Zurich/Paris: Swiss engineering company ABB and French peer Schneider Electric forecast more emerging market demand for power infrastructure in 2011, with the latter looking less vulnerable to competition in Asia.
The companies aim to meet Asia’s growing power consumption by supplying transformers and distribution equipment. They expect utilities in the region to raise infrastructure spending on schemes such as smart grids and energy efficiency. But whereas Schneider on Thursday reported a 21% growth in Asian sales—making up a quarter of its revenues — ABB saw only 5% sales growth in the region due to its larger presence in the competitive Chinese market.
“Both are quite strong in emerging markets but Schneider is more diversified, while ABB is more exposed to large utility spending and the Chinese market, where it faces competition from Siemens and Alstom,” ING analyst Axel Funhoff said.
Shares in ABB were down 1.6% to €22.82 at 1151 GMT, underperforming both Schneider, which was up 2.8 % to €118.2 , and the STOXX Europe 600 Industrial Goods & Services index, which was down 0.4 %. ABB posted fourth-quarter net income of $700 million, versus $695 million forecast in a Reuters poll.
Schneider said its 2010 earnings before interest, tax and amortisation (Ebita) rose 51 % to €3.05 billion, versus €2.73 billion seen by analysts in a Reuters poll Schneider said it was targeting organic sales growth of 6 to 9 % in 2011 and a core operating margin of 15 to 15.5 %. This compares to 14.5 % on a pro-forma basis.
ABB and German rival Siemens, who are top suppliers of transformers and distribution equipment to China’s power generation industry, have taken a battering from local competitors, and ABB said the pressure was not off yet.
Schneider, which is less bullish on Chinese power, has managed to better protect its returns, such as the low voltage segment, where ABB’s operational margin fell to 15.8 %in the fourth quarter from 20.6 %the previous quarter. To counter margin pressure, ABB announced $1 billion of cost savings as it warned a price squeeze was set to continue. Schneider expects about €400 million in savings in 2011.
“I do think we’re at a turning point in our power businesses,” ABB chief executive Joe Hogan said in an interview with CNBC television.
“We’re been able to mitigate a lot of the competitive constraints out there with the right kind of cost takeout,” he said. “We think that as capex comes back in utilities you’ll see that business come back pretty well.”
Schneider said raw material costs of around €250 million in 2011 would be partly offset by price rises of 1 %. Industrial goods suppliers are particularly vulnerable to swings in raw material costs. The prices of steel, copper and aluminum—key components in many products —have risen in the past three months. Copper, used in cables, wires and various electrical products, has risen the most, jumping more than 15 %.
Both companies said acquisitions were a priority in 2011 as they sought to solidify their position in emerging markets and fill in gaps in their existing lines of business. ABB has plenty of firepower available. It had net cash of $6.4 billion at the end of the fourth quarter after buying US industrial motors firm Baldor Electric for $3.1 billion in November to boost its automation portfolio. In October, Schneider paid €265 million for a 50 % stake in Russia’s Electroshield-TM Samara, which is active in oil and gas, power generation and industries that use large amounts of electricity.
The acquisition will boost Schneider’s share of revenues from developing economies, which are already at 37 %.