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ABB : Bets Simplified Structure Will Cut Costs, Boost Profit

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01/09/2019 | 06:22pm EDT

By Tatyana Shumsky

Industrial giant ABB Ltd. is putting more power in the hands of its business leaders and reducing head count at its corporate office in a bid to boost its profit margin and cut $500 million a year in costs.

ABB in December sold its power-grid unit to Japan's Hitachi Ltd. in a deal that values the unit at $11 billion. ABB also announced it would scrap country and regional structures across its remaining business lines -- electrification, industrial automation, robotics and discrete automation and motion.

As part of the restructuring, the Swiss conglomerate gave business unit leaders ownership of products, functions, research and technology and territories. By placing control in the hands of business-unit leaders, the thinking goes, decision-making will become more nimble due to minimized corporate interference and the elimination of duplicative functions.

"We're going towards a fully global entrepreneur model," Chief Executive Ulrich Spiesshofer told CFO Journal on Wednesday. "That's really a massive, massive change to the operational DNA of ABB."

For decades, ABB's country-level and regional managers were responsible for profit and loss. That approach put ground-level focus on optimization, but it also precluded taking a global view on the business, Mr. Spiesshofer said.

"We want to have absolutely clear responsibilities," he said. "People need to own a business and they need to have global, undiluted responsibility to run their businesses, set priorities and really make sure you're lined up against competition."

Staff at ABB's headquarters, already halved during Mr. Spiesshofer's tenure, will be reduced further as part of the restructuring. More cuts are likely as the company roots out duplicative activities across its country-level offices, he said.

ABB hopes to retrain and redistribute many of those employees into open positions throughout the company, Mr. Spiesshofer said.

It costs ABB roughly EUR100,000 ($115,450) to lay off an employee in Germany, compared with about EUR35,000 to retrain them, Mr. Spiesshofer said.

Analysts and investors have largely welcomed ABB's moves, in part because the industrial giant plans to redistribute its net cash proceeds of roughly $7.6 billion to investors through a stock buyback once the first stage of the Hitachi transaction closes in the first half of 2020.

"Management's commitment to redistribute the cash proceeds to shareholders should come as a major relief for those who were concerned about potential reinvestment risks," analysts at Deutsche Bank AG said in a recent note to investors.

Lars Förberg, co-founder of activist investment fund Cevian Capital and member of ABB's board, said focusing ABB's portfolio on digital industries was key. "Further simplifying the business creates a better company and a strong basis for long-term growth," he said in a statement in last month.

Since 2016, ABB has invested roughly EUR100 million a year on a companywide digital platform, which includes its data analytics and artificial-intelligence capabilities, Mr. Spiesshofer said.

The platform, overseen by ABB's chief digital officer, gives each business unit access to computing and analytics resources without single-handedly shouldering the cost of developing and maintaining the infrastructure.

"When you do remote condition monitoring on hundreds of thousands of robots, when you do that on motors, when you do it on buildings, all from the same platform, you get completely different leverage of your cost to serve than any of the focused competitors," he said.

Write to Tatyana Shumsky at tatyana.shumsky@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
ABB LTD 0.29% 19.25 Delayed Quote.2.67%
ABB LTD 0.68% 183.9 Delayed Quote.7.03%
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Financials ($)
Sales 2019 28 829 M
EBIT 2019 2 821 M
Net income 2019 1 726 M
Debt 2019 5 205 M
Yield 2019 4,11%
P/E ratio 2019 22,10
P/E ratio 2020 13,47
EV / Sales 2019 1,63x
EV / Sales 2020 1,54x
Capitalization 41 762 M
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Technical analysis trends ABB LTD
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Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 22
Average target price 22,7 $
Spread / Average Target 17%
EPS Revisions
Ulrich Spiesshofer President & Chief Executive Officer
Peter R. Voser Chairman
Timo J. Ihamuotila Chief Financial Officer
Jacob Wallenberg Vice Chairman
Matti Juhani Alahuhta Independent Non-Executive Director
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