In an interview with CNBC-TV18, Ulrich Spiesshofer, Global CEO of ABB says that India is prospering and ABB plans to use this growth momentum to double its business in the country in coming time.
ABB, in November, this year announced plans to double its workforce at the global engineering section in India. This is majorly due to the strong growth momentum despite softness in other Emerging Markets (EMs), says Ulrich Spiesshofer, Global CEO of ABB.
Speaking to CNBC-TV18’s Shereen Bhan, Spiesshofer says that ABB plans to double its business in India in coming years. Growth rate in EMs, like Russia and Brazil, has softened, but there still exists growth pockets like India, he adds.
Spiesshofer sees India as a strong export, software and engineering hub for the company. Focus will be on three parameters – power for all, industrial efficiency, urbanisation and infrastructure growth, he says.
However, he says India has further opportunities to improve in areas like ease of doing business and that reform initiatives of the Modi government are on the right track.
Besides India, ABB is 'cautiously optimistic' on China. "We have also gained a lot of new customers and we have done well in China to really penetrate more to western parts of the Chinese continent," Spiesshofer says.
ABB is undergoing internal changes to focus more on the needs of its customers and smooth execution of products, he says that the company will focus on key growth areas like cost effectiveness to accelerate growth and value creation. Man-power, he says, is one of key factors of growth for ABB.
On its expansion plans, Spiesshofer says that the company will look at merger & acquisition (M&A) to strengthen the portfolio and fill in required gaps.
Below is the transcript of Ulrich Spiesshofer’s interview with CNBC-TV18's Shereen Bhan.
Q: Before I talk to you about India and the opportunities that ABB sees in India, let me ask you about what you are seeing as far as global growth is concerned and the demand environment. You have actually revised your revenue guidance between 2015 to 2020 downwards because of the headwinds that you are seeing as far as global growth is concerned. So, you are now guiding for about 3-6 percent versus 4-7 percent which was the earlier projection. How bad are things really looking at this point?
A: If you take the current situation in the second quarter of this year we said very clearly we are facing significant market headwinds. On the process industry side, we saw a slowdown in China and in US we see basically a split economy.
Anything that is going towards consumption is growing quite well, anything that is related to process is very soft. Given that change in market environment, given the softer expectation in the emerging market growth we have aligned our ambition with the markets development, relative to the market is constant but since the markets are growing little bit softer we have taken the revenue ambition overall in line with the market.
Q: You have just visited China before you actually came into India. What is your sense about what is happening in China? How bad is the picture because one can argue about the veracity of the data, whether the numbers are actually reflecting the reality on the ground. What is your own sense about the slowdown in China and how confident do you feel about a pick up as far as the infrastructure side of the story is concerned?
A: China has a year to face with moving from an investment driven to consumption driven environment and you will see in certain parts of the industry and certain segments you will see a slowdown and we are experiencing that as we speak.
But if you look at the underlying agenda on the infrastructure side China is keeping to spend on infrastructure especially on renewable pickup, in the large scale power grid investments and ABB as the global leader in that field we are well positioned to participate in that.
On the automation side the process, industry demand is really soft and has much contracted compared to previously that is something we have to better but at the same time the discrete industries for example like our robotics offering is prospering very well. So, it is a mixed bag altogether.
It is very important for us that we have our nose in the wind and see where the segments are sort of growing. I just spent this weekend in Shanghai with the Mayor of Shanghai on not only sharing but also listening to the dynamics. There is a clear change there in place.
So, medium to long term I am cautiously optimistic. Short term, we need to weather the storm in the segments that we see. On the other hand also realise the benefits in the segments where there is still some growth.
Q: But in terms of order inflows specifically as far as China is concerned what is your own sense at this point in time?
A: We in ABB have grown this year in China because we were able to mitigate the contraction in the process industry side with some large orders on the power side. We have also gained a lot of new customers and we have done well in China to really penetrate more to western parts of the Chinese continent. So, that is our role as entrepreneurs. We have to appreciate the softness in certain pockets and then we need to take decisive actions to compensate that in our overall business pattern.
Q: You are also worried about what is happening as far as emerging market story is concerned and emerging market the projection that you have is lower in comparison to 2014 what you had projected. Do you see the picture getting worse in emerging markets and will that then force you to perhaps revive your revenue guidance again for this period?
A: If you take the Brazil, Russia, India, China and South Africa (BRICS), Brazil is definitely much softer than we would have expected 15 months ago. That was one of the main reasons. Russia is much softer than we saw it. India is prospering. So, we can talk at the moment about India. I am very happy with our Indian operations. In China, it had to be slightly calibrated in line with the transformation of the country that is going through at the moment.
So, all together you see a softer development but we still have some pockets of growth. What we are doing now is we are realigning our investment focus. For example yesterday we announced that in India we are going to double the engineering capacity to really take the prosperous elements and the momentum in India as an opportunity to grow.
Q: Speaking of this reallocation or realignment given the growth opportunities where does India currently figure. I know that you are looking at the micro grid opportunity in a big way here in India. The government is talking about renewable and focusing about renewable in a big way. You have finally started to see the order books pick up as far as your India business is concerned after two quarters of de-growth. How confident do you feel about strength of the India story today?
A: Look at our business in the third quarter we have grown in all of our businesses here in India which naturally makes me very happy. India basically had three roles for us. The one is it is a vast demand market that we are serving on three overall themes.
It is power for all and with our solutions both on the conventional power grid and on micro grid solutions we will give access to about 30,000 villages, 300-400 million people that don't have access to permanent power.
We have a fantastic opportunity and I specifically welcome the agenda that Prime Minister Modi has put in place to make sure that in the foreseeable future everybody has access to reliable power supply and ABB has built a very strong capability here.
We have a very large business, we have strong manufacturing, we have good supply chain, we have good service. So, we are ready to play on that one.
The second theme is to drive industrial efficiency. If you look at the efficiency of industrial processes in India in very many industry India needs twice the energy to produce the same amount of output as others. Putting our energy-efficient technology in place will help to achieve the agenda to have a more efficient India in the industrial space.
Thirdly, in the domestic market, the growth in infrastructure, the smart city movement, the urbanisation move that we see we support it with public transport, with building automation with efficient building control. So, this is really an agenda that fits very well for ABB. So, that is the first role that India plays for us; a strong demand market.
Secondly, we have built-up, over the last couple of decades, our own Make for India capability. We will use that to supply into India but also use India much stronger as an export hub into South Asia where you have very attractive free trade agreements.
We are using India as an export hub into Africa. So, I have really high hopes that we can accelerate it significantly into the next couple of years having built now a stable, good quality platform.
Thirdly, India for us is a major engineering and software hub. 50 percent of ABB's offering today is already software based. We are driving that agenda very attractively the digitalisation opportunities that we have in the internet of things, services and people gives us an opportunity to tap that and India will play a major role in that.
So, altogether the three points India as a major demand market, India as an export hub, India as a humming engineering and software centre in ABB makes me quite optimistic.
Q: Since you are talking about the India opportunity and being optimistic about the India story what is this going to mean in terms of financial performance here for ABB. In the third quarter, revenue growth of about seven percent, you continue with your cash over revenue policy; EBITDA growth of about 10 percent year-on-year (Y-o-Y). Analysts are now starting to say that given the demand environment perhaps valuations are looking expensive at this point in time but what is your own sense about being able to better the kind of numbers that you have been able to do?
A: When we are able to drive growth on an established platform that we have we will get some leverage and that means that margins will go up overtime. So, I have expectation that value creation potential of India in the overall portfolio of ABB is tremendous and we will drive that in an aggressive way together with our team here and we are very close to our customers.
We are here at the moment in this when we have 3,000 customers and when I see how the team is connecting with them we have changed focus on ABB much stronger and more customer intimacy, more closeness to the customers it could grow momentum and with disciplined, good quality execution we will be able to drive valuation up.
Q: You were talking about being able to use India as an export hub. What will that mean in terms of incremental investments as far as ABB India is concerned. Are you looking at fresh capacity at this point in time to be able to cater to that demand? Give us a sense of what we can expect in future both in terms of capital expenditure (capex) as well as future investment?
A: If you want to have a sustainable export hub you need basically three things. You need manufacturing capacity at scale. We have front loaded the capacity, meaning we have filled more capacity than we would have needed for the actual demand. So, now we can fill that up. It is already stable, it is built, its machinery and equipment are ones with good quality. So, we don\\'t need to have a huge investment start. We already have that investment in place.
Second, it is very important to have a good education program. Since decades ABB has a strong educational program for its people, especially over the vocational training, for people on the shop floor that makes a difference on the quality of the product if we are shipping and we are driving it. There we will continue to invest in education. Locally, in different municipalities we are working, but also in India via training programs - working with university, working with local schools.
Thirdly, the export capability we are putting in and we have started doing it very actively. People that have the right experience in driving exports from supply chains; from customs for a duty treatment perspective we have also built hubs of Indian people in the destination where we will export too to make sure that we have this transmission belt into the market opportunity.
With these three we have a strong platform, people continue investing in line with the opportunities. But since we have already a good platform in place we can leverage what we have built.
Q: So, given the fact that you have front loaded capacity, given the domestic opportunities and the export opportunities what is the size of India business that you export over the next five years?
A: The mandate to the Indian team is to double the business in the foreseeable future.
Q: Would that be five years, foreseeable future, would that be a fair estimation?
A: Let us see how long that takes. I don't want to give any specific guidance but it is definitely an ambition to more than double in India. If I look at the momentum that we have at the moment in place, if you look at the market opportunities, if I look at the incremental export that is a very realistic expectation.
Q: Let me move away from India for just a bit and talk to you about what is happening as far as ABB internally is concerned. I believe that you are currently in the process of pulling off the biggest transformation exercise that ABB has gone through over the past decade. Where do things currently stand and I would imagine that at this point of time there are critics of what you intend to do as far as ABB is concerned. There are activists, investors who feel differently about your current strategy. Do you think a product lead strategy would fare better as far as ABB is concerned to future proof the company?
A: Our stress is purely customer lead. We have aligned the company now much better with the key customer segments. We are brilliant together - our power and automation offering in a tailored way for certain customer segments.
On the grid side, on the transmission and distribution side, we are forming generally a new division that is called power grid that will cater to all the needs of customers in transmission and distribution as the clear global leader, the number one in transmission and distribution that is products, systems, software and service.
We are forming for the customer that consume electricity that drive to size of the electricity consumption in industry, in infrastructure, in transport - we are forming specific capabilities, we are bringing together our medium voltage and low voltage offering in the electrification products to make sure we get better momentum for our distribution partners for example and bring together what belongs together organisationally. So, all together what we are doing is that the company will be lighter, faster to deal with the customers.
Secondly, we are throwing off significant balance. We have been too slow and we had too many organisational layers. We had too small span of controls. So, with our white collar productivity program we will not only take USD 1 billion cost out we will make this company even more agile and fast.
Thirdly, we have clearly said we will change the centre of gravity of ABB. That means from a risk profile perspective, your question about products versus systems, is a good one.
The balance on the business model what we really supply to our customers will help us to de-risk the business portfolio. Secondly, we are focusing strongly on high growth areas, regionally like India and Africa but also from an industry prospect if food and beverage or the micro grid opportunity that we have and we will try stronger, competitiveness through a software-led differentiation and services which we are growing ahead of the rest of the portfolio to differentiate stronger.
So, all together ABB's second stage of our next level strategy that we have just ignited will accelerate the value creation will, get us closer to our customers and it will tap the value creation potential that everybody, at least ABB has.
Q: But would you like to lean more on the product side because you will be able to extract higher margin?
A: When you come out of a discussion like with the Minister of Energy this morning where we discussed about micro grids which is a solution base for multiple products, systems and services of ABB that is where the world is going.
Especially in emerging economies you see a lot of solution buying that people say give me the functionality of micro grid, give me the control, the service, the products all in one package having pre-installed, pre-configured, easy to install out there. So, what we need to do is we need to play the grand piano of ABB's options to serve its customers in a way it tunes to the customer needs.
Here it might be a micro grid solution, in some other place it might be a pure product play, in some other place it might talk about large and vast system projects. Take for instance the Agra project that we just completed the first phase in India where we are transporting 1.5 gigawatt of power from the clean waters of Himalaya into the Agra region where we supply to more than 20 million with one line. That is a large system project that caters the need.
So, for me it is very important that we understand precisely what the customer wants and if we execute whatever business we chose in a better way than before we have opportunities to become better on quality of product side, we have an opportunity to get better on execution and system and we are working really hard to let it relentlessly drive the execution quality up in ABB.
Q: What about costs because you have of course moved significantly even as far as your plan to bring down costs are concerned. Headcount reduction, I believe since you took over, I believe over 10 percent we have actually seen the headcount coming down. What can we expect and how much more can you eke out by way of cost reduction. I understand that you are shutting down some plants, moving some plants from some locations to another. What is it going to mean in terms of divesture and also the future capabilities by M&A. What is the strategy going to be on that?
A: First when you look at ABB we have a strong cost reduction approach and since the Lehmann crisis in 2008 we have taken out USD 1 billion cost annually and we will continue to do that of our usual cost reduction approach. Now in times of hard weather sailing right now you need to ramp up. The white collar productivity effort will get us an incremental USD 1 billion cost out in addition to the annual USD 1 billion, 3-5 percent of cost of sales equivalent going forward. ABB has today 137,500 people. When I started we had 152,000.
So, we have made the company lighter, we have made it fast and more cost efficient but has still tremendous potential. We are investing in software solution for example support our sales people to spend less time on administration, more time with the customers that with help us with cost but will drive the growth. So, all together we need to really make sure that we use all the opportunities and all the labours to make ABB more agile, fast and customer focussed.
On the M&A side we have clearly played last year that we put a hold on M&A, we had so much going on. Now we have done a lot of homework, our balance sheet is strong, our integration capacity is there. If is the right opportunity comes we will strike but all of our plans are built on organic growth. So, we not desperate making acquisitions but we will tap the opportunities when they are there.
Q: So, what would be compelling as far as M&A is concerned for you. What would be the areas that you would actively consider?
A: We will definitely invest along the process automation value chain. If you look at ABB the global market leader in distribution control system we are number one there. On the measurement on the sensing side, on the actuation side we still have opportunities to deploy some money. When you look at the low voltage offering that we have all around the world we are strong in many markets but there are some where we can still grow stronger.
So, with M&A activities we want to strengthen the ABB portfolio, we will make complimentary move that add to what we have. We will buy good companies and my preference is to buy more early cycle type of businesses to also shift the centre of the cyclicality of ABB more towards mid and early cycle.
Q: Speaking of areas of opportunity for future and I ask you this in the context of what was going on in 2009 when people said that you should go away from the robotics business because it was a loss making business at that point in time and today it is delivering for you. So, future areas of opportunity and what would that mean in terms of reallocation of capital as far as ABB is concerned?
A: The robotics example shows very nicely how our leadership with a steady hand can develop value over time. At a time when we were in trouble in robotics everybody said let us divest robotics, get rid of it. We transformed the business and today, it is one of our rockstars in the portfolio.
You will see us doing that with the other business as well. We are forming to make sure we think through how we keep this business in the number one position in ten years time from a technology basis, from an end market basis from a business model basis and from an ownership basis. We look at all the options, we are working them through and we will come out with an ever stronger way of how we will run this business in the future.
That is my main areas as a CEO to ensure that we are using the value creation opportunities in ABB. We don't get nervous about it. We have got a steady hand in running the company especially in difficult times and we will execute the plans as soon as they are decided.
Q: What do you feel you are most nervous about today and which verticals would you feel most nervous about today and which verticals would you feel most nervous about. I would think the obvious one is oil and gas because we are unlikely to see a pick up as far as prices are concerned but beyond that what would make you nervous and what are the red flags that you are watching out for on your dashboard?
A: If I look what is the most important element to drive success for ABB it is people. We need to make sure that the people that we have in ABB we treat in the appropriate way, we need to give them an exciting task, we need to take them with us in the transformation agenda that we have. Mobilising them is one of the key task of a leader and I have to say - for example in India having spent now a lot of time with the team here and over the weekend in China our teams are really driving this transformation with a very active role.
But we need to make sure that we have in the future appropriate amount of skilled people in ABB to help us to drive the growth. We will now look at the competitiveness of ABB, we are there but if we look at the situation in the labour market it will be key to get the formula right to attract, retain and develop the best people in the world. If you get that done then I am not so worried about the future of the company.
Q: I ask you about India again because you were talking about your export aspirations about converting India into an export hub for ABB. When we talk to CEOs in India and of course talk to global CEOs as well there are concerns about transaction cost, there are concerns about whether we will finally see the Goods and Services Tax (GST) come into play. Of course the obvious infrastructure deficit concerns continue. But you are not finding that as being a deterrent as far as being able to grow your India business specifically from an export point of view?
A: Any action of the government that lightens up the burden that we have in any country that we work on a relative base compared to other countries we will attract investments from ABB. That is very clear. Now, what we have done in India is we have built a very stable platform. We didn't have that 20 years ago in terms of manufacturing we have it today.
The team has done a fantastic job. We see Prime Minister Modi and his team having the right ambition and I welcome any action that drives the transmission belt into concrete actions stronger in the future. There are opportunities for India to further improve to support, to businesses and make ease of business a key element of agenda.
We are working with the government with our own suggestions. This morning we had a couple of ministers and I would like to see the right momentum in these improvements.
Q: Before I end let me ask you this. Given the opportunities that you see here in India and given the global demand environment where would India stand as far as the pecking order is concerned. Would it be in your top three markets and I am not just talking about the emerging market basket at this point in time but where would India figure as far as contribution to ABB's global revenues are concerned?
A: India is definitely on the radar screen as one of the top opportunities for ABB. We have an action that I have just announced putting our Chief Technology Officer (CTO) in India we are sending a very strong signal.
Bazmi Hussain who has had a very rich career in ABB in a mix between research and development and business leadership roles. He is currently our head of India, he will take on the global responsibility for technology in a technology leader like ABB I don't think it could send a stronger signal what role India will play in the future.