INTERVIEW: LEIF ÖSTLING - President and CEO, Scania AB

Scania is one of the most profitable truckmakers worldwide by a large margin. That, its president and CEO tells Eliot Lobo, is because it has been in the business of co-developing profitable business models with its customers, not of selling trucks.

Scania was in touch with Larsen & Toubro for at least 15 years before you sold your first trucks in India. Why did it take so long?

L&T first came to us at the beginning of the 1990s – you know they also have roots in Scandinavia, – but at the time we were changing our whole truck programme, and preparing to launch a new modular system [with the 4-series], which we did in 1996. We saw no chances at that time to enter India. And we also found that the market for the type of products we have was rather limited. But L&T kept pressing us, and eventually convinced us that there was indeed a good market in the mining sector and parts of the construction sector. In 2007 we finally decided it was time to come to India.

The level of technology in our products is very high compared to those in common use here in India — you can see it in the price difference. This means there are rather few operators that really can justify an investment in such equipment in terms of the payback on that investment. But we’ve had a very good cooperation with L&T in the mining sector, with a rolling stock of around 600 units now.

And when you go into a special sector [like that], it always takes some time to find the right specification. So we have had quite a number of engineering people here together with L&T to just read the results from the first vehicles we put into operation to find out, you can say, failures, or to give good instruction to the drivers, who have not been used to this type of equipment. Right from the start we wanted to take responsibility for our products and for training the drivers and technicians out in the different sites where our vehicles are operated so that we could deliver a high service level for the owners. That’s very important. When you buy expensive equipment, you expect that the equipment should work all the time.

So you can say we saw the Indian demand coming, and we were ready to step in five years ago. Before that we were not ready.

Your new modular system was launched in 1996, and there had been persistent interest from L&T for five years already, so why do you say you were not ready?

When you come out with a new modular system, you phase out the old systems. We never run in parallel. When we launched the 4-series, and I remember very well the discussions, we decided we wouldn’t do it (go to India) because we had so many other markets and so much to do with the new modular system. When a new truck programme goes into production you always have children’s diseases, if I may call them that, which you have to correct.

But you can also say that the Indian economy and the Indian market have developed a lot. It was a very depressed market during the 1990s, and only towards the middle of the ’90s did the Indian government take a number of very bold decisions to deregulate the market and to introduce a market economy modelled on what we have in Europe and the United States. It took quite some years before that model started to work in India, but in the past 10 years I must say you have made enormous progress.

So the Indian market developed to a degree of sophistication commensurate with our products and the business model we have of selling products with a very high service level. About seven years ago we started to see this come. And being a niche manufacturer of commercial vehicles, we needed the niches to develop in order to come here.

Could you elaborate what you mean by “niche”?

What I mean is operations that place very high demands on vehicle reliability, or very demanding transports. For example, the mining sector, or the transport of chemicals or containers, and very heavy haulage — particularly of overdimensional cargoes, as you call them here in India.

In Europe or the United States, where we have a hub-and-spoke system, more or less every long-haul transport is heavy haulage [from 40 tonnes in continental Europe to 44 tonnes on the British Isles up to 60 tonnes as in Scandinavia]. The logistics in India have not developed to the same degree, but they will gradually as the country develops. And that means that the niches in the market where we can be present will, over time, grow.

Do you see any of those becoming mainstream?

We’ve seen the process in other parts of the world where we’ve been — in South America for years, also in Russia when it opened up. We now see it in China. It probably takes some 10, 15 years before you really see a more pronounced development of these niches. In India the sophistication in logistics and in transport will start to come now. If you open up for warehouse concepts with more and more large retailers and supermarkets on the distribution side, you will definitely get much more sophisticated logistics in India.

The road network is being upgraded, there are more motorways, and you can cross from one state to another without having to wait at the border for a day or two. All this deregulation is moving the economy in a direction that is very good for our products, and for the markets of our products.

From a strategic point of view, where does India fit into Scania’s scheme of things?

We are not present in the United States and Canada, and that has to do with [the fact that] the legislation there for vehicles is very different from what we have in Europe. But luckily enough in India, the rules, the legislation, and the dimensions for road transport are very much the same as in Europe. That means the design parameters for vehicles in Europe fit very well here, and also in China. And I would say that India and China, with their economic development, are the two very important regions for us to grow in. We have a very good presence in Europe, in South America, in Africa, and also in Thailand, Malaysia, Indonesia, and Australia. But we know that we have much more to do in India, and that there is a bigger market coming up in India, as well as in China.

On more than one occasion you have spoken of the growing importance of buses as countries like India urbanise and cities grow. What’s the opportunity you see for Scania here in buses?

Over time, very good opportunities. I know that [Swedish competitor] Volvo has been successful and we see no reason why we can’t be as successful as Volvo. I remember the first time I was in India almost 20 years ago — I was in Bombay at the railway station in the south, and it was very interesting to see the people coming in that morning, thousands and thousands of them by every train! Then we went to a bus operator, just to study buses of the third class, second class, and luxury type — there were huge differences.

What we now see in India, like in any other emerging market, is a growing middle class, and also a demand for better equipment because the wealth is growing and people can pay for it. That’s exactly the development we need to sell our buses. And buses are a key element of our planning. We’ve been looking into this market for quite some years now.

Longer than for the trucks?

Yes. That was [the reason for] my first visit to India. Quite an experience! India is very different, and Bombay is very different today compared with 20 years ago.

Your products are renowned for their reliability and durability — those values would certainly have been as salient way back then as well.

Oh yes, but when people start to travel over longer distances, you really need buses [of the quality we produce]. India has a good railway system, no doubt, but it is not all over the country. That’s the reason why we see a growing possibility for intercity buses.

What innovations will Scania bring to India? What’s special that you can deliver that your competitors cannot? Apart from the modular system, of course…

Competition in this industry is fierce, so it means we have to work with business concepts that really give our customers, the transporters, a good value. When transporters grow their fleets, what they always demand is higher uptime — that their vehicles are rolling when they should, with a minimum of disturbances. So our innovation is both, in the product and in the service concepts that keep the product rolling. We look at it as a combination of hardware and, not software, but soft products or service products around the vehicle.

And we already delivering this today in India. Out in the mines, one of our innovations – we did this together with L&T – was to introduce the workshop-in-a-box concept that allows us to offer service right where the customer needs us. We have set up more than 10 of these workshop containers, and the experience so far has been very good. And we can relocate them when the fleet moves to another site.

The Opticruise [automated transmission] that we launched at Excon last November is another innovation that not only makes work easier for the driver but also lowers the total cost of ownership by reducing fuel consumption and increasing uptime.

You mentioned Scania introduced its trucks with an initial specification, then you studied them in operation, and optimised them. I imagine this is a continuous process, but where do you see you’ve reached in the mining sector — is the spec you have good enough? No, it’s never good enough. (Laughs.) It always could be made better. And that is in very tight dialogue with the customer, with the operator. All the time we learn more about his operation and he also learns himself. And in that learning process we can bring out improvements and innovations that give our customer a better profit from his operations. It never ends.

How does it actually work in practice? Scania’s customers include both, big fleetowners and small operators who may have one or two trucks. How do you manage both the small guy and the big fleet?

We work with multiple business models. We need different business models, depending on the customer. Small operators, say in haulage operation, need one type of services and one type of product specification. If you go to, say, a tipper operator in the construction industry, he needs another type of specification, another type of service backup. And the real big ones, they are much more sophisticated in their demands and very often are also leaders when it comes to developing new business concepts. It’s very good to have demanding customers because those are the best when it comes to the development of both, product and service concepts.

Do you see a case – and I think Scania is probably most advanced in that direction – where you don’t sell trucks anymore, or services as such, but transport performance?

We see that already today in the mining sector, where the truck is a part of the whole production flow, the production system. And there we definitely sell uptime. But it entirely depends on the customer, and the customer’s operation. In the mining sector you have a mining company, and they source in all the equipment to keep the mine running. The paper and pulp industry comes close to that.

On the other hand big logistics operators like Eddie Stobart sell their services to customers who want to buy logistics from them. So they have a different set of requirements. But uptime is coming — that’s a concept coming and today we see it where you have very tight production flows like in the mines, or in the paper & pulp industry.

One of Scania’s distinguishing characteristics has been its emphasis on the driver — in every market. In India, the driver is at the lowest end of the food chain, whereas if he is looked at as an important asset, things could change a lot. Do you see Scania making a difference here, helping the operator achieve better efficiency just by giving the driver the importance that is his due?

Yes. But that’s something we see with sophisticated customers. We were talking about the mining sector, paper & pulp, Stobart. In Europe, of the total cost for a company like Stobart, one-third is fuel, another third is the cost of the driver. In India, fuel accounts for 45 percent of the mining-truck operator’s costs, and the driver less than 10 percent. Why did we introduce the Opticruise here in India? Well, to save fuel – that 45 percent – for the operator. And how? Because we know that the difference in fuel consumption between a very good driver and a very bad driver could be up to 15 percent. If you have a fuel consumption per year of, say, 50,000 litres diesel – we have examples of more than 100,000 litres, – 15 percent is quite some litres.

In the mines they do 5–6,000 hours times 18 litres, so they consume about 100,000 litres [a year]. And then if you go from a very bad driver to a very good driver, you can reduce the fuel consumption by 15,000 litres! With that reduction, you pay not just the salary of the driver — you pay for two or three drivers with the saving! That’s something we try to get operators to understand. Even if it is a low-status job, the more we can empower the driver with an Opticruise, for example, or with an education how to drive, the more the operator saves. Bringing that 45 percent down translates into a 7–8 percent reduction in his overall costs.

The better-trained human being – when it comes to the operation of any kind of equipment – saves you money not only on the fuel side, but also on repairs and maintenance. We know that you have about the same reduction in repair costs with a very well-trained driver, because he doesn’t expose the equipment to the same risks as a not-as-educated driver. When we explain this to the operator and he starts to understand the potential savings, he immediately realises that the best investment he can make is in training his drivers. That’s why we’ve now been shooting a driver training video here in India, for Indian mine conditions, that we will roll out to our customers with L&T.

In all segments that you enter, you will not be selling just a truck — it’s going to be a package that includes driver training and service. That would mean, if I may imagine it thus, a comprehensive offering centred around the driver because he has it in his hands to save fuel, and to reduce repair and maintenance. And like you said, one of your brand propositions is your ability to deliver the lowest TCO in the industry…

That’s also the reason why, with our concept, and with the technical sophistication we have, we need sophisticated operators in India that understand this concept and buy in.

Have they, — the ones you’ve been working with?

Absolutely. And we see that that kind of customer growing in number and emerging in other segments.

Your trucks have a long life. They run so many kilometres in Europe, and then are good for one or two lives more in another market. How long does the lifecycle of a Scania typically extend?

In long-haul operation we have owners that drive up to 450,000 km a year and they use the truck for between three and four years. That’s 1.5–1.6 million km. Then it goes into a secondary life and when we go to Iraq, for example, where we have been for very long, or in Brazil, we have very many that have done 2.5–3 million km, 20-year-old trucks that seem never to die. All they do is change ownership.

A question from an MAN fan — what possibilities do you see to work together?

I was in Munich yesterday and had a meeting with MAN. We have a number of working groups from the two companies together exploring different areas, finding out where we could learn from each other, and where each can benefit from, say, technical developments the other has been doing [separately], to the mutual benefit of the two companies. We started the process – we were allowed by the European Community to start it – only in November last year, so it’s rather fresh. We see a number of opportunities, but it’s very early to point to areas we really could cooperate much deeper in. But it’s working well, and there is a good atmosphere in the working groups.