Dr Ing Frank Hiller, Chairman of the Board of Management of DEUTZ AG, on the successes of an eventful 2018 and the Company’s ambitions for 2019.
Dr Hiller, the beginning of 2019 marks the start of your third year at DEUTZ AG. What are you most excited about at the moment?
Dr Ing Hiller: DEUTZ never fails to impress me. Our employees have done some truly exceptional work over the past months and years. They have shown a huge amount of commitment and openness as well as incredible flexibility and they have drawn on their strong culture of innovation to drive forward electrification and improve all our other products and services. We’ve all recognised that it is time for DEUTZ to develop a new corporate culture. I am delighted about the team’s dedication to this transition. We are on the cusp of successfully leading DEUTZ into a future full of change. It’s just great to be able to help actively mould this exciting process and to see how an agile approach can work in a company as old as ours!
A company full of new ideas and headed up by someone who is full of drive. That sounds like a dynamic combination. What exactly changed last year and how has this impacted on DEUTZ’s success?
Last year, we pressed ahead with our E-DEUTZ strategy, under which we are electrifying our drive systems, and we completely realigned our market presence in China after terminating the joint venture with FAW. So DEUTZ can look back on a game-changing year featuring some notable successes. As well as reaching the aforementioned milestones, we achieved all of our targets and significantly improved some key financials. Despite several weeks of strike action at Halberg-Guss, one of our key suppliers, our overall business performance was more than satisfactory last year: revenue was up by 20 per cent compared with the prior year and, most encouragingly, there was a further sharp increase in profitability as measured by the EBIT margin, which rose to 4.6 per cent.
What objectives are you pursuing under the E-DEUTZ strategy and what measures did you put in place in 2018 to achieve them?
DEUTZ’s primary objective of becoming the world’s leading manufacturer of innovative drive systems is unchanged. The electrification of our product range is playing a crucial role here. At our ELECTRIP Event Week in September 2018, we unveiled the first fully functioning systems. To get to that point, our engineers managed to develop two prototypes in less than six months, demonstrating not only the dynamism of our Company but also – and above all else – making one thing clear: DEUTZ is a technology leader and is already in a position to supply customers with marketable electrification solutions.
Why do you attribute so much growth potential to electrification and what will become of DEUTZ’s traditional diesel engines?
Electrified systems reduce noise and particulate emissions while also bringing down running costs for our customers, who benefit in terms of their environmental impact as well. Equipment in the low to medium power range that is subjected to varying loads, such as telescopic handlers, is particularly well suited to electrified drives. Forging ahead with development in this area is therefore clearly worthwhile. At the same time, the broader political and economic picture is changing. So it is important to think long term if you want to achieve sustained success as a company.
Despite all this, DEUTZ’s traditional diesel engines are by no means obsolete, not least because of their high power density and the need for independent operation in the off-highway sector. There is currently no substitute for diesel engines in the heavy-duty tractors and excavators that are used in off-highway applications. Here too we are working with various research partners on making alternative fuels an increasingly viable option and we are in constant dialogue with start-ups. Synthetic fuels, known as e-fuels, represent a particularly promising area for us. In addition, we supply gas engines, which are best suited to material handling applications and compact construction equipment. We therefore offer a broad choice of products and can offer solutions to meet a range of requirements.
Alongside the new electrification strategy, DEUTZ is pursuing an international growth strategy. What do your new plans for China entail?
The Chinese market is already the biggest in the world for off-road applications, and it is continuing to grow. With our new three-pillar growth strategy for China, we have come up with an approach that allows us to establish local production operations and be successful in the long term. The first key pillar is the collaboration with China’s biggest construction equipment group, SANY. We are forming a joint venture with SANY in which DEUTZ AG will be the majority shareholder with a stake of 51 per cent. The second pillar is the contract manufacturing alliance with China’s oldest diesel engine manufacturer, BEINEI, which will enable us to serve further customers independently of the joint venture with SANY and potentially also in other countries. These two pillars are supported by a cooperation agreement with HORIZON, China’s largest construction equipment rental company, which gives us access to a comprehensive service network and thereby opens the door to progressing the digitalisation of our service business. This represents the third main pillar of our new China strategy and corresponds to our groupwide objective of expanding the lucrative service business and thus putting our business model on an even more secure footing.
What do you think will be the key milestones in 2019?
2019 is another year that holds a lot of promise for DEUTZ and, of course, it’s exciting for me personally as well. We are particularly delighted about not only the persistently high level of demand but also the consistently positive feedback that we are receiving from our customers, who are showing a lot of interest in our electrification strategy and alternative drive systems.
We have our excellent preparations to thank for much of this demand: DEUTZ obtained certification for EU Stage V, which came into force in Europe at the beginning of 2019, at a very early stage and was one of the first suppliers to do so. This year, building on this achievement, the focus will be on working with our customers to bring the first products with alternative drive systems to production readiness. A lot is also expected to happen with regard to our international growth strategy in 2019. Throughout Asia, we are benefiting from a decisive competitive advantage in a much-changed market environment: the China VI (China VIa) emissions standard for on-road vehicles is being introduced from 2019 and is broadly similar to the Euro VI standard. The China IV-a emissions standard for off-road vehicles is expected to be introduced in 2020. Our growth strategy is also focused on the US. We have long been active in this target market and are the market leader in certain segments. The aim is now to build on this position and become even more profitable both in the US and across all regions.
Can you put that into figures?
We have set ourselves clear targets, including achieving annual revenue of more than €2 billion by 2022. The further expansion of our core business and product portfolio and the ongoing internationalisation of our activities will help drive this growth. We would like our service business to be generating more than €400 million in annual revenue by this time and for the proportion of revenue attributable to electrified products to have grown to between 5 and 10 per cent.
Our aim is also for profitability to increase during this period. We hope to achieve an EBIT margin of between 7 and 8 per cent in 2022. Numerous initiatives and measures will help us to reach this target. The investments that we have already made, including in the acquisition of Torqeedo, in our E-DEUTZ strategy and in 9 to 18 litre engines, are having a significant impact. We are also reaping profitability gains by further optimising our production operations, product mix and purchasing and sales organisations, by expanding our service business and by generally reducing complexity across all parts of the Company.
For 2019, we are targeting revenue in excess of €1.8 billion and an EBIT margin of at least 5.0 per cent.
I am extremely optimistic that we will achieve all of the targets mentioned and I look forward to a year characterised by teamwork and a pioneering spirit, by shared ideas and by innovation!Dr Hiller, thank you for talking to us.