Banking system crucial to turnaround

No clear signs of better times, but Scania will stand well equipped when the turnaround comes − that is how the message of Scania’s Capital Markets Day can be summarised.

TEXT: GÖRAN LIND

“How quickly demand rebounds will depend to a very large extent on developments in the financial system. The question is whether the liquidity now being pumped into the system will stay in the banks or whether it will make its way out into the real economy,” President and CEO Leif Östling told the audience at Scania’s heavily attended Capital Markets Day, which was held in Södertälje, Sweden on September 17.

Just over one year has passed since the global recession began in earnest with the Lehman Brothers bankruptcy, a period that Östling described as “the worst downturn I have ever seen − the market disappeared in the space of three weeks.” But today most observers, including the Executive Board of Scania, seem to agree that the bottom has been reached. So the only question is when demand will rebound. 

Östling painted two conceivable scenarios: One that is similar to what happened after the early 1980s slump, when it took about four years to return to normal levels. And another in which the situation improves within only a couple of years, as occurred in the mid-1990s.
“We don’t know which scenario is more probable. But we must continue to be cautious about the prospects for 2010. The financial system is in bad shape, and before this is resolved the real economy will not get moving,” Östling said.

Positive signals from Asia and South America

One fundamental problem is that many of Scania’s customers among small and medium-sized companies in Europe still have problems in obtaining financing. This is especially true of central and eastern Europe, where companies are more often newly established and highly leveraged. In addition, they are suffering from a price squeeze on transport services due to the general recession.
“Although the downturn has levelled off, activity among our customers remains low,” Östling said.

But there are major geographic differences: The problems are largely connected to Europe, where such markets as the Nordic countries and Great Britain are nevertheless performing decently. In other parts of the world, such as Asia and South America, there is higher activity than in Europe.

“There is continued strong demand in Brazil. In addition, we have boosted our market share in that country. We lacked the capacity to deliver enough trucks in Brazil during 2007 and 2008. and our market share fell below 20 percent. But now we have increased it to between 23-25 percent,” said Martin Lundstedt, Scania’s Head of Franchise and Factory Sales.

In Asia, levels are admittedly lower than a year ago, but Lundstedt was still able to single out a number of bright spots. Scania’s concept of focusing on overall operating economy has been successful in the city bus segment, and activity has increased in certain economic sectors in Asia, among them the mining industry.

There were also other positive signals at the Capital Markets Day. Scania’s Chief Financial Officer, Jan Ytterberg, told the audience that inventory reduction is now largely completed.
“On the whole, there is still surplus inventory only in Russia,” he said. 

Many deliveries during the first half of 2009 consisted of trucks from Scania’s inventories and this led to very low production levels, especially during the second quarter. Because today most markets have no surplus inventories to deliver from, this means that Scania expects its daily production rate to be higher during the third quarter than in the second quarter. Meanwhile demand remains at a low level, and the third quarter is seasonally weak due to the holiday period in many of Scania’s markets.

The speakers also commented on the market for used trucks, which has now stabilised. Those used trucks that Scania receives are largely being sold immediately.

The new R-series was unveiled

Scania is well equipped for the next phase of the upturn. Large-scale training programmes during the past year have further boosted employee skills at production units, and the system of short working weeks and employee time banks will enable the organisation to shift to a higher production rate relatively quickly and cost-effectively.

Meanwhile Scania is continuing to launch new products. The new R-series was unveiled at the Capital Markets Day, and it will ensure Scania’s leading position in the important long-haulage truck segment by offering customers better operating economy.
“This will provide a great opportunity for profitable growth when the market turns around,” Leif Östling said.

Östling believes that the current four-day week has provided lessons that may improve Scania’s work processes in virtually all parts of the company. The four-day week for employees in Sweden will apply until the end of 2009, but it is too early to say what cost savings will be needed next year. 
“We will sit down late this year and evaluate our cost-savings programmes,” Östling said.


“The next peak will come in 2017-2018”


Long-term market trends favour Scania, whose production target of 150,000 vehicles per year remains in place, said President and CEO Leif Östling at the Capital Markets Day.

“The normal economic cycle in our industry is ten years. This would mean that we have seven years of growth ahead of us and that the next peak will come some time in 2017 or 2018,” Östling said.

He maintained that in the long term, globalisation will lead to an increased need for goods transport, especially in emerging economies.
“Today 70 percent of all transport services are by road, and there is no reason to believe that this will change.”

Buses and coaches increasingly important

Östling also foresees favourable conditions for vigorous long-term growth in its buses and coaches business.
“There are major advantages, especially in environmental terms, in moving urban transport from cars to buses.”

This also means that Scania is sticking to its target of manufacturing 150,000 vehicles yearly at the peak of the next economic expansion.
“This will occur with an unchanged workforce. We will streamline our production further within the framework of SPS and increase our outsourcing. At the peak of the next economic cycle, 75 percent of chassis materials and components will be outsourced,” Östling said.

This would mean that the number of vehicles produced yearly per employee will rise to 15.
“We were almost up to eight vehicles per employee before the market plummeted,” Östling said.