SKF to Cut Automotive Unit Costs in Bid to Reach Margin Goal

  • CEO says still reviewing existing goals for the company
  • Analysts predicting SKF will fall short of margin goal

SKF AB, the world’s largest bearings maker, said it will cut costs and improve profitability at its automotive business in a bid to achieve a longstanding group margin target of 15 percent.

“Turning the automotive division around is absolutely crucial,” Chief Executive Officer Alrik Danielson said in an interview at SKF’s capital markets day in Gothenburg, Sweden.

Analysts are unconvinced that SKF can reach the group target in the next few years, as cost cuts may not be enough to compensate for weaker demand and pricing pressure. The average estimate compiled by Bloomberg indicates an adjusted operating margin of 12.3 percent next year and 13 percent in 2017.

The company hasn’t been close to its target since 2011, when the margin excluding some items rose to 14.7 percent, driven by a sharp rebound after the global financial crisis. Since then, the company’s performance has been hampered by lower profitability at its automotive division, whose operating profit from sales of wheel and suspension bearings was 3.5 percent of sales last year.

Reviewing Goals

Danielson, who inherited financial targets from former CEO Tom Johnstone, said he is still reviewing the company-wide goals. “I reserve the right to think some more about what to communicate about the group,” he said, adding that until then, "we have the targets we have."

SKF, which produced the first Volvo car in 1927, said it will reduce the workforce in the automotive business by 10 percent compared with the end of last year to get margins to a new target of 8 percent.

Danielson, who assumed his post at the beginning of this year, has embarked on a major cost-cutting drive, aimed at saving 1.2 billion kronor ($140 million) by 2017. After last month reporting a lower-than-expected third-quarter profit amid slower demand from China and the U.S., the company said it would seek further cost reductions and cut production rates.

SKF makes bearings and seals that go into everything from dishwashers to aircraft, and the company’s results and forecasts are often seen as an important gauge for the health of global manufacturing.

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