Tiptoe through the turmoil

As the main company reporting season approaches, details of the true impact of the Asian crisis are starting to emerge. Swiss-Swedish engineering giant ABB, which wants to expand in Asia, last week reported a fall in pre-tax profits from $1.9bn (£1.2bn) to $853m. It said the fall was mainly due to a restructuring charge of […]

As the main company reporting season approaches, details of the true impact of the Asian crisis are starting to emerge.

Swiss-Swedish engineering giant ABB, which wants to expand in Asia, last week reported a fall in pre-tax profits from $1.9bn (£1.2bn) to $853m. It said the fall was mainly due to a restructuring charge of $886m and the loss of the Bakun dam contract in Malaysia for which it has allowed $100m.

But Goran Lindahl, ABB president and chief executive, believes Asia will ‘bounce back in the next two to three years and resume growth even faster than before. The region’s long-term need for infrastructure and industrial investments remains’.

He adds: ‘As their currencies fall, it presents an opportunity locally to acquire and set up business, which may help to compensate for some of the shortfall in orders.’

In the short-term, Asia’s troubles have galvanised ABB into accelerating restructuring. It wants to boost productivity in the West ‘retaining core competencies there’ and to expand in Asia. Lindahl says it acted early to ‘grab new opportunities as soon as they emerge’.

In October it announced a plan to axe 11,700 jobs (up to 16,500 if the figure includes those at Adtranz, its 50:50 joint venture with Daimler-Benz). The cuts come mainly in North America and Europe, and include the closure of 13 factories.

Half the restructuring relates to power generation. The rest concerns power transmission and distribution, and industrial and building systems.

ABB’s management knows how to handle redundancy; it cut 59,000 jobs in western Europe and North America from 1991 96. But it created 56,000 jobs in the same period mainly in Asia and eastern Europe.

Expansion in Asia, argues Eberhard von Koerber, the ABB executive responsible for Europe, Africa and the Middle East, will not undermine the company’s European operations. He insists the West will remain a big part of ABB’s business despite the drive to far-off markets.

‘Up to 50% of ABB’s volume is generated in Europe, including central and eastern Europe, and this is not expected to change,’ he says.

The company’s final-year results, says Lindahl, hide the fact that ABB is doing well. The ‘indefinite’ Bakun delay, he argues, which affected the power generation and distribution segments, masks the company’s underlying growth.

The restructuring charge of $886m and the strong dollar also helped mask this growth, he says. ‘For example, orders received were 3% higher as reported in US dollars, but 11% higher when expressed in local currencies. Disregarding both the restructuring charge and currency effect, group net income was 4% higher in 1997 than the year before.’

It also spent $2.7bn on research and development last year.

However, the Adtranz joint venture booked a $111m loss, including its share of the restructuring charges and the loss of 4,800 jobs. But it is forecast to move into profit this year.

ABB in the UK is one of the largest contributors to the group’s operating profits. Last year the UK benefited from a number of orders for combined-cycle power plants while Adtranz in the UK did well, notching up 400 vehicle orders and options for a further 800 rolling stock units.

Although the company does not publish figures for each country, Eric Drewery, head of ABB UK, says that in 1997 ABB (including its 50% share of rolling stock company Adtranz) received orders worth £2.2bn, revenue of £1.8bn and created earnings ahead of budget. It has 13,000 employees in the UK.

And ABB has ambitious growth plans. Drewery says its UK operation ‘should be twice the size it is now within three years’.

Growth will be achieved through the now established mixture or internal organic growth and selective acquisitions especially in the industrial services area.’

He continues: ‘We have added 11 companies to the group in the last 16 months including Rolls-Royce’s boiler maker, International Combustion and should be announcing further acquisitions shortly. There are a lot of opportunities.’

For ABB, says Drewery ‘cash is rarely a problem. The main challenge is finding sufficient quality management to run the new businesses.’

It has set up a group at head-quarters to develop a pool of high-quality managers.

ABB was formed 10 years ago through the merger of Asea of Sweden and BBC Brown Boveri of Switzerland. Each parent company has a 50% stake in the company which is registered in Switzerland and reports in US dollars.

It has since grown through acquisitions, joint ventures and internal expansion from a Eurocentric company with $18m orders and 170,000 employees to a global group with a 213,000-strong workforce generating orders of $35bn.

Lindahl has put much store in expansion into Asia. But he knows the region’s infrastructure problems will not go away and is confident that now is a good time to invest.

ABB’s positive approach to the challenges and opportunities in Asia is one that trade and industry secretary Margaret Beckett is promoting, and one that UK-based companies with ambitious plans for the area cannot afford to ignore.