Investment in motion - Kagiso Asset Management
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Investment in motion
Nicole Maduray - Associate Analyst
Bearings are mechanical devices that enable motion
between two parts by reducing the frictional forces
between objects and providing a surface to roll on -
enabling faster, smoother and less energy-intensive
movement. From large manufacturing equipment
to roller skates, ceiling fans to bicycles, bearings are
found in almost anything that has moving parts.
13
Investment in motion
Svenska Kullagerfabriken (SKF), founded in Sweden in 1907, In 1907, Sven Winquist, an engineer and founding member of
is an international bearing manufacturer, providing bearings, SKF, designed the self-aligning ball bearing. Over the next
seals, lubricants, and maintenance and optimisation services decade, he marketed and distributed the company’s bearings
to over 40 different industries worldwide. We discuss the throughout Europe and set up sales offices in the USA,
enduring demand for these seemingly simple parts and how SKF marking the beginning of SKF’s global operations.
has grown to be the world’s leading ball bearing manufacturer.
By the twentieth century, innovation in bearings progressed
The evolution of bearings hand-in-hand with advances in the automobile, machine and
The use of bearings can be traced back thousands of years and, military industries. The choice of rolling elements (the internal
for centuries, humans relied on their own strength to push and parts of bearings) expanded from balls to rollers, tapered
pull large objects over the earth. rollers and spherical rollers that could support greater loads.
One of the earliest attempts at reducing sliding friction Today, the global bearing market is highly competitive with
between surfaces was recorded around 3 500 BC, when the an estimated annual value of USD100 billion, which is expected
Mesopotamians developed a primitive form of the wheel. to grow by 9% annually over the next five years. While SKF is
the current market leader, with 27% market share, there are
A bearing made of leather or wood was placed where the wheel
five other prominent international players who supply large
and axle touched, and then lubricated with animal fat. In the
industries worldwide and collectively represent around 33%
late fifteenth century, Leonardo da Vinci incorporated drawings
of the market. They include: the Schaeffler Group, Timken, NSK,
of bearings into his designs for a helicopter-like machine - the
NTN and JTEKT.
first recorded use of bearings in aerospace design (tabled below).
Industrial market dominance
During the Industrial Revolution (1760 – 1840), steel began to
SKF has developed a significant presence in various large
be produced at large scale and products that had once been
industries including aerospace, energy and rail. Their experience
painstakingly crafted by hand were now mass-produced by
and broad offering have resulted in an extensive distribution
machines in factories. Bearings played a pivotal role in this
network with over 17 000 distributor locations globally.
period, enabling greater machine efficiencies.
Evolution of bearings
1498-1500 1883 1898 1907 1934 1983
Drawing of a Friedrich Fischer Henry Timken Sven Wingquist Erich Frank Robert Schroeder
ball bearing by developed an patented the patented the invented and invented the
Leonardo da Vinci approach for tapered roller modern patented the first bi-material
- the first recorded milling balls bearing, which self-aligning wire race plain bearing
use of bearings in of equal size - can support ball bearing bearing, which that combines
aerospace design crucial for the heavy loads design that can be large yet two materials
manufacturing due to a larger allows for angular lightweight and
contact area misalignment narrow
of bearings
of moving parts
Source: Kagiso Asset Management researchThe company supplies bearings predominantly to the automotive The lifespan of a bearing is dependent on the load it carries
and industrial markets. The latter accounts for around 70% of and the operating speed. While most bearings last between
SKF's sales (charted below) and 90% of operating profits, with eight and 12 years, high-speed, high-load industrial bearings
the remainder from the automotive industry. tend to have shorter lifespans, needing to be replaced more
frequently. For example, in the paper industry, bearings are
The automotive market has become less lucrative over the years,
crucial in keeping paper mills rotating. If a bearing breaks
with vehicle bearings becoming more commoditised and
down, the paper mill stops, potentially resulting in costly
cheaply priced. Additionally, the growth of the automotive
machine damage and extended operational downtime.
bearing market is becoming more commoditised by the
Smooth industrial operations, therefore, involve the regular
increasing electrification of vehicles. Electric vehicles require
replacement of bearings (approximately every two years),
fewer bearings than their conventional fuel-based counterparts,
which results in continuous demand.
and therefore, SKF has decreased its exposure to the lower
margin (typically around 4.5%) automotive market and focused Full-service model captures more value
on the higher margin (around 14.7%) industrial market where In a market challenged by commoditisation, SKF has
they dominate in the rail, heavy industry and industrial responded by adapting its full-service offering to add more
distribution arenas. value to customers. Aside from providing the aftersales
industrial market with bearings, lubricants and seals, SKF
Enduring demand
delivers technical advisory support, preventative maintenance
In the industrial market, bearings are less commoditised as
services and conditioning monitoring. This allows customers
they are generally more specialised, designed for specific
to select the right bearings for their needs and to monitor and
functions and often regarded as critical components that are
optimise performance.
required to keep equipment running well. Industrial operators
cannot risk the high cost of bearing failure by opting for cheaper Furthermore, digitisation has become a growth driver for SKF
alternatives to the brands known for quality. Consequently, in recent years as they supply bearings fitted with sensors
bearings are priced higher in this market. that enable the online monitoring of key operating statistics.
SKF sales breakdown
Light vehicles
16%
Trucks
6%
Other industrial Vehicle
12% aftermarket
8%
Railway
5%
Mining and
chemicals
5%
Industrial
Energy distribution
6% 27%
Aerospace
6% Factory
automation
9%
Source: company reportsInvestment in motion
Based on resulting analysis, machine maintenance can be cost reductions for their customers and stable, regular revenue
adjusted and performed as required. Running times are improved streams for the business. As indicated below, the enduring
and costs are reduced, while spare parts are ordered and demand for bearings from the industrial market, coupled with
dispatched automatically. greater factory efficiencies (and subsequent lower operating
costs), will provide a solid platform for widening profit margins
Strategic investments for sustainable growth
and lead to increasing sustainable revenue growth for SKF.
Over the last three years, SKF has invested a significant
8.4 billion Swedish Krone (SEK) in state-of-the-art manufacturing Continued forward movement
technologies aimed at accelerating the modernisation of their Bearings are not only a vital part of every industrial process
factories and increasing manufacturing efficiency. This involving motion, they also need to be maintained and
investment is proving to boost productivity as well as reduce replaced on a regular basis, ensuring ongoing growth in
lead times and the consumption of energy and raw materials, demand. SKF is well positioned in an attractive market
which in turn, enables more cost-effective bearing production. segment, with high intellectual property and a full-service
offering. Consequently, we are positive about the company’s
The company’s investment scope is widening to include
long-term prospects and our clients hold SKF in funds with
technologies that support fee-based business models. Systems
global equity exposure.
are being introduced to ensure minimal wastage, resulting in
SKF industrial revenue and profit margin
80 18%
Revenue Margin %
70 16%
14%
60
12%
50
SEK million
10%
40
8%
30
6%
20
4%
10 2%
- 0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E2021E 2022E2023E
Source: company reports and Kagiso Asset Management estimatesKagiso Asset Management (Pty) Limited
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Reg No. 1998/015218/07.
Footnote: 1 Annualised (ie the average annual return over the given time period); 2 TER (total expense ratio) = % of average NAV of portfolio incurred as charges, levies and fees in the management
of the portfolio for the rolling three-year period to 31 March 2020; 3 Transaction costs (TC) are unavoidable costs incurred in administering the financial products offered by Kagiso Collective
Investments and impact financial product returns. It should not be considered in isolation as returns may be impacted by many other factors over time including market returns, the type of
financial product, the investment decisions of the investment manager and the TER. This is also calculated on the rolling three-year period to 31 March 2020; 4 Source: Morningstar; net of all costs
incurred within the fund and measured using NAV prices with income distributions reinvested; 5 Source: Kagiso Asset Management; gross of management fees; 6 Median return of Alexander
Forbes SA Manager Watch: BIV Survey; 7 Median return of Alexander Forbes Global Large Manager Watch.
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