Turbocharging Activity report 2011

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Oliver Riemenschneider, what kind of a year was 2011?In many respects it was a record-break-ing business year. Best ever figureswere achieved in both the high- and low-speed engine segments. But the SwissFranc also broke records. Everythingcontributing to lower fuel consumptionand emissions and to improved opera-tional safety and reliability was wellreceived in the marketplace. Accordingly,demand was strong for the A100®-L turbocharger, which enables fuel efficientengine operation at a range of ratings.That’s something with a very direct influ-ence on our end users’ profits. And the high-speed segment also showedstrong A100 sales and the first seriesdeliveries of Power2® two stage turbo -charging. This also benefits users byreducing fuel consumption, increasingpower and keeping emissions low. Weare also working with an engine builderto industrialize Valve Control Manage-ment, another system with a directimpact on emissions and performance.In short, our research and developmentis now translating into results in the market. This will also be the case withour current R&D projects, like the firstsuccessful testing of Exhaust Gas Recir-culation in the medium-speed segment

and cooperation with Hug Engineering onITSCR (Interturbine Selective CatalyticReduction).

The Swiss Franc parity was obviouslya major challenge.Yes, and we responded immediately. Onthe customer side we offered to balancelong-term partnerships against priceadjustments. And on our side, we startedadditional productivity initiatives.

Where do you see further challenges? Market volatility is presenting challengesto the entire organization. Availability atshort notice is becoming even more rel-evant. Then there are the global forcescurrently affecting our industry like highfuel prices, increasing raw material pricesand environmental regulations. The latterare becoming increasingly regionalizedand a greater effort is called for to dealwith them. We are also seeing our cus-tomers expand their global footprint.This makes it all the more important forus to secure and strengthen our profileaccordingly. By having our own produc-tion plants in Switzerland and India, jointventures in Japan and China and licensecooperations in Korea, we are alreadywell on the way, although we cannot takeour eye off the ball.

How does the immediate future look?In the next 24 months we shall see someclarification with regard to IMO Tier IIIemissions solutions and how they couldwork in practice. We want to shift ourfocus from the lab to the field. We shalltake different approaches. As well as primary measures like Power2 andVCM®, we also aim to offer secondarymeasures like EGR and ITSCR. We willsee weakening of the marine marketand other segments becoming increas-ingly difficult to predict, which places anextra strain on a supplier. Nevertheless,we see chances precisely here and withthe lasting strength of the Swiss Francwe have to completely review the waywe do things. Challenges always bringout the best in us. We have the ambitionto take our global productivity to thenext level and create new opportunitiesin the process.

Rethinking the way we work

Our industry is focused on global economic and environmentalissues. A lot more must be done to find answers. The need forinnovative solutions is a conviction I share with all our customers.

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Oliver Riemenschneider, Head of Business Unit Turbocharging at ABB, responsible for the worldwide turbocharging business.

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Urs Gribi, Head of ABB Turbo Systems Ltd in Switzerland.

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Urs Gribi, what was special about2011 for ABB?Markets were good but somewhatunpredictable. The first half of the yearexceeded expectations, then thingsslowed in the second half. We brokerecords without any feeling of euphoria.We have to look at things objectively,and we are learning to live with muchmore volatile markets.

How do you see the situation?High-speed customers are feeling confi-dent about their markets. Medium-speedcustomers differentiate between marineand power generation, with the positivenews restricted to the power plant side.The 2-stroke market is suffering due to enormous overcapacity at enginebuilders, shipyards and above all in thenumber of ships in service. For us, thesudden appreciation of the Swiss Franc

was dramatic. Overnight, our prices roseby 20 %. One proactive step was ourloyalty program tailored to our customers’needs and promoting stable long-termpartnerships. Another was to acceleratesustainable enhancements to our pro-ductivity.

What does the future hold?Unpredictability is here to stay and the2-stroke sector will be a major challengefor the next few years. There is greatpotential in all things connected to energyefficiency. From the engine operator’sstandpoint, fuel is his largest cost factorand governments continue to issue regulations. Our innovations offer a lotof scope for improving fuel efficiency,whether we’re talking about new instal-lations or upgrading existing plants. For example, with our Power2 two stageturbocharging there are many more

points in the system where we can makeadjustments which optimize total systemefficiency. But it requires expert knowl-edge to recognize which setting will havewhat effect. Thanks to our advancedsimulation capabilities, we can identifyavailable potentials and offer optimalsolutions for our customers. And, as ourdevelopment programs show, we areactive beyond the field of turbochargingand engaged in important basic research.

What can Switzerland do to assertitself as an industrial location?Innovation and invention have alwaysbeen strengths of Switzerland and build-ing on these strengths is the way ahead.Changes and readjustments occur con-stantly, but our future oriented actionswill ensure that turbocharging remainsone of the high value technologies inwhich Switzerland excels. We have setourselves the target of reacting to riskswith the confidence to take big stepsand the strong Swiss Franc may be justthe catalyst we needed to take a furtherquantum leap. That’s what we’re work-ing on in several areas and progress todate is good.

The confidence to take big steps

Long-term partnerships and staying power characterize our business. We areinvesting with confidence in innovativesolutions that benefit our customers andthe environment.

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Roland Schwarz, responsible for turbocharging activities in China.

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Roland Schwarz, how did 2011 unfoldin China? Demand for new turbochargers fromengine builders slackened in the secondhalf, but there are still immense prospectsand we will consolidate our position andprepare for resumed growth.

We were able to increase our revenueson turbocharger service thanks to ourbroad service offering and the increasingpopulation of turbochargers in the marineindustry, which were delivered duringthe boom period and now require service.

What were 2011’s highlights?Just at the end of last year, Jiangjinmanufactured and assembled what isboth its first A100 turbocharger – ourmost advanced single stage type – andthe first turbocharger for the 2-strokesegment to be produced in China.

We also delivered the 1000th TPS® turbo -charger for high-speed engines fromJiangjin and the 10,000th turbochargeroverall from the factory since the opera-tional start of the company in 2006.

The Jiangjin factory also became a centerof excellence at a time when ABB Turbo-charging’s supply and production networkis becoming more globally integratedand we are to play a more important role.

On the service side we were very suc-cessful in implementing our OriginalParts and Original Service policy withmajor Chinese customers.

Looking ahead, what will be the basisfor the new growth? New engine production is set to expandin China, driven especially by plans tobe the global number one in shipbuild-ing. This is leading to new engines fromdomestic producers, new licensees, newjoint ventures, and many new engineswith turbochargers to maintain, overhauland repair.

The Chinese Government also has adeclared target to reduce fuel consump-tion, and emissions regulations are underconsideration. The Chinese Railways arealready implementing plans to improvefuel efficiency in their locomotive fleet

and we are in the qualification processwith our TPR® turbochargers. It is alsoexpected that emission legislations willbe implemented for Chinese coastal andriver shipping in the coming years. This brings new opportunities for moreefficient new technology engines.

How are you preparing? We continue to build up our servicepresence and competence in China toserve both domestic and internationalcustomers. Localizing A100 turbochargertechnology was a clear demonstrationthat we will always meet sustainabledemand from Chinese customers withour latest products.

This is the most dynamic engine marketanywhere and speed will be of theessence. We will differentiate our offer-ing by showing we understand our cus-tomers’ business and respond rapidly totheir needs with real added value. Wewill be flexible in our operations and aimto improve our local market intelligenceand forecasting competencies. This will benefit our sales and stocking levels at the factory and, importantly, cus-tomer satisfaction via availability and on-time deliveries. This type of fine tuning,including quality and supply logistics,will be good preparation for Jiangjin taking a larger role in the ABB Turbo -charging global supply and productionnetwork.

Dynamism meets dynamism

More foreign manufacturers are bringingnew engines to China while demand for existing generations is still at a highlevel. It is a real challenge to manage thisbalancing act.

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Axel Kettmann, what is your overallimpression of the business year 2011? Unprecedented sales of turbochargersfor low-speed engines was especiallyexciting. Our recovery had previouslycentered on turbochargers for medium-and high-speed engines. But in 2011 wedid well in all segments, even thoughthe medium-speed marine sector still hasnot recovered.

In the high-speed segment we didextremely well on stationary gas engines,where we commercialized 30 of the first ever Power2 two stage turbocharg-ing systems to be used on large enginesanywhere in the world. On medium-speed engines we continued to do wellwith turbochargers on heavy fuel, dual-fuel and gas engines for large powerplants and in the only marine applica-tions to grow – special vessels for theoffshore oil and gas business.

Our service business result was alsosatisfactory, but we started to feel trendswhich create challenges for both serviceand new business. Marine freight ratesfell at an unprecedented pace due to shipovercapacity. They came close to alltime lows while fuel prices rose by 40 %.For ABB Turbocharging this was com-pounded in mid-year by the rise of theSwiss Franc, giving a perceived 20 %price increase for all our products andservices.

The cash stress on operators was adouble-edged sword. It affected theirability to afford regular maintenance butalso led them to order “mega” containerships as a way to lower their costs. Theresult was the record sales of our A100-Lturbochargers, which are establishedfuel savers. But this driver has run itscourse. Last year’s low-speed orderinglevels will not be repeated soon, but the situation on marine service will.

How are we addressing these challenges and what will drive ourbusiness in 2012 and beyond?Starting from a record year and as themarket and technology leader, we are essentially well placed. We haveresponded creatively to the Swiss Francparity with a global productivity driveand an exchange rate support schemewhich has already cemented long-termcustomer relationships.

On product technology, 2011 saw a shiftof emphasis to even more fuel efficientengine solutions, replacing emissions asthe central customer concern for thefirst time in 20 years. Having answers onemissions is now a given rather than asales advantage.

Similarly, attention shifted to CO2 emis-sions which are directly related to bothfuel consumption and fuel type. As wesaw with the A100-L in 2011, our fuelefficiency enhancing products give us a competitive edge. We are thus alsoseeing great interest in our Power2 twostage turbocharging systems, whichenable the attractive combination of lowNOx, improved performance and betterfuel efficiency on both diesel and gasengines.

Which regions and applications willdeliver growth? China is the fastest growing enginebuilding nation and we are respondingwith localization of our very latest prod-ucts and an increased presence to meetthe needs of 2-stroke licensees, localproducers, joint ventures and westernimplants.

As in Russia and India, China has alsostarted initiatives to put state-of-the-artdiesel technology on their new locomo-tives. We have successfully matched ourdedicated TPR railway turbocharger toapplications in all three countries.

A major growth area will be applicationsarising from the spread of natural gas as a prime energy source in many coun-tries. It is leading to more baseloadpower plants with gas engines and kick-started an increase in the global LNGcarrier fleet and gas engine poweredgas compression plants for both pipe-line transport and underground storage.

Records and realism

We had a really satisfactory year on bothnew turbochargers and service. Withrecord sales for both high- and low-speedengines, our new turbocharger businessrebounded from the 2009 slump in a fantastic way.

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Axel Kettmann, Senior Vice President Sales, Marketing and Service.

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Christoph Rofka, ABB Turbocharging’s Senior General Manager of New Turbocharger Sales.

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Christoph Rofka, how did new turbocharger business go in 2011? Overall it was a really good year, butvery uneven ordering patterns createddifficulties. Then came the collapse ofthe Euro at a time when our competitionwas playing catch-up which threatenedto weaken our unique selling proposi-tions. We stayed ahead by listening toour customers and redoubling our effortsto develop the next wave of solutionsthat bring them the benefits they need.

Let’s look at the medium- and high-speed segments. The markets for both are growing. Anexample is the offshore industry, whereinvestment is very strong globally. Adynamic sector for medium-speed inparticular is turnkey power plants. Powergeneration using high-speed gas enginesis also very active and we will grow withthis market based on the technologicallead we have built up with Power2. Andwe are in the process of gaining a strongfoothold in turbochargers for locomotiveengines. Of course, we are always pre-pared to move with the market into new fields of application. Part of this isexpanding our scope-of-supply toinclude technologies that interact withour turbochargers, like our VCM variablevalve train system. We do this with theaim of being a reliable supplier of attrac-tive products that is always open forcooperations and partnerships.

What are the other benefits of working with ABB Turbocharging?We are a development partner and sup-plier that is here to stay and we are anadvancer of engine technology. We wantto contribute to our customers’ successby enhancing the benefits of their prod-ucts. We have the critical mass to notjust survive lean times but to carry oninvesting in R&D when sales are low, aswe showed in 2009. Essentially, we havethe large engine industry’s most com-prehensive and advanced turbochargingsolutions combined with excellent appli-cation engineering, immense technicalknowledge, true global presence and anexcellent service organization.

Off into new markets

In spite of its long history, turbochargingnever gets boring. Every time you thinkthings have reached a point of perfection,we invent something new for our cus-tomers.

What were the other highlights over the year?The big surprise was the strength of themarket for turbochargers on low-speed2-strokes engines against a backgroundof overcapacity in the ships that usethem. But in the meantime everythinghas changed again. That’s how dynamicthings are.

The pendulum is swinging back? Undoubtedly, the question is only howfar. Our challenge is to position our-selves correctly in the market and tooffer the product performance, qualityand reliability our customers seek.These are the enablers of the lowestpossible costs of ownership for theirengines and turbochargers.

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Rolf Schweizer, what is the state of the service market today?Last year our turbocharger population inthe field passed 200,000 so there is ahuge market and many of those we soldin the boom before 2009 are due fortheir first overhauls. A question mark isthe marine market. Shipowners are con-fronted with very low freight rates andan exponential increase in the price offuel. This can lead to short-term thinking.

How are we responding? With invention and innovation. We areadjusting our value propositions tocounter any temptation for end users todelay service beyond what is sensible,or to experiment with non original partsand non original service. Our startingpoint is that we are the longest estab-lished in the business and have theknowledge only available to the turbo -

charger manufacturer. Over 100 ServiceStations in more than 50 countriesmean we can really say that if there areengines there, we are there. And ourknow-how and field experience meanthe Original Parts we fit restore a turbo -charger to long-term top performanceand reliability.

Give some examples of the steps youare taking. Our initiatives build on this unique cus-tomer proximity and technical knowledge.For example, when an overhaul is due wehave devised ways of upgrading turbo-chargers to the latest fuel saving tech-nology as part of the process. Anotheraspect we are building on is our ATURBdatabase, which we are constantly refin-ing. ATURB charts the career of everyABB turbocharger so, uniquely, we canproactively offer to schedule maintenance

for our end users and when a customercalls we save precious time since wehave a good idea what to pre-order andwhat equipment might be needed on site.

We are also stressing long-term agree-ments and the benefits of our OriginalParts fitted during our Original Serviceoperations by our trained technicians.The focus on the agreements is both partof our response to the rise in the SwissFranc, rewarding loyalty with favorableconditions, but also because customerswho use our OPAC® or MMA delegatedservicing schemes all report substantialsavings. They can budget accurately for service each year as well as gainingpeace of mind from knowing that ourexperts are protecting their assets toensure the uptime and operational efficiency that help them to be success-ful in their businesses.

There is a lot going on.Yes. At the center is customer-supplierloyalty based on openness and fairness.End users who commit to service agree-ments and hence to using only ABB Turbocharging Original Parts and OriginalService will quickly see the benefits. Andthis will help us influence them to specifyABB the next time they buy engines.

Service that goes beyond 24/7

Our world is a village. Acting openly andfairly offers the best chance of long-termsuccess. This has a long tradition at ABBand is something we can build on today.

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Rolf Schweizer, responsible for the worldwide service business at ABB Turbocharging.

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Maurizio Boschetti, Vice President, Head of Production Network and Supply.

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Maurizio Boschetti, how did the yeardevelop on the production side? Excellent work by our R&D and salesteams allowed us to come back stronglyfrom the recession. This meant rampingup production very rapidly across all our factories in Switzerland, China andIndia and in our extensive global supplychain. Significantly, in 2011 we also had to cope with ordering patterns thathad become far less predictable.

While these exacting tasks were under-way we could not neglect our commit-ment to continuously improve productiv-ity and key factors like product quality,throughput times, costs and on-timedeliveries. For example, we had alreadyset ourselves stringent targets for prod-uct quality. As with ordering patterns,the expectations of our customers hadchanged, and we can definitely say thatwhat was acceptable two or three years

ago is not good enough now. To com-pound an already difficult situation, bymid-year the Swiss Franc appreciatedconsiderably against other currenciesand it became clear that we would needto redouble our efforts to improve pro-ductivity.

What specific measures were alreadyin the pipeline and which were addedin the course of 2011? Our key targets are productivity and flexibility and two natural focuses are newequipment and process optimization.With the aim of creating a state-of-the-artmachine park, a major step was commis-sioning the “Mammut” multi-purposemachining center for large casings. Thisled to a considerable reduction in pro-duction times and costs for those parts.

While specific investments of this kindcontinue, we are looking at the complete

global value chain across our network ofplants in Switzerland, India and China asa route to higher total productivity. A priority is getting more flexibility into thesystem to meet the volatile ordering pat-terns which we now regard as the norm.We are approaching suppliers and work-ing with them to achieve this flexibility.

Naturally, the appreciation of the SwissFranc accelerated these processes and led to a review of our total sourcingstrategy, including potentials for pro-curement on a truly global basis, withemphasis on Asia and Eastern Europe.

Overall, we are striving to achieve boththe highest productivity in our industryas well as the greatest flexibility. This isexcellent preparation for coping not onlywith short-term fluctuations but also thetypical business cycles of the engineindustry.

Global productivity

It was one of the most successful years for ABB Turbocharging.We made considerable steps forward in both the internationaliza-tion of our value chain and our longer term plans to be the mostproductive, quality-driven turbocharger manufacturer in theworld.

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Markus Mühlethaler, how was 2011 inSupply Management ?Challenging! Key issues were deliveryperformance, quality of raw materials,currency fluctuations, globalization andincreasing productivity. Our ability todeliver was tested early in 2011 by asharp rise in orders. We kept pace,despite some problems with raw materi-als. Then there was the strong SwissFranc, which brought the cost aspect intofocus. We are meeting the challengeswith a root-and-branch makeover of oursupply chain, involving considerableinvestments in our supplier base.

What will be your main concerns inthe future?Supply Management’s role has changed.Its importance is growing, especially inview of the competitive advantage it cangive you in a globalized world. Materialsare the majority of a turbocharger’scosts, giving us considerable leverage inthis area. Adjustments in sourcing canbring large savings. We intend to profitfrom this by developing new suppliers inemerging countries, especially in Asia,Eastern Europe and South America. In2012, for example, the first turbine wheelsand turbine blades will be delivered from emerging markets. The companywas audited with good results, we are confident that quality and on-timedelivery meet our high expectations. The challenge will be to establish thisnew supplier base as fast as possible at the lowest overall cost. The overallsupplier base has to be optimized, rawmaterial quality has to be increased aswell as improving our already excellenton-time delivery record.

What about improvements resultingfrom better design? Design defines the majority of a newproduct’s costs and we are taking ourdesign-to-cost philosophy to the nextlevel. This focus is clearly visible in thedevelopment of our Power2 two stageturbochargers. Suppliers will be involvedin the design process as early as possi-ble and give their input for optimizingproduct design, material usage and pro-duction processes.

How will supplier relationshipschange? We see ourselves working much more asa team with all our suppliers. The trendtowards global sourcing is irreversibleand gives us the chance to optimize oursourcing according to each suppliers’strengths. One area we need to addressis the more complex requirements of the service business. The service net-work orders a huge range of OriginalParts in relatively small quantities. Wecan increase our customer value andcompetitiveness by qualifying partnerswho can respond rapidly on small quan-tities while maintaining the expectedhigh quality level. Given the total order-ing volumes for Original Parts this is agreat opportunity for suppliers preparedto embrace our new philosophies.

Global sourcing

The international character of our businessinspires and motivates us. Wherever yougo in the world you’ll find that we have agood reputation. We want to be sure welive up to it.

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Markus Mühlethaler, in charge of Supply Management at ABB Turbo Systems AG and in the network.

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Christian Roduner, what were your2011 highlights – in business termsand personally? I am very happy with the way we mas-tered several tasks simultaneously. Thiswas a great proving ground for a newteam of experienced colleagues in a newset-up. We kept pace with the ramp upof the A100-L single stage turbochargerfor low-speed engines as the focusshifted from its TPL®-B predecessor. Wegot a high efficiency and fuel savingproduct to market at precisely the righttime to capture record sales.

Also, as we completed the A100 gener-ation for medium- and high-speedengines we were already extending therange by adding versions giving consid-erable new customer benefits. For exam-ple, we designed higher performancecompressors to fit existing A100 hous-ings and hence increase power density.This means engine builders can nowuse fewer or smaller turbochargers for agiven turbocharging performance. Tomeet market demands we also decidedto complete the development of large,axial versions of the A100-M for thelargest medium-speed engines.

Last but not least, we established theproduct objectives and cornerstone fea-tures for our major future offering, secondgeneration Power2 two stage high pres-sure, high efficiency turbocharging.

On the personal side, I think that theinstallation of the new management teamwent very well and the handover fromUrs Gribi to myself reflected our closeworking relationship over several years.

Tell us more about second generationPower2. The next generation of turbochargingsystems will be enablers of ever lowerengine fuel consumption to counter rising fuel prices, ever lower NOx andgreenhouse gas emissions to counterlegislation, and of higher and more flexi-ble power from a given engine displace-ment. Second generation Power2 twostage turbocharging and our interactingVCM variable valve train system addressall these objectives. VCM is now startingthe process of industrialization with anengine builder and, illustrating the paceof the market, the second generationPower2 concept was finalized as thefirst generation was just entering com-mercial applications on diesel and gasengines.

The experience and know-how gainedwas thus immediately transferred to thenew generation, which calls for a com-pact, rational design with a 50 % rise in pressure ratios to 12. Significantly,our concept takes account not only ofaspects like product costs but also end user concerns about doubling thenumber of turbochargers per engine by designing in serviceability right fromthe start.

What other new developments are in the pipeline?An important one is the new TPR 56 turbocharger which specifically targetsenergy efficiency on railway locomotives.A special aspect is that many of theseturbochargers will use VTG variable tur-bine geometry, involving us in the elec-tronic technology needed to control it aspart of the engine’s overall managementsystem. We can learn a lot for the moresophisticated turbocharging systems wewill be developing in future.

Planning, completing, extending

There were real achievements in 2011. A new team found itsfeet, we laid foundations for important future products, and wedeveloped new customer benefits on existing turbochargers.

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Christian Roduner, Vice President, Head of Technology and Engineering.

Contact

ABB Turbo Systems LtdBruggerstrasse 71 aCH-5401 Baden/SwitzerlandPhone: +41 58 585 7777Fax: +41 58 585 5144E-mail: turbocharging@ch.abb.com

www.abb.com/turbocharging

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