SKF, the world's biggest bearings maker, believes its services business which includes monitoring and maintaining equipment can tap customers' focus on cost savings and productivity improvements to help drive its profit margins to record highs. The Swedish group is at the forefront of a move in recent years by traditional industrial firms to expand in services to reduce cyclical swings in their businesses.
The 107 year-old company, whose bearings are used in products from dishwashers to wind turbines, already made about 45 percent of its 2013 sales of 64 billion Swedish crowns ($10 billion) from services and parts for the aftermarket. And it believes growth will continue as customers emerge from a period of global economic uncertainty with an ever-greater focus on efficiency, and new technologies such as smartphones and tablets create easier ways to monitor equipment.
"Our whole concept is to sell 'uptime' to the customer," long-time SKF CEO Tom Johnstone, 58, said in an interview at the group's headquarters in Gothenburg. "If you can help the customers reduce unplanned 'downtime' you basically open up capacity for them, and it avoids them having to invest in new capacity."
In a bid to woo customers, SKF is pushing the concept of the total cost of ownership for a product over its life cycle, where as much as 90 percent of the total equipment cost in many major industries can be service related. So as well as selling bearings, seals and lubrication equipment, SKF is offering services from specification, design and manufacturing, to installation, monitoring and maintenance, and is now monitoring millions of pieces of equipment for its customers across the globe.
The strategy makes business sense. SKF's Industrial Market, Regional Sales and Service (RSS), which comprises the bulk of the group's service business, had an operating margin of 12.1 percent last year, the highest of its three business areas. The group as a whole, whose rivals include Germany's Schaeffler and US group Timken, had an operating margin of 11.9 percent excluding one-off costs.
SKF set new long-term financial targets in 2010, aiming for a 15 percent operating margin and 8 percent annual sales growth, and is in the midst of a major cost saving program set to lower its annual cost base by 3 billion crowns by the end of 2015. Johnstone said high-margin service businesses were key to reaching the financial targets. "These are absolutely critical elements for us to be able to hit our targets, we won't do it just by cost-cutting," he said.
SKF raised list prices by 3 percent early this year, and Johnstone said an important way of justifying this to clients was its Documented Solutions Program (DSP), which aims to quantify savings the group makes for them through its products and services. "Our DSP savings last year was 4 billion crowns. That's over 6 percent of sales that we save for our customers," he said.
"We are going with 3 percent of price increase and we saved our customers 6 percent, which means a net saving of 3 percent. You give me a net saving of 3 percent, then I'll pay the price. I think that's an important change in philosophy." SKF began building its service business in the late 1980s and believes its broad client base and its five technology platforms have created a competitive advantage. It counts GE's Bently Nevada as its main rival in condition monitoring.
Sector-wise, the process industry, food and beverage and oil and gas industries have been driving demand for SKF's services as "unplanned downtime is a disaster for them", Johnstone said. The service market has evolved considerably in the past 5-10 years as companies become more accepting of outsourcing.
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