SKF Cuts 2,500 Jobs to Reduce Costs Amid Weakening Demand

SKF AB, the world’s largest maker of bearings, will cut about 2,500 jobs and move production from western Europe to faster-growing countries to help save 3 billion kronor ($464 million) and offset flagging demand.

“Demand weakened as we went through the fourth quarter and we expect it to continue at this lower level at the beginning of this year,” Chief Executive Officer Tom Johnstone said in a statement. “Manufacturing was therefore reduced more than planned to reflect this.”

The cornerstones of the program include the transfer of production from western Europe to eastern Europe, Asia and Latin America to serve those markets with more local production and a reduction in purchasing costs, mainly through supplier standardization and rationalization, Gothenburg-Sweden based SKF said. The total cost of 1.5 billion kronor for the program will be booked between 2012 and 2015, the company said.

SKF is a barometer for global industrial demand as its products are used by customers in the construction, automotive and aviation businesses. SKF on June 13 announced a cut of 400 jobs in Germany due to weaker development in western Europe and Asia. Third-quarter net income declined to 1.23 billion kronor from 1.6 billion kronor a year earlier while the margin on earnings before interest and taxes declined to 12.4 percent from 15 percent, the company said Oct. 17.

Voluntary Solutions

The stock rose 0.4 percent to 162.90 kronor as of 1:15 p.m. in Stockholm, valuing the company at 74.2 billion kronor. The shares have added 7.5 percent over the last 12 months, compared with a 12 percent increase in the OMX Stockholm 30 Index.

The new cuts are an expansion of a program unveiled in October 2010 when SKF, which now employs about 46,000 people, set new financial targets, including a goal of reaching an operating margin of 15 percent and reducing fixed costs. The main focus of the reductions will be in early retirements and other voluntary solutions, the company said today. The restructuring is necessary if SKF is to achieve its margin target again, Nordea Bank analyst Andreas Koski said today in a note to clients.

Exceptional Productivity

“In 2010 to 2011 when the Ebit margin exceeded 15 percent in some quarters, it was due to exceptional productivity that is not expected to be repeated with the current structure of SKF,” he said. “But with today’s announced savings, it could become a reality again.”

Demand for the industrial part of the company’s business weakened in Europe, North America and Asia, while automotive demand faltered in Europe, spokeswoman Ingalill Oestman said by phone. The production shift may involve closing down entire plants or just moving some manufacturing, Oestman said. SKF may also opt to sell some businesses, she said. The company will disclose which units are affected after talking to employees first.

SKF will book restructuring costs of 200 million kronor in the fourth quarter and book 100 million kronor in impairments and writedowns of assets. In a first step, some 550 people will be affected, mainly in the Ukraine, Italy, Sweden and the U.S., SKF said.

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