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					Financial objectives and dividend policy


Overall objective                               These factors also contribute to stabilizing
                                                the share price development.
SKF's overall financial objective is to create      SKF's objective is to have a solvency of
value for its shareholders through providing    35 percent calculated as an average over an
a sustainable and market-comparable total       economic cycle.
return in the form of dividends and value
appreciation. Over time, the return require-    Dividend policy
ment on the shareholders’ investment in
SKF, the market-value shareholders’ equity,     SKF's dividend policy is based on the prin-
should exceed the risk-free interest rate by    ciple that the dividend should be adapted to
about 5–6 percentage points. This is the        the trend of earnings and cash flow, taking
basis for SKF’s decisions on financial           into account the Group’s development
objectives in its operations.                   potential and financial position.
                                                   The Board of Directors’ view is that the
Management model                                dividend should amount to approximately
                                                one third of SKF’s average net income,
SKF's management model, which is a sim-         calculated over an economic cycle.
plified economic value-added model, is
intended to create value for shareholders       Financing
and, consequently, promotes improved
margins, capital reductions and profitable       SKF's policy is that Group operations
growth. The model is linked to operating        should be financed through long-term bor-
income, less taxes paid and costs for own       rowing. The goal is that the loans required
and external capital in accordance with         to finance anticipated needs should have
generally accepted principles. The result       maturities exceeding three years. As of
shows a good correlation with the trend of      December 1997, the average maturity of
the share price. Today, Group manage-           SKF's loans was 5.5 years.
ment’s bonus and option programs are               According to the Group’s financial
based on this model.                            policy, SKF should have – in addition to
                                                this loan financing – payment capacity in
Capital costs, return requirement               the form of surplus liquidity and/or long-
                                                term credit facilities, amounting to
Currently, a weighted capital cost is used in   approximately USD 350 m. As of Decem-
SKF's management model in which costs           ber 31, 1997, the Parent Company had
after tax for shareholders’ equity is about 6   long-term loan commitments totaling USD
percent higher than interest on government      475 m from ten banks.
bonds. The weighted capital cost is cur-           The Group has been assigned a “BBB+”
rently approximately 9 percent. Accord-         rating for long-term credits by Standard &
ingly, this corresponds to the average return   Poor’s and a “Baa2” rating by Moody’s
requirement over an economic cycle which        Investors Service.
the company must exceed to create value
for its shareholders. The weighted capital
cost and the return requirement are calcu-
lated based on the market value of share-
holders’ equity.

Financial position

A strong financial position and good credit
rating are prerequisites for solid long-term
growth and profitability in a business that is
sensitive to changes in economic conditions.



   28
Financial risk management


Financial risks                                   currencies, can affect Group income by a        Interest-rate risks
                                                  couple of hundred million kronor.
SKF’s operations are exposed to currency             SKF’s policy is to hedge currency flows       The risk associated with interest rates is
risks, interest-rate risks and credit risks. As   for four months on average. This is the         that changes in interest rates will have a
a result of the broad geographic distribution     length of time deemed to be required, under     negative impact on Group income. SKF’s
of its business, with operations in many          present conditions, to adjust to new condi-     basic policy for establishing fixed-interest-
countries, the Group has a complex and            tions. Within the framework of established      rate periods is that the average duration
changeable risk situation, but one that is        risk limits, it is possible for SKF Treasury    should be six months. This applies to bor-
diversified.                                       Center AB to make significant deviations         rowing as well as investment of funds and
   The Group’s financial policy clearly            from this average period. Risks are man-        also includes the use of derivatives.
defines currency, interest-rate and credit         aged based on a risk-evaluation system that        The composition of the Group’s interest-
risks and establishes responsibility and          takes into account the volatility of curren-    rate portfolio is diversified and normal
authority for the management of financial          cies as well as their mutual relationship. As   changes in interest rates are not considered
risks. This policy states that the primary        of year-end, the lengths of the actual for-     to have any significant impact on SKF’s
objective is to avoid or minimize risk and to     ward contracts largely conformed with the       earnings.
contribute to a better return on Group assets     basic policy.
through an active management of risks.                                                            Credit risks
   The management of these risks, and             Translation exposure
responsibility for all treasury operations, is    Group income is also affected by the effect     Credit risks pertain to the creditworthiness
largely centralized in SKF Treasury Centre        of translating the income of foreign sub-       of counterparties and can be reduced
AB, the Group’s internal bank.                    sidiaries to Swedish kronor. When there is a    through a detailed evaluation of their ability
                                                  change of approximately 10 percent in the       to fulfill their obligations before credit is
Currency risks                                    value of the krona, this effect can also        granted. Credit risks that arise as a result of
                                                  amount to a couple of hundred million kro-      trading in financial instruments and in con-
The currency risks to which the Group is          nor, depending on the country in which the      nection with the investment of liquid funds
exposed consist of changes in exchange            income arose and the respective currency        are carefully defined in the financial policy.
rates in future flows of payments, trans-          movement in relation to the Swedish krona.      Transactions are carried out only within
action exposure, as well as the revaluation          The Group is also affected by the trans-     established limits, and with counterparties
of income, assets and liabilities in foreign      lation to Swedish kronor of net assets held     who have good credit ratings.
currencies when these currencies are              outside Sweden. At year-end 1997, SKF’s
translated to Swedish kronor, translation         net foreign assets amounted to SEK
exposure.                                         9 200 m, of which approximately SEK
                                                  1 300 m was hedged. In accordance with a
Transaction exposure                              policy decision, only a few currencies are
The Group’s principal commercial flows of          hedged.
foreign currencies pertain to exports from
Europe to North America and Asia, and to          Economic exposure
flows of currencies within Europe. Over the        SKF’s principal competitors have the
long term, SKF is seeking to establish a          greater part of their production capacity in
balance between production and sales              Germany, the U.S. and Japan. Currency
within the European, American and Asian           changes affecting those countries’ cost situ-
zones.                                            ation primarily in relation to Sweden, Italy
   SKF has flows in some 20 currencies.            and France, where SKF, in addition to
The total flow of goods exceeds SEK                Germany and the U.S., has substantial man-
31 000 m. After offsetting flows in the same       ufacturing operations, affect SKF’s compet-
currency, the net flow amounts to approxi-         itiveness in relation to these competitors.
mately SEK 8 000 m. The flows that – due           Over the long term, SKF is seeking to
to their size – could have a major impact on      establish a better balance in production and
SKF’s income are inflows in USD, DEM               sales between the European, American and
and GBP that are converted into SEK, FRF          Asian zones.
and ITL. Fluctuations of approximately 10
percent in foreign exchange rates in these



                                                                                                                                          29
SKF and European Monetary Union


Countries other than Sweden accounted for 95 percent of SKF Group sales                     work covers strategic, financial and infra-
                                                                                            structural aspects, such as information tech-
during 1997.                                                                                nology, financial accounting and reporting,
                                                                                            as well as legal aspects.
European countries accounted for 54 percent of SKF Group sales during
                                                                                               As a result of the wide geographic
1997.                                                                                       spread of Group operations in many differ-
                                                                                            ent countries, SKF is exposed to a complex
   Today, more than half of SKF’s sales are to countries within Europe,                     situation regarding currency risks. The
                                                                                            introduction of EMU will simplify the
with a strong concentration to Germany, France and Italy. The Group has                     Group’s risk situation, since the number of
                                                                                            currencies handled will be smaller. Today,
also located production facilities in a number of European countries.
                                                                                            SKF’s operations are concentrated to cur-
                                                                                            rencies linked to the DEM and USD. With
                                                                                            the introduction of EMU, the currencies
The map below shows the locations of SKF’s operations in Europe.                            that are linked to the DEM will be replaced
                                                                                            by a common EU currency, the euro.
                                                                                               SKF is a Group with a centralized infra-
                                                                                            structure, particularly regarding informa-
                                                                                            tion technology. IT is the area that will
                                                                                            require the largest single work input to
                                                                                            prepare the Group for EMU. During 1997,
                                                                                            SKF’s Group-wide systems for orders,
                                                                                            sales, purchasing and production were
                                                                                            scrutinized in order to identify areas where
                                                                                            system or process changes are needed. A
                                                                                            corresponding review of local systems that
                                                                                            will be affected by EMU was conducted
                                                                                            simultaneously.
                                                                                               The companies in the SKF Group will
                                                                                            switch over from their present local curren-
                                                                                            cies to the euro during the transitional
                                                                                            period from 1999 to 2001. Various coun-
                                                                                            tries could switch to the euro at different
                                                                                            times during this period. Introduction of a
                                                                                            Group-wide finance and accounting system
                                                                                            will begin during 1998. The system, called
                                                                                            SARA (SKF Accounting and Reporting
                                                                                            Applications), will be implemented at all of
                                                                                            SKF’s major European companies in the
                                                                                            run-up to the year 2000. SARA will be able
In the current situation, it is likely that   financial reports expressed in euro would      to meet the requirements faced by each
European Monetary Union (EMU) will            provide the most accurate picture of the      SKF company when EMU is introduced.
start on January 1, 1999 and encompass up     Group's financial position and earnings.       The transition to the euro will be co-
to 11 European countries, including Ger-      For as long as no other option is permitted   ordinated among all the Group companies
many, France, the Netherlands, Belgium,       under Swedish law, however, SKF will          that change their financial systems during
Finland and possibly Italy.                   retain the Swedish krona as its working       the period from 1999 to 2001.
   Viewed in the light of SKF’s operations    currency.                                        The preparatory work prior to imple-
in these countries, the introduction of EMU      SKF has been working on preparations       mentation of EMU will continue during the
will mean that Group operations will be       for EMU since November 1996, with the         next few years, and will cease when the
absorbed into EMU regardless of whether       aim of assessing the effect of changed        present local currencies have been com-
Sweden as a country decides to join EMU       external conditions and ensuring that the     pletely replaced by the euro.
or remain outside it. Obviously this also     requirements and demands directed at the
means that as far as SKF is concerned,        organization can be met. The preparatory


   30
Environment - Toward ISO 14001


Nineteen ninety-seven was a milestone year     auditing, which greatly reduces the costs.     reduction in the number of hours lost, when
for Group environmental affairs. SKF           The external auditors can assess the whole     compared to 1996.
became the first of the major bearing manu-     Group based on sample audits at selected
facturers to achieve a certificate for ISO      sites. About one third of the sites are        Performance improved during
14001: the new international standard for      expected to receive this external assessment   1997
environmental management. Seven of the         prior to certification. The frequency of sub-
Group’s plants were registered to this         sequent surveillance audits at the sites is    The total consumption of electrical energy
standard during the year, and SKF has          also reduced, cutting the overall cost of a    at all SKF manufacturing units in 1997 was
embarked on an ambitious program to            Group certificate to about 20 percent of that   about 1 777 gigawatt hours (GWh); the
certify the rest of the Group.                 for individual certification.                   same as in 1996. About 28 percent of the
                                                                                              electrical energy was used in the steel mills.
Group certification before 1999                 Corporate audits improved                         However, when compared to 1996, the
                                                                                              consumption of electricity and most hydro-
In 1997 SKF applied to a leading certifica-     Several improvements were made in 1997         carbon materials reduced in relation to the
tion body for Group registration to ISO        to the corporate program for environmental,    production volumes, which increased sig-
14001. The registration process takes about    health and safety auditing. The number of      nificantly. This enhanced performance is a
18 months, and should be completed by the      auditors was increased, and all audit staff    result of continual improvements to the
end of 1998. The application is for a single   received training to “Lead Auditor” level.     Group’s manufacturing equipment and
certificate covering all manufacturing units       The revised audit scheme, and the ISO       processes.
in the Group, rather than individual certifi-   14001 project, have together significantly         Investments in environmentally related
cates for each unit. The strategy for Group    increased the rate at which environmental      projects at SKF Engineering and Research
certification was developed after extensive     improvements have been implemented. This       Centre was SEK 3.8 m in 1997. In addition,
liaison with external auditing/certification    rate of improvement will be maintained in      a total of SEK 120 m was invested in envi-
bodies, and is unique to SKF.                  1998, as more companies reach the stan-        ronmental, health and safety improvement
   To be eligible for a Group certificate,      dard for ISO 14001 certification.               projects throughout the Group during the
SKF has developed an environmental man-                                                       year.
agement system conforming to ISO 14001,        Accidents and injuries reduced
suitable for all manufacturing units;          worldwide                                      SKF Environmental Report 1997
whether they make bearings, seals, steel or
other related products. The new system         The improvement trend seen is not confined      The Environmental Report, which is dis-
allows SKF to operate globally to a set of     to environmental performance. Accidents        tributed together with the Annual Report, is
common management procedures by defin-          and injuries have been reduced in the          a comprehensive description of the SKF
ing national and local variations in supple-   Group’s plants worldwide. An example is        Group’s environmental activities during the
ments or appendices to these procedures.       the plant at Pune in India. The number of      year.
   A major advantage of Group certification     work related injuries there was reduced by
is a much reduced frequency of external        53 percent in 1997, with a 40 percent




Toward Year 2000
Problems related to the inability of com-      tems are today Year 2000 compliant. The        cial services, and utilities, regarding their
puter systems, microprocessors, and other      work proceeds in all the affected operations   Year 2000 plans and readiness.
electronic devices to deal appropriately       during 1998 and 1999 with the objective of        The Year 2000 program is organized
with dates on or after January 1, 2000, are    solving the major issues by the end of 1998.   under the umbrella of a Group project to
becoming a major issue for all businesses.        Our Year 2000 activities also include       secure a safe and trouble-free transition into
   About a year ago SKF started to identify    checks with our business partners, includ-     Year 2000 and the new millennium.
Year 2000 critical computer hardware and       ing customers, suppliers, transport
systems. Adaptation work is in progress and    providers, communication providers, finan-
several of our main common business sys-


                                                                                                                                     31
SKF 100 – A sprint that never ends


”The difference between the many athletes who can run 100 meters in 10 seconds
and the few who can do it in 9.8 seconds is mostly mental,” says world-famous
American track coach John Smith. It is a question of believing that it is possible to
improve the speed in every stride by a few thousandths of a second, achieving
barely measurable gains that demand the mobilization of everything the individual
can give.

         his particular coach is no different    Göteborg was allowed to negotiate directly       able personnel. Power was concentrated at

T        from many others in today’s most
         highly competitive sports. It is true
that sprints are the most extreme form of
                                                 with governments.
                                                    However, SKF’s competitors learned
                                                 more about the company’s capabilities, and
                                                                                                  the management level. Now, however, in an
                                                                                                  era when minute differences count, power is
                                                                                                  gradually shifting back to the many team
competition, with the competitors in a           in due course the customers began review-        members - albeit only the power to “van-
world-class final often finishing within a         ing all the alternatives. During the 1970s,      quish or vanish.” Any organization that fails
few hundredths of a second of each other. A      the situation reached the point where SKF        to motivate its employees incurs such a dis-
sprinter who runs at only 99.9 percent of        had to fight for its very existence. The com-     advantage that it can totally lose the battle.
his or her capacity in an important final         petition in the ball bearing segment
risks losing. This tough and unrelenting         changed character, as happened in many           The most extensive cultural
competition characterizes an increasing          other traditional segments.                      change process in the company’s
number of sports.                                   Last year was SKF’s ninetieth anniver-        history
   For one who has been writing about            sary. The company produced more than
companies and competition for almost three       ever and was still the world leader, but had     Accordingly, SKF 100 should not be
decades, it is impossible not to be fasci-       barely two thirds as many employees as           viewed as preparation for the company’s
nated by the nature of competition, whether      during the 1960s. The intervening years          centenary, but rather as an attempt to mobi-
in relation to sport or to business. There are   were a period of constant rationalization        lize another few percentage units of the
competitive situations where it seems that       and the pursuit of greater efficiency. And        company’s potential resources. It will be the
those who quickly move into the lead will        this must continue to be the case.               most extensive cultural change process ever
be able to retain it for some time. Microsoft,                                                    in the company’s history.
Intel and certain other IT companies oper-       How do you learn to pick up your                    The tool which the company uses in its
ate in young, rapidly changing markets in        feet a few thousandths of a                      efforts to involve all employees in an ongo-
which the competition seems to fall into         second faster with every stride?                 ing process of change and mental mobiliza-
this pattern.                                                                                     tion is called TQM (Total Quality Manage-
                                                 How is it possible to maintain the lead in a     ment). It is a work process that involves the
Difference between winning and                   field where competition is so fierce? How          participation of all company employees –
losing becoming smaller                          do you learn to pick up your feet a few          more akin to the study circles arranged by
                                                 thousandths of a second faster with every        popular movements in former times than to
By contrast, the more established form of        stride? How can the company secure its           the mass meetings, marshaled with mili-
competition between companies is more            world leadership for another decade?             taristic discipline, that used to characterize
akin to those sporting events where the             For me, the company’s SKF 100 program         companies. The objective is that all employ-
difference between winning and losing is         is an interesting example of the manner in       ees will work toward a common vision by
becoming even smaller.                           which tough global competition transforms        both accepting and actively changing the
   At the beginning of this century, SKF         the competing companies. Competition is          steps that lead there. Some of the old mili-
resembled today’s IT companies, as the           now entering the mental phase to which           tary terms (such as authority and strategy)
company grew within a few decades from           John Smith referred. Even the best technol-      have been complemented with concepts
being a basement operation to become a           ogy and the most rigorous discipline are no      such as ethical standards and openness.
world leader. During World War II, SKF           longer sufficient; results must also come            The process is never-ending. Continuous
was even regarded as such an important           from motivation and total mental mobilization.   measurement of factors such as quality,
international player that the company’s             When SKF was in its infancy, Taylorism        work climate, speed and financial results
products played a substantial part in the        held sway, with its emphasis on “the tech-       constantly provides incentives to go back
economic aspect of the war. Toward the end       nology of interchangeable parts.” Which led      and try to repeat the same steps – but better
of the war, the SKF management in                in turn to production based on interchange-      and faster.


    32
                                                                                                                                    SKF 100




SKF’s basic values                               SKF’s strategic drivers                            More “minimalism.” No extravagant ges-
                                                                                                 tures. The company will do precisely what
The first step in SKF’s process of change is      The second step concerns SKF’s four             it has always done, with no deviations. The
based on the seven basic values which all        strategic drivers, or day-to-day methods as     aim is to achieve the same market position
employees must know, share and practice:         they could also be termed.                      in North America and Asia as exists in
• Business focus – which means never los-        • Quality, or total quality, means that the     Europe. Growth must derive from market
  ing sight of objectives and customer             job is done “right from the start.” It is a   growth, or occur at the expense of competi-
  needs.                                           fundamental precept.                          tors. Certain competitors will be acquired if
• Continuous improvement – which means           • Cost means that products and services         the opportunity arises. There are no other
  continuously growing and improving in            will be supplied at the lowest possible       options.
  every area.                                      cost, and faster than before.
• Empowerment – which means that deci-           • Growth will be assured by being able to       SKF’s vision
  sions and initiatives should, as a matter of     offer customers better products and ser-
  course, be concentrated wherever the best        vices than the competition.                   The vision of SKF that everyone will per-
  expertise is to be found.                      • Speed means eliminating waste and             ceive is as a world leader in all the above-
• High ethics – which simply means that the        unnecessary steps and processes without       named product areas. This will be achieved
  organization shall display honor and             compromising quality.                         by being best at giving customers value for
  integrity in all its actions.                  Reading between the lines, we can detect        money, best at developing the company’s
• Innovation – which is the organization’s       here a blend of traditional entrepreneurial     own employees, and best at creating value
  weapon for responding to every change          wisdom and oriental influences. Everything       for shareholders.
  and new opportunity.                           should be simple and clear. Those who want         While coach John Smith’s expertise may
• Openness – the aim of which is that all        to be the masters cannot afford to dissipate    not extend to team sports, he would nod
  employees shall have access to the infor-      their energy. Because the competition won’t     approvingly at SKF’s mental mobilization
  mation they require, regardless of their       do so either!                                   process. There will be no huge, revolution-
  position in the organization.                                                                  ary changes for SKF prior to the company’s
• Teamwork – which is founded on com-            SKF’s strategies                                centenary in 2007, since we are so close to
  mon values and mutual respect.                                                                 reaching the limits of the vision. Rather,
“Just empty phrases,” may be the scornful        The third step in the process focuses on        everything depends on gaining those thou-
response of a few financial analysts or           understanding the SKF Group’s strategies,       sandths with every step. This is why the
adherents of the old-style militaristic school   meaning the competitive weapons and the         changes demand so much from all who are
of management. In that case they have            parameters Group management has estab-          involved.
ignored the trend that has characterized the     lished for operations based on analyses of         And don’t forget that – just as in sport –
manner in which companies are viewed             customers and competitors. The four most        the winner takes all!
during the past decade. And the old-style        important strategies are as follows:
idealists of the popular movements might         • SKF will concentrate on bearings, seals        
well be horrified and amazed at the manner          and closely related products, as well as
in which organizations dedicated to capital-       providing services and support in the soft-   The author, who was editor-in-chief of
ism are now appropriating the dream of the         ware area to the company’s extensive cus-     Affärsvärlden (Business World) magazine
“model organization.” It is a potent dream,        tomer base.                                   for many years, has also received plaudits
which was valid when circumstances were          • SKF will increase its world market share      for his series of books entitled Före-
different. Motivated and committed people          in the bearings segment.                      tagsledarnas Århundrade (The Company
can achieve miracles by working together.        • SKF will actively participate in the          Managers’ Century), published by
But the key is to constantly keep the pio-         restructuring of the bearings production      Norstedts.
neering spirit alive. Perhaps competition          industry.
itself provides a guarantee that even compa-     • SKF will grow strongly in Asia, Central
nies that are approaching 100 years of age         and Eastern Europe and North America,
can enjoy eternal youth. Otherwise the era         and consolidate its position in Western
of the megacompany will be no more than a          Europe.
brief interlude.




                                                                                                                                        33

				
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