdown in Japan.
In India also a softening demand following the general economic slowdown. In Indonesia, it is and has been a growing market year-to-date, but for the recent months we are also witnessing a slowdown following some new developments in the resource industry in the mining business. South Korea also softening, South Korea is an export dependant country of course to Europe and U.S. and other markets as a country. And of course the general economic situation takes – it’s told there as well. China also softening demand and Australia strong demand. The heavy-duty truck market in Australia is up over 20% year-to-date.
Okay. See generally speaking I think is aligned with the comments you heard on the truck markets. But see on Western Europe, the market continuing to soften moving from weakness in the South Northward. And that’s also creating some pricing pressure as there is in the industry I would say a higher level of stock then we’ve seen in the past couple of years. Eastern Europe, which has been strong is moving sideways now and include in that Russia.
North America has been going through a fleet renewal as it been six years of downturn and rental companies and dealers are needed to replenish fleets. And we see that seems to be reaching a saturation point now still very slow growth, but reaching a saturation point.
South America demand is mowing sideways now. China the markets have been soft for a while now its still weakening due to weaker GDP development and I think the most dramatic industry news is the fact that in some cases mines are even shutdown for under the guides of safety reviews and also demand and stocks of iron ore are piled up in front of some of the mines.
So, definitely a slowdown in the mining activity in the industry and the large amount of industry inventory through the competitive landscape there in China. Rest of Asia is also impacted by the mining slowdown and this is compounded by some non-GDP related factors, we have some cases for example in Goa 90 plus mine shutdown for license reviews at this point in time. And of course markets like India with strong views on export taxes in the mining sector, which has affected the mining portion of the market as well. So that’s the update from me
Okay, thank you very much guys. And you will be online for questions, and as you know when it comes to markets and updates we have the upcoming Q3 presentation, where we’ll of course give you as normal the full update on the market and the market situation.
So by that I think we open up for Q&A’s. And I just leave the floor open we will have microphones and there is the first hand already risen.
Michael Tyndall – Barclays Capital
Hi, there it’s Michael Tyndall from Barclays Just a couple of questions if I may. The first one I guess, thank you very much for the details on your plan I guess I am curious to know when we start given the plan is from 2013 to 2015. I think previously the 300 basis points was from the beginning of 2012 I’m wondering if that still the case. And then if I think about 2013, I’ve got launch cost for the FH I’ve got a new truck for Renault. I’ve got the value truck launch and I should just sit on markets the outlook is pretty weak.
So I’m just wondering, what the progression of that 600 basis points at trucks looks like to 2015, whether or not we see some pretty lack luster 12 months coming up. And then my second question is just around the industry itself and it’s a slightly unfair question. But, you’re working very hard to improve your margins timeless working hard to catch up MAN and Scania are basically working I guess to find more synergies.
I’m just wondering with profitability across the industry improving whether or not you think you and the others can hold on to that profitability or whether in fact that’s factored into your 200 basis points of headwind? Thanks
Okay. Let’s start with thanks for very good questions, the first one about the starting point on the 300 bps overtime improvement. That is the starting point end of 2011. Okay, so that is the starting point we have said that all the time I have not changed it, what I’ve been clear on those that this strategy for group trucks. And also then in connection will see is major cornerstone a very big pillar in order to achieve that going forward.
But I want to repeat the fact that I am not standing here and promise that we will be 300 basis points over the 2011 by 31st of December 2015 because we don’t know how that’s going to look. But that has not changed in that respect. I hope clarify that. Then when it comes to the progression of these and investments that you need to do in order to make sure that, that you are doing the right things.
There are two size of this. One is quite interesting because that is we are a huge group and its not like we don’t invest in product renewal and in product launches today. Is just that what with this strategy, we’ll do is that we are going to focus the activity very much on the supporting activities to those twenty targets, and that means that we are going to get into the business of saying no.
And that’s going to be one of the key issues in these strategies, actually to say no to things I really evoke to talk all the way through, and really make sure that we focus on these things that we need to actually address and there we have many of these, if not all of these are of course long-term things. I don’t forget the question is it difficult to launch FH in this environment and so on and so forth that is not the issue, the issue is that we are ready.
The issue is that we believe is good positioning, and we will always live in the ups and the downs in our market. And therefore we need to do when we are ready. So that question is that we will refocus the investments that we have and we do a lot of it, and we have to make very stringent and actually prioritization and that is something that we need to do.
And then finally, in terms of all profitability and the competitive, I don’t of course look at the competitors because that’s how we are going to measuring the new financial targets. But I can assure you that when do the things and setting up the targets. We are looking on our ability. And we are looking at our opportunities and those opportunities are to a larger extend our own destiny.
It’s our own task to do it. It’s on - our own responsibility. And we can do that regardless of what is happening around the world. But then of course, we will have impacts reduce beyond our control both internal and externally all this three years. And that’s why I think it’s more not more than prudent to really make sure that we are open with you. And also say that there will be some headwinds coming through these years. Does that address your questions? Good, thank you. We have already one mike, no that we don’t sorry that was a paper that looks very much like a microphone. Yes, please.
Fredric Stahl – UBS
Okay. Hi, Fredric Stahl from UBS. Can I ask you in terms of the production cost? How important is the launch of the FH here, does it increase your the commonality between the different brands and regions, is it a step up in that sense, that’s the first question. And then technicality, I guess on the dealer absorption. How do you increase that? What’s the lever as you pull to get your dealers to focus more on the services?
On the first one when it comes to the commonality on the platform thinking, there is and I will not go into detail of it, but we should remember that here we benefit from a work that has been done in this group for many, many years. We have talked about and in platform programs, we talk about chassis platform. We talk about cast implementation in order to make sure that we leverage.
And all that work has been done and has been and that’s something we can utilize now, when we start to think about the value truck and the other products that we are going to do. And of course, we are going to utilize that to absolute maximum, but we are going to do it in a way where the end product fits in to the segment and that’s the big difference.
We are going to make. We are going to decide the segmentation, take the target costing, the target pricing, the service offer and there we are going to decide with utilizing the platform. So we are going to merge the best of the two there. When it comes to dealer absorption, its one very important thing is to - first of all, it is not difficult for to get the dealers involved here, but I think what we have to do in relation to our soft offer and dealer absorption target is actually to come up with new products.
They’re looking at and I’ve said that many times, if you look at the truck is a revenue generating asset for our customers, but also for ourselves and our focus around that, which we need to look into with new eyes, and what that means in practice that remains to be seen, but there are definitely opportunities looking at that revenue-generating asset in the middle and I see what can we actually get engaged in? So it’s a lot about that, but also of course the efficiency. There is definitely a efficiency in the dealer network as well that you need to address to make sure that the cost level are right, and thereby the threshold price should become 100% absorption rate is lower. So it’s basically the leverage thing again on the micro scale compared to the Group.
(Inaudible) You’ve talked about revenue synergies taking out cost and we also have the restructuring charges in UD Trucks in North America. And what kind of a cost should we expect going forward to generate the synergies both on the cost and revenue side and should we expect more just kind of restructuring charges from Volvo going forward?
I mean what we will see coming in the future and when we have those kind of programs, we will communicate it and if and when we have it. But we have said all the time and I think also Christer has been clear on that that we will take that as they come and we don’t give any forecast of that, because we do have a number of roadmaps and talking about 100 roadmaps, and now we need to sort of them attach to activity plans to it as well to hit the ground running in those aspects.
Colin Gibson – HSBC
Hi, it’s Colin Gibson from HSBC, two questions please. You said early on you got tough targets and I mentioned, Volvo is a company which is made itself famous over the years for aggressively following up on those sorts of targets. You have that top 120 managers here earlier in the month. Can you talk about the incentivization for people of that level within the organization to achieve these company targets was the first question? Second question kind of the last week a lot of the OEMs, particularly the German OEMs standing more cautious about the idea of a pre-buy in the European truck market for 2013, what’s your view? Thank you
Okay. We’ll start with the incentives, the organization and motivating the organization to actually receive that. And my experience is that, since we have done the homework both in terms of addressing the organization issue, the foundation issue, we have a heck of a energy level in the organization right now to actually get on with it and start to build these future opportunities that we have presented here.
That to me is the best incentive you can have. And also making sure that, we have the stringent and very down to earth and practical follow-up, and that’s why I’m so open and also so clear with you that this is going to be an operational business for us. This is not something you come back every half year and give us latest report on, this is on the monthly management team meetings that we’re going to go in and take a look and do corrective actions. And by that, we will also build it incentive.
But in general if you look at all these things, and if you look at how much is actually future looking revenue driven is not the hard strategy to rally people around, and that’s to me is the most important thing. But of course, we need to be very stringent and discipline. And I think we have shown by the way, we have done the first transformation, but also the whole foundation building in basically less than nine months to be able to come that we have shown as an organization that we can take on difficult task and actually do things, or pre-buy, sorry, I mean it’s very difficult to say, I mean you have the different angles on the pre-buy, one is of course, the absence of pre-buy previously in Europe and thereby also taking that experience into the next run.
On the other hand you also have the somewhat new situation now when you look at incentive schemes and when they come and how they come and how that will impact the different customers both from a Central European point, but also Eastern transfer and all of that. So it is very difficult to say, and I rather not here and today speculate about it. And we will see what comes out a little bit, but there are things on the both size on that place in both direction, and we see how it will pan out going forward.
Laura Lembke – Morgan Stanley
Hi, it’s Laura Lembke from Morgan Stanley, I have three questions please. The first one is regarding your margin improvement potential on the trucks division. And I was wondering if you could share with us a little bit of detail on where and which region you see the biggest improvement potential here if there is a big regional brains. The second one is on Northern American production, if I’m correct, I think you are taking some two down weeks coming up now. I’m just wondering how you are really managing the production adjustment in Q4, and potentially also in Q1, going forward like the cost structure really and from and moving production down and up, are you actually in a position where maybe if orders don’t pick up, you actually need to go from two shifts to one shift?
And then the last question is on the Renault brand, you had a slide where you were showing that the Renault brand is now positioned very much at the top end, or let’s say the premium end of the market. And if I remember correctly in the past, you had outlined, not you, but let’s say two years ago that the Renault brand was suffering from relatively low residuals, because it wasn’t positioned in the right way and that it was positioned too much as a value brand and it now sounds as if you are moving that brand back to where it came from, is that the correct way to interpret this, and if so why are you doing this?
Let’s start with the last question, because I think it’s very important and answer to your question is that, if you look at two slides that Peter showed you actually you can see that we very much, or keeping the Renault brand in the high-end segment, which I truly believe, but we also now have a clearly defined stretch on the Renault brand as we have on the Volvo brand, which means that we are able to address the top end on the value high-end value segment as well.
And that is of course something Peter mentioned that we have announced that in June, next year, we will have new product coming out from Renault, and that is something that is of course, are coming in line with that. And we will then have to work on the position on that. So I don’t agree to that description. I think that with this clarification, we have Renault plays in a very interesting high-end market, where you have big volumes in Europe.
And you also have the possibility to utilize the brand in the value base, which is also something that if you look at it in North Africa today, we are already addressing those targets very successfully with the Renault brand. So that is something that we have clarified, but it’s not, I would say something that is absolutely revolutionary on that one.
Then working myself backwards in your questions, here I’m looking at North American production, and we will not comment on that today other than saying that we’re going to continue to react on the seamless from the market and we’re going to react early and we’re going to make sure that we do the capacity adjustments needed in order to make sure that we don’t overproduce on thereby billing stock. And that is something we have an ongoing discussions all the time around the different countries, regions, and so on and so forth.
The third question, if there are any particular region where you would see improvements and the answer is that, there might be, but there is nothing that we are sort of especially highlighting to me, it’s now, it’s a matter of really making sure that we find regardless where they are finding the opportunities.
And the interesting thing is, when you start to turn each and every stone the way we’re doing now. You find sort of did some pieces of improvement potentials all over the place. And we have been very successful and we have done a lot of different improvements, programs in the past. So believing that you should under a stone, find it something completely revolutionary, that is of course not the case. The case is now that really a, take the decisions that you need to take like stop production, in UD on America, like taking a real grip on the cost structure in Japan and continue doing those kind of things. And therefore, I’m confident also that we have enough in the pipeline of activities and ideas to be able to really support the targets.
(Inaudible) from Deutsche Bank, two questions please. How do you stretch the brands from one segment to another segments without sacrificing margins, or jeopardizing what the brand stands for? And secondly, also how do you enter new markets, or increasing your share in the markets that where you are underperforming like the German or entering new markets with a new brand or new product without using strategic pricing, which I guess is just very low pricing?
I think the intellectual activity to actually do the brand stretch is something that is easy to show on a slide, but it’s not so easy to do in reality, but yes, because it’s not easy, it doesn’t mean that you can’t do it. We have seen plenty of examples where we actually can do it. And I think what Pat just show now on the Volvo brand on the BRIC-loader side, you absolutely can do it. We have seen it also in the Renault side, where you have the differentiation in the brand and the brand image.
But also on the Volvo side, the Volvo is a global brand, but really if you look at it in different parts of the world, it doesn’t stand for exactly the same position everywhere and we sometimes always think the Volvo and the Volvo brand at the end of premium, premium high-end, but the big chunk of it is actually in the high end, which is a segment, which has done already there a little bit stretch, but we also take amount. So there is a, and how we’re going to do that, that’s for us to know and you to find out, because that’s part of something that we don’t really communicate, because that’s a very critic way of position our self in that one.
But we have enough knowledge and we have enough of very good discussions in the teams now in order to make sure that we are not destroying any brand, on the contrary, we’re going to sort of strengthen the brand, but that is also going into this competitive sets remember that target where we want to be ranked as number one in the attribute for that competitive set, and that’s going to be a enormous generator of good ideas, because all of a sudden you said okay, now we know what these brands going to do on this market, with this construction, and that’s going to be the trigger of the whole discussion. Did you have the second question?
Yes, on how to enter new market without the competitor?
Yeah. I don’t think, we have good examples now all over. And if you take Korea UD, South Korea UD, filling interest space where we believe we have a very good product on the specific thing. We utilize in the existing network in order to actually strengthen the network and by doing that, you actually have a limited amount of investments, but at the same time, you actually go in and can start to pick the start to grow the business as you deem necessary on the speed that you want to do in order to capture the right market share.
And having done the analysis properly, then it should be something. And other one is, see in Brazil, that we did a competitive different, where we actually said that okay. In Brazil, on the wheel loader side, we went to the existing Volvo dealer network and said listen, we want to get SDLG into Brazil, but the brands are too far away, so we cannot make those two brands, so you need to invest by yourself into a completely different set of networks, and then we will start to support NV products. And let’s say, yes, we happily to do that and then you start to done on a small scale billing up, and in this case, it took 1.5 year, two years perhaps going from share into Chinese segment, and we are now market leader in the Chinese segment in Brazil.
In Germany, as we mentioned that as well, as Peter pointed out, in Germany, there are two things, one is definitely the products, and there is new FH, and what we’re going to see coming also with a Renault product next June will give us a totality of products that’s going to be very well fitted for the German markets, that’s one.
And secondly, as Peter said, we’re also going to combine and therefore get more efficiency out of the distribution network, because that’s another part that we need to do and there you are looking at what kind of investments that we need to do in order to reach that. So we have plenty of example how you do it, and you need to really have a little bit of imagination in order to do it a big portion of our strategy and then utilize all the different opportunities that we have, because we can do it in many different ways.
Hi, this is (inaudible). You have given us so much information today that I’m getting confused I think. I wonder if you could clarify something, when it comes to the 2015 timeline, you say that announced on the quarter that you constantly have promised that you’re going to have 300 higher bps on the margin in 2015, because no one else knows what the Volvo look like, et cetera.
But what I’m trying to understand is of your, the 20 different strategic objectives that you have shared with us today is that the intention that those objectives are to be reached by end of 2015, or is it the intention that the strategies are implemented by end of 2015, because that’s not the same thing?
No, it’s not the same thing and there is no doubt by the 31st of December 2015, the target should have been achieved. That is not the same thing. As you pointed out to promise that we would have a 3% higher margin, but the targets that we have set out is due for delivery 31st of December. The rollout, the implications, and when that will hit the profit and loss and when that will hit the revenue side, that’s going to be different, it’s going to be spread out, we’re going to need to take some initial decisions in order together going either ones are low-hanging fruit that we’re going to address much more immediately and so on and so forth. So there will be a differentiation and actually implementation, but at the end of the day, that should be.
Also I didn’t, thank you. I didn’t fully understand either the new value platform, or value truck, does it exist or not, I think it will sort of exist, but someone else think that…
Why don’t you add, I think Joachim was quite clear on it. Please go ahead, Joachim?
I have driven it. So my only question is of course, when can customers drive it?
Yeah. And on purpose there of course, I was not very specific. It would be launched over the coming years.
I have one final question from me just in time, also all these changes that go through including launch of a lot of new products, I wondered does it have any effect on your CapEx and product development costs, and launch costs in the next couple of years?
It goes back a little bit what I said before as well, I mean it’s not like we don’t have any cost of that today and we will redirect them and that will pan out. I mean what we are giving you today is that, if you look at the R&D targets, that is a reduction, which means that we have to do a lot of more things with eventually less money than we have today.
So that’s going to put an enormous strength on our ability to say lot of things and really focus on ones we should say, yes, but also doing the things we’re doing much more efficiently, and that’s a challenge in itself, but we’re committed to fix it.
It’s [Tim Johnson] at JPMorgan. One to the cash flow related question, here you’ve painted a very self-contained, self-help roadmap. But I think in emerging markets Asia-Pacific in particular, where might M&A still fit in within your sort of next three-year roadmap much, it still provide an important contribution?
As we have shown, I think it’s absolutely clear that the absolute main focus that we do have and what we believe that we can achieve is this organic thing and a whole sort of the FH presentation we are giving, the value truck we are giving, the teaser of the Eicher new lineup in terms of product in our global reach that we have today, and all of that is sort of that is what we’re going to work with.
Having said that, I’m paid for and I say that all the time, I’m paid for looking at the industry and see what’s happening in the industry, but my focus is as you can understand really to make sure that those 20 targets are achieved.
Fredric Stahl – UBS
Yeah. Hi, Fredric here from UBS again. We talked quite a lot about getting margins up today. When you look at your Board’s targets and look at Volvo Group’s history, while at least conclusion was that the biggest upside for your cross cycle profitability was to protect the margins in downturns. Could you maybe highlight from all the information we got today, what are you doing to actually offset the margin compression we’ve seen historically when the cycle goes against you?
I think there are two, if I would translate those targets into my one of my favorite charge, and that is the leverage charge, okay. And while you have the sort of the break-even on one side and then you have the leverage on the other side. If you take what, translate this information given today, it means two things. One is a, we garner with the cost side of the story reduce or move the break-even points to the left and with the revenue growth part and the efficiency part of the equation, you’re going to have a different eclipse on the leverage curve.
So that is actually transforming into what I described last year at the Capital Markets Day. And if you sort of translate the information you got today, you will see that, that is very consistent, and actually now both moving it and changing eclipse, which then replies your question, by doing that you have a higher full height and you have a better margin and cushion to move when the cycle is going in their own direction.
So it fits very well actually what I have said all the time about addressing one of the major issues, I think in the Volvo history in terms of the profitability, which is that we’re flattening out on the leverage when the volume comes out too quick. So we don’t follow that all the way up and thereby creating us a question. And that is due to two things, one is the breaking curves is too much to write and we don’t have the efficiency at the end when you get up to there. And all these targets you can see is actually addressing that.
(Inaudible) from UBS O’Connor. It’s pretty clear if you talk about the 300 basis points of improvement. It’s essentially $9 billion of better operating profit. But coming back to what you just talked about the leverage going forward on the growth, can you give a sense for what type of profit improvement to growth you are talking about in the 2012 program. What kind of EBIT improvement is that going to lead to or how to assess that?
I think that there we’re going to stay with what we have said is then the three percentage improvements over time and what this will then come into in terms of extra revenues and thereby sort of changing the equation in the numbers you have got because we have fixed one variable and that is the turnover to the 200 and a 300. That remains to be seen and then we will have to come back.
I think we have opened up really to give you information on the fact that we do have this program running on the 300 basis points. And then the equation about revenues will of course be market driven. It will be very difficult to see because it goes up and down with the market as well and it has also to do where the launches are coming and how they’re coming and so and so. Okey-dokey, are you getting hungry?
(inaudible) Deutsche Bank again. Can you tell us a little bit about what you have done already to improve capacity or productivity? You’ve invested quite a lot in it and then late last year you started to take down production in your two major markets in Europe and Lat-Am and you are going to continue that work in the first of this year. And the margin impact was not that severe as it would have been some years ago. I would say so, done quite a lot already. Can you say what you have done is it just industrial system that has improved, is this is the way of running it or can you tell on that?
I think there are three major pillars that makes us faster in actually doing one. I think it’s perhaps the most important that we read this thing and then we take them serious and we don’t second guess under Siemens. So when we see the Siemens coming, we take the decision, and we do that now in this weekly pace and we have talked about before, it’s a much sort of quicker in order to do that.
Secondly, we have since this crisis increased our flexibility substantially with particular in the Swedish system, which means that we can then compared to before adapt our results to the ups and downs in a much better way. And thirdly I would say, which is also very important is that we have to get, where our supplier also learn how to be quicker in adapting the whole supply chain because that’s something you all forgot is one thing to sort of go down with your own production, but if you have material flowing in an uncontrolled way, a lot of that sort of benefit that you have allowing production is just going away in other things.
And then we also improved together with our suppliers in a very good way to manage ourselves better in the whole chain to make sure that everything is sort of lined up for this more volatile up and down environment that we showed you in that. So I think those are the three major areas that we have learned from the crisis and continue to learn as well.
Hello there, (inaudible) from Merrill Lynch. I’ve just got three quick questions if I may. Firstly on the reduction in R&D expense that you mentioned, I was just so wondering whether that’s sort of a change to capitalization ratio that you’re looking at why this basically not impacting margins, and whether you are capitalizing less going forward.
And then on the same slide you mentioned optimized pricing strategy and that was mentioned about short-term pricing strategies and that possibly mainly raising and lowering prices. I just wondered if you could give a better clarity on maybe what markets you have so for existing on that? And finally just on the sort of the Renault, Volvo, you talk if combining distribution networks and things specifically in Germany. I was just wondering whether that was basically the source, the side was funds of the Group or more aftermarket focus?
Okay, Christer, perhaps you can elaborate a little bit on the R&D and the capitalization there?
So if we start with the current R&D spend for trucks, it’s running around $12.6 billion during the second quarter, if you analyze it, and that’s the P&L so to say, but then keeping in mind that we are actually capitalizing roughly $500 million more than we are amortizing right now. But as we go through Euro 6 now and start to launch those products, capitalization will come down quite a lot and then we will start amortizing the previous capitalized R&D. And that’s why unfortunately we’ll see that the P&L impact will not be so big, but coming of the Euro 6 we’ll start amortizing in a higher rapid pace.
Good, thank you. And then when it come to prices, I would not give any examples, but it’s absolutely right that you said that is not per definition only raising prices. You can actually buy lowering prices and be more intelligent on that that you’ll get volume and thereby coverage, and thereby margin improvements as well. So we have to work with all.
But what I can say is that we’re actually getting those pricing strategy is going to be really detail and local and driven from a sort of a holistic view, but then down into regions, down to models, positioned them against the competitors, making the plus or minus lists and down the coming with action plans how to increase. And so you have to really go down there, because it’s easy to say the 3%, but the pricing strategy needs to be built up, but we need also to do it in a way.
And this is interesting because that’s going to be in a way that also supports our brand portfolio. So you can see that we tied that together now in terms of actually positioning the brands as well and pricing is of course one leaver that you can do with that. And I think the BRIC loader from path is a brilliant example weighed on position itself from the high-end in China of that segment. By utilizing the low-end technology together with the Volvo Technology and thereby you can work with a small pricing structure as well. So there again, there is a lot of opportunities. When it comes to the Renault, Volvo question, Peter, why don’t you elaborate on that a little bit?
I can do that. When it comes to the distribution, we say that now in the new setup, we can definitely optimize our distribution in a much, much better way. And what we are going to do is to join forces. If you take Germany as an example, we have a lot of white spots in Germany. And the reason for that is that we don’t get the running fleet enough to really build out our distribution network.
By joining forces, we can then build a better running fleet around the new dealership in an area where we have white spots today. If it combined the forces from Renault and Volvo together and we can have one service, a dealer serving both of them for example and in that way we can expand much, much faster in the country like Germany, where we all underrepresented when it comes to service network.
The same thing is in Russia, we are still developing the network in Russia and as I said it’s extremely expensive in Moscow for example and Saint Petersburg and so on. In Moscow, you need four dealerships, south, north, east and west. Should we build eight of them around Asia or should we build four it make sense to combine forces there as well. I hope that answered your question.
Yeah, we have one down here. I don’t know is the mike is out? The mike is out, yeah.
Austin Heuer – Marshall Wace LLP
Hi, Austin Heuer from Marshall Wace. I wonder whether you would be possible to ask one of your senior managers to actually explain on a day-to-day, week-to-week basis the difference for moving from a matrix through structural organization, functional organization, how that’s changed their sort of day-to-day, week-to-week functioning?
Yeah. I think in a matrix structure by definition, you don’t have one reporting line. I think that’s very clear. and sometimes in organizations, you have incompatible at least difficult to agree upon objectives that are coming from different places, that is not the case today. And another big thing is of course, that while we work in functions, or we’re belonged to functions, we work in processes. and I think the emphasis that this new way of working has brought has been significant.
We take decisions in the cross-functional committees. We have this weekly phase that Olof frequently refers to. So every Monday, with Olof and the rest on the phone, even though I’m living in Japan, and we’d take weekly decisions as opposed to previously, if I take myself as an example, then I was sitting in internal quarterly boards. So the whole machine, the whole clock frequency if you like has radically accelerated.
And I think there are few of the examples. And of course, I think the most important thing is not that that is my, let’s say a normal week. The most important thing is it’s cascaded down. So the whole organization is working, let’s say in the same way and then you get the full power of 80,000 people working in one direction.
And now of course with the sort of future and the compass set very clearly on these five key focus areas with the 20 objectives, and which I think is very important that we will say no to things that don’t fit into that frame. I think the energy that you release is going to be significant then I think that it what’s called propellers to the next level of performance. Thank you.
(Inaudible) and again, I heard Germany a lot cross-selling Renault Volvo, that’s eminent and domain territory of 60,000 unit market, is there a market share target here also, I mean it’s very competitive with the Siemens pricing is the key issue here?
Yeah. And to be quite honest, Germany is one of many examples that that were brought up here. so I think it’s a fundamental example also showing that we exactly are building with this new product with the Renault products coming with the actions. We’re doing on the distribution side, that we’re building self-confident and actually asking ourselves why do actually we have 16% on the Volvo side around the Europe, and only 9% in Germany, why should it be that we have the market share we have in Renault. and basically, we have a very, very limited rest of the market in Germany. So that is the kind of feeling, and it shows a little bit more of the example of actually doing, and to ask your question now, there is no market share target set.
So it can be asset management side of analyst, I can answer your question.
I mean, you’ve done a bit of these exercises before at VCE, I presume. And then if you would look back what sort of expectations you had implementing this at VCE. Were there any things that’s or what surprised you the most, what was the most the biggest surprise when you implemented it in VCE that you’re doing today. So can you sort of guide as its okay, this is something that I didn’t believe before, which is truly exciting. And I’m so excited right now, because I’ve seen it work once?
Now, I think if I understand your question correctly, and Pat can perhaps who are supportive of that Q&A also ship into that. But I think what we learned during the VCE time and what I learned about the VCE time was actually that it’s doable. I think that is the absolute, the energy and the potentially in an organization, if you actually do the kind of setup, the kind of process that you do now is that you’ve previously almost unachievable targets, all of a sudden started to become reachable and over time also did reach them. that’s one thing that we have for instance, a huge debate about availability target that we put into CE at that time three years ago, is it that all possible to reach that. And now the trend is definitely moving in very much in that direction. that’s one thing.
Then what I learned also is that and that we have done better this time, because that was the first time we did it, it was Pat, myself and the rest of management team in the VCE did a lot of the work. And we really did it very quick, because I was in the middle of the crisis. We need to get this compass in place and so and so forth. The preparation work we have done now, foundation, transformation, the concrete example, the engagement, the involvement, the building up of the structure is completely different now. We are the road maps. We’re already now three months ahead, they actually launched of it. We are already now getting in to quite detail roadmaps. We already take decisions based on the 20 targets and we did that and we have launched and communicated a few of them there. But that’s sort of the long and the short answer and that’s almost within the discussion your question, but it’s a very important one. I don’t know if you want to add to the Pat or…?
That’s may be important to mention Olof for me at least. When you talk about margin improvement, you often quickly think of cost, but actually the experience I had is part of the last even see as the huge amount of potential you can drive with growth and business development in these kind of strategies as well from the proper brand positioning and that makes it a lot more fun that’s for sure, when you’re doing it.
The second thing is something that you all again mentioned I think I underestimated in the beginning of the benefit and value of the pace. The pace is something I’d never want to go back to the old way from this weekly pace, it really drives a lot more activity and action in the company and it does cascade as you said you’ll gave some couple of observations.
You will not be allowed to go back to the month. You better keep that weekly. That was not a microphone, again it looks like microphone, but you have twisted paper sorry. Okay.
Maybe, we can take one question and then...
Yeah, one more, yeah, we have one minute and two seconds left so.
Yeah, I was just wondering on the value tracks, if you could talk a little bit about how you’re going to win, who are your key competitors and what will you do to beat them potentially? I guess this is my question. And perhaps also why what’s keeping you from launching I guess?
Okay, Joachim, why don’t you explain on that a little bit?
Well, the competitive sets for the value truck platform is joint venture products coming out from other OEMs, which is normally a mix between western technology and low cost technology for instance in China and India, but it’s also the top end range of those mass market producers in those countries. It is also the kind of products that we see today for instance from some of our Japanese competitors existing already to day in Africa or Middle East or for that matter in South East Asia.
To your question, why we would be successful, I guess we have been thoroughly planning and developing this range. We have listened to our customers. We have thoroughly tested it. We simply believe that we got the formula right. So I think that is the rational.
And thirdly, what is preventing us from launching it, I guess you know to develop a new platform in the truck industry in the automotive industry in general takes some time. And generally, a bit longer than in fast moving consumer goods for instance and I guess that is what we are waiting for and we will not launch this range until it is ready, until we can secure that we have verified it, that the features are where they should be, the cost is where it should be et cetera, et cetera. So that is more important to be honest than if you just launched tomorrow or a year from now or two years from now. Thank you.
Okay, I have a target for this day and that was to give you a good flavor on two things. One, a good explanation on my hesitancy to get into and a deeper discussion about the 300 bit target that was communicated last year during the year, and I hope you have got an understanding for the fact that transformation, build into ground making sure that the concrete is dry before its not running is very important.
Secondly, I’ve hoped that we have given you the confidence not only that we have opened out the strategy and also explained to you the areas that we see being the most crucial ones and the ones that we’re now going to have in the truck case 80,000 people working on that is sort of make sense and also open up the kind of questions and as the kind of questions you did have.
And finally and perhaps most important is that you have the feeling with examples that we have shown today with some of them are really big news in terms of what we’re doing, others are more fine-tuned things, but still activities that fits in to the strategy that you bought by day, but that’s also got a good feeling that we have not sort of we’re not sitting waiting. We are on the move and we have already started the journey because this is a journey and it’s going to be extremely challenging. There is going to be a lot of fun during these three years. There is going to be some rainy days as well, but those we have to survive.
So with that, I would like to thank [Mark] for your attention and good questions in order of that and also thank my management team for supporting. I’ll leave over to my today’s boss Christer to get further on.
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