During 2013, we continued to deliver power and automation solutions that help our customers meet the challenges of a rapidly-changing world. Foremost among these are climate change and the need to use electrical energy more efficiently and with less impact on the environment. We addressed the challenges in several ways, as described below.
One is a long-term commitment to technology leadership in areas such as high-efficiency power transmission; automation and control systems to manage complex industrial processes using less energy; and technologies to capture the full potential of renewable energies, such as wind and solar power. In 2013, for example, we launched Emax 2, the first low-voltage circuit breaker with integrated energy management functions. Replacing existing traditional breakers with the Emax 2 breaker has the potential to achieve annual electricity savings equivalent to the consumption of 1.4 million European Union households per year, corresponding to a 4-million-ton reduction in CO2 emissions. We also entered a five-year joint industry program with the Norwegian oil and gas company, Statoil, to develop transmission, distribution and power-conversion systems for subsea oil and gas installations at depths of up to 3,000 meters. Subsea pumping and gas compression contribute to improved utilization of oil and gas resources through greater recovery rates and reduced production costs. We won an order in April 2013 to provide the world’s largest-ever mine hoist system, including a new generation of mine hoist braking technology, for a potash project in Canada by Australia-based mining company BHP Billiton. We also delivered the 262-kilometer East West Interconnector to EirGrid, the Irish transmission system operator. The 500-megawatt transmission connection is the highest capacity link of its kind to go into commercial operation. The interconnector enables cross-border power flows, enhances grid reliability, and allows Ireland to export surplus wind-generated electricity to the United Kingdom. In May 2013, we announced the development of a new technology to power the world’s first high-capacity flash charging electric bus system in Geneva, Switzerland. The ultrafast-charging system, with no overhead lines, enables new opportunities for next generation silent, flexible, zero-emission urban mass transportation. ABB was also recognized in February 2013 by the Massachusetts Institute of Technology (MIT) Technology Review for the hybrid HVDC breaker developed in 2012, placing it among the ten most important technology milestones of the past year.
A second way is our development and manufacturing presence in more than 100 countries around the world. This allows us to meet the needs of our customers faster and with solutions that are better suited to their local requirements. It positions us to benefit from the rapid growth expected in the emerging markets in the coming years while also supporting our large and important markets in the world’s mature economies. In 2013, we took further actions to adjust our geographic and portfolio balance, such as the acquisition in September 2013 of Turkey-based ELBI Elektrik to improve our position in the Turkish low-voltage products segment and to expand our existing business in Eastern Europe. We also invested $50 million in new high-voltage switchgear and distribution transformer factories in India and established a joint venture in China to design, manufacture and service high-voltage instrument transformers. Furthermore, our geographic scope provides us with access to a large pool of talented and highly qualified people from very diverse cultural and business backgrounds – a key competitive advantage. In 2013, we generated approximately 46 percent of our revenues from emerging markets.
A third way is our ability to combine both power and automation technologies into packaged solutions that meet the needs of new growth sectors – such as renewable power generation and electrically powered automobiles – as well as traditional markets, such as marine. For example, in 2013 we expanded our position in the global solar inverter market through the acquisition of U.S.-based Power-One Inc. (Power-One), aimed at creating the global leader in the most attractive and “intelligent” part of the photovoltaic (PV) value chain. We also announced plans to begin production of solar inverters in South Africa to support the rapidly growing local PV market, adding to our existing capacities in Estonia, India and China. In addition, we were selected by Fastned to supply chargers to more than 200 electric vehicle fast-charging stations in the Netherlands, bringing an electric vehicle fast charger – capable of charging electric vehicles in 15–30 minutes – within 50 kilometers of all of the country’s 17 million inhabitants. We also launched the world’s first nationwide fast-charging network for electric vehicles in Estonia, using 165 web-connected DC fast chargers and in 2014, we announced a strategic collaboration with Shenzhen BYD Daimler New Technology to supply high-power DC chargers in China over the next six years for DENZA. In the marine industry, we delivered to a Norwegian ship owner our first Onboard DC Grid solution, a highly efficient power distribution, automation and electric propulsion system that reduces fuel consumption and emissions by up to 20 percent and the space needed onboard for electrical equipment by up to 30 percent.
Economic uncertainties continued in 2013 in areas such as sovereign debt levels in Europe and the United States and the pace of economic recovery in various markets. As a result, some of our customers postponed the award of large infrastructure projects, mainly in the utility, mining and metals sectors, which was reflected in lower orders in our power divisions as well as our Process Automation division and, as a result, lower total orders in 2013. However, the broad scope of our business portfolio helped us mitigate some of these developments and we were able to take advantage of areas of growth. For example, our larger exposure to the North American automation market, through the acquisitions of Baldor Electric in 2011 and Thomas & Betts in 2012, allowed us to increase both orders and sales in our Discrete Automation and Motion, and Low Voltage Products divisions. The Process Automation division continued to benefit from investments in the oil and gas sector but experienced some order declines in the mining sector, where our customers have been reducing their capital expenditures in response to low commodity prices and overcapacity. In 2013, we maintained the profitability of our Power Products division despite the continued challenging market environment through successful cost savings and productivity improvements as well as our ability to be more selective in the orders we take, thanks to our broad product and geographic scope. Our Power Systems division experienced weather-related delays in the execution of certain offshore wind projects in December 2013 and some operational issues that affected profitability. Our new management team in the division began to take actions in the fourth quarter to address these issues, largely based on accelerating the repositioning of the division – first announced at the end of 2012 – to focus on higher-margin products, systems, services and software activities. Our strong positions in fast-growing emerging markets and selected mature markets, our flexible global production base and technological leadership, as well as the operational improvements we continue to make in our businesses, also supported our business in 2013.
Foremost among these improvements was the successful reduction of costs to adapt to changing demand. Savings in 2013 amounted to more than $1 billion and were principally achieved by making better use of global sourcing opportunities and eliminating operational and process inefficiencies.
In November 2011, we announced an updated strategy for the period 2011 to 2015, along with financial targets to measure our success in achieving them. The strategy is based on five priorities:
- Drive competitiveness in our current markets by developing, producing, sourcing and selling to better match market needs, thereby profitably growing the business while increasing productivity and quality.
- Capitalize on megatrends, such as the growing need for resource and energy efficiency, increasing urbanization, electrification, digitization and growth in emerging economies.
- Expand our core businesses to secure the next level of growth, for example, growing the service business by tapping opportunities in our installed base and by building the software business for our core power and automation customers.
- Execute a disciplined approach to value-creating acquisitions that close key gaps across product, end market and geographic lines.
- Find and exploit disruptive opportunities, such as the application of direct current electricity solutions to improve power efficiency and performance compared to conventional alternating current technologies.
Furthermore, in 2011, we introduced a new target measure of cash return on invested capital (CROI) that we believe provides a more accurate reflection of our operational performance by focusing on cash returns, which are less prone to non-operational accounting adjustments that may be applied to income from operations from time to time. CROI is defined as the total of net cash provided by operating activities and interest paid, as a percentage of capital invested. Capital invested is defined as the total of fixed assets (property, plant and equipment, goodwill, intangibles, and investments in equity-accounted companies) before accumulated depreciation and amortization plus net working capital less deferred tax liabilities recognized in certain acquisitions.
In September 2013, Ulrich Spiesshofer assumed the role of CEO for the ABB Group and affirmed his intention to maintain continuity in the execution of the 2011-15 strategy. At the same time, he highlighted opportunities to improve the performance of the company in the areas of:
- profitable growth through a combination of improved penetration of existing markets, innovation in technology and ways of going to market, and expansion into attractive markets through both organic growth and by continuing to fill gaps in the business portfolio through bolt-on acquisitions,
- business-led collaboration across our business segments to create more customer value by delivering our combined automation and power portfolio, and
- relentless execution to drive sustainable cost savings, cash flow and capital efficiency and to ensure successful integrations of our acquisitions to maximize the return on investment.
In February 2014, we announced that we are entering a new strategic planning phase and will communicate the outcome and new long-term targets to drive earnings per share and CROI at our Capital Markets Day in September 2014.
The long-term demand outlook for our businesses remains clearly positive. The need for efficient and reliable electricity transmission and distribution will continue to increase, driven by factors such as: accelerating urbanization in emerging markets; actions to address global warming; the rapidly increasing power needs from digitization; and the refurbishment of aging power grids. At the same time, demand for industrial automation solutions will grow as customers strive to improve productivity, efficiency, product quality, and safety. ABB is well positioned to tap these opportunities for long-term profitable growth with its strong market presence, broad geographic and business scope, technology leadership and financial strength.
In the short term, there are some positive early-cycle macroeconomic signs, such as strengthening growth in the U.S. and the more encouraging growth in many parts of Europe. However, there are also some uncertainties related to the impacts of quantitative easing and the speed and strength of economic development in the emerging markets, especially China.
In this market environment, ABB’s management team aims to systematically drive profitable organic growth through increased market penetration, generating more revenues from our pipeline of new product innovations, and expanding into new attractive market segments. In addition, management intends to accelerate business-led collaboration, such as further developing the service business, driving the successful integration of acquired businesses and increasing ABB’s productivity by focusing internal support activities on the needs of customers. A third priority is relentless execution, especially in the areas of cost savings, cash flow generation and returning the Power Systems division to higher and more consistent returns.