Exchange rate has bearing on SKF

SKF’s market demands technology but won’t pay

By Paul Carslake

SKF, the world’s biggest bearings manufacturer, last week saw group income dip 12.5% to SKr2.1bn (£159m) – figures that would have been SKr350m lower had it not been for the positive effect of exchange rate changes on the value of overseas earnings.

SKF admitted its mix of products in 1997 was unfavourable. Customers who buy large volumes, but which generate lower margins, accounted for most of SKF’s 7% increase in volume.

The reality, though, is that margins remain feeble throughout the bearings industry because of relentless price competition between rival players seeking market share.

There is little return to bearings companies for the high level of technology involved. Fierce competition and already high levels of reliability and performance mean that product improvements are proving difficult to sell. Added to that, buyers remain conservative and even sceptical.

SKF’s Carb bearing is a case in point. It was launched at the Hanover show in 1995. The self-adjusting properties of the rollers provide more durability and significant performance advantages over conventional bearings in a variety of applications, especially where the rotating axle can become offset.

But despite its clear advantages over some conventional roller bearings, profit opportunities from Carb look modest. In its attempt to get wary buyers to take Carb on, SKF has priced it at the same level as its standard bearings, even though it will face no competition from other bearings manufacturers until the first Carb patent expires in 2005.

Roddy Bridge, analyst at HSBC James Capel, says this is typical of the bearings industry’s failure to cash in on technological advance.

‘They are trying to show they have got a premium product, but then they end up matching the competitors’ prices to win the business,’ he said.

SKF admits that its pricing policy is aimed at getting volume. But the bulk of these volume orders for Carb will come only later, when OEMs redesign machinery and equipment incorporating some of the design advantages offered by Carb. That process is only just beginning.

So far, industry has been slow to begin ordering, due in part to a misconception that Carb would be complex to install and was aimed only at heavy industrial applications.

‘This perception did hold back sales in the first year,’ said Carola Kylin, Carb marketing manager.

A dedicated Carb bearing factory was opened in May 1997, and Kylin says the forecasts are back on track. But Carb sales have still barely taken off. SKF’s optimistic forecasts of Kr250m for 1998 are equivalent to about 60% of this first plant’s capacity, but will be less than 1% of SKF’s total bearing sales in the year.

The real potential market for Carb-type bearings is difficult to quantify. Some at SKF talk of a massive 50% of all roller-bearing applications. Others limit forecasts to a handful of market sectors into which Carb has been sold (paper mills, fans, steel rolling mills and planetary gearboxes) which could account for a market of up to SKr2bn, or about 6% of SKF’s existing sales, realisable within the next four years.

The stock markets remain unimpressed. Despite the announcement of Carb, SKF’s most traded B share has underperformed the market by 20% for the last two years.

Peter Augustsson, SKF chief executive, shrugs this off. ‘We are not concentrating on the share price, but on performance,’ he said.

So too is Percy Barnevick, head of Investor, the investment vehicle of the Wallenberg empire which holds a controlling stake in SKF. He is known to be seeking better performance throughout the group of companies. Augustsson says there has been no change in SKF’s strategy following Barnevick’s arrival.

But the pressure from the market and from Barnevick at Investor to realise some returns from the high investments in bearings technology look set to increase.