ABB, the Swiss power and automation giant, is positioning India as the lead country in its Emerging Markets pack. Global CEO, Ulrich Spiesshofer in an exclusive conversation with CNBC TV18’s Archana Shukla says the Indian business will grow way ahead of ABB’s global revenues growth targets of 4-7% in the next 5 years.
Spiesshofer, who was on his first visit to India after taking charge as the global CEO, says as much as it was about meeting clients and government officials, the purpose of his visit was to reassess growth targets in India. He says the industrial capex cycle is on its recovery, especially in the power segment and could convert into formal orders for ABB in 24-36 months. His bullishness comes from the positive discourse on policy under the new government. He feels a push with Make in India policy and easing of export policy will create opportunities for ABB. The company is building India as manufacturing hub to service most of the growing power and automation requirements in Africa and South Asia.
Below is the verbatim transcript of Ulrich Spiesshofer's interview with Archana Shukla
Q: Let me begin by asking you about the entire talk about the emerging markets being the next driver of growth. I was seeing your strategy paper that you put out and you said the next set of drivers would come in from countries in Asia, Middle East and Africa. Where is this optimism coming from? There have been a lot of issues in the emerging markets that we have seen in the last 3-4 years. However why do you say that they will be your next driver of growth?
A: ABB is the leader in power and automation. If you look at emerging markets already over the next year we are ideally positioned to serve the emerging markets in the next phase of growth. The demand in infrastructure is going up rapidly. The demands on automation and competitiveness in the emerging markets are going up. So, we are working very closely with local governments and with the relevant regions to have the right offering in place. It is a consumption story on one hand and there is a competitive story on the other hand because the emerging countries are more and more getting into competition with each other and automation and power efficiency will be a key differentiator for competitiveness.
Q: In that space how do you look at India? In the last couple of months especially with the new government coming in, every company CEO that we speak to says two words upbeat and bullish on India. How do you look at the growth chart in India especially now with the ne government in place?
A: The new government has given confidence back to the business. Since I arrived here in India early this week I met many of our customers. I can sense a certain improvement in sentiment, in optimism. So, I think the willingness is there, the openness is there, now we need to see the action.
Q: The sectors that you operate in power and automation, at least in the last four years or so we have seen those sectors really struggle in the Indian market as far as policies were concerned, as far as orders were concerned. Do you see things actually now improving on ground with the policy and the optimism that you are talking about from the new government?
A: I see dynamics on both sides of our business in the power side and the automations side. On the power side there is a big shift in the value chain in India. On the generation side there is a commitment to do more renewable power to become less dependant of all the imports become more clean in terms of power generation. So, that is one driver that we benefit from. That means this power needs to be transported over longer distances and we have just announced great new technology that is developed here in India like the 1200 KV breaker that we just installed here that allows us to uniquely play into long distance, high efficiency low loss power transmission business. If you looked it locally there are about 300 million people in this country that don’t have access to electricity. If I look at the amount of investments, the 150 KV gigawatt of additional power generation that will come in the next couple of years. So, I am optimistic about that and I see good actions from the government coming.
On the automation side the strong focus on energy efficiency is one that we can really help in.
Q: We are talking about a lot of positives that could come in opportunities but for them to come on ground which are the certain policies which you think really need to change at this point in time?
A: Let me give you a couple of examples. The Make in India policy, it is really a strong requirement to set up industrial value chains, even stronger than the country has done so far will accelerate growth and create jobs and create prosperity, so that is a good one. The easing off of export policy and making it possible to export easier from India is another element. The changes that we see and the legislation that is being put in place on the renewable energy side is another piece.
So all together they are some really good pieces of the future jigsaw puzzle of the prospering India that will help to get this country to the next level of better quality growth.
Q: When you talk about the power sector with whatever optimism you have spoken about and the policy moves that you have spoken about have you seen on the ground movement in terms of order pick up. Have you seen that translate into order pickups. I understand ABB will see the late cycle recovery which is how you are placed in the entire value chain but at least in terms of a pick up which are the sectors where you are seeing a pick up and have you actually seen a pick up?
A: It is too early to celebrate a huge growth on orders but what we see is a significant increase in tender discussions where people really say we want to invest stronger on the power infrastructure side. If you look at 150 gigawatt that are planned in addition until 22 half of that is at the moment already being considered in concrete projects.
So in these concrete projects we have discussions with our customers to say not only how can we support the establishment of the power generation capacity but also how can we support the transport of the new capacity to the points of consumption.
The second half of this 150 gigawatt in addition that are coming is not yet planned. So, this is a long term game where we are working together with the key player in the industry to get going. So, tender activity coming up, long term project development needs coming and the orders building come also accordingly with it.
Q: So, what is the timeline that you are projecting for your company to actually see a pickup in these orders and them translating into formal orders for you?
A: Over the course of the next 24 to 36 months you will significant projects kicking in. We are optimistic that our orders grow in the field of infrastructure will go in line with that development.
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Q: If we talk about the order inflows especially in the power side a lot of it would be pushed by the ordering from the Power Grid Corporation of India. How is the order scenario and order placements from Power Grid looks like? Some of the orders that they have placed in last couple of quarters they have actually not progressed from the tendering process. If you could run us through what is the status update on that? A: For me the one big expectation that I have towards the new government in India is to get predictable, clear guidelines to business and to decision makers on the utility side and to enhance and accelerate the decision process. As you rightly say there is a lot of tender discussion, we need to make this tender discussion is being put into the project and realization that the people in India benefit from the growth in infrastructure. Short-term we see the need for some clear instructions for some clear guidelines and priorities in terms of investments. We also see a need for support on some open questions, the land rights question that you have with every large infrastructure project is an important one and we see some acceleration in that filed. So, all together the framing conditions to take a tender into realisation, to make sure all the permits, land rights, execution enablers are all set up. I have high hopes with the new government that this will accelerate and become much better. Q: Why I asked you was because in the last couple of quarters we have seen the order inflows actually decline if we talk about the quarterly performance in the last three to four quarters. As you are not starting on a good order book base your execution cycle would also be tapering towards the end of the year. Which is why I want to understand from order inflow versus execution and eventually translating it to numbers for ABB what is the cycle and if you could quantify that to some extent for us? A: If you take the order book situation in India we have not only out business on the power side we also have our business on the automation side and in some of the process industries. We have seen a significant slow down in some parts of that sector and that has naturally gone through a certain slow down. We had some very strong years then it got little bit soft so the comparable orders went down and now they are picking up again. In terms of quantification of that one we are not giving the forward looking guidance as I said before. However if you take the gross domestic product (GDP) growth of about 5 to 6 percent that is expected, if you take the capex growth in the infrastructure side which will be ahead of that we will be at a multiple of the GDP growth in the years to come in term of the order pick up. Q: With the new government we have spoken about the optimism we have spoken about the policies that could change and you are saying in the next 24-36 months you could see a lot of these tendering actually translate intro some orders. Are you reworking your targets in terms of growth for the Indian market from hereon as you have a very optimistic view for let say next five years from here? What sort of growth are you targeting? Growing more than GDP is what you have said but if you could quantify it and if you are reworking your targets? A: If you look at the purpose of the visit the purpose of the visit is to get together with customers, meet some politicians but also work with the team and understand what is the right ambitions level to address the opportunities in a country like India. India will get back the growth rate; there will be strong investments in infrastructure and automation side. Our global ambition is to grow revenue in a significant way between 4-7 percent. The ambition locally in India is ahead of it, it is even stronger because we believe the underlying dynamics are good. So, we will be probably much more at the upper end of the range of growth for the years to come. Q: How about the margins? Those have been under pressure. We understand that that is also because the order inflows were not coming in, execution was suffering because of that. Going forward what sort of margins do you think you would be working on in the Indian markets? A: It is our ambition globally and locally to drive margin at region over the next year. How will we get there? On the one hand on the pricing side if we got fantastic value coming out of our products you get fairly paid by your customers. Many customers that I meet globally but also here locally are ready to pay a good price if you provide the right value. Secondly we need to continue to taking cost out. We have a great development of the Indian supply base. So, between good value added topline growth on good technology and very strong execution focus I am optimistic that when the market picks up margins will pick up as well. Q: 11-16 percent EBITDA is what you have been targeting globally for your business in the next 5 years, I think this is 2015-2020 target that you are talking about where could India be? A: If you look at the margin drivers going forward we have now industrial business at scale in India which is one opportunity for margin accretion. Second we will drive more volume through exports and really get that going. Third we will drive the continuous execution to another level. So, altogether I am optimistic that ABB India will contribute to the margin accretion that we have planned. Q: It would be inline with that 11-16 percent that you are globally targeting? A: Margin accretion that we have planned in next years ABB India will play its role in that one as well. Q: You are a listed entity in India. In the capital goods space most of the multi-nationals who are trading on the Indian stock market, stock prices are really quite high. You are quite overvalued is what we understand when we look at the stock charts and the performance which is where the question always comes in. You are already at 75 percent shareholding in the Indian entity, would there be a thought process to eventually go in for delisting? A: When I look at the current share price, I think the current share price reflects the opportunities that people see ABB to have here in this country. We have a very good future and the share price is always a combination of future expectations and current performance. Current performance operationally is strong, the future expectations are high that is why the share price is up. Secondly we are focusing fully at the moment on running the business and driving operational performance and when the time is right to consider any changes in the shareholding structure we will talk about it. At the moment the focus is fully on operational improvement and serving the country. Q: So, delisting is not on the cards as of now, should shareholders look for some dividends? A: At the moment we have no plans for any change in the shareholder structure. At the moment the focus is on operational improvement.
Q: You are already manufacturing here and exporting a lot from the Indian plants as well for your requirements across the world. Any plans of expanding or increasing he exports from the Indian plants now with your expansions in your plants in place? A: ABB in India is really ready for the next stage of growth. In the next stage of growth locally I already described. The next stage of growth internationally and for export is a very interesting one. If you look from a macro perspective the free trade arrangements that India has for example with South Asia positions India very strongly. We have built up a very good quality, capabilities here in terms of manufacturing. We have good infrastructure on the export side in India which I really welcome and yesterday meeting with some politicians they will invest even more in the export infrastructure. So given that I have very high hopes and a very good feeling about increasing exports here from India. South Asia is one area, Africa is another area that we go. You might have seen we recently announced the reorganisation for ABB. ABB will be in the future organised in the three regions in growth. The Americas, Europe and Asia, Middle East, Africa. The battle in Africa will be won in a nexus between Asia, Middle East and Africa and we have organised the company now exactly that way. The Indian team will play a decisive and differentiating role to drive competitiveness when we develop Africa as a market for us. So, for me yes we are ready and we will take the export piece to the next stage of excellence in the next couple of years. Q: So, could we say that you are looking at building Indian manufacturing capabilities sort of a manufacturing hub for ABB to service these markets? A: We have been doing that since many decades. So, we don’t need to start it now. We are already on a really good path, but what we will do is we will take that to the next stage. We will take the existing capacity and high quality output and invest continuously in that. We will develop markets outside of India and pull additional demand into this part of growth. So, I see a very steady, very strong growth coming. The overall macro economic conditions, if you look at the currency, if you look at the predictability of the economic system India will become a much more predictable, reliable partner now under the new government for us which we welcome to make long term investment plans. Q: Currently what is the percent of exports from the Indian market and let’s say in the next three to five years time percent wise how much growth do you anticipate? A: At the moment we are ready to export about a quarter. What we are doing in the future this could be half or more if we are successful. So there is no limitation to that in terms of market perspective. We need to make sure we do it under the same paradigm as we do every of our business. Q: From the automation side and the industrial processes that you operate, from that segment’s perspective, from the projects that have already been announced especially in the railway’s side from the dedicated freight corridor side and the smart city side have you assessed what would be in quantifiable terms the opportunity that you could bid for. Whether it comes or not is obviously secondary but in terms of what is the opportunity that you could bid for? A: If you look at ABB’s role in public transport we have on the one hand fixed infrastructure side making sure there is power supply along railway lines, making sure there is reliable systems there. We have invested in the urban space very strongly and I see strong pickup in tendering activity. Just to make a very concrete example if you go to the city of Bangalore there are a couple of new metro lines coming in and we are already working with customers there to prepare that as one of the competitors that are bidding for it. If I look on the rolling stock side it is very important that the next stage of public transport is one which is a high quality, high efficiency public transport. We have invested in local value add, be it on the tracks and propulsion system for these locomotives in the public transport system, with that we are ideally positioned to support our customers there. I see a double digit growth opportunity for our public transport business over many years to come. Q: The other bit of the pie that you spoke about was renewable energy and when I was reading up I realised globally also you have put a lot of thrust and that is also one of the next growth drivers that you are talking about. What sort of opportunities, what is the kind of additional capacities that the government is talking about and how much of that do you think could be addressable by a company like ABB? A: If you take the 150 gigawatt additional power generation capacity they will establish over the next year significant part of that one will be renewables. There is a discussion whether it is 20, 30 or 40 percent but it is a significant amount, which is a fantastic growth opportunity for us. We are today on the solar side clearly the number one here in India and we will continue to invest in local value added, in local people, in local engineering to keep that growth going. So all together I am highly optimistic about the renewable fuel and I see from the new governments some clear actions in the right direction. Q: Overall if we talk about the power space for ABB in India and the growth that you are anticipating, let’s say out of 100 in the next five years how much do you think would come from renewables? A: I would say that more than a third comes from renewable space. If you look at our transmission and distribution activities which is the main focus of ABB. For us we are generation diagnostics, whether we connect a coal plant or solar plant or wind plant we can do it all. Q: Have you seen the economy pick up as far as the developed markets are concerned and are you seeing globally order pick up happening, the industrial capex returning back? A: ABB acts at the moment in a pretty uncertain role. We don’t know yet exactly where Europe is going in and where it is coming up in the US we see some strong signals but their economic numbers are not in full swing yet. So we need to be cautious in running this government. We need to manage our costs for the worst and growth for the best. That is the way how we have set ourselves up. Q: One and half years as CEO for ABB, you have already laid out your plan. How does the next few years look like as the CEO at the helm of ABB? A: First of all the first 15 months as the CEO of this company was a wonderful experience. The team here has come together very strongly and don’t forget it is never the CEO only that runs the company. It is a strong team and we have come together and we have made some changes. We have put in a new strategy; we know exactly where we are going in the next couple of years. So, the first phase was around charting the course, setting the course where we are going, giving the company a clear identity and accelerating the momentum. That were the three topics that we worked on in the first 15 months. Now that we have to clear course we have accelerated the momentum and we know where we are going. There is a lot of professional fun coming in prospering this company and working together with our customers and the teams.
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