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Electrolux uses motor industry ideas in productivity push

03/19/2015 | 10:06am EST

STOCKHOLM (Reuters) - After shifting much of its production to low-cost countries, Electrolux (>> Electrolux AB) is using motor industry ideas to cut costs and give it the flexibility to succeed in a fiercely competitive home appliances business.

STOCKHOLM (Reuters) - After shifting much of its production to low-cost countries, Electrolux (>> Electrolux AB) is using motor industry ideas to cut costs and give it the flexibility to succeed in a fiercely competitive home appliances business.

The Swedish group has called an end to major plant moves out of Europe and North America. Now it says it is comfortable with making 30 percent of its washing machines, fridges and ovens in higher cost countries, provided a productivity push succeeds in ensuring plants there remain competitive.

This strategy, coupled with smarter R&D and a push up market such as into kitchens for the "foodie" followers of celebrity chefs, has raised expectations that Electrolux has found an exit from the commoditisation trap - making only cheap products that consumers struggle to distinguish from rivals' offerings.

American CEO Keith McLoughlin is using modularisation, a motor industry technique that has come late to home appliances, and Electrolux has recruited from the likes of Volkswagen AG.

"This is a concept in automotive that has been going on for a while," said McLoughlin, a graduate of the U.S military academy at West Point who was the first member of his working class Irish-American family to go to college.

"We hired the lead people from Volkswagen around modularisation, and that source of getting the global operations productivity is a very important part of where we are today."

Modularisation aims to reduce complexity, allowing manufacturers to raise the number of components common to a range of products. This cuts purchasing and labour costs, while making product development easier and faster.

The trick is to make a greater variety of machines on the same production line and latch on to trends more quickly, persuading customers that what they buy is no commodity.

Electrolux, which makes appliances under brands such as Frigidaire and Zanussi as well as its own, has spent roughly 1 billion crowns ($115 million) per year in the past decade closing or moving 25 plants.

This has raised its output in low cost countries such as Thailand and Mexico to 70 percent of the total from 25, helping Electrolux - which is awaiting approval of a $3.3 billion acquisition of GE Appliances - to withstand Asian competition and industry overcapacity.


A leading figure in the strategy for competing with rivals such as Whirlpool (>> Whirlpool Corporation) of the United States and LG Electronics (>> LG Electronics Inc.) of South Korea, is Chief Operations Officer Jan Brockmann. During a decade at VW, the German engineer mastered the process of modularisation which car makers began using in the 1990s.

"He is the real rock star of the organisation," said Mathias Leijon, head of fundamental equities at Nordea Investment Management, which built a 4.5 percent Electrolux stake in 2014.

A few years into the first phase of the programme, Electrolux is close to saving 1.5 billion crowns annually on materials. It announced this year it would no longer report one-off costs, a sign that productivity is coming cheaper.

"In terms of improvement and taking advantage of our global scale, it is the key programme," Brockmann said.

A decade ago Electrolux had seven stove plants in Europe with separate product platforms, said Jonas Samuelson, head of major appliances in the region who also spent a decade in the motor industry with General Motors and Saab.

Now it has two plants and platforms, with oven cavities of the stoves aligned with its built-in ovens. Such productivity gains need to be maintained to keep high-cost plants in Europe viable. "That hinges on us succeeding with modularisation, with smart automation," Samuelson said.


In washing machines the group used to have 23 different "washing groups" - the drum and associated components - and is moving to 12 - but with varieties of products unchanged.

"What we want to do is also to enable innovation and the speed of innovation," Brockmann said, describing the example of adding steam functionality to ovens to meet demand from the growing body of cook-it-yourself gourmets.

He wants to modularise the steam component in Europe, North America and Brazil, so "we'll be faster also in delivering offers to the market".

Electrolux shares are up 80 percent in the past 12 months and trade at 20.6 times forecast 2015 earnings per share versus 17.3 for Whirlpool, which has gained almost 40 percent in the same period.

"The company is doing a lot right, and they have good management. But I do think the valuation at these levels is just a bit too stretched," said Christer Magnergard, analyst at DNB which has a sell recommendation on Electrolux.

Despite lacklustre markets outside North America, operating earnings rose 18 percent to 4.8 billion last year. But analysts expect the big improvement to happen over the coming two years.

Thomson Reuters mean analysts' expectations show earnings, excluding GE Appliances, hitting 6.9 billion crowns in 2016. This would be the highest level since Electrolux span off outdoor gear maker Husqvarna (>> Husqvarna AB) in 2006.

The next phase of the productivity push, due to begin this year, focuses on more common platforms, product architecture and automation.

The biggest benefits lie ahead, Samuelson said, sitting beside Electrolux's most pricy kitchen range for households, Grand Cuisine, which can cost 100,000 euros. "We still have a lot to harvest from phase one, and we will also get big benefits in terms of productivity that we haven't had before," he said.

(Reporting by Niklas Pollard; Editing by Alistair Scrutton and David Stamp)

By Niklas Pollard and Johannes Hellstrom

ę Reuters 2015
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EURO / BRAZILIAN REAL (EUR/BRL) -1.51% 6.2197 Delayed Quote.-0.68%
GENERAL ELECTRIC COMPANY -0.23% 102.78 Delayed Quote.8.91%
GENERAL MOTORS COMPANY 0.88% 59.2 Delayed Quote.0.27%
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LG ELECTRONICS INC. -1.78% 138000 End-of-day quote.0.00%
THE LEAD CO., INC. 2.60% 553 Delayed Quote.5.27%
VOLKSWAGEN AG 2.20% 194.64 Delayed Quote.7.35%
WHIRLPOOL CORPORATION 0.30% 211.74 Delayed Quote.-10.62%
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