Asia To Be The High Growth Region For Freudenberg

 

Freudenberg, a global technology group, strengthens its customers and society through forward-looking innovations. Together with its partners, customers and the world of science, the company develops leading-edge technologies, and excellent products, solutions and services for more than 30 market segments, including automotive. Its tagline is ‘Innovating Together.’ Between 2013 and 2017 the company doubled its investment in R&D to have more innovative products. Asia is considered as the high growth region of the world for at least the coming one or two decades. “We believe in the potential of Asia, including India. The share in our revenue from the region will rise by a couple of percentage points, from the current 20 percent, in the next two to three years. In the long-term we want a third of our total sales to be from Asia,” Mohsen Sohi, CEO, Freudenberg Group, told T Murrali of AutoParts Asia in an exclusive interview. The excerpts:

Q: You had significant revenue growth in 2017 after acquiring Vibracoustics in 2016. Which are the industry segments this acquisition helped Freudenberg to enter?

A: Vibracoustics was a 50:50 joint  venture between Freudenberg and Trelleborg. We acquired the other 50 percent as Vibracoustics is the leader in its market segment (in terms of market share, technology, product portfolio, with a global footprint in every region of the world) for vibration and control products for automotive and light trucks.

Q: Did it give you the opportunity to enter the commercial vehicle segment in a big way?

A: Yes, but that was not the main driver. It was because we wanted to have Vibracoustics as it gave us a lot of flexibility to develop our business further.

Q: Freudenberg has invested in innovation and on research and development activities €427.8 million (previous year €335.1 million). Why do you make such huge investments?

A: Our tagline is ‘Innovating Together.’ In our judgement, for Freudenberg to stay successful in the long-term, it has to be based on innovation and technology. We want to be efficient and cost-effective but that will not be enough for us to be successful in the marketplace. Though we were spending a healthy amount on R&D we decided to strategically increase that. Between 2013 and 2017 we doubled the amount invested in R&D; it was the company’s long-term commitment as our survival is based on R&D and having more and more innovative products.

Q: About one third of your revenue was from sales of products introduced less than four years ago. Do you make your own products obsolete or does the industry in which you are
operating do that?

A: I would say that this statement is true most of the time. The fact of the matter is that if we do not make our products obsolete, somebody else will. There are cases where we introduced a new product that was not there earlier. But several times we have introduced products that were better than the generation before and replaced them. We have to do that to stay successful otherwise our competitors will.

Q: How do you decide to make a product obsolete? Does the drive come from outside or from within?

A: It comes from having a close relationship with our customers. The customers know exactly what they need, and we can engineer it with them. Many times, we have gone to the customers with a completely new idea and told them that if it is integrated into their product it would have a revolutionary effect in terms of performance; they would accept our solution and test it. We always strive to give our customers the very best of solutions based on our continuous innovation.

Q: You mentioned, “Our sustained high earnings power is a result of the consistent action taken to improve productivity and efficiency.” Can you elaborate?

A: The basic philosophy is that we have to put our resources in the areas that benefit our customers the most. A product, services and manufacturing company like Freudenberg makes sufficient investments in innovation and technology to produce high quality products; that’s what attracts customers as they see the likely benefits to themselves. We also want to be very competent in some of the back-office operations that are complementary to all these to ensure high levels of innovation and technology. That’s why our motto: ‘More innovation, Less Administration.’

Q: Does it also enhance process capabilities at your manufacturing facilities across the world?

A: Yes absolutely, that is an integral part of it with digitalisation playing a prominent role in making our processes more efficient in the speed of production. A lot of investment goes into our factory as innovation backed by relevant software tools is extremely necessary to keep improving the quality of our products as also timely deliveries to customers.

Q: To expand innovative strength, Freudenberg continues to advance its material, process and systems expertise with technology platforms; could you elaborate?

A: One of the basic technology competencies that we have is in polymeric materials for interface in terms of lubrication and developing of release agents. We believe that ‘Material Science’ is one of the basic foundations of our success and we continue to invest in that.
We have selected some specific areas that we call technology platforms; for example, non-wovens for sealing technology, friction science and so on. These are the areas where, if we invest, many of our businesses would benefit. This concept is not only within each business group but also in our corporate R&D centre at Weinheim, Germany.

Q: It is said that six core themes: materials, waste, energy, emissions, water and health are the most important factors for the group. What do they mean for your customers and other stakeholders?

A: We started three years ago and want to make it more systematic. After some benchmarking and internal discussions, we decided that the way we look at sustainability falls into two areas. One is the processes and resources we use internally; what footprints do we leave in creating our products. Obviously, we want to reduce the footprints that affects the environment. On the other hand, through the products and services we provide to customers, we can help them make their products more efficient and sustainable. We call that our handprint. We want to minimise our footprint as far as negativity is concerned and maximise our handprint in the solutions we provide to customers to make their products sustainable.

Q: Does this form part of Freudenberg’s USP to convince customers?

A: Exactly; as far as the footprint is concerned we have selected three KPIs (key performance indicators); one is material efficiency – minimise the wastage of material used in manufacture, try to bring it to zero. The second is energy efficiency and the third emissions. We have started tracking these three KPIs group-wise to try and reduce negativity every year.

Q: The current trend is to use Artificial Intelligence, Internet of Things and other technologies to manage customer demand. Won’t these disruptive technologies be counter-productive to your focus?

A: I don’t see them as being counterproductive. For example, we use polymeric material in the moulding processes in some of our business groups. Through digitalisation we have improved those processes and brought in innovative moulding technologies called ‘Netmold’ where 99 percent of the material goes into the end-product and wastage is minimal.

Q: What are your plans to tap the untapped industry segments?

A: We did an interesting project called Odyssey. The goal of this project was to look beyond the normal strategic planning horizon. Normally we look 10-15 years into the future to understand the likely megatrends and based on that we develop our strategy. In Odyssey we looked beyond that to the year 2050 and assumed that there would be 80 percent less use of fossil fuels as a source of energy. We went through a systematic process called ‘scenario analysis’ and came up with some interesting theories as to how the world would look like and from there identified the market segments that would be of interest to Freudenberg in the future. Take for example sensors; to process the massive amount of data digitally available then, you will have to rely on sensors. So, we forecast that the sensor market segment at that time would be of prime importance for us. We have identified about a dozen market segments that we will work on either through acquisitions or internal investments for Freudenberg to be successful in the future.

Q: With Freudenberg’s focus on occupational safety the negative trend reported for 2016 was reversed. Last year the LDIFR was 1.4 against 1.8 in the previous year. Could you explain how the group achieved this?

A: LDIFR, Lost Day Incident Frequency Rate, measures all incidents at work involving at least one day’s absence per million working hours. After 2016 when you look at the industrial data and compare it with other companies, our achieving 1.8 was good, but we were not happy with ourselves because we were reducing the number every year but in 2016 it increased. So, we undertook a significant global initiative to sensitise all our factory managers and site executives on some of the fundamentals of safety. Wherever we saw deficiency in the additional technology solutions we could offer in terms of sensors, laser curtains and other technical measures, we corrected it immediately.
It was really a global ‘top-to-bottom, bottom-to-top’ initiative that brought in positive results.

Q: As part of this initiative do you consider the ‘near-miss’?

A: Yes. When you have a ‘near-miss’, on one hand you are happy that the accident did not happen; but it could have happened. We look at it seriously and take action to eliminate the root cause to make sure we don’t get into a situation like that again.

Q: How is the rate of ‘near-miss’ coming down?

A: Through the ‘wide-eyes’ initiative where you want people to identify the things that could lead to an accident; we want them to report the ‘near-miss’ as soon as it happens. With this you can drive down the LDIFR matrix.

Q: Freudenberg claims that it has become more efficient and innovative, year-on-year; can you explain how? What are the key drivers for these results that improve the bottom-line?

A: Within each factory and business group we track the productivity matrix. As mentioned earlier, our model is ‘More Innovation, Less Administration.’ Between 2013 and 2017 we doubled our investment in innovation and in the same period reduced our administrative costs from 9.4 percent to 6.7 percent of revenue.

Q: Freudenberg plans to initiate investment projects with a total value of about €400 million in 2018. Could you give a break up on how much it would be in each region?

A: Of this amount about €93 million will be invested in North America, €179 million in Europe, €123 million in Asia and €7 million in the rest of the world. For India we have invested €15 million, on top of the €17 million that we invested in 2017.

Q: How will the changing landscape in the automotive segment, especially with electro mobility and autonomous driving gaining significance, influence Freudenberg’s performance in the next five years? What measures have you taken to tide over these issues? Do you see more opportunities with electro and shared mobility?

A: Our view is that electro mobility and autonomous driving will happen; there is no doubt about it, but how fast? Significant shift will not be in the next five years but between 2035 and 2040 at least a third of the vehicles would be electric, either plug-in hybrid, fully battery-driven and so on. Our approach is to be ready and support our customers regardless of the powertrain they have. Not only hybrids, we will also support fuel cell technology. With the electro-mobility comes new opportunity. If you are not ready to take it you will lose business. Freudenberg is well prepared on all fronts.

Q: Do you see sales from the Asian region growing, which is currently contributing about 20 percent to your total revenue?

A: Asia will be the high growth region of the world for at least the next decade or two. We believe in the potential of Asia including India.

Q: What kind of share are you expecting in the next three to four years?

A: I would expect it to rise by a couple of percentage points in the next two to three years. Over the long-term (10-15 years) we want our sales and profitability from Asia to be a third of our total sales.

Q: From which region do you see the maximum sales coming from, in the next five years?

A: The most growth will come from Asia but in terms of absolute value it would be a different story; Europe would still be the leader.

Q: What are the key drivers for this? Is it the growing population or the consumption pattern or something else?

A: It depends on the standard of living. If the Indian economy grows at seven percent a year, obviously it would bring about a lot of growth and increase in the standard of living.

Q: Any significant growth plan for the next five years?

A: What we would like to do, as we have done in the last few years, is to grow organically above the market rate in various regions. We will continue to make acquisitions in different parts of the world. I am optimistic of the future.

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