Investment in motion

Investment in motion

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.

Svenska Kullagerfabriken (SKF), founded in Sweden in 1907, is an international bearing manufacturer, providing bearings, seals, lubricants, and maintenance and optimisation services to over 40 different industries worldwide. We discuss the enduring demand for these seemingly simple parts and how SKF has grown to be the world’s leading ball bearing manufacturer.

The evolution of bearings
The use of bearings can be traced back thousands of years and, for centuries, humans relied on their own strength to push and pull large objects over the earth.

One of the earliest attempts at reducing sliding friction between surfaces was recorded around 3 500 BC, when the Mesopotamians developed a primitive form of the wheel.

A bearing made of leather or wood was placed where the wheel and axle touched, and then lubricated with animal fat. In the late fifteenth century, Leonardo da Vinci incorporated drawings of bearings into his designs for a helicopter-like machine the first recorded use of bearings in aerospace design (tabled below).

During the Industrial Revolution (1760 – 1840), steel began to be produced at large scale and products that had once been painstakingly crafted by hand were now mass-produced by machines in factories. Bearings played a pivotal role in this period, enabling greater machine efficiencies.

In 1907, Sven Winquist, an engineer and founding member of SKF, designed the self-aligning ball bearing. Over the next decade, he marketed and distributed the company’s bearings throughout Europe and set up sales offices in the USA, marking the beginning of SKF’s global operations.

By the twentieth century, innovation in bearings progressed hand-in-hand with advances in the automobile, machine and military industries. The choice of rolling elements (the internal parts of bearings) expanded from balls to rollers, tapered rollers and spherical rollers that could support greater loads.

Today, the global bearing market is highly competitive with an estimated annual value of USD100 billion, which is expected to grow by 9% annually over the next five years. While SKF is the current market leader, with 27% market share, there are five other prominent international players who supply large industries worldwide and collectively represent around 33% of the market. They include: the Schaeffler Group, Timken, NSK, NTN and JTEKT.

Industrial market dominance
SKF has developed a significant presence in various large industries including aerospace, energy and rail. Their experience and broad offering have resulted in an extensive distribution network with over 17 000 distributor locations globally.

The company supplies bearings predominantly to the automotive and industrial markets. The latter accounts for around 70% of SKF’s sales (charted below) and 90% of operating profits, with the remainder from the automotive industry.

The automotive market has become less lucrative over the years, with vehicle bearings becoming more commoditised and cheaply priced. Additionally, the growth of the automotive bearing market is becoming more commoditised by the increasing electrification of vehicles. Electric vehicles require fewer bearings than their conventional fuel-based counterparts, and therefore, SKF has decreased its exposure to the lower margin (typically around 4.5%) automotive market and focused on the higher margin (around 14.7%) industrial market where they dominate in the rail, heavy industry and industrial distribution arenas.

Enduring demand
In the industrial market, bearings are less commoditised as they are generally more specialised, designed for specific functions and often regarded as critical components that are required to keep equipment running well. Industrial operators cannot risk the high cost of bearing failure by opting for cheaper alternatives to the brands known for quality. Consequently, bearings are priced higher in this market.

The lifespan of a bearing is dependent on the load it carries and the operating speed. While most bearings last between eight and 12 years, high-speed, high-load industrial bearings tend to have shorter lifespans, needing to be replaced more frequently. For example, in the paper industry, bearings are crucial in keeping paper mills rotating. If a bearing breaks down, the paper mill stops, potentially resulting in costly machine damage and extended operational downtime. Smooth industrial operations, therefore, involve the regular replacement of bearings (approximately every two years), which results in continuous demand.

Full-service model captures more value
In a market challenged by commoditisation, SKF has responded by adapting its full-service offering to add more value to customers. Aside from providing the aftersales industrial market with bearings, lubricants and seals, SKF delivers technical advisory support, preventative maintenance services and conditioning monitoring. This allows customers to select the right bearings for their needs and to monitor and optimise performance.

Furthermore, digitisation has become a growth driver for SKF in recent years as they supply bearings fitted with sensors that enable the online monitoring of key operating statistics.

Based on resulting analysis, machine maintenance can be adjusted and performed as required. Running times are improved and costs are reduced, while spare parts are ordered and dispatched automatically.

Strategic investments for sustainable growth
Over the last three years, SKF has invested a significant 8.4 billion Swedish Krone (SEK) in state-of-the-art manufacturing technologies aimed at accelerating the modernisation of their factories and increasing manufacturing efficiency. This investment is proving to boost productivity as well as reduce lead times and the consumption of energy and raw materials, which in turn, enables more cost-effective bearing production.

The company’s investment scope is widening to include technologies that support fee-based business models. Systems are being introduced to ensure minimal wastage, resulting in cost reductions for their customers and stable, regular revenue streams for the business. As indicated below, the enduring demand for bearings from the industrial market, coupled with greater factory efficiencies (and subsequent lower operating costs), will provide a solid platform for widening profit margins and lead to increasing sustainable revenue growth for SKF.

Continued forward movement
Bearings are not only a vital part of every industrial process involving motion, they also need to be maintained and replaced on a regular basis, ensuring ongoing growth in demand. SKF is well positioned in an attractive market segment, with high intellectual property and a full-service offering. Consequently, we are positive about the company’s long-term prospects and our clients hold SKF in funds with global equity exposure.

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