By Vandana Gombar, Senior Editor, BloombergNEF
Schneider Electric, the €34 billion ($37 billion) company providing energy management and industrial automation solutions worldwide, expects to see the real impact of the US Inflation Reduction Act on its business next year.
“We see over $2 trillion in spending between the IRA, the Chips Act and the Infrastructure Investment and Jobs Act. All of these are addressing our industry in some way, and we anticipate further private spending to boost this amount over time,” Chief Financial Officer Hilary Maxson told BloombergNEF in an interview.
The US is the company’s largest market, making up almost a third of its global revenue. “We were seeing good demand before the IRA across many sectors that we do business in. The impact of IRA will be felt in 2024, and beyond,” she said.
As many as 16 states in the country, however, have anti-ESG legislation which could constrain the flow of funds to the green economy. Maxson views higher interest rates as the bigger threat to spending. “Electrification, digitalization, automation and energy efficiency – these trends and the related demand to my mind is autonomous to the backlash around ESG,” she said.
The company works on a multi-hub model, with supply chains organized regionally to control emissions. There are two reasons for that, explained Maxson. Firstly, Schneider Electric’s sustainability commitments could not be met if materials are being shipped constantly across vast distances. The other reason is to ensure speed to market.
The war that’s followed Russia’s invasion of Ukraine has pushed the company to look at further regionalization and localization of supply chains. It has also forced investments in resiliency. “This would include dual sourcing, building spare capacity in plants and building R&D capability in semiconductors and electronics,” she said.
The following Q&A has been lightly edited for length and clarity.
Q: Schneider Electric’s latest results show that North America is now your biggest region by revenue. Does that reflect the impact of the Inflation Reduction Act? Are US performance and the IRA behind the increased guidance for revenue growth, earnings and margins in 2023?
A: I think the IRA is an unprecedented industrial policy, and western countries haven’t really focused on industrial policy for quite some decades. We see over $2 trillion in spending between the IRA, the Chips Act and the Infrastructure Investment and Jobs Act. All of these are addressing our industry in some way, and we anticipate further private spending to boost this amount over time.
From a Schneider Electric viewpoint, and Schneider Electric North America in particular, it is a big opportunity. With €11 billion in sales in 2022, the region is 32% of our overall revenue. There is a big focus on electrification, on modernizing and digitalizing the electrical backbone, ports, airports, water and waste-water systems. Another sector in the US that hasn’t had a lot of investment or modernization for some decades is the transportation sector, so trains and everything around EVs. There is a push for buildings across the public and private sector to become more efficient and more connected. All of these play into what we do in the region. We have invested €300 million since 2020 to strengthen our capacity in the US – we have 20 manufacturing facilities and 19,000 employees there. We were seeing good demand before the IRA across many sectors that we do business in. The impact of IRA will be felt in 2024, and beyond.
Q: Where is your investment in the US focused?
A: The US is our largest country by revenue, with China as the second largest for quite some time. We are a multi-hub organization, with no specific headquarters as a company. It is very unusual actually. We don’t have a centralized place for all the leaders to sit. Instead, they are distributed across the globe and hubs. In these hubs, we have everything from sales to R&D for that region, as well as manufacturing for that region. As we see North America as a good growth market for us, we made investments in manufacturing capacity, as well as in R&D, sales and in digitalization.
Q: As opportunity and business in the US grow, do you expect the company’s attention to Europe to drop off?
A: Europe has put together its own subsidy packages. They are without the big focus on local manufacturing but with a similar focus on climate change and on energy transition. Funding has already started to flow. EU regulations also put building renovation front and center. We still see opportunity in pieces of the economy in Europe. The bigger concern for Europe is the energy crisis.
Q: How did the war in Ukraine, and the following energy crises, change your business in Europe? How does that inform your strategy today?
A: Our Russia business was around 2% of our sales in 2021. We exited that business last year. The war triggered an energy price shock and put pressure on global supply chains that were already under a lot of stress. The confluence of these drove inflation further and as a consequence, we are in an environment today where interest rates are going higher and higher. Because we are in the business of electrification, energy efficiency and everything associated with building up energy security, resiliency, sustainability – all reinforced by the type of shocks that we saw after the invasion of Ukraine – these megatrends are impacting our business positively. It really hones our strategy in the direction of electrification, digitization, energy efficiency and automation. Energy efficiency hasn’t been very popular over the past couple of decades except in some unique pockets. It is a critical piece of the energy transition. It is super positive if energy efficiency starts to come to the forefront of discussion. All the graphs of net zero emissions by 2050 depend on a huge component of energy efficiency. We need the right incentives to make that happen.
Q: I hear some companies talking about setting up separate supply chains for different regions because of the way policies are evolving. How is Schneider Electric localizing supply chains?
A: We are primarily regionalized with our supply chain already. The big exception would probably be the exception that everyone on earth has, which is the supply chain associated with electronics or semiconductors. We have a global supply chain that is administered globally and set up regionally. There were two reasons for that: Schneider Electric has made sustainability commitments since 2005, and it is pretty impossible to hit decarbonization targets if you are shipping materials constantly across vast distances. The other reason is speed to market. Your lead time for customers – unless you keep a lot of inventory on hand – is long. It takes months to ship materials from Asia to the US, for example. So over 15 years ago, Schneider Electric had already decided to go down the path towards regionalization. We are very regionalized already, but there is still thinking on how to improve on that.
Q: In a way you were well placed for the world that has followed Russia’s invasion and the IRA, and were best placed to take advantage of the changes. Did anything need to change further?
A: We have a lot of learnings from the supply chain crises. Despite being mostly regionalized, we are moving further with our regionalization policy. Secondly, we are making investments around resiliency. This would include dual sourcing, building spare capacity in plants and building R&D capability in semiconductors and electronics. We are exposed to an industry that has faster and faster cycles of design. We are rethinking design and innovation and seeing how our products can be more agile in an environment where they are more and more connected. We are also shifting from an acquisitive strategy to a more organic growth strategy. We will focus on innovation and on execution. We are positioning for the future and making sure that we are really taking those opportunities that we have available.
Q: How do you manage China’s role in the supply chain?
A: We have almost no exports out of China. In 2022, quite a bit of our manufacturing in China was out of Shanghai, so we had a big impact from lockdowns there, but just in China. We don’t have a big focus on shifting our supply chain out of China because there is almost nothing being exported out of China.
Q: There is an ESG backlash reverberating across companies and financial institutions in the US. As many as 16 states have anti-ESG legislation. Do you see this limiting green financing?
A: Electrification, digitalization, automation and energy efficiency – these trends and the related demand to my mind is autonomous to the backlash around ESG. Even in places like the US, the IRA means huge investments associated with energy transition. What is interesting in the US is that you don’t see any backlash against the IRA. For me, ESG is tied to good business, and driving good value for your business. ESG reporting and regulation is important, and is driven by investors too. We would like to see some ESG reporting standardization so you don’t end up with too many different standards. It leads to a bit of chaos for the business community from the reporting standpoint. From Schneider Electric’s perspective, we don’t see any signs of reduction in green funding. What may cause a slowdown in spending generally is interest rates.
Q: For a company that is active across multiple geographies, and as the CFO, how do you view dedollarization?
A: It is an extremely complicated topic. The dollar is the world’s reference currency that is still used for majority of international trade. It might be diminishing over time very slowly. There are no obvious substitutes. As a European company, both the dollar and euro are important to us. We also do business – like most global companies – primarily in local currency, so we are already sort of dedollarized. There is nothing at the moment that would make us think really differently about what we are doing.
Q: What are the biggest challenges you see for Schneider Electric out to 2025, and in the longer term?
A: Most of our portfolio is in areas of strong growth. We see good demand bolstered by government spending and government policy but the biggest concern we see is business confidence. The consumer linked side of the portfolio could be impacted by high interest rates. We have given guidance for 2022-2024 – revenue growth will be 5-8% organic on average, mainly on volume. We are still comfortable with that number. Longer term, we are now on a 5%+ organic business growth trajectory, on average across the economic cycle.