CHAPTER 5
Danfoss A/S - Global Manufacturing Footprint This case was prepared by Professor Torben Pedersen and Research Assistant Jacob Pyndt of the Copenhagen Business School. We thank Danfoss A/S for its helpful collaboration in developing this case. The case is developed solely as a basis for classroom discussion rather than to highlight effective or ineffective management in administrative situations. Some facts have been disguised to retain proprietary rights. Not to be used or copied without written permission from the authors. Instructors who wish to use this case may contact the authors at
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[email protected].
Looking at the world map of Danfoss’ production sites, COO Hans Kirk speculated: One of our main challenges for the years to come is to optimize the geographical location of our production sites and to explore the possibilities for a consolidation of our global plant portfolio. I see a lot of small lights all over the world, each representing a Danfoss plant. The question is where the lights should be in the future, and whether it is advantageous to unite some of those lights. Traditionally, Danfoss expanded its product lines following the “one product, one plant” philosophy, which suggested that each time a new product was invented, production capabilities were mobilized and a new plant was built. This development had resulted in more than 50 plants worldwide; yet the majority located in European markets. The plants operated independently, as product lines were very specialized and shared few aspects that could create scope effects. Despite the geographical multiplicity, the specialization of Danfoss’ global production network, and the complex product portfolio, Danfoss expressed a one-company identity. Contesting the conglomerate identity, CEO Jørgen Mads Clausen declared: We are not a conglomerate. We would be if we owned a string of unrelated companies, but all our divisions are linked together (Berlingske Tidende 27 March 2005). Faced with saturated European markets, Danfoss began investigating how the plant portfolio could be optimized in terms of better coordination between production units in 2004. One objective was to be positioned appropriately to meet future market demand. As the center of international commerce moved towards Asia, the company’s focus on Denmark and Europe might become
Danfoss A/S – Global Manufacturing Footprint
inappropriate. Literally, the task was to turn Danfoss’ plant portfolio, with its high degree of specialization, into a global production network and investigate the potential benefits of interlinking production operations. Danfoss also needed to consider economies of scale and scope, and how production relocations r elocations would impact R&D. A team was put together to investigate a target footprint that could serve as the basis for future investment and divestment decisions. The team worked closely with CFO Ole Steen Andersen and reported regularly to the entire Executive Committee. The team included Senior Director Ian Colotla, a mechanical engineer from the University of Colombia and with a PhD from Cambridge. With seven years of experience in engineering, manufacturing and project management at Danfoss, Mr. Colotla was a specialist in international production networks. He worked together with Senior Director Nicholai Lüche Tandrup who, in addition to his consulting experience, had worked on issues related to strategy and business development within Danfoss. In addition, external consultants were brought in to assist. One of the team’s prime tasks had been to generate scenarios for a competitive production network structure by 2014. Conducting this comprehensive analysis, they needed to consider inflexible manufacturing volumes, product mix allocation and footprints with a strong focus on high cost countries while overcoming barriers to change for existing footprints.
Introduction to Danfoss Under the original name of “Dansk Køleautomatik- and ApparatFabrik” (Danish Cooling Automatics and Equipment Factory), Mads Clausen founded Danfoss in 1933. The company was established in response to Danish custom barriers and import bans hindering the trade of automatic valves for refrigeration plants which then took place in the United States. Danfoss developed from a small valves shop into one of Denmark’s largest industrial groups, with sales of DKK 16,345 million in 2004 and 17,543 employees worldwide (see exhibit 1). Danfoss is privately held by the Bitten and Mads Clausen Foundation, and members of the Clausen family. Danfoss’ activities are divided into three main business areas: refrigeration and air conditioning (RA), heating and water (HW) and motion controls (MC), each a leader within its industry. Danfoss owns a significant share of one of the world’s leading manufacturers and suppliers of mobile hydraulics, Sauer-Danfoss (see exhibit 2). The Danfoss group presents itself as a leader within research, development and production, sales and service of mechanical and electronic components for several industries (Danfoss’ website).
Danfoss A/S – Global Manufacturing Footprint
Generally speaking, the company’s products help to heat and cool homes and offices, refrigerate food and control production lines. The company’s mission statement reflects its objective: Making Modern Living Possible. Danfoss has a global network of 118 sales companies, 72 agents and distributors, and production facilities in 56 factories in 20 countries. All together, these locations produce, sell and distribute 250,000 items per day. Despite its global presence, the majority of Danfoss’ sales comes from Western Europe, equaling roughly 65% in 2004. Other important sales regions include Eastern Europe (11%), North America (8%), and Asia-Pacific (10%). The geographical distribution of employees also reflects Danfoss’ strong European orientation. While approximately 6,200 employees work in Denmark, 11,300 are employed outside Denmark. Of these 65 % are located in Europe, with most working out of Germany, Slovenia and France.
Organizational Development Danfoss was strongly attached to its original home in Nordborg on Als, a small island located in southern Denmark. Given its strong commitment to local community initiatives and the business environment, a symbiotic relationship between the company and Als existed, particularly in Nordborg. Danfoss took pride in its long tradition of social responsibility towards both employees and the surrounding environment. All together, Danfoss provided over half of the jobs in Nordborg, amounting to roughly 3500 employees, of which approximately 550 were engineers. Due to its remote location, the business press often speculated about the difficulties Danfoss must have had in recruiting talented business people. However, according to CEO Clausen, the headquarter location on Als would continue to serve as the focal location in the future. There are no places that can match what we have here. It would take a long time to build up the technological foundation we possess here at Als. It is not us who are located remotely. It is the others who are located far from us (Berlingske Tidende 27 March, 2005). At the end of 2004, the company hired Niels B. Christiansen, age 38, as Executive Vice-President and COO. Mr. Christiansen came from a position as President and CEO of GN Netcom, where he had a successful track record in increasing sales substantially. More importantly, he possessed a global outlook and extensive business experience in China. One of his first tasks was to monitor Danfoss’ more than 50 worldwide production sites together with Executive Vice-President Hans Kirk. According to Mr. Christiansen, Danfoss
Danfoss A/S – Global Manufacturing Footprint
needed to employ a young leader with global experience and a keen interest in industrial engineering. Having traveled four out of five days the first six months of service, he had obtained a grasp of the multiplicity of Danfoss’ many business areas. Mr. Christiansen then felt equipped to explore new business opportunities and areas for improvement in Danfoss’ global organization. He talked openly of delegating more responsibility to subsidiary management units to capture market trends swiftly. Commenting on his own role, Mr. Christiansen stated: I believe my key skill is my ability to explore how we can do things in a different or new way. Being at the helm when the course has been set is also critical, but less challenging (Børsen 21 April 2005).
Different Product Divisions On 1 January 2005, Danfoss officially changed the names of its core business divisions to the Danfoss Refrigeration & Air Conditioning Division, the Danfoss Heating Division (including Danfoss Water Controls), and the Danfoss Motion Controls Division (see exhibit 3). The RA division comprised by far the largest unit with respect to sales, generating approximately 53% of Danfoss’ total sales in 2004 (see exhibit 1). Business units within RA, such as Compressors, and Industrial and Appliance Controls, were responsible for product development, production and key accounts. The RA products were manufactured at 27 factories in 16 countries (see exhibit 4) and sold to the global market through the division’s own sales organization. The sales organization, responsible for sales, marketing, customer support and distribution, was organized into four global regions: Europe, the Middle East and Africa; Asia-Pacific; and North and Latin America. Marketed products included household refrigeration, commercial refrigeration, industrial refrigeration, industrial air-conditioning, supermarket refrigeration and industrial controls for manufacturers (OEMs), wholesalers and installers. Comprising roughly 26% of total sales, the HW division constituted the group’s second largest division. The division offered a number of components and solutions for the generation, supply and control of heating with a view to optimizing comfort and saving energy in private houses and small, commercial buildings. Water Controls included components for the water industry in the form of valves and related products. Product lines with the HW division were manufactured at production sites in more than ten countries, while sales were conducted by sales companies and agents on all heating markets worldwide (see exhibit 4). EU markets reached a status quo in 2004, while positive
Danfoss A/S – Global Manufacturing Footprint
market growth in Eastern Europe, Russia and China drove an increase in net sales. Danfoss’ third business division, Motion Controls, was comprised of two main business units: Drives and Gear Motors. In 2004, the division contributed roughly 18% to total sales, and factories were concentrated in Denmark, Slovakia, China, Germany and the US. While sales grew modestly in EU markets, areas such as Eastern Europe, Asia, and North and Latin America were responsible for a 7% increase in sales. Particularly in the American market, Danfoss gained momentum after several years of sluggish growth. In fact, both the MC and RA divisions showed double digit growth rates due to increased sales to OEM customers. Danfoss’ three business divisions all have a stronghold in Europe, which was reflected in the share of European sales compared to total sales. Within the RA division, sales inside the EU (including Denmark) amounted to 57 % in 2004, down from 61 % in 2003 (see exhibit 5). Danfoss actively sought to achieve higher growth outside the EU, yet parts of the European market still provide attractive opportunities. Major markets like Germany and France declined or stagnated in 2004, while others - Italy, Sweden, Belgium, and England - experienced double-digit growth rates. For the HWC division, the accumulated European market share amounted to 70% in 2004, while the MC division had an approximate 55% sales concentration in the EU. The long term growth strategy for these divisions was oriented towards market opportunities in Asia, Eastern Europe and, to a lesser extent, the nearly saturated EU markets.
Strategy and Internationalization efforts Until the mid-1990s, Danfoss was, in terms of orientation, more European than global. The company established small-scale production units in UK, Brazil, and India during the 1960s and 1970s, but these units remained insignificant as the lion’s share of production was located in Denmark and Germany. Until the early 1990s, 90% of Danfoss’ revenues were generated by western European operations. It was not until the founder’s son, Jørgen Mads Clausen, became CEO in 1996 that the globalization strategy took off. Trained as an engineer with an MBA from the University of Wisconsin, Mr. Clausen brought a global mindset to the position and declared his ambition of changing Danfoss from a locally-focused company into a major global player that was number one or two in relevant markets worldwide. Danfoss’ strategy was to optimize production locations in countries adjacent to major markets and to expand these facilities in order to reap the
Danfoss A/S – Global Manufacturing Footprint
benefits arising from economies of scale. While major market shares were maintained in saturated European markets, by 1996 a presence was necessary in expected growth markets such as China and the US. Danfoss operated in industries characterized by mature technologies and price pressures. Hence, locations in low cost regions were essential. To realize its global aspirations, Danfoss invested a USD three-digit million sum between 1996 and 2004 to establish production facilities, increase sales presence and acquire companies. Geographically, the US and China were the biggest recipients of these investments. Danfoss’ internationalization efforts can, at best, be described using a market-to-market establishment chain. Once experienced with exporting into a specific market, Danfoss established sales subsidiaries and then invested in production facilities. In that sense, Danfoss utilized its previous experience in setting up production and sourcing units, and applied this knowledge to new opportunities. When the company initiated in-house production of expansion valves for the local Chinese industrial refrigeration market in 1995 and 1996, Danfoss benefited substantially from similar activities previously undertaken in Poland, Ukraine and Russia. In some instances, R&D facilities were co-located with production, as the company sought maximum synergy. First, we globalized sales. Now we relocate production because it is important to be close to customer, if you want to grow, which we do. A natural element of this strategy is, in some instances, that R&D activities follow the relocation of production (CEO Jørgen Mads Clausen, Børsen 17 December, 1996). While Danfoss’ engagements in China were promising, not every aspect of the company’s globalization strategy proved successful. Danfoss, in its pursuit of a global presence, could not ignore the North American market, which harbored eight major global air conditioning providers - all major Danfoss customers. However, despite considerable investments in low cost production facilities in Mexico, from which Danfoss tried to serve the American market, the company’s endeavors remained elusive and progress was slow. We did not enter the US in due time and now it is almost impossible to work up the market. Acquisition is the only avenue but it is difficult to find acquisition targets, and when we find them, they are only available at excessive prices (Jørgen Mads Clausen, Børsen 22 October 2003). Danfoss failed to gain momentum in the American market, which was largely attributable to underestimates of the challenges involved, including product redesign, and employment and training of local staff, while at the same time the company was closing down its production in Nordborg.
Danfoss A/S – Global Manufacturing Footprint
Historically, Danfoss’ major markets were European, but these markets experienced sluggish growth, forcing the company to work up new markets. Significantly, the company had high expectations for not only the blooming Chinese market, but also for Russia and other Eastern European markets. In 2004, Danfoss’ revenue in these regions amounted to DKK 3.4 billion, corresponding to 20% of total revenue. The sale of Danfoss products in China totaled DKK 750 million in 2004 but the company aggressively sought to meet its ambitious objective in the big republic of DKK 3 billion in revenue in 2008. Danfoss’ believed that the cultivation of the markets in the east would be handled through a combination of organic growth and acquisitions. In particular, China’s complicated market structure prompted negotiations with potential Chinese acquisition targets. The process of screening, valuating and negotiating acquisition candidates was cumbersome. Recapitulating Danfoss’ strategy in China, CEO Jørgen Mads Clausen commented: We have major ambitions in China. Having undertaken comprehensive analytical work, we are ready to initiate. We strive to grow 50% annually in China in the years up to 2008. Currently, we are talking with two or three Chinese companies that we are interested in buying. However, we need to drink a lot of tea before the Chinese are ready to discuss prices (Børsen 3 January 2005). To help execute and implement Danfoss’ China strategy, the company had, along with Niels B. Christiansen, engaged Hans Michael Jebsen on the Danfoss board. As CEO of a family-owned trading company based in Hong Kong with a strong link to southern Denmark, Mr. Jebsen was expected to apply his knowledge of the Asian business environment, particularly with regard to China. CEO Jørgen Mads Clausen commented: We are tremendously satisfied and proud that Hans Michael Jebsen has agreed to join our board. Hans Michael Jebsen, who was born and raised in Aabenraa [southern Denmark], has a long and impressive career in Hong Kong that is highly applicable to our work. His extensive knowledge of China and Asia will be of great benefit to Danfoss. Moreover, he has shown that he shares Danfoss’ attitude towards local community work (Børsen 11 April 2005). As a rather new initiative, Danfoss established a China Board, headed by Jørgen Mads Clausen and Niels B. Christiansen, which aimed to make Danfoss’ Chinese management more adaptive to market signals and enable it to make quicker decisions. According to Danfoss, the Chinese management needed a higher degree of involvement by the general management team in Denmark to prevent bottlenecks in internal decision processes from hindering business development in the fast growing Chinese market.
Danfoss A/S – Global Manufacturing Footprint
Though Danfoss had set the ambitious goal of DKK 24 billion in revenues by 2008, short-run prospects appeared somewhat bleak. The majority of the company’s sales outside Europe was based in USD. Considering the weakness of the dollar’s exchange rate, this would hamper net sales growth. In addition, Danfoss had experienced increases in costs for raw materials, such as copper, brass, steel and oil, throughout 2004. The company held raw material prices at bay through its long-term contracts. However, Danfoss felt the pressure from suppliers who were requiring significantly higher prices in response to Danfoss expansion of capacity. The effect of increasing prices on raw materials exceeded cost-cutting efforts, and increases in product prices were then passed on to consumers. In Danfoss’ belief, the rise in raw material costs decreased the 2004 bottom line by DKK 100 million. If these trends continued, they would most likely impact the 2005 result negatively (Berlingske Tidende Nyhedsmagasin 17 September 2004).
Challenges Ahead – Changing Production Philosophy The sales concentration and location of production sites posed a number of challenges for Danfoss. Through its web of 56 production facilities in 20 countries, Danfoss could meet its goal of being close to its customers (see exhibits 5 and 6). However, would customers continue to be where they were 20 years ago? Danfoss summed up its short and long-term expectations as: Growth in 2005 is expected to primarily come from the overseas markets and Asia, and China is expected to be particularly important in future years. Europe is expected to continue to show low growth rates and stagnation is expected on the important German market (Danfoss Annual Report 2004). A significant share of the manufacturing base was located within the EU area so the question regarding to what extent the production network was aligned with future growth was highly relevant. In addition, the fact that the major share of production sites resided in high cost countries could, from a cost perspective, prove disadvantageous. This issue was further brought to the fore in the light of the price pressures Danfoss experienced across a large portion of its product portfolio and the fact that competitors had a more cost competitive production set-up in terms of location. Although there was an alignment between Euro-based sales and costs, Danfoss was very dependent on the Euro Zone in its global outlook. The RA division serves as a case in point to illustrate Danfoss’ challenges. In line with expectations, sales outside of the EU grew 17% in 2004, with one-third
Danfoss A/S – Global Manufacturing Footprint
of net sales being obtained on dollar markets. Danfoss’ Eurodominated cost base, in conjunction with an all-time low dollar exchange rate, threatened the company’s competitiveness and earnings potential. Competitors with a larger dollar cost base were better positioned as the Euro value increased. A second concern involved scale and scope in production sites. Although all three divisions sold, by and large, to the same markets, little interaction took place between them as each division handled development and production for various product groups. All three divisions had adopted a “one product, one plant” manufacturing strategy and co-located R&D with the main plants. Consequently, products and components did not flow between plants. In some instances, especially in less developed economies, placing two distinct product lines under the same roof would make it easier to negotiate with public authorities. Yet, in the long-term, Danfoss had seen that co-location led to diseconomies of scale, as R&D and engineering teams supporting production became too specialized when production volume increased. Two initiatives were launched to streamline and support future growth: 1) relocation of production units to countries with competitive cost levels, and 2) a productivity improvement program. In terms of the former, non-recurrent provisions totaling DKK 150 million had been invested within the RA division to restructure the production activities for household compressors. The factory (700 employees), located in Flensburg, Germany, was relocated to Slovakia, a project that would be completed by 2007. According to the Vice-President for communication and reputation management at Danfoss, Ole Daugbjerg, the move was imperative in order to gain competitiveness: The last couple of years, the production of household compressors yielded a monthly shortfall of DKK 7.5 million. Having tried out several initiatives without the desired effect, we turn to the last resort, which for us is offshoring (Børsen 21 January 2005). The decision process surrounding the initiative to relocate to Slovakia illustrated in a nutshell the company’s approach to dealing with globalization issues. While recognizing the necessity, relocation was regarded as the last option. In addition to the Slovakian move, Danfoss’ Chinese factory in Tianjin was expanded to 40,000 square meters and ground was broken in June for a new, 12,000 square meter factory in Wuqing, China. The building project, amounting to approximately DKK 50 million, was expected to be completed in 2005. Finally, the company devoted DKK 130 million to establish a new factory of 12,000 square meters in the Istra region outside Moscow.
Danfoss A/S – Global Manufacturing Footprint
The other initiative set in motion related to a new productivity program. Based on lean manufacturing principles, the program was implemented primarily to eliminate bottlenecks at production sites and establish a more efficient production flow, creating a basis for improved utilization of the production facilities. The next phase of the program would include sales operations. Danfoss’ investments in the program amounted to DKK 66 million in 2004. In line with its new production set-up, Danfoss argued that production development had gone from volume production to more customer-adapted mass production. One visible result of this trend was the establishment of new a business unit, Systems & Sub-Assemblies, within the RA division. Located close to existing customer’s production sites, Danfoss could offer system solutions rather than component solutions. Expectations were that the new unit, based on those seen in the automotive industry, would lead to an improved commitment from customers and that it would become an important element of future growth. This trend led the company to unite different Danfoss products that comprised customer applications. Instead of delivering single items, Danfoss aimed to hand a sub-system over to the customer. All else equal, this development spurred a more interrelated relationship between various production lines. Since its inception, Danfoss had been strongly committed to engineering and state-of-the-art manufacturing techniques. Around 10% of the employees were engineers by training. Danfoss invested, on average, more than its competitors in production equipment. One of Danfoss’ challenges involved gradually changing from an engineermindset to a more commercial type of thinking and reasoning. Sound engineering work was the lifeblood of Danfoss. Particularly with respect to quality in research and product development, engineering capabilities had proven enormously critical. However, the company’s pride in developing product landmarks had, in some instances, been at the expense of consumer demand and preferences. Danfoss needed to respond more attentively to market trends and incorporate these trends into product development, rather than producing technological advanced items and expecting the market to buy into these innovations. The engineering spirit permeating the company also affected the establishment of foreign production units. Traditionally, the company had been reluctant to apply manual labor practices. The preference for state-of-the-art machinery notably impacted cost structures and pay-back times, in some instances explaining Danfoss’ difficulties in gaining an international foothold.
Danfoss A/S – Global Manufacturing Footprint
Establishing a Global Production Network To strengthen work efforts around the global production network, Danfoss allocated extra resources to the work conducted by Mr. Colotla and Mr. Tandrup. The purpose of 2004’s analytical endeavors was to define and evaluate the best manufacturing footprint options based on such criteria as alignment with future sales, factor costs, labor availability, supplier presence, and infrastructure. From a financial standpoint, Danfoss was interested in how increased coordination between different plant activities, such as production technology and overhead, could result in savings and help maximize returns on capital. Danfoss’ “one product, one plant” philosophy was likely to increase complexity in operations and incurred costs that added little value for the client. If Danfoss could find better geographical spots for its production activities and explore coordination between them, earnings could be enhanced. To analyze these issues, Danfoss developed a fourstep methodology (see exhibit 7). The first step was to estimate financial attractiveness by calculating the cash flow effect of variations in the operating costs and capital expenditures resulting from plant relocations. In particular, Danfoss was concerned with recurrent savings arising from factor cost and logistical differences, and relocation costs and one time investments. Relocating plants to low-cost regions was certainly not without its costs (see exhibit 8). When the company decided to relocate the household compressor business from Flensburg to Slovakia between 2004 and 2007, the company assigned a total of DKK 150 million in non-recurrent provisions to the restructuring process to cover such elements as severance agreements. The second step contrasted the financial attractiveness of plant relocations with the individual business logic of each plant. Such aspects as the relocation’s alignment with expected market growth, value chain linkages with R&D, and marketing and sales were analyzed. In addition, proximity to suppliers and the impact on lead times were considered as well, as were labor availability and potential effects on quality. With regards to the supplier base, Danfoss saw potential savings in buying from Chinese suppliers. To establish a web of Chinese suppliers, Danfoss had set up three procurement offices with a total of ten employees. The company expected to purchase production inputs valuing DKK 1 billion from China within 4 to 5 years. Many Danish companies will lose sales to us. I am not able to tell the exact number, but evidently the amount is significant. We can realize substantial savings by purchasing standard supplies from
Danfoss A/S – Global Manufacturing Footprint China rather than from our Danish and European suppliers, commented Jørgen Mads Clausen (Berlingske Tidende 22 October 2003). Specific plant relocations could not be considered in vacuum without taking the network dynamics into account, which was the methodology’s third step. Danfoss was particularly interested in scrutinizing the “one product, one plant” philosophy and exploring the potential for increased coordination and scope in production, site overhead, and R&D synergies. Moreover, given Danfoss’ Euro-centric cost base, currency exposure along with the political and economic risk profile needed to be investigated. Finally, decisions on plant relocations needed to be contrasted with Danfoss’ Nordborg vision and emphasis on the local community. Throughout its history, Danfoss had been the embodiment of local community engagement and played an omnipresent role in the business environment of southern Jutland. There had been some instances in 1999-2001 where other Danish companies relocated jobs, mainly low-skilled, to low-cost regions like China, Mexico and Poland. Despite the necessity to strengthen competitiveness, Danfoss felt that to do so it would undermine its traditional culture. However, when lay-offs of Danish workers became inescapable, Danfoss worked and communicated openly with public and trade unions to agree on the speed of relocation and to explore new opportunities in more advanced positions in Denmark. The sincere responsibility Danfoss felt for local community development, in particular for the Nordals community, meant that number of lay-offs and the possibilities for gaining alternative employment needed to be investigated thoroughly.
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With an expected annual growth rates of 8 to 10% and a revenue goal of DKK 24 billion by 2008, Danfoss had a valid reason to pursue costefficient manufacturing solutions while simultaneously retaining the company’s flexibility, responsiveness, and alignment with future market demands. Historically, there had been little exploitation of scope effects. With a cost-base heavily concentrated in the Euro zone and prospective markets residing in dollar-zones, redesigning the manufacturing footprint was too important a challenge to ignore. However, a redesign potentially meant abandonment of the “one product, one plant” philosophy which had guided Danfoss’ international activities for decades. Potentially, it also meant taking on
Danfoss A/S – Global Manufacturing Footprint
an activity-based view in order to explore the potential for scope effects. To reverse these mental maps or international routines could prove problematic. Rethinking the design and strategy of the entire production network was strenuous. Mr. Tandrup speculated that new product-lines and plant facilities normally constituted the best opportunities to redesign plant structure and locations as they held no sunken costs or existing resource commitments and few vested interests. Although each plant had a history, Danfoss’ approach needed to encompass all plants. With more than 50 plants in 20 different countries, the potential was significant. Each factory needed to be evaluated in terms of the financial potential of relocating or co-locating. In addition, Danfoss believed that customer-adapted production would become increasingly important - a trend that underlined the necessity to investigate potential scope effects from co-locating plants. As the analytical work progressed, Mr. Tandrup felt excited, as a presentation to the executive committee of various scenarios was due the following week.
Suggested Literature Colotla, Ian; Shi, Yongjiang; Gregory, Michael J. (2003): “Operation and Performance of International Manufacturing Networks”, International Journal of Operations & Production Management, vol. 23(10), pp. 1184-1206. Ferdows, Kasra (1997) “Making the Most of Foreign Factories”, Harvard Business Review , vol. 75(2), pp. 73-88.
Danfoss A/S – Global Manufacturing Footprint Exhibit 1: Danfoss Financial Highlights 2000-2004 Danfoss Financial Highlights 2000-2004 (million DKK) 2000 2001 Profit and loss account - Net Sales 14.797 14.384
- EBITDA
2002
2003
2004
14.923
15.434
16.345
1.596
1.439
1.571
1.994
1.757
717
605
721
1.109
1.083
98
68
107
58
138
- Financial items
-73
-193
-78
-138
-121
- Profit before tax
742
480
750
1.029
1.100
- Net profit
501
332
513
744
775
- From operating activities
998
912
1.462
1.254
1.200
- From investing activities
-1.088
-947
-559
-1.142
-919
- Free cash flow
-90
-35
903
112
281
- Cash flow from financing activities
642
-165
-158
-416
-712
1.148
948
1.693
1.389
958
- Return on net assets
10.3%
8.9%
10.7%
16.7%
15.4%
- Net investment ratio
2.3%
8.0%
4.8%
10.5%
7.4%
- Return on sales
5.0%
3.3%
5.0%
6.7%
6.7%
- Return on equity
8.2%
5.1%
7.6%
10.5%
10.2%
- EBIT (operating profit and percentage of net sales)
4.8%
4.2%
4.8%
7.2%
6.6%
Number of employees (headcount)
16.905
16.544
16.972
17.449
17.543
Number of employees in Denmark
-
-
-
6.102
6.048
Sales per employee (DKK million)
0.886
0.869
0.879
0.885
0.932
- Operating profit - Income from associates and joint ventures
Cash Flow Statement
- Cash/Equivalents (end year) Key Ratios
Main business segments 2003-2004 9000 8000 ) 7000 n o 6000 i l l i 5000 m ( 4000 K 3000 K D 2000 1000 0
2003 2004
Refrigeration and Air Conditioning
Heating (incl. water controls)
Motion Controls
Source: Danfoss Annual Report 2004
Danfoss A/S – Global Manufacturing Footprint
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s l o s r t s t n l n o g r o e n i t n t n C o o g p a n e C i t m o H t r a C o e r r o f o e l m H t F o i c n r r u C t s B i D
t r i n A e g g & i t n r e m n n n l b g e e o i o i S e d t t i i H a s r d n s e e n g s r e g o a i n P i r f C V s e u R B
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s l o r t n o C r e t a W
s r s o r e C s o / c s s n A s e a r e d r i l p n s p s a l m m p p l o o o A o n t r r t o n C i n l C & t l o i o a d a l a r C i C c o t r e r g e h i e s r u f m s d e m u n o R I o C H
s e c i v r e S s s o f n a D
Danfoss A/S – Global Manufacturing Footprint Exhibit 3: Product Segments Main Divisions
Product Segments Refrigeration and Air Conditioning Controls. Product lines within this segment include self-acting valves, electronic valves and regulators, thermostatic expansion valves, thermostat and pressure controls. Commercial Compressors. Product lines specialize in large hermetic reciprocating and scroll compressor technologies for commercial air conditioning and refrigeration. The compressors and condensing units are used in a large array of applications in both businesses.
RA
Household Compressors. Product lines include hermetic compressors and fan-cooled condensing units for refrigerators, freezers and light commercial applications, such as bottle coolers and display counters. Industrial and Appliance Controls. This product segment is split in two: 1) temperature controls for the home appliance industry, and 2) industrial controls, which encompasses products for industrial monitoring and control systems based on the principles of pressure and temperature measurement, electrical power, and fluid control. Particularly within this segment, Danfoss has attempted to developed customer-specific solutions by cooperating closely with selected customers. Combined solutions include using valve and pressure and/or temperature products. This development has resulted in lower customer costs and added value through trimmed design solutions. Comfort Controls. Danfoss’ best known product - the radiator thermostat - belongs to this product range. Other products are hydronic balancing valves, electronic thermostats, and thermostats for comfort cooling.
HW
District Heating. Product range includes self-acting controls, automatic electronic controls, shut-off valves, heat exchanges and substations. Burner Components. Products include a wide range of components for oil burners and boilers, including pre-heaters, nozzles, pumps, and igniters. Floor Heating. Offers electrical as well as hydronic floor heating. Water Controls. Products include butterfly valves and pressurereducing valves.
MC
Drives. Products include converters for the speed control of motors in the food, beverage, automotive, chemical, petrochemical, textile, steel and mining industries. Gear Motors. Supplies gear motors for industrial applications with a strong position within the automotive, material handling and steel industries.
Abbreviations:
RA (Refrigeration & Air Conditioning Division) HW (Heating and Water Division) MC (Motion Controls Division)
Source: www.danfoss.com
Danfoss A/S – Global Manufacturing Footprint
s E T F 0 0 4 >
s E T F 0 0 4 0 0 1
s E T F 9 9 0 1 s l o r t n o C n o i t o M
r e t a W & g n i t a e H
o i l o f t r o p t n a l p ’ s s o f n a D f o w e i v r e v O : 4 t i b i h x E
g r o b d r o N
K D f o t s e R
g n i n o i t i d n o c r i A & n o i t a r e g i r f e R
Danfoss A/S – Global Manufacturing Footprint Exhibit 5: Danfoss Business Divisions 1999-2003: Geographical Split Geographical split - Refrigeration and Air Conditioning 70 60 e 50 g a t n 40 e 30 c r e 20 p 10 0
1999 2000 2001 2002 2003 Western Europe
Eastern Europe, Middle East and Africa
North America
Asia-Pacific
Latin America incl. Mexico
Geographical Split - Heating and Water 80 70 1999
60 e g 50 a t n 40 e c r 30 e p 20
2000 2001 2002 2003
10 0 EU
Eastern Europe North America
Other regions
Geographical split - Motion controls 80 70 e 60 g 50 a t n 40 e c r 30 e p 20 10 0
1999 2000 2001 2002 2003
Europe, Middle North America East and Africa
Asia-Pacific
Source: Danfoss annual reports, various issues
Latin America incl. Mexico
Danfoss A/S – Global Manufacturing Footprint Exhibit 6: Production Locations Country Brazil (120)
Factories and Product Lines
Danfoss do Brasil (07,17)
Bulgaria (10)
Danfoss EOOD (01,02,03,04,06,07,08,09,10,16,17,18)
Canada (10)
Danfoss Inc. (03) Danfoss Inc. (2) (18)
China (210)
Danfoss (Tianjin) (01,03,08,16,17)
Denmark (3200)
Danfoss (Glamsbjerg) (08) Danfoss (Appliance controls division – Nordborg) (07) Danfoss (Floor heating – Vejle) (03) Danfoss (Spring factory – Tinglev) (02) Danfoss Redan (Risskov) (08) Devi A/S (Vejle) two factories (03) Gemina-Termix Production A/S (Sunds) (08) Danfoss A/S (Nordborg) (01,02,04,07,08,10,14) Danfoss Industrial Refrigeration (Hasselager) (01) Danfoss Drives (Graasten) – two factories (09) Danfoss Analytical (Sønderborg) (10) Danfoss Water Hydraulics (Nordborg) (14) Danfoss (Kolding factory) (01,04) Danfoss (Silkeborg factory) (03) Danfoss (Viby J factory) (03,08) Danfoss Plastic Manufacturing Plant (07)
Finland (140)
LPM Group Oy (08) Danfoss Bauer Oy (18)
France (900)
Danfoss Socla. Desbordes – Siège Social (16) Danfoss Commercial Compressors S.A. (17) Danfoss Commercial Compressors S.A. (Anse plant) (17) Danfoss Socla S.A.S Water Controls division (16) Danfoss Socla S.A.S (only production site) (16) 1
Germany (1800)
Great Britain (160) Italy (100)
1
Danfoss Compressors GmbH (Flensburg) –two factories (06) Danfoss Industrieautomatik GmbH (Korntal-Münchingen) (04) Danfoss Silicon Power GmbH (Schleswig) (09)
Danfoss Randall Limited (03,08) Danfoss Ltd. (Unit 1) (18) Danfoss S.r.l. (Appliance Controls division – Torino) (07)
Mexico (400)
Danfoss de S.A. de C.V. (RA division) (01) Danfoss de S.A. de C.V. (Household compressors division) (01,04,06,09,10,16,17) Danfoss de S.A. de C.V. (Appliance controls division) (07)
Norway (90)
Danfoss Esco (16)
In order to maintain a competitive household compressor business, in 2004 Danfoss decided to relocate production activities from Flensburg to Slovakia. These adjustments will cut 160 jobs in 2006 and 540 jobs in 2007, corresponding to a 50% reduction (Danfoss Annual Report 2004).
Danfoss A/S – Global Manufacturing Footprint Exhibit 6: Production Locations (cont’d)
Poland (550)
Danfoss LPM Sp. Z.o.o. (08) Danfoss Sp. Z.o.o. (04) Danfoss Sp. Z.o.o. (03)
Russia (30)
ZAO Danfoss (Moscow) (03)
Slovak Republic (400) Slovenia (1370) South Africa (10) Ukraine (20)
US (300)
Danfoss Compressors spol. s.ro, Zlaté Morazce (06,18) Danfoss Trata d.o.o. (Ljubljana-Sentvid) (08) Danfoss Compressors d.o.o. (Crmomelj) (06) Danfoss (Pty) Friga Systems Division (17) Danfoss T.o.v. (Kiev) (03) Danfoss Danfoss Danfoss Danfoss Danfoss Danfoss Danfoss
Inc. (RAC division – Baltimore) (01,02,06,07,17) Commercial Compressors Ltd. (17) Drives (09) Graham (09) Water & Wastewater (04,09,10) Bauer Inc. (18) Flomatic Corporation (16)
Product lines Refrigeration and Air-Conditioning products (RAC) 1. Refrigeration and AC/Controls 4. Industrial Controls 6. Households Compressors 7. Appliance Controls 17. Commercial Compressors Heating and Water products (HW) 2. Burner Components 3. Commercial Comfort Controls 8. Distict Heating Controls 16. Water Controls 20. Floor Heating Heating and Water products (MC) 9. Drives 18. Gear Motors 10. Ventures 14. Water hydraulics
Source: www.danfoss.com
Danfoss A/S – Global Manufacturing Footprint
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Danfoss A/S – Global Manufacturing Footprint
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Danfoss A/S – Global Manufacturing Footprint
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Danfoss A/S – Global Manufacturing Footprint Exhibit 9: Production and Sourcing Cost Indices Country
Production Cost Index
Sourcing Cost Index
Vietnam
11
11-59
China (Mainland)
11
12-53
Ukraine
13
13-34
Cambodia
13
14-72
China (Coastal)
14
14-55
Malaysia
17
17-59
India
17
17-59
Mexico
21
22-75
Latvia
22
23-31
Belarus
26
27-45
Thailand
27
27-69
The Philippines
27
28-69
Czech Republic
30
30-34
Lithuania
32
32-38
Bulgaria
36
37-50
Poland
38
38-42
Russia
38
38-56
Slovak Republic
39
39-41
Hungary
39
40-49
Slovenia
48
48-49
Hong Kong
54
54-85
Portugal
57
57-64
Denmark
146
132-146
- The indices are based on UK =100
-
-
Production Cost Index is calculated on the basis of: o A standard company with 140 employees o Equity capital of EUR 300.000-1.500.000 depending on country o Standard Allowed Minutes (SAM) accumulated– measures the amount of time allowed to perform a given task (e.g., a sewing operation) as determined by engineering. o Direct and indirect wages o Yearly work time o Productivity o Depreciation of machinery and buildings o Interest rate Exchange rate 1 USD = 1,15 EUR Raw material costs are assumed equal around the globe. Tax incentives, export subsidies and special quota arrangements are not included.
Source: www.textile.dk
Danfoss A/S – Global Manufacturing Footprint
