With demand for transport equipment dependent on economic growth, the outlook in many of Scania‘s markets is not good, but should brighten in the longer term. Based on economic recovery in Europe and continued growth in emerging markets, the company is preparing for production capacity of 150,000 vehicles per year at existing facilities and expansion of its service business. The company sees a greater focus on reduced environmental impact increasing demand for efficient logistics – and therefore its products and services.
At the recent 2012 IAA Commercial Vehicles show in Hanover, Germany, Automotive World spoke to Martin Lundstedt, who assumed the role of President and Chief Executive on 1 September.
AutomotiveWorld: How much optimism is practical at the moment, given the situation in Europe and the high cost of Euro VI compliance?
Martin Lundstedt: I’m a glass half-full guy, but we need to be realistic about European growth in the coming years. The economy has structural issues to deal with and, given the strong correlation between GDP and transport needs, we can only sit and hope that the market situation soon improves. That said, there are still medium-term mechanisms in the transport business that can offset a little of the pessimism.
We had quite high levels of renewals in 2006-2008, and the market has never really returned to those levels. The fleet is ageing, approaching the age when the operating cash flow gets too high for customers and there will be a natural offset. How big that will be in relation to the general economy is difficult to judge.
At Scania, we have high levels of volume flexibility and are not building order books. We’re making the orders very customised and are not producing to stock, the worst thing you can do. And that’s how we live with reality.
I can also say that some customers are working in industries where demand for Euro VI-compliant engines is coming. It’s in retail and in other sectors where demand comes from the logistics buyers. If there were also incentives programmes, it would be an opportunity for Scania.
Our position is unique, since we started shipping Euro VI vehicles 18 months ago and already have vehicles that have run up to 700,000km with customers taking their second and their third deliveries, repeat orders.
AW: What pressure is there from Volkswagen Group for Scania to work more closely with MAN?
ML: Volkswagen has been Scania’s main shareholder since 2000, so it’s a long relationship and VW is strongly supporting Scania’s strategy when it comes to product portfolio, investment levels and our future strategy. We have the same way of thinking when it comes to the long-term development of our industrial solutions. Volkswagen is a completely natural part of our board and how we operate, and they support the Scania culture, how we have developed and how we’ll move forward.
MAN is a new member of Volkswagen Group, and we have that we always need to look at the unique value the Scania brand brings for our customers. When we find things that add value for customers, and when there could be a mutual benefit in co-operation projects, we will do so.
It is normal in business to co-operate on projects and to build mutual benefits. We have partnerships on the sales side in different countries and we have partnerships with Cummins on our injection system. We have identified some projects where we will look at our resources. There are certain technical areas in our application and engineering where we think there could be a mutual benefit.
AW: In the past, Scania has made much of the fact its R&D takes place right next to the production line. Is that likely to change?
ML: Over the last 12 years, when we have had Volkswagen as the main owner, we have never invested more in research and development in Sweden. I’m not saying we will not take advantage of Volkswagen Group’s extensive base research in areas that are important for our industry, such as electricity, battery technology, or other important future technology areas.
The capital cost of a truck these days is around 8-10%. Putting development and production closer together is making the European transport sector by far the most efficient in the world. Still, we know that if we are looking at the total value chain of logistics in Europe, we can gain another 20% or 30%. It’s not easy, because it’s split between the logistics buyer, the transport company, and the traditional manufacturers. We belong to this last category, although we don’t see ourselves as the manufacturer, but as an integrated part of the transport solution value chain.
It’s a long answer, but it’s important to have application engineering, powertrain and connected truck developments close to your customer’s operations. When it comes to ergonomics, it’s important for it to be close to your industrial footprint.
AW: Perhaps three decades ago, horsepower rating was virtually the only consideration; then came emissions levels and the different aftertreatment and combustion technologies. How will you manage even greater powertrain diversity: through hybrids and natural gas engines?
ML: We believe that diversity must exist. For us, hybrids are not a substitute to renewable fuels. You can hybridise any powertrain, but the benefit depends on the usage. If it’s a city bus, you could achieve 25-30%; in a distribution truck, 5-7% is a possibility. We need to see the complete value chain.
We have ethanol and biogas engines that are also now Euro VI-compliant and we have been successful in biodiesel. I believe that production of biogas and ethanol from waste will continue to develop and that could be done on a micro-scale. Our ability to adapt different powertrains to local needs is key: modularity is the name of the game.
AW: Will Scania’s absence from North America change under your leadership?
ML: We are in North America, but only for engine sales, selling through bigger OEMs there. We have been very successful in power generation and marine applications, but as emissions levels have changed, we have received opportunities. We have some big contracts with construction equipment manufacturers. We don’t say never, but we have no concrete plans because of the capacity situation and because of the need for access to service networks.
AW: North America must also be much less attractive right now because of the growth in markets like India and China?
ML: What’s interesting about China is that it is, depending on how you measure it, a 600-700,000 unit market, but once the logistics infrastructure is up to standard, the market will be around 300,000. When the market matures and can afford higher efficiency, it will drive demand for higher mileage and higher uptime that will play in our direction.
The name of the game for us in China and India is to be part of segments that have that business logic from the start, where there are just-in-time flows: mining, petrochemicals, and city buses to some extent too. It’s the approach we took in Brazil, Russia and Turkey. It’s the same growth model that we took in Sweden and Europe even.
AW: How do you plan to grow your business with existing customers?
ML: Customers are asking for more services: repair and maintenance, site operations, driver training. Ecolution is one such approach. We look through the value chain with transport companies and big retailers. In the past, the business model involved outsourced drivers and low-spec vehicles, but it’s no longer working. In 2000, the logistics cost for retail was 4% of their topline, and today it’s more like 8%. We work together to find gains in driver training, maintenance and fuel economy, and look for ways to share to share the benefit.
