GIMO, Sweden (Reuters) - Swedish Sandvik’s Machining Solutions business, the world’s top maker of metal cutting tools, needs to make its production more flexible and boost product development to stay ahead of growing competition, its top executive said.
With a 20 percent share, SMS leads the 22 billion dollar global metal cutting tools market, followed by Berkshire Hathaway’s Iscar and U.S. Kennametal.
But the unit, which makes tools used in the aerospace, car, oil and gas industries, was hit hard by the financial crisis when industrial demand slumped, and narrowly escaped a loss in 2009. Now, with Iscar catching up, Asian competitors muscling in and overall demand still weak, it is under pressure.
“We have to be mentally prepared to need to be extremely good in everything we do. You don’t get much for free anymore,” said Jonas Gustavsson, president of SMS for a little over a year.
Gustavsson is seen as a rising star in Sandvik’s management after doubling underlying profit margins at its struggling specialty steels unit Materials Technology (SMT) in 2012.
“SMT is an underdog and we had an incredibly clear mandate. Either you fix this or we will have to look at if we are going to keep it,” Gustavsson told Reuters in an interview at the Gimo works, SMS’ largest production plant a few hours north of Stockholm.
By contrast SMS, Sandvik’s most profitable unit by far and for years its main cash cow, generates a third of group sales.
For Gustavsson the challenge now is: “to turn something good into something even better,” he said.
SMS, under Gustavsson, is rolling out productivity improvement programs at its sites, closing factories and reallocating products for production elsewhere.
It has also expanded its portfolio to include new, longer-wearing products and has entered the highly competitive but faster growing mid-market segment, big in China and India, where it sells cheaper and less sophisticated products.
Gustavsson said SMS was putting into practice lessons learned from the tough period during the financial crisis, such as inventory management and production flexibility, using time banks and running shorter production series at times.
“One thing I have learned is that no matter how good our products are and how successful we are in marketing, positioning and branding, you’ve got to have a world class production and supply structure,” said Gustavsson.
“Being overstocked can be very painful. Now we have a much tighter connection between our assessments far out in the market all the way back to production,” he said.
Sandvik, which also makes products from mining and construction gear to tubes for oil and gas, launched a massive efficiency program in 2011 to step up growth as well as saving several billion crowns through staff cuts and factory closures.
But results so far have failed to please investors, putting pressure on Gustavsson and his executive colleagues to come up with the goods soon.
Sandvik had a core operating margin of 12.3 percent last year, down from 13.3 in 2010, the year before current CEO Olof Faxander took the helm. While stronger than the group average, SMS has also seen its margin dip, easing to 18.2 percent from 19.0, burdened by restructuring costs and currency headwinds.
Sandvik shares are down 23 percent in the past three years compared to a 23 percent rise in the STOXX Europe 600 Industrial Goods and Services index in the same period.
“I think all of us at Sandvik are terribly keen to see some of all these actions that we have initiated achieving their full effect,” said 46-year-old
Reporting by Johannes Hellstrom; Editing by Sophie Walker