Lagercrantz 2008/09

Lagercrantz Group is a technology trading group in the areas of electronics, electrics, communication and adjacent areas. Customers are mainly industrial companies in northern Europe. Lagercrantz Group has the largest part of its sales in Denmark and Sweden. The largest end customer segments are power generation, electricity distribution and electronics.

Lagercrantz Group is a technology trading group active in northern Europe. The largest markets are Sweden and Denmark. Lagercrantz Group works exclusively with sales to other companies, so-called business-to-business. Customers are mostly industrial companies. As the service sector in the Nordic Region and northern Europe grows ever larger, Lagercrantz Group’s sales to the sector have increased.

Lagercrantz Group is made up of some 25 units that work with a clear niche focus, which means focus on a limited market, where the individual company can achieve a leading market position.

End customers for Lagercrantz Group’s products are found primarily in electrical power generation and distribution, electronics, transportation and telecommunication.

DRIVING FORCES

The major driving forces affecting Lagercrantz Group’s customers, and hence the demand for Lagercrantz Group’s products, is the constantly growing demand for energy, the ongoing globalisation of trade, the increasing flows of information and the growth of new markets, especially in Asia. These driving forces has been affected by the dramatic decline in industrial output in the end of 2008 and beginning of 2009, but even so, investments in infrastructure to meet the global demand for electricity are in a phase of long-term growth, primarily tied to the economic development in China, India and other parts of Asia. Energy distributors around the world need to build new grids and expand already existing ones in order to increase capacity. Regulations and the economic situation speak for expansion of ever more efficient energy production with minimal environmental impact.

Growing world trade and global competition make for increased productivity in manufacturing industry, so focus has been directed at such areas as purchasing functions and line processes.

The increasing volumes of information in stationary and wireless networks, is enforcing the expansion of capacity and development of new technology.

The emergence of new, large markets in Asia has led to growing expansion investments to meet the large demand thus created.

TYPES OF BUSINESS IN TECHNOLOGY TRADE

There are two main business models on the technical markets: Direct sales from manufacturer to end user and sales via some kind of partner. Only a small number of global companies can reach out to all their end customers via their own channels. Large companies often choose to act on their own on a few key markets, while they seek a strong local partner on other markets. For smaller manufacturing companies, partnerships with local sales companies are often the only way to reach out to their customers.

Lagercrantz Group is a technology trading company with strong ties to its customers as well as its suppliers. The location in the supply chain is motivated by the fact that Lagercrantz Group can offer technical and business knowledge, problem-solving, localisation, combinations and systems, as well as training and service. The technology trading company is the local link that makes world-leading technology available on a small market. For manufacturers it is a way out to small markets and ensures qualified counselling, service and after-market activities.

The subsidiaries within Lagercrantz are mainly operating on a well defined market. This is an important part of the overall strategy of Lagercrantz enabling the companies to build up sharp local business intelligence and long-term customer relationships.

Trading in different forms constitutes the largest part of the Group’s sales, or just below 60 percent. The trading companies are represented in divisions Electronics and Communications in particular. Trading comprises hardware (e.g. electronic components, network products, IT hardware) as well as software (e.g. CAD software) for customers in several market areas and includes sales of everything from individual components to various sub-systems for integration in the products manufactured by the customers.

Some companies in the Group work with an export perspective. These are mostly companies with their own products that sell on a world market, either themselves via subsidiaries, or with the help of partners. Just over 15 percent of the Group’s revenue is sales in this form, especially in divisions Mechatronics and Electronics (electrical connection systems) and Electronics (embedded PC solutions, routers). The ambition is to increase this proportion of the Group’s revenue.

Niche production makes up just over 15 percent of consolidated revenue and means that the companies manufacture special solutions for account of the customer. This type of selling is done mostly in division Mechatronics in conjunction with production of cable harnesses for use especially in wind power stations or static frequency changers.

Approximately 5 percent of the Group’s revenue is derived from systems integration where the companies in Lagercrantz Group undertake to deliver a complete solution, often with after-market service. This type of sales is common in division Communications in particular (integrated security systems, CCTV infrastructure, video conference solutions).

THE SUPPLY CHAIN

Lagercrantz Group works with value-adding technology trade. That is why it is important for the companies in the Group to make the value-creation clearly visible to the customer. One aspect hereof is to work as close to the end customer as possible. Today just short of 40 percent of consolidated sales go directly to end customers. A little less than 35 percent of sales go via selling partners and resellers to end customers. Examples of such partners are installation companies, distributors and wholesalers. About 15 percent of consolidated sales go to contract manufacturers. Another important customer group is systems integrators, who account for just over 10 percent of the Group’s sales.

CHANGING PURCHASING PATTERNS

Important trends among Lagercrantz Group’s customers that affect conditions for the Group are shorter lead times (time-to-market), outsourcing of certain functions and moving out production. The first two of these trends can be said to constitute positive factors, while moving out constitutes a threat to Lagercrantz Group’s local sales.

Shorter time-to-market and outsourcing mean that the customers to a greater extent need to work with partners for a part of the work previously done internally. This opens opportunities for a strong technology trade company in the development phase as well as later in a product’s life cycle. For the customer this means greater security since the customer can buy well-tested solutions where focus can be placed on adaptation to the customer’s specific needs. The customer can free up resources for marketing work and the entire supply chain is rendered more efficient.

Among the effects of the economic downturn are that manufacturers’ inventories of components have been reduced to a minimum, thereby raising the demands for short delivery times and flexible solutions in the interface between Lagercrantz and the customers.

In general, the purchasing pattern has become choppy, with less long-term planning and growing demand for quick deliveries. The tolerance level for logistical errors has been significantly reduced. Lagercrantz Group’s business model, with key words such as proximity and flexibility, has proved to be successful in this environment and many customer relationships have thus been strengthened, even though the overall volumes have been reduced.

COMPETITION

Lagercrantz Group is active on niche markets and competition is different between them depending on products, volumes and geographic scope. In general, it can be said that in technology trade there is often many alternative products and players on each market. Small local suppliers who represent foreign manufacturers dominate on the Nordic markets. They possess a high level of knowledge about their products that may be on a par with the expertise in Lagercrantz Group. Several of the global manufacturers have their own sales organisations in the Nordic Region and can offer good service and technical competence. There are also a number of major wholesale companies with a broad product line and who distribute large volumes. Among these, specialist knowledge about individual products is not as pronounced.

CUSTOMERS AND SUPPLIERS

Lagercrantz Group’s sales are spread over a large number of markets and many customers. This means that the dependence on individual customers is relatively limited. No individual customer accounts for more than about 5 percent of consolidated sales. Even for individual subsidiaries, the dependency on the largest customers is limited. On average, a subsidiary’s 10 largest customers account for about 65 percent of that company’s sales.

A corresponding situation prevails with respect to suppliers, where Lagercrantz Group’s subsidiaries operate in a number of different technology niches. Very few supplier relationships comprise more than one company in the Group. Lagercrantz Group tries to work close to its suppliers and to develop active co-operation.

CURRENCIES

A majority of the Group’s sales and purchases are made in currencies other than Swedish kronor. The largest transaction currency is euro, which accounts for about 35 percent of sales and 50 percent of purchases. The Danish krona, the exchange rate of which is linked to euro, accounts for about 20 percent of sales and 10 percent of purchases. The American dollar is the third largest currency with about 10 percent of sales and almost 20 percent of purchases. Currencies other than Swedish kronor stand for 75 percent of sales and 85 percent of purchases respectively.

Lagercrantz continually analyses its risk exposure in foreign currencies. Based on sales volume and volatility experienced during the 2008/09 financial year, the Group’s revenue was affected most by euro and U.S. Dollars, followed by Danish kronor measured against the Swedish krona. The biggest effect on gross profit, where weight is also given to the purchasing volume in foreign currency, came from the exchange rate for Norwegian kroner, followed by the U.S. Dollar. This is due to the big difference in purchasing volume in these currencies.

Major changes in recent years in the exchange rates, have prompted more and more customers to choose to work with the euro as transaction currency. Lagercrantz works actively in trying to minimise the risk that emanates from exchange rate fluctuations by pricing in purchasing currency and by using currency clauses. Refer also to Note 41 “Risk management.”