S
UST 1015-046
KRISTIAAN HELSEN JEROEN VAN DEN BERG ARMAND GHIEUW TTI: Tooling up for Asia
The way we differentiate ourselves from competitors is by developing breakthrough products that outperform our competition and that is why we are winning. […] We believe we will be the global leader in cordless [power tools] for years and decades to come. Joe Galli, CEO TTI1
On 19 August 2015, Techtronic Industries (TTI), a leading manufacturer of tools, outdoor products and vacuum cleaners, announced record revenues and profits for the first half of 2015. According to Joe Galli, the company CEO, TTI’s success could be attributed to the continuous roll-outs of innovative products; investments in productivity and automation; and highly targeted geographic expansion.2.
Even though TTI’s star had been shining brightly its executives would not rest. They were always looking for methods to sustain the company’s growth in the global market. They predicted that in the next 10 years, Asia could become an important market for TTI. 3 Given the large number of possible entry markets, the company wanted to rank the Asian countries by level of market attractiveness. For those markets that seemed to offer the most attractive opportunity a range of other issues had to be addressed. What would the most suitable market entry strategy? A one size fits all approach was probably not workable.
1 Joe Galli, interview by Shery Ahn, Earnings Edge, Bloomberg, 20 August 2015. 2 Ibid. 3 Joe Galli, interview by author, Hong Kong, 11 August 2015.
Jeroen van den Berg and Armand Ghieuw prepared this case under the supervision of Professor Kristiaan Helsen solely as a basis for class discussion. Cases are written in the past tense; this is not meant to imply that all practices organizations, people, places or facts mentioned in the case no longer occur, exist or apply. Cases are for educational use only and are not intended to serve as endorsements, sources of primary data, or illustration of effective or ineffective handling of a business situation.
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Last edited:2 October 2015
HKUST Business School Thompson Center for Business Case Studies
Techtronic Industries
"The vision of the chairman was: If I want to be able to control my destiny I need brands. As an OEM (original equipment manufacturer), you are at the mercy of your customers’ strategy competing on price against all the other manufacturers." Stephan Pudwill, President of Strategic Planning, TTI4
Horst Julius Pudwill, the Chairman of TTI, co-founded the company with Roy Chung in Hong Kong back in 1985. H. Pudwill, who was an engineer turned entrepreneur, first came to Hong Kong from Germany in the mid-1970s as an executive with Volkswagen. 5 TTI began operating in a small industrial building as an original equipment manufacturer (OEM) supplier to companies like Sears, Hoover and Dirt Devil vacuum cleaners. The first manufacturing plant was based in Dongguan, China in the Pearl River delta just across the Hong Kong-Shenzhen border. To have better control of the company’s destiny, they were determined to go beyond operating as an OEM and decided to build their own house of brands. TTI was listed on the Hong Kong stock exchange in 1990. In 1999, the company acquired its first brand, VAX, a leading vacuum cleaner brand in the United Kingdom. It subsequently purchased a number of popular power and hand tool brands including Milwaukee, AEG, Ryobi, Homelite, Stiletto and HART. Other acquisitions included Hoover and Oreck floor care brands which were already household vacuum cleaner brands in the US consumer and commercial markets. [see Exhibit 1 - timeline]. By 2015, TTI had evolved into one of the largest companies of its kind with an annual turnover of USD4.7 billion in 2014 [see Exhibit 2 - TTI global footprint] and [Exhibit 3 – TTI financial statements].
Floor Care
TTI's turnover could be roughly split up in two business lines: power equipment and floor care.
Floor care included TTI's industrial and commercial vacuum cleaner products and their accessories. The brands TTI owned in floor care were the leading brands in their segments. Oreck was a professional brand serving the commercial market. Hoover and Vax were premium brands that were known for their upright vacuum cleaners, and Dirt Devil was a general consumer brand selling a range of cleaning solutions including hand held and upright vacuum cleaners [see Exhibit 4 - floor care]
Power Equipment
Power equipment, which included hand tools, power tools and lawn and garden tools, was TTI''s largest business segment. The segment generated roughly 75% of total revenues or USD3.6 billion [See Exhibit 5 - sales by segment]. Within the segment, power tools generated the bulk of the revenues, whereas TTI’s total hand tools sales were less than USD100m. Fiscal year 2014 was a banner year and there was growth in all business segments and geographic regions. North America grew by almost 9%, Europe by 11.3% and the rest of the world by 26.4%. [See Exhibit 6 - sales by region].6
4Denise Tsang, New products key to Techtronic’s future, says founder’s son, http://www.scmp.com/print/business/companies/article/1502386/new-products-key-techtronics-future-says-founders- son, accessed 8 July 2015. 5 http://www.forbes.com/profile/horst-julius-pudwill/, accessed 26 August 2015. 6 Euromonitor International , “Power Tools: Category Overview,” February 2015.
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As a designer, manufacturer and marketer, TTI had a clear strategy for its power equipment segment and was focused on end-consumers, professional and industrial users in the home improvement, infrastructure and construction industries. It always looked to add to its brand portfolio. It also considered brand extensions that fulfilled new market niches and/or advanced its technological edge in the marketplace. Geographic expansion was also part of TTI’s long-term strategy to build its business outside the North American and European markets, the company’s traditional strongholds. The introduction of innovative new products remained the centerpiece of its business model.
New products account for approximately one-third of our revenue annually. We keep investing in our brands. It is critical to keep on the forefront of technology. Stephan Pudwill, President of Strategic Planning, TTI7
TTI's strategy for long term success was centered on four pillars: powerful brands, innovative products, exceptional people and operational excellence. In 2009, the company combined its scattered China production plants and engineering centers into one big factory campus in Dongguan, China [See Exhibit 7- TTI Manufacturing & Innovation Center ] and [Exhibit 8 – TTI consolidated efficiency]. This move boosted productivity by 25% by putting design, production and engineering facilities under the same roof8.While rising costs and the appreciation of the Chinese yuan were driving some manufacturers out of China, TTI had so far defied the odds by automating its production wherever possible to achieve greater cost efficiencies and by focusing its revenues on traditional markets like North America and Europe. In addition to the China facility, TTI has a diversified manufacturing strategy with facilities in the US, Germany and the Czech Republic according to Stephan Pudwill9, TTI's president of strategic planning.10
In 2014, TTI spent US$118mln on research and development. A significant amount was spent on expanding the lithium cordless platform across all product segments, and enhancing the performance of battery and motor technologies. Effort was also devoted to developing completely new products or enhancing the safety and productivity of existing ones.
We do R&D and product development in the US and in Europe, but we do the back end work in Asia. They [the US and European teams] can come up with the ideas in the markets and the teams in Asia can then work on the implementation of those designs together with the US, European and ROW teams. Stephan Pudwill, President of Strategic Planning, TTI11
To bring new products to the marketplace faster and to reduce product development lead- times, R&D activities were shared between its US and European offices and its China Dongguan Innovation Center. Typically the local teams identified the needs of the end-users they served.
7 Stephan Pudwill, interview by author, Hong Kong, 28 July 2015. 8 Anita Lam, Innovation spares Techtronic delta pain, http://www.scmp.com/print/business/companies/article/1278233/innovation-spares-techtronic-delta-pain, accessed 8 July 2015. 9 Stephan Horst Pudwill had been with TTI since 2004. Prior to joining TTI Stephan Pudwill held managerial positions at Daimler Chrysler AG. He was the son of Horst Julius Pudwill. 10 Stephan Pudwill, interview by author, Hong Kong, 28 July 2015. 11 Ibid.
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The product development itself was a joint effort of the local R&D and the China R&D teams [see Exhibit 9 – TTI product development]. Examples of product innovation included the development of a power tool for an application that up till that point could only be done with hand tools; or the addition of a finger guard on a tape measure that eliminated the chance of the user’s fingers getting hurt when the tape retracted, thereby improving the user experience.
S. Pudwill estimated that while 80% of products were global, 20% of products were market specific. Jigsaws, for example, were particularly popular throughout Europe while a specific miter saw was only used in southern Europe. In North America, on the other hand, most homes were constructed with wooden frames which required a different set of “location-specific” tools.12
Power Tools Worldwide demand for power tools was forecast to increase by 4.8% per year through 2018 to USD32.9 billion13. The US continued to dwarf all other markets and accounted for a third of global sales of power tools14. US demand in 2016 was expected to reach USD7.3 billion.15
London is an example of a strong growth market for power tools. Even though it is a developed market, there is a lot of construction activity. Growth can come from mining, industry, infrastructure development or redevelopment, residential construction, light commercial fabrication etcetera. Joe Galli, CEO TTI16
TTI used a three layer market segmentation strategy and had crafted its brand architecture around them. Milwaukee was the industrial brand, targeting tradesmen (e.g. plumbers, electricians, carpenters) and industry (e.g. automotive, mining). AEG and was the professional brands, targeting both tradesmen and premium do-it-yourself (DIY) users, while Ryobi and Homelite were ‘consumer’ brands mostly targeting end-users in the DIY, hobbyist and garden enthusiasts segments. [see Exhibit 10 – power tools brand table]. Industry-wide, roughly two thirds of demand for power tools came from tradesmen and industry with the remaining one third from DIY and hobbyists.17
Changes in power tool technology had been driven by competition for market share, changes in related industries (batteries, electronics, motors, software) and environmental and safety legislation. For example, cordless electric tool technology made an important shift from nickel- based to lithium-ion batteries resulting in improved battery life which provided more power with less product weight. Another breakthrough was the brushless motor. Brushless motors utilized electronic control logic to direct the electronic current so as to eliminate frictional energy loss resulting in more powerful output and increased durability18. All major players were continuously
12 Stephan Pudwill, interview by author, Hong Kong, 28 July 2015. 13 http://www.prnewswire.com/news-releases/world-power-tools-market-300030218.html, accessed 7 August 2015. 14 Euromonitor International , “Power Tools: Category Overview,” February 2015. 15 Power Tools Market Insights, http://leaguepark.com/downloads/Power_Tools_Market_Insights.pdf, accessed 11July 2015 16 Joe Galli, interview by author, Hong Kong, 11 August 2015. 17 Power Tools Market Insights, http://leaguepark.com/downloads/Power_Tools_Market_Insights.pdf, accessed 11July 2015. 18 A traditional brushed motor contains a brush through which current is applied directly to a communicator resulting in a magnetic field that makes the armature rotate about the axle. The more current you apply, the stronger the magnetic field and the faster the motor spins. As the brush is in direct contact with the communicator there is friction,
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striving to produce lighter, quieter, lower vibration industrial tools with easy-to-change accessories for the professional market.19
In mature markets, the development of power tools forged ahead towards premiumisation and innovation in order to create and fulfill new consumer needs. Euromonitor noted a drive towards wireless charging technology and the creation of platforms built around interchangeable batteries.20 Both Ryobi and Milwaukee were prime examples of the success of such a platform strategy. One blockbuster invention was the Ryobi ONE+ line of power tools featuring a single battery charger system which was interchangeable with more than 50 power tools in the line. It became a runaway success for the DIY market and added more than one million new customers for TTI each year through new product launches and promotional marketing campaigns.21 The company’s Milwaukee industrial brand took the professional market by storm in 2014 achieving 22.2% global growth. Its principle M18 and M12 series were based on a patented Redlithium battery platform and Powerstate brushless motor technology. These developments, which applied to more than 70 cordless tools, gave them similar if not better performance than their corded counterparts.
The new technologies also had an impact on the tool repair industry. Repairing malfunctioning corded tools with corded brushed motors used to be a significant business. Modern cordless tools, however, tended to wear out before they broke. Replacement cycles had become shorter. Galli explained: "If a cordless tool breaks 85% of users will buy a new tool. With the old corded tools only 40% would buy a new one while the other 60% would repair the tool."22
Hand Tools Our Strategy in hand tools is to acquire if there is technology we don’t have. We find that people easily leap from a power tool to a hand tool with the same brand. The Milwaukee brand is respected, so its hand tools are selling like crazy in North America. Our strategy is always have a demonstrably better product, with points of differentiation you can demonstrate to users on a jobsite, as opposed to me-too products Joe Galli, CEO TTI23
The hand tools industry was a USD8 billion market globally. Unlike the power tool market, the hand tools market had seen little innovation with tools left unchanged for decades. There were few truly global hand tool brands. Brand loyalty was also less when compared to power tools. Hand tools themselves, on the other hand, were global in terms of functionality and design. Tools used by tradesmen in the US were similar to the hand tools used by their counterparts in Europe or Asia.
resulting in a drop of speed and thermal energy loss as well as heat generation, wear, and noise. Brushless motors use a different design without brushes, as a result they are more powerful, consume less energy, are quieter, run cooler, have longer life expectancy and require less maintenance. Brushless motors are more expensive to design and manufacture. See: http://toolguyd.com/power-tool-brushless-motors, accessed 28 September 2015. 19 Power Tools Market Insights, http://leaguepark.com/downloads/Power_Tools_Market_Insights.pdf, accessed 11July 2015. 20 Bosch. 2014 Annual Report. 21 Techtronics Industries. 2013 Annual Report. 22 Joe Galli, interview by author, Hong Kong, 11 August 2015. 23 Ibid.
5 UST 1015-046 TTI: Tooling up for Asia HKUST Business School Thompson Center for Business Case Studies
TTI had set an aggressive goal in the hand tools market, planning to grow sales to at least USD500m within five years. It had extended the Milwaukee brand to the hand tools segment, and was rapidly adding innovative products to its hand tool lineup. Its other hand tool brands included Empire, aimed at the professional market, and Hart for the DIY market. It also owned the Stiletto brand which produced ultra-high-end titanium hammers and the DreBo brand of carbide tipped drill bits.
Key Markets
We have always been focused on developed markets. When the emerging markets were booming we didn't look smart. People were asking: why aren't you more focused on South America or CIS [Former Soviet countries]? Today we look very smart because the markets we sell in today are doing very well Stephan Pudwill, President of Strategic Planning, TTI24
To date, TTI had largely focused on markets of North America and Europe. More recently, they had successfully entered the Australian market. But while TTI’s competitors had made forays into emerging markets, TTI's approach was more conservative [see Exhibit 11 – competitor profiles].
We are No. 1 in North America, Bosch is No 1 in Europe, Makita is No. 1 in Asia, Stanley Black & Decker is No. 2 in North America, No. 3 in Europe. Joe Galli, CEO TTI25
More than 70% of TTI annual sales were made in North America. A significant share of those sales were made through the Home Depot (HD), whose sales accounted for 36% of TTI’s total 2014 revenue.26 HD was founded in 1979 in Atlanta, Georgia and had become the world’s largest home center with over 2,200 stores mainly located in the US, Canada and Mexico. From the beginning, HD developed close partnerships with industry-leading manufacturers to deliver the most exclusive assortments to its customers. TTI was such a case; its Ryobi power tool line was exclusively available at HD stores in North America27.HD also carried Milwaukee as well as TTI's hand tool brands.
Europe was TTI's second largest market with 20.4% of total sales. Unlike North America, Europe was hugely diverse. TTI had a leading position in the UK where it partnered with key retailers. Its presence in some other European markets such as the Benelux28 was smaller29. European professional and industrial users also differed in purchasing behavior from their North American counterparts. Typically, they would buy their products in specialty stores and not at large home centers.
TTI's third major market was Australia, which it had been expanding in aggressively in recent years. A key partner in the country was the leading home center Bunnings, which
24 Stephan Pudwill, interview by author, Hong Kong, 28 July 2015. 25 Joe Galli, interview by author, Hong Kong, 11 August 2015. 26 Citi Research Equities, Techtronics (0669.HK), 20 May 2015. 27 https://corporate.homedepot.com/OurCompany/History/Pages/default.aspx, accessed 10 July 2015 28 The Benelux is composed of Belgium, The Netherlands and Luxemburg. It was one of the earlier customs unions and a predecessor to the European Union. 29 Stephan Pudwill, interview by author, Hong Kong, 28 July 2015.
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distributed the AEG and Ryobi branded power tools through its 350 sales outlets. By 2015, TTI was the largest power tool company in the DIY segment30
Marketing and Distribution Strategies We are capturing market share in the right way-not by cutting prices at end of quarter, but through innovation. Joe Galli, CEO of TTI31
TTI had managed to bolster its gross margins for seven consecutive years while simultaneously burnishing the image of the various brands in its portfolio. To promote its brands and improve sales, TTI placed sales representatives at store outlets of the home centers TTI partnered with. Though some competitors did the same, their efforts were on a much smaller scale. Each sales representative represented a single brand, but they could also cross sell and advise a DIY user. For example, those who wanted the very best were advised to buy Milwaukee, or a tradesman who was looking for a lower cost would be advised to buy Ryobi.
When people purchase tools they want to touch, feel, and see what the latest changes are. They like to talk to an expert and get advice on what tool is best for their application. When you go into a hardware store you typically don't buy a single item, you might also get some paint, wood, drill bits etcetera. Stephan Pudwill, President of Strategic Planning, TTI32
Apart from home centers, TTI marketed through several other channels. Tools aimed at the industrial and professional segment were sold through industrial supply companies like W.W. Grainger, as well as various industry related channels.33 Due to the technical and complex nature of power tools, e-commerce had been limited to the online store of the channel partner (e.g., www.homedepot.com). Tools targeting the DIY segment were also distributed through hardware stores.
When I created DeWalt34 it was done in a brand new way. It was done through jobsite demonstrations and grassroots marketing [sponsored Nascar]. I am open to any way that allows us to develop the business Joe Galli, CEO of TTI35
TTI used a wide range of marketing strategies to try to find new ways to market its products to the end user. For the industrial market, one strategy was the development of jobsite teams. These teams visited construction sites with a truck full of Milwaukee products for on-site demonstrations. The jobsite teams did not sell the product directly, but generated demand for the Milwaukee products and directed interested parties to their distribution partners in case they
30 Euromonitor International, “Home Improvement in Australia,” May 2015. 31 Techtronics Industries AGM Meeting, 19 March 2015. 32Denise Tsang, New products key to Techtronic’s future, says founder’s son, http://www.scmp.com/print/business/companies/article/1502386/new-products-key-techtronics-future-says-founders- son, accessed 8 July 2015. 33 Joe Galli, interview by author, Hong Kong, 11 August 2015. 34 Joe Galli worked at Black and Decker for 19 years. He was responsible for the launch of the DeWalt powertool brand and rose to the position of president of worldwide power tools and accessories. After leaving Black & Decker he joined Amazon.com as president and COO. Before joining TTI he was a director and CEO of Newell Rubbermaid Inc. 35 Techtronics Industries AGM Meeting, 19 March 2015.
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wanted to make a purchase. Other strategies included providing tools to vocational training centers, tradeshows, product endorsements, DIY workshops, websites, advertising, and viral videos on social media [see Exhibit 12 – TTI marketing].36
If there is a new brand, normally 3rd party endorsement is why they [the end-user] buy it. The second biggest reason for buying a new brand is that the owner of the shop tells you to try it. Joe Galli, CEO of TTI37
Forays into Emerging Markets
As a rule of thumb, we’re willing to take bold risks on new products, but when it comes to country specific geopolitical risks, we’re extra careful. Joe Galli, CEO, TTI38
Even though TTI was doing very well in mature markets the company continued to explore avenues to sustain its growth momentum. Galli was well aware of the risks associated with hasty entries into emerging markets like Brazil and Russia. He recalled how in 2009 they decided to go into Brazil. Up to that point TTI only sold their products indirectly in Brazil through exporters. TTI set up an office in Sao Paolo and appointed a general manager. The possibility of setting up a factory to take advantage of Latin America’s Mercosur39 rules was also discussed but eventually dismissed. Instead TTI imported the goods and paid import tariffs of up to 30%. Meanwhile TTIs competitors jumped in head-on and set up factories in Brazil to take advantage of Mercosur only to subsequently suffer with the outbreak of the Petrobras scandal40.
The Russian market was another example of how TTI's cautious approach had paid off. While competitors entered aggressively and treated Russia like "a western market"41, TTI had taken a more cautious approach in setting up an office. For instance, it insisted on cash-on- delivery from its distributors. After Russia’s military intervention in the Ukraine, international sanctions were imposed against Russia. Coupled with rapidly falling oil prices and the collapse of the ruble, Russia’s economy went into a tailspin. While TTI’s sales in Russia dropped from USD20m to USD15m, competitors saw a much larger drop in sales42.
Major home centers like HD and B&Q also had a patchy record with their overseas forays. In 2006, HD acquired China’s 12-store home center The Home Way but pulled out only after six years in the country. B&Q pulled the plug on China in 2014 and sold 70% of its stake to its
36 Stephan Pudwill, interview by author, Hong Kong, 28 July 2015. 37 Techtronics Industries AGM Meeting, 19 March 2015. 38 Joe Galli, interview by author, Hong Kong, 11 August 2015. 39 Mercosur was a customs union established in 1991. Its full members were Argentina, Brazil, Paraguay, Uruguay and Venezuela. While the union allowed for free transit of goods and services amongst its member states, they applied fixed tariffs for products and services originating from non-member states. 40 Petrobras, the semi-public Brazilian oil company with revenues of USD130 billion in 2013 was caught up in one of the world's largest corporate scandals in 2014 and 2015. Public prosecutors identified 'suspicious' contracts worth tens of billions, mostly related to construction projects. Many of Brazil's business and political elite were accused of paying or accepting bribes. 41 Joe Galli, interview by author, Hong Kong, 11 August 2015. 42 Ibid.
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Chinese partner. Major reasons for their departure included a weak local DIY culture and stiff competition from local retailers.43
Earlier entries into Asian Markets Our strategy in emerging markets is that we go in if the market can support a premium priced, value added range of product. Asia has tremendous opportunity, but it is about identifying the right countries. We want to capture market share but only in strategic categories that can be profitable down the road. Stephan Pudwill, President of Strategic Planning, TTI44
Although Asia had billions of consumers [see Exhibit 13 - Asia country data] TTI's total power tool sales in Asia were very low [see Exhibit 14 - TTI Power tool sales in Asia]. South Korea was TTI's largest market in Asia with USD6.3m in sales in 2014, up from USD2.97m in 2013. The rapid growth was the result of TTI setting up an office in the country and hiring a general manager who was a veteran of the Korean power tool industry. Besides entering into retail dealer and wholesaler partnerships, the Korean office also set up a jobsite team to promote Milwaukee products at construction sites and large scale industrial users. By generating demand on construction sites and larger users groups, they also got distributors interested in carrying TTI products.
China was another market in which TTI had a small presence in terms of sales, selling USD1.5m worth of mostly Milwaukee tools. TTI sold no tools in the DIY segment in Asia [see Exhibit 15 - Asia home improvement sales] and [Exhibit 16 - Asia home improvement trends]. Most DIY sales in Asia were in the consumables segment, items like paint and wall paper. Home owners would buy the products and hire tradesmen to do the actual renovation work. Younger white collar workers had an increasing interest in DIY, partially fuelled by home decoration programs on TV and online, as well as the desire to do something 'unique' with their home. Rising home prices also left new home buyers with less money for decoration and DIY was often the cheaper option45. However, Galli referred to the power tools they mostly bought as 'throwaway tools'46
The next step in Asia
In the Asian theatre there is more that we don't know than we do now, we believe that in the next ten years this region is going to be a very important economic zone. Joe Galli, CEO, TTI47
Powerful brands, innovative products, exceptional people and operational excellence were the core of TTI’s success. It now wanted to leverage those strengths to enlarge its footprint in Asia. With over 20 possible markets, Galli realized that the first step would be to rank the various markets in terms of attractiveness. In which countries would there be an appetite for the
43 Euromonitor International , “Power Tools: Category Overview Passport,” February 2015. 44 Denise Tsang, New products key to Techtronic’s future, says founder’s son, http://www.scmp.com/print/business/companies/article/1502386/new-products-key-techtronics-future-says-founders- son, accessed 8 July 2015. 45 Euromonitor International, Home Improvement in China; Euromonitor International, Home Improvement in Hong Kong. 46 Joe Galli, interview by author, Hong Kong, 11 August 2015. 47 Ibid.
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productivity and safety benefits TTI tools provided? Should TTI enter new countries in Asia or would it be more sensible to expand its presence in countries where the firm already had a foothold? Also, for the shortlisted countries what should be its entry and its medium to long term strategy? Galli was very pleased with TTI’s recent progress in Australia. How could TTI replicate the Australian success story in Asia?
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EXHIBIT 1: KEY MILESTONES
Year 1990 2014 Change Revenue 63 million 4.8 billion + 76 times (USD)
Source: Provided by company
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EXHIBIT 2: TTI GLOBAL FOOTPRINT
Source: Provided by company
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EXHIBIT 3A: TTI FINANCIAL STATEMENTS – INCOME STATEMENT
in millions of USD . Income Statement For the Fiscal Period Ending 12 months 12 months Dec-31-2013 Dec-31-2014 Currency USD USD
Revenue 4,299.8 4,753.0 Other Revenue - - Total Revenue 4,299.8 4,753.0
Cost Of Goods Sold 2,858.0 3,079.9 Gross Profit 1,441.8 1,673.1
Selling General & Admin Exp. 1,068.2 1,208.3 R & D Ex p. 107.1 118.0 Depreciation & Amort. - - Other Operating Expense/(Income) - -
Other Operating Exp., Total 1,175.3 1,326.3
Operating Income 266.5 346.8
Interest Expense (36.7) (39.6) Interest and Invest. Income 11.8 14.5 Net Interest Exp. (24.8) (25.1)
Other Non-Operating Inc. (Exp.) 19.2 3.4 EBT Excl. Unusual Items 260.8 325.2
Impairment of Goodw ill 34.9 - Asset Writedow n (19.3) - Other Unusual Items - - EBT Incl. Unusual Items 276.4 325.2
Income Tax Expense 29.0 25.7 Earnings from Cont. Ops. 247.4 299.5
Earnings of Discontinued Ops. - - Extraord. Item & Account. Change - - Net Income to Company 247.4 299.5
Minority Int. in Earnings 2.9 0.9 Net Income 250.3 300.3
Supplemental Operating Expense Items Selling and Marketing Exp. 562.8 643.8 General and Administrative Exp. 505.4 564.4 R&D Ex p. 165.4 178.5 Net Rental Exp. 54.0 56.8 Imputed Oper. Lease Interest Exp. 15.4 18.7 Imputed Oper. Lease Depreciation 38.6 38.1 Source: Provided by company
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EXHIBIT 3B: TTI FINANCIAL STATEMENTS – BALANCE SHEET
in millions of USD . Balance Sheet Balance Sheet as of: Dec-31-2013 Dec-31-2014 Currency USD USD ASSETS Cash And Equivalents 698.1 690.4 Short Term Investments 76.1 86.0 Trading Asset Securities 1.0 1.2 Total Cash & ST Investments 775.2 777.5 Accounts Receivable 780.5 808.6 Other Receivables 47.3 53.4 Total Receivables 827.8 862.0
Inventory 884.2 1,056.3 Other Current Assets 5.1 39.7 Total Current Assets 2,492.3 2,735.5
Gross Property, Plant & Equipment 803.3 883.3 Accumulated Depreciation (419.4) (457.9) Net Property, Plant & Equipment 383.9 425.4
Long-term Investments 16.3 7.0 Goodw ill 532.5 554.1 Other Intangibles 251.5 257.8 Deferred Tax Assets, LT 79.1 86.9 Deferred Charges, LT 208.0 238.3 Other Long-Term Assets 49.0 46.3 Total Assets 4,012.6 4,351.4
LIABILITIES Accounts Payable 686.6 743.3 Short-term Borrow ings 199.5 150.3 Curr. Port. of LT Debt 382.9 479.0 Curr. Port. of Cap. Leases 1.0 2.3 Curr. Income Taxes Payable 50.2 57.9 Other Current Liabilities 456.5 514.4 Total Current Liabilities 1,776.6 1,947.2 Long-Term Debt 374.7 322.2 Capital Leases 3.2 11.1 Pension & Other Post-Retire. Benefits 106.3 99.4 Def. Tax Liability, Non-Curr. 6.3 4.4 Other Non-Current Liabilities - - Total Liabilities 2,267.1 2,384.4
Common Stock 23.5 643.9 Additional Paid In Capital 617.6 - Retained Earnings 1,096.1 1,332.1 Treasury Stock - - Comprehensive Inc. and Other 3.5 (8.9) Total Common Equity 1,740.7 1,967.2
Minority Interest 4.7 (0.1) Total Equity 1,745.4 1,967.0 Total Liabilities And Equity 4,012.6 4,351.4 Source: Provided by company
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EXHIBIT 3C: TTI FINANCIAL STATEMENTS – CASH FLOW
in millions of USD . Cash Flow For the Fiscal Period Ending 12 months 12 months Dec-31-2013 Dec-31-2014 Currency USD USD
Net Income 250.3 300.3 Depreciation & Amort. 74.2 80.8 Amort. of Goodw ill and Intangibles 8.7 8.6 Depreciation & Amort., Total 82.9 89.4
Other Amortization 59.1 61.3 (Gain) Loss From Sale Of Assets 10.1 12.1 (Gain) Loss On Sale Of Invest. 5.0 1.6 Asset Writedow n & Restructuring Costs (15.6) (4.3) Stock-Based Compensation 0.4 1.7 Provision & Write-off of Bad debts 3.9 13.1 Other Operating Activities 26.1 (5.5) Change in Acc. Receivable (102.0) (54.9) Change In Inventories (215.8) (180.4) Change in Acc. Payable 326.3 89.3 Change in Other Net Operating Assets 33.3 (0.2) Cash from Ops. 464.1 323.8
Capital Expenditure (104.6) (144.0) Sale of Property, Plant, and Equipment 6.4 16.8 Cash Acquisitions (21.8) (48.2) Divestitures - - Sale (Purchase) of Intangible assets (89.1) (95.7) Invest. in Marketable & Equity Securt. 1.2 6.3 Net (Inc.) Dec. in Loans Originated/Sold - - Other Investing Activities 11.8 14.5 Cash from Investing (196.1) (250.3)
Short Term Debt Issued - - Long-Term Debt Issued 1,111.9 2,531.8 Total Debt Issued 1,111.9 2,531.8 Short Term Debt Repaid (318.1) (41.8) Long-Term Debt Repaid (930.6) (2,487.6) Total Debt Repaid (1,248.8) (2,529.5)
Issuance of Common Stock 3.7 2.2 Repurchase of Common Stock (7.2) (2.5)
Common Dividends Paid (48.9) (61.9) Total Dividends Paid (48.9) (61.9)
Special Dividend Paid - - Other Financing Activities - (4.0) Cash from Financing (189.2) (63.8)
Foreign Exchange Rate Adj. 0.9 (12.1) . Net Change in Cash 79.7 (2.5) Source: Provided by company
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EXHIBIT 4: TTI FLOORCARE
Market Segment Major Market
Commercial North America
High- Global Performance
Commercial North America Cleansing Australasia Asia Middle East & Africa
Consumer Global
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EXHIBIT 5: SALES BY BUSINESS SEGMENT AND HEADCOUNT
(US$ m) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Segment
Sales $580 $958 $1,216 $1,477 $2,202 $2,194 $2,164 $2,376 $2,177 $2,386 $2,663 $2,864 $3,144 $3,553 Power Equipment Segment 74.0% 79.0% 72.0% 71.0% 77.0% 79.0% 68.0% 70.0% 71.0% 71.0% 72.6% 74.4% 73.1% % 74.7%
Sales $202 $259 $474 $613 $664 $604 $1,012 $1,036 $897 $997 $1,004 $988 $1,156 $1,200 Floor Care Segment 26.0% 21.0% 28.0 % 29.0% 23.0% 21.0% 32.0% 30.0% 29.0% 29.0% 27.4% 25.6% 26.9% % 25.3%
14- Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CAGR %
Sales $782 $1,217 $1,690 $2,090 $2,866 $2,798 $3,176 $3,412 $3,075 $3,383 $3,667 $3,852 $4,300 $4,753 +13.8%
Headcount 10,000 12,000 16,000 21,000 22,000 20,679 23,685 19,354 16,772 18,440 17,818 18,068 18,746 20,081 +5.1%
Source: Provided by company
17 UST 1015-046 TTI: Tooling up for Asia HKUST Business School Thompson Center for Business Case Studies
EXHIBIT 6: SALES BY REGION
(US$ m) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Region North $673 $991 $1,398 $1,693 $2,195 $2,062 $2,321 $2,517 $2,322 $2,461 $2,648 $2,807 $3,120 $3,393 America Region 86.0% 81.0% 83.0% 81.0% 76.5% 73.7% 73.0% 74.0% 76.0% 73.0% 72.2% 72.9% 72.6% 71.4% %
EMEA $75 $141 $195 $307 $544 $589 $729 $759 $619 $713 $764 $768 $870 $969 Region 10.0% 12.0% 12.0% 14.7% 19.0% 21.0% 23.0% 22.0% 20.0% 21.0% 20.8% 19.9% 20.2% 20.4% % ROW (Rest of $34 $85 $97 $90 $127 $147 $126 $136 $134 $209 $255 $277 $310 $391 World) Region 4.0% 7.0% 5.0% 4.3% 4.5% 5.3% 4.0% 4.0% 4.0% 6.0% 7.0% 7.2% 7.2% 8.2% %
Source: Provided by company
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EXHIBIT 7: TTI MANUFACTURING & INNOVATION CENTER
Source: Provided by company
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EXHIBIT 8: TTI CONSOLIDATED EFFICIENCY
Source: Provided by company
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EXHIBIT 9: TTI PRODUCT DEVELOPMENT
Source: Provided by company
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EXHIBIT 10: TTI POWER TOOL BRANDS
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EXHIBIT 11: COMPETITOR PROFILES
Bosch
Tool brands: Bosch, Beissbarth, Accu Turn, CST/Berger, Dremel, Freud, Gilmour, Nelson, Rotozip, Sia, Skil, Vermont American, OTC, Robinair.
Bosch was a large German engineering and electronics multinational with 2014 revenues of EUR48.9bn. Its key product lines included automotive parts, energy and building technology, industrial technology and consumer goods. Its consumer goods division which included household appliances and power tools generated 9% of total sales. Bosch main tool brand was 'Bosch' which was sold in two separate color schemes. Green Bosch tools were aimed at the DIY market while the blue tools were for end-users in the industrial segment. Most of its other brands were specialty tool brands focused on a specific product category and/or industry, the exception being Skil which sold a range of power tools aimed at the DIY segment.
Makita
Tool brands: Makita
Makita was founded in 1915 in Japan. They sold power tools under the Makita brand in the industrial segment. The company had a global footprint, with over 50 subsidiaries and manufacturing facilities in Japan, the US, The UK, Brazil, China, Romania and Thailand. Revenues for fiscal year 201548 were 3.46bn, an increase of 8.2% y-o-y. Operating margin was 17.3%. Europe was the most important region for Makita, generating 42.3% of total sales. Japan (16.3%), and North America (13.8%) were other key markets. Makita had been aggressive in expanding across developing markets. Russia was its largest market in Europe and the company derived significant revenues from Asia ex-Japan (9.6%), Central and South America (7.3%) and the Middle East (5.1%).49
Stanley Black & Decker
Tool brands: Stanley, Black & Decker, DeWalt, Porter Cable, Bostitch, Proto, Mag Tools, Facom, Vidmar, Powers, Lista, Sidchrome
Stanley Black & Decker (SBD) was a US manufacturer of power and hand tools, fasteners, automatic doors and locking systems, and security systems. Total revenues for 2014 were USD11.3bn spread over the US (49%), Europe (25%), emerging markets (17%) and Canada (5%). The company's main tool brands were DeWalt aimed at the industrial segment, Stanley and Porter Cable aimed at the professional segment and Black & Decker aimed at the DIY segment. Together, these brands made up SBD's CDIY segment. The CDIY segment made up 49% of SBD's total revenue, an increase of 7% y-o-y. Operating margins in the segment were 15.7%.50 SBD had strong global brand awareness for the Stanley and Black & Decker brands. This brand awareness was fuelled by sponsorships in motorsports, European football, Chinese basketball, and Major League Baseball. To increase sales in emerging markets, SBD launched 1,000 new mid-price point SKUs in 2014.
Source: compiled from Makita 2015 annual report, Bosch 2014 annual report, Stanley Black & Decker 2014 annual report, Stanley Black & Decker 10-K filing.
48 Makita's fiscal year runs from 1 April to 31 March 49 Makita Annual Report 2015 50 Stanley Black & Decker Annual Report 214.
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EXHIBIT 12: TTI MARKETING
Source: Milwaukee Tool North America Facebook page
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EXHIBIT 12: TTI MARKETING (CONT’D)
Source: Ryobi Tool USA Facebook page
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EXHIBIT 12: TTI MARKETING (CONT’D)
Source: AEG Power Tools Facebook page; AEG Power Tools UK website; AEG Power Tool Australia website
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EXHIBIT 13: ASIA COUNTRY DATA
$ # Country Rank Country 2014* Index CPI Business Doing Ease of 2014^ Rank Country /Country Territory 2014 (PPP) est.GDP USD 2015 July Population est. (million) Corruption Perception Index Score GDP Growth 2014 Bangladesh 533.7bn 6.1% 158.76 25 145 173 Bhutan 5.86bn 6.3% 0.76 65 30 125 Cambodia 49.96bn 7.0% 15.04 21 156 135 China 17.62tn 7.4% 1370.79 36 100 90 Hong Kong 397.5bn 2.5% 7.30 74 17 3 India 7.38tn 7.4% 1299.50 38 85 142 Indonesia 2.78tn 5.0% 255.46 34 107 114 Japan 4.75tn -0.1% 126.89 76 15 29 Korea (South) 1.78tn 3.3% 50.62 55 43 5 Laos 34.4bn 7.5% 3.80 25 145 148 Macau 51.68bn -0.4% 0.64 51 n/a n/a Malaysia 746.1bn 6.0% 31.03 52 50 18 Mongolia 34.76bn 7.8% 3.03 39 80 72 Myanmar 242bn 8.5% 52.28 21 156 177 Nepal 66.78bn 5.5% 28.04 29 126 108 Pakistan 882.3bn 5.4% 191.79 29 126 128 Papua New Guinea 18.07bn 5.5% 7.32 25 145 133 Philippines 692.2bn 6.1% 102.97 38 85 95 Singapore 445.2bn 2.9% 5.54 84 7 1 Sri Lanka 217.4bn 7.4% 20.87 38 85 99 Taiwan 1.08tn 3.5% 23.46 61 35 19 Thailand 985.5bn 0.7% 68.39 38 85 26 Vietnam 510.7bn 6.0% 91.81 31 119 78
$ GDP growth is from The World Bank for 2014. Exceptions are 1) Papua New Guinea where World Bank Data for 2013 is used. 2) for Taiwan where 4th quarter 2014 data from National Statistics Bureau of Taiwan is used # The Corruption Perception Index by Transparency International measures how corrupt a country's public sector is seen to be. Countries are scored on a scale of 100 (clean) to 1 (highly corrupt). Scores are for 2014, except for Macau which is 2011. * Country ranking for 2014, out of a total of 177 countries/territories. Denmark is top ranking country with a score of 92. Canada ranks 10th, Australia ranks 11th, the US ranks 17th. ^ The World Bank Ease of Doing Business rank ranks 189 countries/territories on how conductive the local environment is to the starting and operation of a local firm. The US ranks 7th, the UK ranks 8th, Australia ranks 10th.
Compiled from: CIA world fact book, Wikipedia list of Asian countries by population, Transparency International, World Bank, National Statistics Bureau of Taiwan.
27 UST 1015-046 TTI: Tooling up for Asia HKUST Business School Thompson Center for Business Case Studies
EXHIBIT 14: TTI POWER TOOL SALES IN ASIA
in thousands . For the Fiscal Period Ending Dec-31-2012 Dec-31-2013 Dec-31-2014 Exchange Exchange Exchange Currency Local rate USD Local rate USD Local rate USD Korea 2,714 3,131,297 1,054.36 2,970 6,281,941 996.15 6,306 China 9,520 6.25 1,523 15,881 6.25 2,541 19,762 6.1 3,240 Malaysia 168 901 4,626 3.13 1,478 Thailand 1,238 1,285 920 Taiw an 1,559 1,773 2,412 Hong Kong 1,129 1,524 2,013 Phillippines 1,938 2,671 2,527 Other Asian 3,052 2,057 2,601 Total 13,321 15,722 21,498
Source: provided by company
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EXHIBIT 15: ASIA HOME IMPROVEMENT SALES
2009 2010 2011 2012 2013 2014 2015 est. 2016 est. 2017 est. 2018 est. 2019 est. China CNY billion Hand Tools 3.0 3.4 3.8 4.2 4.5 4.8 5.0 5.2 5.4 5.5 5.7 Power Tools 2.1 2.4 2.8 3.1 3.3 3.5 3.7 3.9 4.1 4.2 4.4 Hong Kong HKD million Hand Tools 31.7 36.1 39.1 41.9 44.0 46.0 46.6 47.0 47.4 47.7 47.9 Power Tools 9.3 8.7 9.6 10.5 11.5 12.5 13.1 13.7 14.2 14.7 15.2 Indonesia IDR billion Hand Tools 165.5 174.4 187.0 202.6 222.9 247.4 259.5 271.5 282.4 292.2 301 Power Tools 25.3 30.3 35.2 40.5 44.4 48.2 50.4 52.5 54.6 56.6 58.6 India INR billion Hand Tools 2.8 3.1 3.4 3.7 4.0 4.4 4.5 4.7 4.8 5.0 5.1 Power Tools 1.7 2.0 2.3 2.6 2.9 3.3 3.4 3.6 3.7 4 4.2 Japan JPY billion Hand Tools 77.2 79.5 82.3 84.9 86.1 84.7 83.8 83.0 82.4 81.9 81.5 Power Tools 64.9 64.2 64.1 64.5 68.7 72.8 76.0 78.7 80.7 82.3 83.7 Malaysia MYR million Hand Tools 83.4 86.5 90.8 94.5 98.1 102.5 103.7 105.4 107.3 109.4 111.8 Power Tools 367.7 381.3 400.4 414.8 431.0 450.4 457.1 465.4 475.1 486.1 498.2 Singapore SGD million Hand Tools 10.4 10.6 10.6 10.7 10.8 10.8 10.7 10.5 10.4 10.3 10.2 Power Tools 27.0 29.4 30.6 31.7 33.2 34.2 34.7 35.1 35.6 35.9 36.3 South Korea KRW billion Hand Tools 12.0 12.5 12.8 12.9 13.1 12.9 12.6 12.4 12.1 11.9 n/a Power Tools 20.1 21.3 22.5 23.4 24.4 24.9 25.2 25.6 25.8 26.1 n/a Taiwan TWD million Hand Tools 612.0 604.6 617.3 630.9 638.7 652.8 657.4 661.3 664.6 667.3 669.3 Power Tools 540.3 532.7 542.3 553.2 559.5 568.4 569.0 571.3 575.3 580.5 586.3 Thailand THB Million Hand Tools 559.7 586.0 608.3 638.7 667.4 687.5 706.7 724.4 738.9 752.2 n/a Power Tools 467.8 500.5 523.1 554.4 584.9 603.7 621.8 639.2 655.2 668.3 n/a Philippines PHP million Hand Tools 53.3 55.2 57.4 59.8 62.2 65.9 67.1 68.4 69.6 71.5 73.2 Power Tools 756.3 782.8 814.1 863.0 895.7 948.2 967.1 988.4 1013.1 1040.5 1070.7 Compiled from various Euromonitor International reports
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EXHIBIT 16: ASIA HOME IMPROVEMENT TRENDS
China • Consumers in China tended to buy home improvement products themselves, but employ professionals to carry out renovation and decoration projects. • In recent years, the concept of DIY had become increasingly popular, especially among white collar consumers in cities. This trend was spurred by DIY being a cheaper option, rising property prices (leaving less money in consumers’ pocket), and the popularity of home renovation and decoration TV programs.
Hong Kong • Most Hong Kong consumers preferred hiring professionals for interior design and renovation jobs. • However, in the wake of exposure to interior design via the internet and other platforms, young consumers were increasingly willing to design and furnish their homes themselves. • Hammer drills were the most popular type of power tool. Cordless power tools gained prominence due to their convenience. • A lack of consumer awareness about the benefits of battery-powered tools using lithium-ion technology hampered the performance of this type of tools. One reason for this lack was that manufacturers were not investing heavily in marketing such products. • In 2014, market shares as a percentage value of the home improvement market were: Bosch: 0.2%; TTI: 0.2%.
Indonesia • Low-cost labor was available to undertake basic small home repair jobs. In Indonesian villages, DIY was popular for renovation tasks. • Power tools were a small but growing category. Consumers tended to prefer corded power tools due to their lower prices and the perception that such tools were more powerful than cordless ones. • Still, cordless were gaining popularity. Some manufacturers like Bosch had been promoting the benefits of using battery-powered tools. Pricing remained a key barrier.
India • The low cost of labor coupled meant that many Indian consumers preferred hire labor for home improvement jobs. Furthermore, such services tended to be convenient and reliable. • Nevertheless, the concept of DIY was gaining ground in India. DIY was done by hobbyists or people interested in repairing their own homes. • Power drills were the most popular type of power tools products in India. Indians tended to favor corded tools as they were not yet willing to pay a premium for cordless ones.
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EXHIBIT 16: ASIA HOME IMPROVEMENT TRENDS (CONT'D)
Japan • The majority of Japanese consumers preferred professional services for home improvement related jobs. • One new trend was the emergence of a female DIY segment (“joshi”). Manufacturers had launched power tools geared toward this segment, including pink-colored and/or light-weight tools. • Battery-powered tools using lithium-ion technology were most popular among Japanese consumers due to the convenience offered by such tools. • Many Japanese did DIY as a hobby; cordless power tools enabled them to undertake DIY anywhere they would like in their home. • The competitive landscape was dominated by local players. Company shares as a percentage value of the home improvement market in 2014 were: Makita: 3.2%; Hitachi: 2.0%; Bosch: 1.3%; Ryobi: 0.7%.
Malaysia • DIY was popular in Malaysia for small repair jobs. For heavier tasks, consumers would usually hire professionals. Especially urban consumers usually preferred using professional services for home repair jobs. • Younger consumers in Malaysia liked to do repair and renovation jobs to show their own style and creativity. • Cordless tools were more popular than corded ones given their convenience and ease of use. • Battery-powered tools using lithium-ion technology were becoming popular due to their smaller size, longer life span, and reliability. Also, as more options in this segment were introduced by manufacturers, these products had become more affordable for consumers. • In 2014, market shares as a percentage value of the home improvement market were: Bosch 2.9%; Black & Decker: 2.3% (DeWalt: 0.5%); Makita: 1.0%; Hitachi: 0.5%.
Singapore • For major renovation projects, Singaporeans would hire professionals. However, consumers in Singapore tended to use DIY for smaller scale renovation jobs. • One emerging trend was the rising popularity of DIY amongst retirees. • For power tool purchases, consumers favored reputable brands as these offered more quality assurance. Hand tools were commonly bought for small-scale DIY tasks. • In 2014, market shares as a percentage value of the home improvement market were: Bosch: 6.6%; Black & Decker: 6.2%; Makita: 2.3%; Hitachi: 2.2%.
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EXHIBIT 16: ASIA HOME IMPROVEMENT TRENDS (CONT'D)
South Korea • In general, Koreans tended to hire specialist companies for home improvement jobs. • One key trend was the rising popularity of DIY. Consumers had picked up the necessary skills and knowledge by watching various online channels. Also, consumers would share tips on how to do home repair jobs via blogs. • One other characteristic was the preference for environmentally-friendly home improvement products. • In 2013, market shares as a percentage value of the home improvement market were: Bosch: 0.6%; Black & Decker: 0.4%.
Thailand • Most Thai people tended to hire professionals for home improvement jobs as they lacked the skills to carry out such projects themselves. • In general, Thai households would own power tools in case of an emergency. Multifunction tools and corded tools were the most popular product types. • In 2013, market shares as a percentage value of the home improvement market were: Makita: 0.2%; Bosch: 0.1%.
Taiwan
• Most Taiwanese preferred hiring professionals for home improvement projects as such services were relatively affordable and the waiting time was not long. • Very few consumers, mainly young adults, would buy equipment needed for smaller DIY tasks. • Some consumers would buy power tools for their hobbies; others would buy smaller or cheaper power tools for one-time use when they had a specific project to carry out. • In 2014, market shares as a percentage value of the home improvement market were: Bosch: 1.5%; Makita: 0.4%; Hitachi: 0.3%; Black & Decker: 0.3%.
Philippines
• Just as in some other Asian markets, many Filipinos would often hire professionals for home improvement jobs given the low cost of labor and to save time. • Nevertheless, DIY was gaining popularity in certain segments. • DIY-savvy consumers liked to buy their own set of power tools. Corded power tools were preferred as such products were perceived to be more powerful and able to perform more complex jobs than cordless ones. • In 2014, market shares as a percentage value of the home improvement market were: Black & Decker: 1.0%; Bosch: 0.8%.
Compiled from various Euromonitor International reports
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