Global Insight Perspective | |
Significance | Scania has posted an increase in its first-quarter net profit, of 44% y/y, buoyed by continued strong demand for trucks in emerging markets amid positive global economic growth. |
Implications | Central and Eastern Europe have become more important to the Swedish truck manufacturer as strong demand in the region continued during the first quarter. |
Outlook | Scania said that the outlook for global demand for trucks, especially in Central and Eastern Europe, remains positive, with Russia set to become Scania's largest market by 2008, ahead of Brazil and the United Kingdom. The company is remaining silent over any potential talks with MAN. |
Scania has reported a 44% year-on-year (y/y) increase in its first-quarter net profit, lifted by demand in Eastern and Central Europe, but the Swedish company has remained silent on merger talks with Germany's MAN. One of Europe's largest truck manufacturers said that its first-quarter net profit rose to 2.09 billion kronor (US$312.5 million), up from 1.45 billion kronor a year ago, while sales increased 11% y/y to 19.13 billion kronor. Scania's B shares rose 4.8% on Friday (27 April) to 650 kronor in Stockholm, while the company's shares have risen 90% during the past year, boosted by booming sales figures and consolidation talks with MAN (see Europe: 23 March 2007: MAN Considers Alliance with Scania), which withdrew its 10.3-billion-euro (US$14.06-billion) hostile bid in January after Scania's two largest shareholders rejected it. Scania Chief Executive Officer (CEO) Leif Östling said that there are no ongoing consolidation talks with MAN; however, when asked if talks are set to take place this year, he gave no information. First-quarter order bookings at Scania rose 45% y/y to 25,378 trucks, from 17,514 trucks a year earlier. "In Scania's largest market, Europe, transport needs are growing and there is a shortage of transport capacity," Östling further stated, adding that, "We expect demand for heavy trucks to remain strong in Europe throughout 2007."
Outlook and Implications
Scania’s results were boosted by strong demand for trucks across all of the company's markets, but particularly Eastern and Central Europe, South America and the Middle East, while price increases contributed to higher sales values. Central and Eastern Europe have become more important to Scania and accounted for 22% of truck deliveries in the first quarter, up from 11% a year ago. The strong rise in demand in the region continued during the first quarter, with order bookings more than doubling to 5,011 trucks, boosted largely by Poland and Russia. Östling said that at the current rate, in 2008, Russia will become Scania's single largest market, ahead of Brazil and the United Kingdom. In Russia the company's service network is being expanded primarily through partnerships with local dealers, but also under Scania's own auspices. Scania has stepped up its production rate in Russia, and in 2008 will increase output capacity to 90,000 vehicles.
The rising global demand for trucks is a result of the growth in demand for commodities and positive economic growth in emerging markets. The fact that much of the growth is occurring in these emerging, remote markets is fuelling demand for trucks, to supply raw materials and take away what is produced there. On top of this, higher disposable income is also increasing consumer demand for foreign products, which further raises traffic volumes, while production outsourcing also results in a lot more freight traffic as companies produce in low-cost countries and then export back to more wealthy ones. Large investments in infrastructure and production in the new European Union (EU) member countries are contributing to rising demand for trucks for all types of transport, such as distribution, long-haul and construction work. Investment levels are expected to remain high for several years, resulting in strong demand for transport. Scania's main problem at present is a lack of capacity, but it forecasts demand for trucks to remain high in its largest market, Europe, and the company has successively raised production, to an annual rate of 80,000 vehicles in the first quarter of 2007, a 25% increase compared to the same period last year. With further investments of about 220 million euro to be made over the next three years, Scania will increase its annual production capacity to 90,000 vehicles during 2008, and towards the end of 2009 capacity will reach 100,000 vehicles per year.
As part of its attempts to boost capacity, Scania recently acquired General Motors (GM) Powertrain's plan in Sodertalje (Sweden), where manufacturing of engine components and production of the Scania XPI fuel-injection system will take place (see Sweden: 22 February 2007: Scania to Buy GM Powertrain Plant). The ongoing negotiations between Scania, which is partially owned by Volkswagen (VW), and Germany’s MAN over an eventual merger may further increase the international position of the Swedish truck manufacturer, especially in growth markets such as Asia.