Abb Asea Brown Boveri Ltd. Business Information, Profile, and History

Company Perspectives:

The ABB Asea Brown Boveri Group is a federation of national companies. It finds efficient solutions for specific customers' problems and exports worldwide in specialized fields.

ABB uses a matrix structure for its organization: The ABB Group is made up of some 1,000 companies and more than 5,000 profit centers. Worldwide business activities are grouped into 4 Business Segments comprising 37 Business Areas. Each Business Area is responsible for global strategies, business plans, allocation of manufacturing, and product development. Local company managers, in turn, are responsible for operations in each country in line with the global strategy of the Business Area.

The Group is also managed in three global regions--Europe (including the former Soviet Union) Middle East and Africa--the Americas--Asia Pacific&mdashø promote cross-border cooperation and support the development of ABB's composite plant business.

History of Abb Asea Brown Boveri Ltd.

Formerly fierce competitors in the heavy-electrical and power-generation fields, Sweden's ASEA AB (which changed its name to ABB AB in February 1996) and Switzerland's BBC Brown Boveri Ltd. (which changed its name to ABB AG in February 1996) announced in August 1987 that the two companies would combine their assets to form a new company, called ABB Asea Brown Boveri Ltd. (ABB). The merger took effect on January 5, 1988. ABB is headquartered in Switzerland and owned equally by the two parent companies, which maintain separate stock listings in their own countries and act as holding companies for ABB. The merger, which created Europe's largest heavy-electrical combine, was designed to take advantage of ASEA's management strengths and Brown Boveri's technological and marketing expertise.

ABB's operations include three main business segments: power generation systems for utilities, industries, and independent power producers; electrical power transmission and distribution systems and products; and products, systems, and services for industrial processes and building systems. A fourth segment, rail transportation, is now part of ABB Daimler-Benz Transportation GmbH (ADtranz). A 50--50 joint venture with Germany's Daimler-Benz AG, ADtranz is the world's largest provider of total rail systems. Increasingly global in its operations, ABB transacts 57 percent of its total sales in Europe, 18 percent in the Americas, and 25 percent in Asia, Australasia, and Africa; Southeast Asia and China are ABB's main growth areas in the late 1990s. The Wallenberg family dynasty of Sweden holds a 25.5 percent indirect voting stake in ABB.

Early History of ASEA

Elektriska Aktiebolaget in Stockholm was established in 1883 by Ludwig Fredholm to manufacture dynamos based on the designs of a young engineer named Jonas Wenstrom. Wenstrom's innovative designs quickly led to financial success, and Fredholm soon wanted to expand the scope of his firm's operations. He arranged a merger with Wenstroms & Granstroms Elektriska Kraftbolag, a company founded by Jonas Wenstrom's brother Goran.

Allmanna Svenska Elektriska Aktiebolaget (ASEA) was created on November 18, 1890, to provide electrical equipment for Swedish industry. Goran Wenstrom shared presidential responsibilities with Fredholm, who also served as chairman of the board. After Fredholm's death in 1891, Wenstrom become sole president and Oscar F. Wijkman was appointed chairman.

The dawning of the electrical age provided ASEA with large new markets as the industrial and residential use of electricity became commonplace in Sweden. The company quickly established itself as a pioneer in the industrial field. ASEA's installation of electricity at a rolling mill in the town of Hofors is believed to be the first of its kind in the world, and in 1893, ASEA built Sweden's first three-phase electrical transmission, between Hellsjon and Crangesberg.

ASEA's early success was short-lived. In 1896 one of Sweden's leading inventors and industrialists, Gustaf de Laval, acquired a 50 percent interest in the company and both Wenstrom and Wijkman were ousted in a management reorganization. But Laval's mismanagement of ASEA soon led the company into severe financial difficulties. With the help of the Stockholms Enskilda Bank, management opposed to Laval eventually extricated the company from his control. Disorganized and deeply in debt, the firm lost a significant share of the electrical equipment market in Sweden.

Stockholms Enskilda Bank played a major role in ASEA's financial recovery. In fact, it was only after the bank agreed to guarantee his salary that J. Sigfrid Edstrom, the former manager of the Gothenburg Tramways Company, agreed to become president of ASEA in 1903. Under Edstrom's direction, the company began to show a substantial profit by 1907. In addition, he expanded the firm's markets in Europe: subsidiaries were established in Great Britain, Spain, Denmark, Finland, and Russia between 1910 and 1914.

Although Sweden remained neutral during World War I, the company was adversely affected by the conflict. ASEA prospered during the early years of the war since the scarcity of coal stimulated the development of electricity, including the company's first major railway electrification project. Eventually, however, the firm lost many of its European markets due to the success of German submarine warfare. In Russia, all of ASEA's operations were interrupted by the revolution beginning in 1917.

The postwar years brought a deep recession to Sweden that lasted from 1920 to 1923. Yet Edstrom's cautious spending policies enabled the company to survive. By the late 1920s, ASEA was once again on the road to profitability and growth. In 1926 the company provided the electric locomotives and converter equipment for the first electric trains on the Stockholm-Gothenburg line, and in 1932 ASEA built the world's largest naturally cooled three-phase transformer.

During the 1930s, company management decided to concentrate on expanding and improving its domestic operations. After several years of negotiations, ASEA and LM Ericsson Telephone Company signed a pact in 1933 stipulating that the two companies would not compete with each other in certain sectors of the electrical market. As part of the agreement, ASEA purchased Elektromekano from Ericsson, giving ASEA undisputed control over a large portion of the electrical equipment market in Sweden.

In addition to its production of electric locomotives and rail equipment for Sweden's national railway electrification program, the firm expanded into new markets. ASEA purchased A.B. Svenska Flaktfabriken, a firm specializing in air-freight handling technology, and a large electric-motor manufacturer in Poland to augment its domestic production. In 1934 Edstrom was named chairman of the board and Arthur Linden, executive vice-president and a close Edstrom associate for many years, was named president. These two men directed the company's successful growth and expansion strategy until World War II.

Although Sweden remained neutral during World War II, once again war severely affected the country's economy. The Nazi occupation effectively curtailed ASEA's operations throughout Europe, and even to a significant extent in Sweden. A new president, Thorsten Ericson, was appointed in 1943, but this management change had little impact on the company's fortunes for the remainder of the war.

During the immediate postwar years, domestic power demands skyrocketed forcing utility companies to expand rapidly. ASEA was unable to meet this demand for electrical equipment due to shortages of material. To make matters worse, a five-month strike by metal workers played havoc with the company's delivery schedule, leaving ASEA unable to meet the demand from the Soviet Union for electric equipment based on a 1946 trade agreement between Sweden and the U.S.S.R.

In 1947 ASEA broke into the American market by signing a licensing agreement with the Ohio Brass Company for the local production of surge arrestors. During this time, ASEA also received substantial orders for the first stage of the massive Aswan Dam project in Egypt.

In 1949 Ake T. Vrethem, formerly with the Swedish State Power Board, was named president of ASEA and Ericson became chairman of the board. Under their direction, the company continued its pioneering efforts in several areas: ASEA supplied electrical equipment and technical expertise to the world's first 400 kilovolt AC transmission, between Harspranget and Hallsberg in 1952; the company claims to have produced the world's first synthetic diamonds using high-pressure technology in 1953, two years before General Electric announced a similar achievement in the United States; and ASEA supplied the first permanent high-voltage, direct current (HVDC) transmission, linking the Swedish mainland with the island of Gotland in 1954.

The company continued to play a critical role in Sweden's rail transit system. ASEA's locomotives accounted for virtually all the traffic on the country's rail network. In the mid-1950s, the firm introduced its "Ra" light-class electric locomotive, which was an immediate success and gave a boost to ASEA's efforts to market competitive locomotive models internationally.

Curt Nicolin Era at ASEA, 1961--80

In 1961 Curt Nicolin was appointed president. Nicolin restructured the parent company, introduced a new divisional organization, and relocated some of ASEA's manufacturing facilities. The company formed an electronics division, signaling the start of ASEA's transition from a traditional heavy electrical equipment manufacturer to an electronics company in which high-technology played an increasingly important role.

In the mid-1960s, ASEA's American market expanded considerably and became more important to the company's overall sales strategy. After serving customers such as the Tennessee Valley Authority, the company firmly established itself in the United States when it was chosen to supply HVDC equipment for the Pacific Internie Project on the West Coast.

ASEA also received an order to build Sweden's first full-scale nuclear power station during this period. The company then merged its nuclear division with the state-owned Atom-Energi to form ASEA Atom in 1968. ASEA acquired the remaining 50 percent state interest in Atom-Energi in 1982.

In 1963 ASEA achieved a major technological breakthrough with the introduction of an improved thyristor able to handle substantially more electrical current than existing devices. As a result, the company began manufacturing thyristor locomotives for Swedish and European rail systems. In the mid-1970s, ASEA worked with its American licensee, the electro-motive division of General Motors, to secure an order for 47 thyristor locomotives for use on Amtrak lines in the Boston-New York-Washington, D.C. corridor.

Nuclear power became an increasingly controversial issue in Sweden during the late 1970s. ASEA continued to manufacture nuclear reactors and received its first foreign order, from Finland. But in a 1980 national referendum Sweden voted to phase out nuclear power programs over a period of 25 years. The company was still allowed to complete orders for foreign reactors, but ASEA Atom's future looked bleak.

Curt Nicolin was also appointed chairman of the board in 1976. During the 1970s, however, Nicolin's management style was overwhelmed by the fast pace of changing technology. A large number of utility and electrical equipment manufacturing companies, including ASEA, experienced falling profits and lackluster growth.

Percy Barnevik Era at ASEA, 1980--88

ASEA began to revive in 1980, when 39-year-old Percy Barnevik was named managing director and, eventually, CEO. Barnevik immediately began a reorganization of the company's management strategy. ASEA had previously bid on projects with low profit margins for the sake of maintaining a minimum sales level and a certain number of employees, but under Barnevik's direction the company would emphasize high profit margin projects. Barnevik's strategy began to pay off quickly.

ASEA initiated a major expansion into high-tech areas, investing heavily in robotics and other state-of-the-art electronics. The development costs of robotics at first held profits down in that sector, but Barnevik viewed robotics as a long-term, high-growth area.

Barnevik also considered ASEA's industrial controls business, with products such as large automation controls, a high-growth sector. ASEA already had a major share of the rapidly expanding market for industrial energy controls, such as those that recycle waste heat. In addition, the company positioned itself to take advantage of a growing demand for pollution controls, spurred in part by the acid-rain controversy in Europe and North America.

In 1985 the company was accused of an illegal diversion of proprietary U.S. technology to the Soviet Union. A former ASEA vice-president was charged by Swedish authorities with tax evasion and violation of foreign exchange regulations in connection with the sale of six sophisticated computers with possible military applications. Barnevik insisted that the diversions occurred without management's approval.

Early History of BBC Brown Boveri

BBC Brown Boveri was established in 1891. The company's development is interesting because it was one of only a few multinational corporations to operate subsidiaries that were larger than the parent company. Because of the limitations of the Swiss domestic market, Brown Boveri established subsidiaries throughout Europe relatively early in its history, and at times had difficulty maintaining managerial control over some of its larger operating units. The merger with ASEA, a company which was praised for its strong management, was expected to help Brown Boveri reorganize and reassert control over its vast international network.

Brown Boveri's early activities included manufacturing electrical components such as electrical motors for locomotives and power-generating equipment for Europe's railway systems. In 1919 the company entered into a licensing agreement with the British manufacturing firm Vickers which gave the British firm the right to manufacture and sell Brown Boveri products throughout the British Empire and in some parts of Europe. The agreement gave Brown Boveri a significant amount of money and the promise of substantial annual revenue, and also helped the company expand into foreign markets at a time when protectionist policies inhibited international expansion.

In the early 1920s, Brown Boveri, already a geographically diversified company with successful operating subsidiaries in Italy, Germany, Norway, Austria, and the Balkans, suffered losses due to the devaluation of the French franc and the German mark. At the same time, in the Swiss domestic market, production costs increased while sales remained static, causing the company further losses. In 1924 Brown Boveri devalued its capital by 30 percent to cover the losses it had incurred. In 1927 the agreement with Vickers ran out and was not renewed.

During the same time, Brown Boveri's various subsidiaries grew rapidly. Industrialization throughout Europe created strong demand for the company's heavy electrical equipment. Italy's burgeoning railroad industry provided a particularly strong boost to Brown Boveri's Italian subsidiary, and the company's German facility actually did considerably more business than the Swiss parent. For the next few decades Brown Boveri grew as fast as technological developments in electrical engineering. Each of the company's subsidiaries tended to develop individually, as if it were a domestic company in the country in which it operated, and broad geographic coverage helped insulate the parent from severe crises when a certain region experienced economic difficulties.

This sort of segmented development had its drawbacks, however. After World War II, the cold war presented a variety of business opportunities for defense-related electrical contractors, but Brown Boveri's subsidiaries were seen as foreign companies in many of the countries in which they operated, sometimes making it difficult for the company to win lucrative contracts involving sensitive technology and other government contracts. The company, nevertheless, excelled at power generation, including nuclear power generators, and prospered in this field. Electrification efforts in the Third World also provided Brown Boveri with substantial profits.

Reorganization of Brown Boveri in 1970

In 1970 Brown Boveri began an extensive reorganization. The company's subsidiaries were divided into five groups: German, French, Swiss, "medium-sized" (seven manufacturing bases in Europe and Latin America), and Brown Boveri International (the remaining facilities). Each of these groups was further broken down into five product divisions: power generation, electronics, power distribution, traction equipment, and industrial equipment.

Throughout the 1970s, Brown Boveri struggled to expand into the U.S. market. The company negotiated a joint venture with Rockwell, the American manufacturer of high-tech military and aerospace applications, but the deal fell through when the two companies could not agree on financial terms. While Brown Boveri counted a handful of major U.S. customers as its clients, among them large utilities such as the Tennessee Valley Authority and American Electric, Brown Boveri's American market share was dismal considering the company's international standing (North American sales accounted for only 3.5 percent of total sales in 1974 and 1975), and the company continued to search for a means of effectively entering U.S. markets.

In 1974 Brown Boveri acquired the British controls and instrument manufacturer, George Kent. The deal at first raised concern in Britain over foreign ownership of such highly sensitive technology, but Brown Boveri prevailed with the encouragement of George Kent's rank-and-file employees, who feared the alternative of being bought by Britain's General Electric Company (GEC). The newly acquired company was renamed Brown Boveri Kent and made an excellent addition to the parent company's already diverse product line.

In the mid-1970s growing demand in the Middle East for large power-generating facilities distracted the company from its push into North America. Oil-rich African nations, like Nigeria, attempting to diversify their manufacturing capabilities also created new markets for Brown Boveri's heavy electrical engineering expertise.

In the early 1980s Brown Boveri's sales flattened out and the company's earnings declined. In 1983 Brown Boveri's German subsidiary in Mannheim, West Germany, which accounted for nearly half of the entire parent company's sales, rebounded. In spite of an increase in orders, however, the company's cost structure kept earnings down. In 1985 the subsidiary's performance improved as a result of cost-cutting measures but price decreases in the international market and unfavorable shifts in currency exchanges rates largely offset these gains. In 1986 the parent company acquired a significant block of shares in the Mannheim subsidiary, bringing its total stake to 75 percent.

In the later 1980s Brown Boveri took steps to reduce duplication of research and development among its various groups. While each subsidiary continued to do some product-development research for its individual market, theoretical research was unified under the parent company, making more efficient use of research funding. In 1987 the company introduced a supercharging system for diesel engines called Comprex. This system was capable of increasing an engine's horsepower by 35 percent and delivering up to 50 percent more torque at lower speeds. The Japanese automaker Mazda planned to use the new supercharger in its new diesel passenger models.

Formation of ABB in 1988

In August 1987 ASEA and Brown Boveri announced their intent to merge their assets for shares in a new company, ABB Asea Brown Boveri Ltd., to be owned equally by each parent company and to be headquartered in Zurich. When the merger took effect on January 5, 1988, ASEA's Curt Nicolin and Brown Boveri's Fritz Leutwiler became joint chairmen. ASEA's CEO, Percy Barnevik, became the new operating company's CEO, while his Brown Boveri counterpart became deputy CEO.

The joint venture between these two former competitors allowed them to combine expensive research-and-development efforts in superconductors, high-voltage chips, and control systems used in power plants. In addition, ASEA's strength in Scandinavia and northern Europe balanced Brown Boveri's strong presence in Austria, Italy, Switzerland, and West Germany.

The integration of the giant was the new management's first task. CEO Barnevik had been applauded for his excellent job of rationalization at ASEA. When he took the helm of that company in 1980 it was struggling but by 1986 it was earning 5.5 percent of total sales, compared to Brown Boveri's 1.5 percent. The companies hoped Barnevik would have similar success with Brown Boveri's operations. For his part, Barnevik aimed for ABB to achieve an overall operating margin of 10 percent.

In 1988 and 1989, ABB reorganized its existing operations by decentralizing and ruthlessly slashing bureaucracy. The combined corporate headquarters alone went from 2,000 to 176 employees. During the same period, ABB also went on an acquisition spree in Western Europe and the United States, purchasing a total of 55 companies. Perhaps most importantly, ABB was able to gain a foothold in North America, something both halves of ABB had struggled to achieve for the previous two decades. In early 1989 ABB formed a joint venture with the American electrical firm Westinghouse. ABB owned 45 percent of the new subsidiary, a manufacturer of electricity distribution systems for international markets. Then, in December 1989, ABB exercised its option to buy Westinghouse out of the venture, leaving ABB the sole owner of the company. That same month, the company agreed to buy Stamford, Connecticut-based Combustion Engineering Group, an unprofitable manufacturer of power generators and related equipment, for $1.56 billion. These U.S. investments, however, were not immediately successful for ABB, and the company, over the next few years, had to reorganize the acquired businesses, divesting $700 million in assets and trimming their payroll from 40,000 to 25,000.

Expansion in Asia and Eastern Europe and Major Restructurings in the 1990s

With recession plaguing the markets of Western Europe and North America in the early 1990s and with the continuing maturation of those markets, ABB decided that its future lay in the emerging markets of Eastern Europe and Asia, where opportunities for growth were plentiful and where it could set up lower-cost manufacturing operations. Although the company had virtually no operations in Eastern Europe at the beginning of the decade, through a series of acquisitions and joint ventures in eastern Germany, Poland, and Czechoslovakia, ABB had established a considerable presence in the region by 1992, employing 20,000 people in 30 companies. By the end of 1995, ABB had a network of 60 companies in Eastern Europe and the former Soviet Union, giving it the largest manufacturing operation of any western firm in the region. Operations in Poland and the Czech Republic continued to lead the way, but significant operations had also been established in Russia (3,000 employees), Romania (2,000 employees), and the Ukraine (1,500 employees).

At the same time, ABB began to expand more cautiously in Asia, laying the groundwork for $1 billion in investments there by the mid-1990s. In 1992 an operating structure was created for the Asia-Pacific region and more than 20 new manufacturing and service operations were established in the region through acquisitions, joint ventures, and other investments. Investments in Asia continued in 1993, the year that ABB carried out another major restructuring. This one involved the reorganizing of the company's global operations into three geographic regions: Europe (including the Middle East and Africa), the Americas, and Asia; the folding of six industrial business segments into the following four: power generation, power transmission and distribution, industrial and building systems, and rail transportation; and the streamlining of the executive committee to eight members (Barnevik, the heads of the three geographic regions, and the heads of the four business segments).

In 1994, in addition to making additional investments in Asia, ABB entered into a contract to build a $1 billion combined-cycle power plant in Malaysia. On January 1, 1996, ABB merged its rail transportation unit with that of Germany's Daimler-Benz AG to form ABB Daimler-Benz Transportation GmbH (ADtranz), a 50--50 joint venture which immediately became the largest provider of rail systems in the world. As part of the agreement, Daimler-Benz paid ABB $900 million in cash for its half share of the new venture since its rail operations were only about half the size of those of ABB.

In February 1996, the parent companies of ABB changed their names, with ASEA becoming ABB AB and Brown Boveri becoming ABB AG. At the same time, changes were made to ABB's board of directors. These changes were intended to reflect the company's increasingly global nature and to improve the relationship between the subsidiary and its parent companies. Further management changes came in October 1996 when Barnevik relinquished his position as chief executive of ABB in order to take over the chairmanship of Investor, the Wallenberg family holding company. Assuming the position of president and chief executive was Göran Lindahl, a 25-year company veteran who had been executive vice-president for power transmission and the Middle East and North Africa region. Barnevik remained ABB chairman. In June 1997 the Wallenberg group, in need of cash for a takeover, reduced its indirect voting stake in ABB from 32.7 percent to 25.5 percent.

In June 1996 ABB was awarded a contract by the government of Malaysia to play the lead role in the building of a $5 billion-plus hydroelectric power generation plant and transmission system at Bakun on the Balui River but this project ran into problems in the following year. As a result of the Asian economic crisis which hit Malaysia particularly hard, the Malaysian government was forced to announce an indefinite delay in the project in September 1997. Despite this setback, and the continuing uncertainty surrounding Asian economies, ABB did not pull back from its expansion in that region. In October 1997 the company announced yet another major restructuring in which it planned to shift thousands of jobs from Europe and the United States to Asia, cutting 10,000 jobs over an 18-month period. This was in addition to a 3,600-job cut announced just a few days earlier at ADtranz. ABB's executives were betting that the Asian economic crisis would be of relatively short duration and reasoned that, although they might lose business in the region in the short term, they could recoup some of these losses by taking advantage of the countries' weakened currencies which brought manufacturing costs down even further. To cover the costs of the reorganization, ABB took a charge of $850 million in the fourth quarter of 1997.

From its first year of operation in 1988 through its ninth year in 1996, ABB Asea Brown Boveri Ltd. had nearly doubled in size, increasing revenues from $17.83 billion to $34.57 billion. Although it failed to reach Barnevik's goal of a 10 percent operating margin for even a single year, the merged company was much more profitable than its predecessors, ASEA AB and BBC Brown Boveri Ltd., achieving a peak operating margin of 9.7 percent in 1995 before falling back to 8.8 percent in 1996. ABB was certainly much stronger, better managed, and more global in nature than its parent companies had been when operating independently. The question for this engineering giant at the turn of the millennium was whether the company's huge bet on Asia would pay off in the long run or lead to further financial difficulties.

Principal Subsidiaries: ABB Asia Pacific Ltd. (Hong Kong); ABB Asea Brown Boveri Pty. Ltd. (Australia); Asea Brown Boveri AG (Austria); Asea Brown Boveri S.A.-N.V. (Belgium); Asea Brown Boveri Ltda. (Brazil); Asea Brown Boveri Inc. (Canada); ABB China Ltd.; Asea Brown Boveri s.r.o. (Czech Republic); Asea Brown Boveri A/S (Denmark); Asea Brown Boveri Europe Ltd. (Belgium); ABB Oy (Finland); Asea Brown Boveri S.A. (France); Asea Brown Boveri AG (Germany); Asea Brown Boveri S.A. (Greece); Asea Brown Boveri Ltd. (India); Asea Brown Boveri Ltd. (Ireland); Asea Brown Boveri S.p.A. (Italy); ABB K.K. (Japan); Asea Brown Boveri B.V. (Netherlands); Asea Brown Boveri AS (Norway); Asea Brown Boveri Ltd. (Poland); Asea Brown Boveri SGPS, S.A. (Portugal); Asea Brown Boveri Ltd. (Russia); Asea Brown Boveri Pte. Ltd. (Singapore); Asea Brown Boveri S.A. (Spain); Asea Brown Boveri AB (Sweden); ABB Management AG (Switzerland); Asea Brown Boveri Ltd. (Taiwan); Asea Brown Boveri Ltd. (U.K.); Asea Brown Boveri Inc. (U.S.A.); ABB Daimler-Benz Transportation GmbH (Germany; 50%).