Focused in digital industries
In times of rapid and unprecedented technological change, ABB is shaping itself to be even more agile and innovative in order to seize on new opportunities and remain competitive.
The combined impact of the Energy and Fourth Industrial Revolutions is profoundly influencing how we power the world, produce goods, work, live in cities and move in a sustainable way. ABB is taking action to focus, simplify and lead from a position of strength to drive leadership in digital industries.
Next Level strategy achievements
When ABB launched its Next Level strategy in 2014, it established the goal to be #1 or #2 in all its global businesses. By actively shaping and transforming itself, ABB built up its four market-leading divisions.
In addition to shifting ABB’s center of gravity toward leading positions in industry through active portfolio management, the company drove profitable growth momentum, made a quantum leap in digital with the introduction of ABB Ability™ digital solutions, achieved cost savings through its 1,000-day programs, and brought profitability and growth back to its Power Grids business.
The Next Level strategy helped make ABB a leaner, more market-focused organization, with better performance management and an improved compensation system. While making this transformation, ABB strengthened itself as a global brand that stands for writing the future as a pioneering technology leader, and delivered attractive cash returns of more than $12 billion to its shareholders.
The changing world
ABB achieved those milestones in a very challenging environment. Change is accelerating at an unprecedented rate. In the power sector, it is estimated that the implementation of global climate pledges will result in over $4 trillion of investment in new renewable energy generating capacity globally by 2030. In production, the world’s industrial value chains are undergoing transformation through digitalization – with connected devices set to soar, growing by 30 percent per annum between now and 2030.
Rapid advances in automation and robotics, as well as massive demographic shifts, are leading the world toward an era of autonomous operations, where factories, buildings, mines and ships are increasingly running themselves. Furthermore, the world’s population, particularly in Asia, continues to urbanize. Over 5 billion people are expected to be living in cities by 2030, a massive increase of more than 1 billion in just over 10 years.
Meanwhile, advances in technology, changing economics and climate concerns are driving electric mobility to fuel growth in the transport sector. It is estimated that 30 million electric vehicles could be sold in 2030, compared to 1.1 million in 2017 – representing compound annual growth of 30 percent.
Hand-in-hand with these strong secular growth drivers, the patterns of ABB’s customers have been diverging. In Power Grids, the rise of distributed generation of electricity has created a re-convergence between generation, transmission and distribution, while the division’s customer base, predominately utilities, is going through consolidation. Power Grids’ business success is increasingly influenced by access to large-scale financing capabilities, while the share of investment from state-owned enterprises is rising again, with major decisions being driven by government planning.
Meanwhile, ABB’s Electrification Products, Industrial Automation, and Robotics and Motion divisions have been experiencing a major increase in demand for digital solutions and services that add value to more traditional product and service offerings. Their industrial customer bases are increasingly diverse and expanding rapidly.
These global changes have necessitated the reshaping of ABB to drive attractive value creation.
First action: Focus of portfolio on digital industries
In its first action to stay competitive as a pioneering technology leader in this fast-changing world, ABB is focusing on digital industries and divesting its Power Grids business to Hitachi. The agreement to divest this market-leading global business, signed with Hitachi on December 17, 2018, positions ABB to focus on capturing exciting opportunities in digital industries and to create value for all stakeholders, while strengthening Power Grids under new ownership. Hitachi is a trusted and known partner for ABB, with a working relationship that has expanded successfully under the joint venture they formed in 2014.
ABB shareholders will benefit from the crystallization of the value created by the turnaround of the Power Grids division, with the transaction representing an enterprise value of $11 billion for 100 percent of the division, an implied 11.2 times EV to operational EBITA multiple before share of corporate cost. At closing, expected in the first half of 2020, Hitachi will acquire 80.1 percent of Power Grids. ABB will hold a 19.9 percent equity share in the new joint venture.
With the divestment of Power Grids, ABB finalizes its move away from large-scale infrastructure businesses and strengthens its focus on digital industries.
Second action: Simplification of business model and structure
ABB’s second action is to simplify its business model and structure and to empower its businesses, in a continuation of the journey that formed an integral part of the Next Level strategy. Before 2014, ABB’s business structure included eight regions and five divisions, all with their own P&Ls. With Next Level, the Group streamlined itself to four global P&Ls and three customer- and growth-oriented regions.
Now, ABB is fully eliminating the legacy matrix structure of regions and divisions. The Group is fully empowering its businesses with a simplified operating model, ensuring zero distance to customers and faster decision-making. Under the new structure, ABB businesses are directly responsible for all customer-facing activities – unlike the present model, where regions and global functions still create multiple interfaces for ABB with its customers.
While functional activities managed at the corporate or country level, including R&D and shared business services, are being devolved to the businesses, ABB’s corporate center itself is being streamlined and focused on Group strategy, portfolio and performance management, capital allocation, key common technologies, and the ABB Ability™ platform.
In this simplified, decentralized setup, ABB’s country and regional structure, including related Executive Committee roles, are being discontinued. Experienced, country-level resources will strengthen the teams of our businesses.
The implementation of these simplification actions on Group and business level is expected to deliver net cost reductions of $500 million annually in the medium term. The scale of this change is extraordinary for ABB, changing its fundamental operating pattern to rely on fully empowered, staffed and responsible businesses. The result will be a simplified business that can go to market with greater speed and agility, thereby strengthening growth and margins.
Third action: Shape four leading businesses aligned with customer patterns
ABB will continue to have a strong presence globally, well balanced across major geographies, and will continue to benefit from significant scale advantages and global reach, with approximately $29 billion in annualized revenues and around 110,000 employees.
The company’s markets are large and attractive, at $410 billion today, and expected to grow at an average of 3.5 to 4 percent per annum. By 2025, they will be one-third larger, at $550 billion. ABB will continue to focus on fast-growth segments, including software and digital solutions, EV charging, robotics, data centers, machine and factory automation.
ABB’s leading offering for digital industries combines electrification, automation and robotics, and digitalization solutions in a unique and truly differentiating way. Equipped with the Group’s established domain know-how, world-class engineering and technology, and the leading digital offering ABB Ability™, the new ABB will be the only company able to provide a platform as well as a complete set of solutions to digital industries.
From fulfilling electrification needs at any consumption point, to providing for all the automation and robotization needs of industry, including integrating leading-edge products and software solutions, ABB’s unique portfolio serves as a solid foundation for the Group’s competitive differentiation in already attractive markets.
To drive growth, ABB is shaping four customer-focused, entrepreneurial businesses, each ranked #1 or #2 in the markets they serve and each creating value for customers through tailored ABB Ability™ solutions that benefit from the synergy of a common ABB Ability™ digital platform.
Electrification – writing the future of safe, smart and sustainable electrification
The Electrification business will provide a complete portfolio of innovative products, digital solutions and services from substation to socket, pointing the way to a future of safe, smart and sustainable electrification. Leveraging its clear #2 market position, the business’ portfolio generates $13 billion in revenue, including the acquisition of GE Industrial Solutions. It sells to an addressable market of $160 billion, which is expected to grow at 3 percent per year.
Industrial Automation – writing the future of safe and smart operations
The Industrial Automation business serves customers in process and hybrid industries with its integrated automation solutions across process, electrical and motion, measurement and analytics as well as marine and turbocharging solutions that leverage its leading technologies including its #1 DCS (distributed control systems), broad digital portfolio, deep industry expertise, largest installed base and vast global footprint. With $7 billion in revenues, Industrial Automation is the global #2 in a $90 billion market that is projected to grow by 3 to 4 percent per year.
Motion – writing the future of smart motion
ABB’s newly created Motion business will provide customers with a comprehensive range of innovative, energy-efficient electrical motors, generators, drives and services, as well as integrated digital powertrain solutions. It will leverage economies of scale as the global #1 in its market, writing the future of smart motion. With revenues of $6 billion, Motion sells to an $80 billion market, which is growing at 3 percent per year.
Robotics & Discrete Automation – writing the future of flexible manufacturing and smart machines
Lastly, the Robotics & Discrete Automation business will combine ABB’s machine and factory automation business, mainly B&R, with the Group’s leading robotics platform. It will be uniquely positioned to capture the opportunities associated with the “Factory of the Future” by writing the future of flexible manufacturing and smart machinery. With $4 billion in revenue Robotics & Discrete Automation will be the second-largest player in an $80 billion market that will experience estimated annual growth of 6 to 7 percent.
ABB’s four new businesses are designed to enable the Group to write the future of digital industries. They have been shaped based on careful evaluation of changing customer patterns and on how ABB expects digital technologies and emerging innovations such as industrial artificial intelligence to play a major role in its markets in the future.
The Group’s aim is to continuously improve its customer offerings and its customer interfaces, in turn securing enhanced growth for ABB.
Each of the Group’s businesses offers a tailored suite of ABB Ability™ solutions that create value for customers and build on our common ABB Ability™ digital platform across all businesses. ABB will increasingly leverage emerging technologies, including industrial artificial intelligence, to satisfy growing demand for smart and connected devices and software solutions.
Delivering attractive growth
In simplifying ABB, the Group’s ambition is to be a leader focused in digital industries. At the same time, these actions will result in our business having a stronger commercial impact. A greater proportion of the Group’s portfolio will benefit from strong, secular growth drivers in attractive markets such as data centers, EV charging and robotics and factory automation, in turn driving growth for ABB. The reliability of earnings will improve as ABB’s offering to customers is marked by more digital solutions and is less impacted by volatility induced by large orders exposures. Moreover, ABB will capture more recurring revenue as it leverages its large installed base to provide more digital and service offerings.
While ABB initiated the shift in this direction through its Next Level strategy, the sweeping actions announced in 2018 will put the Group in a strong position to deliver profitable growth.
ABB’s new business model and simplified structure will provide sustainable efficiencies that support strong margins, delivering run-rate cost reductions of $500 million over the medium term. ABB will further optimize capital allocation, driving shareholder value through the right balance of organic investment, active portfolio management and attractive returns.
The Group has signaled its confidence in this strategy with its intention to maintain its dividend policy following the closing of the Power Grids transaction and aims to maintain its “single A” credit rating over the long term.
Through these fundamental actions, the new ABB will be well positioned as a pioneering technology leader in digital industries. The management and the board strongly believes that this path positions ABB well for the future and will materially enhance value for all stakeholders over the short, medium and long term. Together.
(1) Power Grids moved to discontinued operations starting in Q4 2018 until closing.