Chairman and CEO letter

Hubertus von Grünberg & Joe Hogan (Photo)

Dear shareholders,

2011 was another very successful year for ABB. We achieved strong revenue growth, and our order intake rose to a record $40 billion.

We managed this growth while keeping costs firmly under control, so that we were also able to strengthen our profitability. Operational EBITDA(1) – the measure of profitability that we track – rose by $1.2 billion last year, and our profit margin on this basis also increased.

Our financial results are an indication of the underlying successful direction of ABB and, in order to further advance ABB’s growth and performance, we unveiled a new strategy last year for the 2011–15 period. We’d like to take the opportunity in this letter to put the financial results into the broader context of where ABB is heading.

“Our financial results are an indication of the underlying successful direction of ABB”

Externally focused

The world is going through a period of unprecedented change. Growing populations and rising living standards are increasing demand for resources, the trading of goods and transportation. About 60 million people are migrating into cities every year, increasing demand for urban transport solutions and for clean forms of energy such as electricity.

Our world is also going digital, requiring huge capacity for data storage: the amount of data created from the origins of history until 2003 is now generated every 48 hours, and by 2020 this volume of information will likely be produced every 60 minutes. Related to these changes are efforts to reduce society’s environmental impact by using resources more efficiently.

These trends all add up to a tremendous need for technology and innovation, which has always been one of ABB’s strengths.

In 2011, we were particularly proud to win an order for an innovative power transmission link in northern India that will deliver enough electricity for 90 million people. On a smaller scale, in Estonia, we are developing the world’s first nationwide network of fast-charging stations for electric vehicles.

ABB also launched some highly innovative products in 2011, including offerings for energy efficient data centers and ships using DC technology, and a new high-efficiency motor design that won a prestigious automation award in Germany last December.

To ensure that we continue to meet our customers’ technology requirements in today’s rapidly changing environment, we are committed to increasing our investment in R&D over the next few years. R&D spending rose by more than 20 percent in 2011 to reach 3.6 percent of revenue, and we are targeting 4 percent by 2015.

In this world of unprecedented change, however, our customers need more than technology. One of our most effective tools for keeping abreast of their needs is a straightforward survey that asks customers whether they would recommend ABB to a colleague and why. We know from the feedback that we are receiving that responsiveness is just as important to customers as the quality of our technology.

“We are committed to increasing our investment in R&D over the next few years”

As technology cycles shorten and competition intensifies, our customers need to move fast and need us to keep up. We have therefore combined the survey, known as Net Promoter Score (NPS), with a process to identify causes of dissatisfaction and to address complaints rapidly. However, this is only partly about executing a process and more about developing the right culture and attitude.

The same is true of our approach to service. One of the benefits of service is that it gives us a unique opportunity to become more proactive in our response to customers: by being closer to their day-to-day activities we can develop a better understanding of the way our solutions can meet their needs. We still see a very significant opportunity to develop our service business, which had 15 percent order growth and accounted for 16 percent of ABB’s revenue in 2011.

Driving entrepreneurship in ABB

At the same time as we improve our responsiveness to customers, we are also making a bigger effort to expand into markets in which we are underrepresented. We are the technology leaders in many of our businesses, and are convinced that we can apply best practices from our established markets to succeed in new ones.

This also requires a change of mindset. It means learning to be a challenger, to be nimbler and more experimental in order to discover the best inroads into new markets.

“It is time to focus more management attention on our presence in significant mature markets”

Over the last decade, much of ABB’s growth has come from emerging economies, and particularly from China. While we expect China to continue to be a growth engine for ABB, it is time to focus more management attention on our presence in significant mature markets.

In recent years we have substantially improved our position in North America. In this strategic planning period, Europe will become increasingly important. Despite its current economic challenges, the European Union’s economy is one of the world’s largest and we still have room to grow in most of the region’s big economies, especially France, Germany and the UK.

We also see tremendous potential for ABB in the emerging markets of South-East Asia, Latin America and Africa. Of the $1.1 billion in cost savings achieved in 2011, a part was reinvested in sales to help us grow in new markets. Since organic growth provides the best return on investment, this is always our preferred way to grow the business.

Where we think that organic growth would take too long, however, we are looking for acquisitions to close strategic gaps in our portfolio. We analyze acquisitions along three vectors: whether they fill geographic gaps, like our North American acquisitions; end market gaps, like the acquisition of Newave Energy in Switzerland, which boosts our exposure to the growing data center market; or product gaps, such as the acquisition of Epyon to increase our offering for the electric vehicle fast-charging market, and Trasfor in the specialty transformers space.

Baldor, the US maker of motors and mechanical power transmission products acquired in January 2011, was our biggest acquisition for many years and has already made a significant contribution to ABB’s results. Its unique business model has made Baldor a market leader in North America and an asset we are keen to preserve and learn from.

Mincom, based in Australia, was also acquired in 2011 and is now being combined with Ventyx to give us a leading position in enterprise asset management software. Ventyx and Mincom bring experience in running a software business that ABB had little prospect of obtaining on its own, and which will help develop our network management business and provide ABB with a stronger offering to address the development of smart grid opportunities.

And in January 2012, we announced an offer to acquire Thomas & Betts, a US manufacturer of low-voltage equipment. This would significantly expand our access to the world’s largest automation market and T&B’s access to the rest of the world.

“Our aim is to look for technology or business model disruptions to position ABB for leadership”

So, whether organically or through acquisitions, our aim is to look for technology or business model disruptions to position ABB for leadership.

The keys to sustainable success, however, will be to meet local product requirements, to be competitive locally from a cost and performance standpoint, and to be quick to bring our products to the market. To achieve this, we need strong local product managers and a product development organization that is highly responsive to the needs of different markets.

An important outcome of this effort is that it will diversify our global presence and ensure that none of our global businesses is too dependent on any one region.

Aiming to be best in class in all we do

Both of the goals we have highlighted in this letter – becoming more externally focused and more entrepreneurial in addressing new market opportunities – have in common the need to be fast, efficient and innovative. This is why one of our chief priorities is to continue developing world class operations.

Our supply chain management has delivered tremendous savings over the past three years, which has made a significant contribution to keeping ABB in remarkable financial health. This is reflected in the confirmation of ABB’s investment grade rating by ratings agencies after the announcement of the T&B transaction. Our profit margins are among the highest and our balance sheet is among the strongest in our sector, which gives us the flexibility to pursue growth opportunities as they arise.

We are proud of the further improvement in our health and safety performance in 2011, since running a safe business is one critical aspect of running an excellent business. The progress in this area is a great example of what can be achieved in a culture of continuous improvement.

Some areas of our operations require more attention. The way in which we hire, retain and develop people is one of these. Another is the way in which we gather and process customer requirements, which needs to become more local, and meet customer expectations in terms of delivery times and quality.

However, the goal of excellence applies across the company to all we do, and we are already achieving or approaching world class at several other levels.

Over the years, for example, we have put in place one of the most comprehensive and rigorous programs worldwide to embed integrity into our culture. We believe that honesty and fairness on our part are essential to developing the relationships we strive for with our customers, based on trust and respect. Our employees know that they must walk away from business that cannot be done with integrity and that we will support them. We do not tolerate deviations from this integrity standard.

“One of our chief priorities is to continue developing world class operations”

The value of our global crisis management training was highlighted in 2011. It helped us to react in a timely manner to the Fukushima disaster in Japan and ensure the safety of employees, as well as business continuity. Crisis training and expertise also contributed to the safety of employees and contractors during the revolutions in North Africa.

Further work was also undertaken to embed core sustainability criteria in key business decision-making processes, including the review of proposed projects, supply chain, and mergers and acquisitions.

Ready for the future

Behind the headline figures of our financial results, ABB therefore made significant progress in 2011 toward becoming an even more responsive and entrepreneurial business with a strong track record of technical innovation and of driving growth while controlling costs.

Confidence in the strength of the business and the balance sheet are behind the Board’s proposal to raise the dividend by 8 percent this year. The short-term economic outlook remains unclear, but the longer term perspective is positive given the big trends that play to our strengths in the fields of power and automation.

Although electricity has been in use for more than a century – and ABB has been in the business since 1883 – it is still transforming lives. In fact, it is becoming increasingly relevant, as a way to use renewable energy, to power the exchange and storage of information, to automate our factories, and to provide a cleaner alternative in transportation.

For us, one of the greatest thrills of working at ABB is to experience such a variety of projects that push technology to new heights to help make the world a better place.

March 15, 2012

Signature of Hubertus von Grünberg, Chairman, ABB Ltd. (handwriting)

Hubertus von Grünberg
Chairman, ABB Ltd

Signature of Joe Hogan, CEO, ABB Ltd. (handwriting)

Joe Hogan
CEO, ABB Ltd

(1) For an explanation of Operational EBITDA, see “Note 22 Operating segment and geographic data” to the Consolidated Financial Statements

© Copyright 2012 ABB.