ABB Starts To See Daylight

Its U.S. chief talks about how it is getting in on the global factory boom

On a car factory floor, ranks of welding robots hum and whir in a mesmerizing dance of sparks. It's the sort of industrial minuet that has not only helped make cars with fewer faults but also has eliminated some of the dreariest, most dangerous jobs on the factory floor. And it's the sort of technology that has kept Zurich-based ABB Ltd. (ABB ) at the vanguard of power and manufacturing technologies since 1883, when ABB's predecessor built Europe's first electrical infrastructure. Last year ABB -- which employs 102,000 worldwide -- sold more than $20.7 billion worth of industrial machines, engineering services, and heavy-duty electric power equipment in about 100 countries.

For all its technological prowess, ABB's global push hasn't gone quite like clockwork lately. The company's last profitable year was 2000. And the U.S. -- where ABB collects 17% of total sales and employs some 8,500 people in 32 states -- has been a particular drag. After 15 years in the U.S., ABB has yet to turn a profit. In 2004, amid a broad industrial recovery, U.S. orders surged by 20%, and revenues hit $3.5 billion. Yet lingering asbestos liabilities prevented earnings from climbing into the black.

Dinesh Paliwal has pledged to put an end to the red ink. A 20-year company veteran, India-born Paliwal was appointed president and CEO of ABB Inc. USA in January, 2004. He recently talked with Industries Editor Adam Aston in New York. An edited transcript follows:

We're in the midst of an industrial upsurge. Is this lifting ABB's prospects?

Yes, industrial demand has been strong over the past year and a half. So much so, in fact, that many manufacturers are running at or near capacity. That's good news for us. To boost capacity, they face a choice: Either spend a billion dollars and set up a new plant in the Middle East, China, or India, or look at existing plants here in North America and invest a couple hundred million dollars. In practice, productivity improvements at an upgraded plant can deliver capacity gains to meet the demand. It comes down to capital employed. In older plants, a lot of capital is already written off, so by putting in new money they get more bang for the buck.

High energy costs are hurting many manufacturers. How is this affecting ABB?

It's very much an oil-and-gas-driven economy right now. We have been surprised by how many inquiries we're getting on the upstream oil production side -- especially for facilities to handle liquefied natural gas to recapture and re-gasify LNG transported by ship. That has pushed the marine industry to an all-time high. The shipyards we work with -- in Germany, Norway, and Korea -- are all booked through 2008, mostly because of demand to build LNG carriers. There's also strong demand for vessels able to break ice in the Arctic Seas so energy companies can explore Arctic regions and move energy into and out of Siberia, where new gas fields are coming on line.

How do U.S.-based companies fit in?

We recently held a conference where top executives from Bechtel, Fluor (FLR ), NOVA Chemicals (NCX ), Dow (DOW ), Dupont (DD ), Shell, and others met with our senior management, including the group CEO Fred Kindle and myself. The message was the same across the board: It's clear that we're going to have oil nearer to $50 than $20 for a long time. Yet many of the oil companies' existing projects were designed to work at $20 per barrel. So at $50 they have a lot of profit and more flexibility to look at new projects -- such as new pipelines and developing new fields. It means a huge amount of capital expenditure is being mobilized for North America and the Gulf of Mexico.

What's the scale of these investments?

Picture an offshore well, one of those enormous platforms at sea packed with pipes and machines. On a new offshore platform, we'll supply the systems to generate power right there, using three or four big generators supplied by companies like Caterpillar (CAT ), fueled by the gas or oil coming up from the well. We also supply complete gasification systems, electric transformers and switch gears, large electrical drives, and other heavy-duty power equipment. Plus, we provide the control and safety systems and instrumentation used to measure the oil flow. Altogether, a single project like this could involve from $20 million to $100 million worth of ABB gear. And worldwide, around 80 new offshore wells are being built.

What about the auto sector, which is the main consumer of your industrial robots?

Robots are a highly cyclical business, driven mostly by carmakers. Every five years or so we'll see a flood of new car models hit the marketplace. If GM (GM ) launches new models, Ford (F ) tries to match them, along with everyone else. So our robot sales piggyback that cycle. Last year and this year new car model introductions rose. So we had a great 2004: We sold 10,000 robots globally, an all-time high, including 3,500 here in North America. This year, despite the bad news from GM and Ford, has been pretty strong, too.

How do you ride out the ups and downs of robot sales?

ABB is focusing more on robotics services. We're looking at the total life-cycle cost for robotic equipment, from sale and delivery through operations and maintenance to replacements and upgrades. Increasingly, we can service our robots remotely, where we diagnose and fix problems via wireless or Ethernet communications. And a robot's operating software -- its brains -- can be reprogrammed offline too.

And the hardware -- are robots getting more flexible?

We can refurbish hardware so that older robots can be redeployed. This might, for example, mean adding vision systems to older units, so that they can look at works in progress and perform more variable tasks. Older robots navigated solely using positioning information.

Another important recent innovation is multirobot work clusters. It's just like a team of basketball players controlled by a coach setting up a shot -- they have more flexibility than a single player. For example, one robot will hold a car frame and move it so the other robots can in turn weld components in place. No single robot can do this. We expect to achieve a 10% reduction in overall capital required to accomplish the same output.

What is ABB's outlook?

We're optimistic. Last year orders grew by 20%. This year for the first quarter, North America is ahead of the overall group, with order growth of 25%. But remember, even in rising business cycles, during good times, ABB in North America has never made money. That's my top challenge. It's one of those classic stories of how difficult it has been for European companies to manage North American operations.

How do you fix this?

My goal is to get all 12,000 of our North American staff to share one vision. I'm quite honest about these things. People can't be engaged to share a vision if they don't have a real picture of how good -- or bad -- we are doing. They need to trust their counterparts here in order to win trust from senior management in Europe. That's the missionary job I'm doing. The second part of my job is to bring Europe here. I have brought in executive management twice in the past year to North America. The third part of my strategy is to bring to North America key technologies and innovation, such as new developments in drives and robots, which have been designed and manufactured by European units in the past.

Back to energy. Don't high costs drive up your operating expenses?

Yes. But my view is that commodities prices have peaked -- they're as high as they can go. It's a tough environment. Even with hedging, we've been hit hard by energy prices. And also by rising raw materials prices such as steel, copper, and transformer oil. Another big price spike in energy prices would hurt energy-intensive manufacturing seriously -- such as steel, copper, aluminum, mining, chemicals. It could stop the current investment cycle dead in its tracks and really drive everyone in the wrong direction.

To learn how the CEO at industrial-tech giant Siemens is shaking things up, click here

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