Haunted by ‘Sell’ SKF CEO Wants Respect for $100 Billion Market

(Bloomberg) -- Bearings make the wheels of industry turn, computers run, fidget spinners whiz and wind turbines spin. But they are just another commodity to many analysts, who won’t hesitate to slap a “sell” rating on the industry’s biggest producer.

That painful reality has Alrik Danielson on a mission. As chief executive officer at SKF AB, the world’s largest maker bearings, he has delivered record profits, lowered costs and cut the company’s debt level in half.

SKF now wants to break down the notion that just anyone can play a part in a global market valued by Grand View Research at $102 billion. His company is creating the next generation of interactive bearings, ensuring that they help minimize the risk of costly production breakdowns and save energy and improve performance.

“Bearings are highly differentiated products,” Danielson said in an interview at the company’s headquarters in Gothenburg, Sweden. “They are becoming increasingly critical, and I think that’s contrary to what many people believe.”

SKF by most measures had a good 2018. Sales grew 10 percent and the company finally surpassed a 12 percent operating margin target set back in 2016. Still, spooked by the escalating trade war and fears of a global economic slowdown, the shares have slumped in the past year and now trade below the level they were at when Danielson took over in early 2015.

Danielson has also divested businesses, such as a linear-actuator business that was sold for $314 million last year, to focus on components that facilitate rotation in machinery.

Investors and analysts are far from convinced. Amid concerns over mounting competition from Chinese producers, less demand from electric vehicles and economic concerns, more than 40 percent of analysts covering the company recommend investors sell the stock.

One of them is Credit Suisse Group AG analyst Andre Kukhnin, who says that while bearings are more complex than the most crude metal components, the machines used to make them with quality and precision are accessible to a wide range of competitors.

“I’m not doubting that a bearing is a highly engineered, mission-critical device, but the technology has worked against them in that it’s become available to everyone,” he said in a phone interview.

To Kukhnin, investing in SKF is more about timing. And right now -- after two years when the company has ramped up inventories to meet surging demand -- is not the right time to own the stock, he said.

“To me when the stock really works is on the inflection points, when demand has been bad and is about to improve,” Kukhnin said. “There’s a lack of a company-specific story with SKF.”

But Danielson is keen to tell a story on how SKF will combine its expertise with new technology to provide new services and new business models. Fitting bearings with sensors “creates totally new opportunities” and could pave the way for a fee-based system where companies pay for uptime rather than per unit, he said.

SKF has already delivered 4 million connected bearings that enable monitoring to predict problems before they occur, avoiding breakdowns and making it possible to take bearings out of use and recycling them before they are too worn. 1.5 million of the bearings are connected to the company’s digital service centers, where data is analyzed.

Kukhnin said SKF’s idea of incorporating their software, data and expertise into broader industrial Internet-of-things platforms such as Siemens AG’s MindSphere or ABB Ltd.’s Ability is “the right way to go with this.”

SKF isn’t the only bearings maker frustrated by the dismissive attitude of their product. To prove a point about the importance of high-quality bearings in reducing friction and improve performance, Japanese competitor NSK has made a $157 fidget spinner that whirs for a record-breaking 12 minutes.

But the signs of struggle are clear. Germany’s Schaeffler AG this month abandoned long-standing earnings targets and began an overhaul to shift focus to electric and self-driving technology. Almost a third of SKF’s bearings go to the auto industry, and Danielson often gets the question how the shift to electric cars with fewer bearings will impact his business.

“My answer is that it’s positive, and the potential loss is so small, and in factories that can make other things, that it’s a non-issue for SKF,” Danielson said. “Unless it happens over night, it’s not a big deal.”

To contact the reporter on this story: Niclas Rolander in Stockholm at nrolander@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Jonas Bergman, Niklas Magnusson

©2019 Bloomberg L.P.