Chairman and CEO letter

Hubertus von Grünberg & Joseph Hogan (photo)

Dear shareholders,

ABB performed well in 2012, demonstrating once again its agility and resilience in a difficult environment. The economic slowdown of recent years has given us opportunities to strengthen ABB in various ways, and we can confidently say that ABB has become one of the best companies in its sector.

ABB’s power and automation businesses outperformed those of most competitors in 2012 in terms of organic revenue growth and profitability (earnings before interest, taxes, depreciation and amortization, or EBITDA). Also, ABB has among the highest revenue and profitability levels per employee compared with peers.

“One reason for ABB’s strength is our global reach matched with well-developed local capabilities”

One reason for ABB’s strength is our global reach matched with well-developed local capabilities. We have built a strong presence in North America through acquisitions in the last three years, complementing our leading position in Europe, the Middle East and Asia. We are now a leader in most of the largest or fastest-growing markets on every continent. The positions that we have in these markets are also deep-rooted thanks to our local R&D and product development capabilities, which enable us to match and exceed local competitors when it comes to speed of product development and deployment.

We therefore have a presence and insights into different markets that few can match, and we can use this to achieve consistent growth and results throughout the economic cycle. This helps to explain ABB’s resilience. We also have a truly international leadership team which gives us a real global perspective on the opportunities available.

Besides investing in acquisitions, we have committed an additional $1.9 billion since 2007 to building or expanding factories, strengthening our sales teams in growth markets, and boosting R&D. Our outstanding success at managing costs, which yielded another $1.1 billion in annual savings in 2012, has given us the flexibility to make these investments and continue building ABB for the future.

Investments in R&D have risen from 3 percent of revenues in 2007 to 3.7 percent in 2012, lifting annual spending by 68 percent over this period to almost $1.5 billion. This reflects the fact that technology remains one of our most significant competitive advantages, and it is therefore essential to our success that we stay at the forefront of technological developments.

“Technology remains one of our most significant competitive advantages”

Technological innovation

The investment is paying off as we achieve genuine technological breakthroughs and bring advanced products to the market. We are pleased that 2012 was a particularly rich year for technological achievements. After years of research, our teams were able to report the development of the first hybrid high-voltage direct current (HVDC) circuit breaker, a breakthrough that removes a major hurdle in the evolution of interconnected grids based on direct current and that could speed up the deployment of renewable energy on a large scale.

It is arguably the most significant scientific achievement in the field since ABB developed HVDC transmission 60 years ago, an innovation that created entirely new possibilities for transporting electricity over long distances.

Other technological achievements in 2012 included the development and testing of an ultrahigh voltage direct current converter transformer, the commercialization of a new type of electric motor that is highly efficient, an order for the first-ever direct current power grid on board a ship, and the construction of Europe’s largest direct current data center.

These successes are important to ABB because technological leadership is a pillar of our goal to stay competitive and to push technology that drives disruptive market changes, which are priorities of our strategic plan for the years 2011–2015. This leadership and expertise is highly valued by our customers. They consistently recognize and reward our industry and application knowledge, our engineering and design capability, and the quality of our products and systems.

Priorities for 2013

In 2012, we achieved local-currency growth of 7 percent in revenues and 4 percent in orders. Excluding Thomas & Betts, revenues rose 3 percent and orders were steady (in local currencies). Our results for 2012 reflected the difficult environment and the measures taken in the fourth quarter to refocus the Power Systems division, and illustrate why driving competitiveness remains our top goal for 2013.

Deepening the integration of recent acquisitions will be one priority for this year. We have spent more than $10 billion on acquisitions since 2010 as part of our strategy to grow the business profitably and create value for shareholders. The value is being realized through a combination of cost and growth synergies, which in turn depend on the successful integration of the new businesses with those of ABB.

With Thomas & Betts, the US low-voltage business we acquired last year, we are intensely pursuing opportunities to use T&B’s products in our ABB businesses and to sell them through our global distribution channels. We have some promising pilot projects and will be exploring how to get the most out of the opportunities that have been identified.

We will also be looking at ways to scale up the new businesses that we have successfully developed. We have entered several new markets in recent years, such as electric vehicle infrastructure, energy storage, energy consulting and data center electrification, and we will make sure that the ones with the greatest potential have the resources and business models that will enable them to grow. A related priority will be to effectively commercialize the advances made in our R&D programs.

We will keep customer satisfaction at the top of our priority list by continuing to address the areas they want us to improve, mainly responsiveness and delivery time. Importantly, we are improving in the eyes of our customers: Our Net Promoter Score (NPS) measure of customer satisfaction rose by more than 30 percent in 2012 compared with 2011. The score remains lower than we would like it to be but we are pleased at the progress we are making.

As we strive to increase the satisfaction of our customers, the Executive Committee has introduced a systematic approach to addressing the top issues that they have raised, with EC members personally supervising the projects set up to address them. The project teams are responsible for determining the root causes of the issues and the measures that need to be taken, and will establish an implementation plan to ensure steady improvement.

We are confident that we have the right projects in place with the right leaders to ensure that we achieve the Group targets that we have communicated.

Shaping the future

Looking ahead, we are confident that ABB is well placed to benefit from several long-term trends, and even to shape them through technological innovation.

The major trends driving demand include the increasing use of electricity in areas such as data centers and electric vehicles; the rapid economic growth and urbanization in emerging markets; the need to use our natural resources more efficiently; and the integration of new sources of energy – such as wind and solar – into existing grids.

Balancing electricity supply and demand at any time is becoming harder as renewable energy becomes more widespread, given that wind and solar power are highly intermittent as well as distributed across a very large number of sources. Ensuring frequency and voltage stability of the grid is therefore an increasingly complex challenge.

In Europe, power networks will have to be better interconnected if the region is to make use of its natural power sources. Wind from the North Sea or the Atlantic, sun from the South, hydro facilities in Norway or the Alps, all need to be connected with energy-intensive industrial regions. Transmission grids need to be upgraded but they also need to become more flexible and intelligent. We expect HVDC to be deployed more widely as it is well suited to many of the emerging trends, and the hybrid HVDC breaker should pave the way for the development of an interconnected grid based on direct current.

“ABB is one of the few global companies operating in the attractive sectors of power and automation”

Manufacturing is also changing. Rising wages in emerging economies, higher transport and energy costs, and increasing levels of automation are driving manufacturers to look for ways to stay competitive other than by offshoring activities to markets with lower labor costs.

Among these, the ability to respond rapidly to changing customer needs stands out. Quick customer response, the need for mass customization, short lead times and low inventories favor the location of manufacturing facilities close to the customer, and recent advances in automation enable this change. Modern factory automation systems are flexible and allow manufacturers to respond quickly to changes in demand without sacrificing quality or consistency, with fewer, more skilled workers. Further, integration of automation systems and fast communication mean that supply chains can be kept lean despite the variety of products.

These trends illustrate why power and automation continue to be dynamic segments with compelling growth prospects. ABB is one of the few global companies operating in these two attractive sectors.

Unique strengths

We remain confident because ABB has many strengths. ABB has been resilient in the recent slowdown thanks to the way our activities are balanced across geographies and across the business cycle. We have a unique and strong presence in most of the markets in which we operate thanks to the deep roots that we have established in leading mature and emerging markets alike.

“Our strong balance sheet gives us ample flexibility”

We have also been resourceful, penetrating geographic markets as diverse as the US and Indonesia and new industrial ones such as data centers, developing attractive business models such as our new approach to service, and continuing to drive sustainable savings across the business through greater efficiency. We have invested extensively in technology, sharpening our technological leadership in power and automation.

What’s more, our strong balance sheet gives us ample flexibility to invest where we see an opportunity to grow the business profitably while maintaining our single-A credit rating. Thanks to the company’s excellent cash generation and prospects, the Board has once again proposed an increase in the dividend to shareholders.

Most importantly ABB has become a company in which integrity and sustainability have evolved from top-down activities into ways of thinking that are becoming embedded in the way we do business. Our people have a passion for technology, a pragmatic common sense, and the cultural diversity that helps us to find and exploit new opportunities.

We are confident that all these factors make ABB a great company to work for, do business with and invest in, and are the promise of a great future.

Signature of Hubertus von Grünberg, Chairman (handwriting)

Hubertus von Grünberg
Chairman

Signature of Joseph Hogan, CEO (handwriting)

Joe Hogan
CEO

March 14, 2013