CHAPTER 5

Danfoss A/S - Global

Manufacturing Footprint
This case was prepared by Professor Torben Pedersen and Research Assistant Jacob
Pyndt of the Copenhagen Business School. We thank Danfoss A/S for its helpful
collaboration in developing this case. The case is developed solely as a basis for
classroom discussion rather than to highlight effective or ineffective management in
administrative situations. Some facts have been disguised to retain proprietary rights.
Not to be used or copied without written permission from the authors. Instructors who
wish to use this case may contact the authors at tp.int@cbs.dk or jpyndt@deloitte.dk.

Looking at the world map of Danfoss’ production sites, COO Hans

Kirk speculated: One of our main challenges for the years to come is
to optimize the geographical location of our production sites and to
explore the possibilities for a consolidation of our global plant
portfolio. I see a lot of small lights all over the world, each
representing a Danfoss plant. The question is where the lights should
be in the future, and whether it is advantageous to unite some of those
lights. Traditionally, Danfoss expanded its product lines following the
“one product, one plant” philosophy, which suggested that each time a
new product was invented, production capabilities were mobilized and
a new plant was built. This development had resulted in more than 50
plants worldwide; yet the majority located in European markets. The
plants operated independently, as product lines were very specialized
and shared few aspects that could create scope effects. Despite the
geographical multiplicity, the specialization of Danfoss’ global
production network, and the complex product portfolio, Danfoss
expressed a one-company identity. Contesting the conglomerate
identity, CEO Jørgen Mads Clausen declared: We are not a
conglomerate. We would be if we owned a string of unrelated
companies, but all our divisions are linked together (Berlingske
Tidende 27 March 2005).
Faced with saturated European markets, Danfoss began
investigating how the plant portfolio could be optimized in terms of
better coordination between production units in 2004. One objective
was to be positioned appropriately to meet future market demand. As
the center of international commerce moved towards Asia, the
company’s focus on Denmark and Europe might become
 Danfoss A/S – Global Manufacturing Footprint

inappropriate. Literally, the task was to turn Danfoss’ plant portfolio,

with its high degree of specialization, into a global production network
and investigate the potential benefits of interlinking production
operations. Danfoss also needed to consider economies of scale and
scope, and how production relocations would impact R&D.
A team was put together to investigate a target footprint that could
serve as the basis for future investment and divestment decisions. The
team worked closely with CFO Ole Steen Andersen and reported
regularly to the entire Executive Committee. The team included Senior
Director Ian Colotla, a mechanical engineer from the University of
Colombia and with a PhD from Cambridge. With seven years of
experience in engineering, manufacturing and project management at
Danfoss, Mr. Colotla was a specialist in international production
networks. He worked together with Senior Director Nicholai Lüche
Tandrup who, in addition to his consulting experience, had worked on
issues related to strategy and business development within Danfoss. In
addition, external consultants were brought in to assist. One of the
team’s prime tasks had been to generate scenarios for a competitive
production network structure by 2014. Conducting this comprehensive
analysis, they needed to consider inflexible manufacturing volumes,
product mix allocation and footprints with a strong focus on high cost
countries while overcoming barriers to change for existing footprints.

Introduction to Danfoss

Under the original name of “Dansk Køleautomatik- and Apparat-

Fabrik” (Danish Cooling Automatics and Equipment Factory), Mads
Clausen founded Danfoss in 1933. The company was established in
response to Danish custom barriers and import bans hindering the trade
of automatic valves for refrigeration plants which then took place in
the United States. Danfoss developed from a small valves shop into
one of Denmark’s largest industrial groups, with sales of DKK 16,345
million in 2004 and 17,543 employees worldwide (see exhibit 1).
Danfoss is privately held by the Bitten and Mads Clausen Foundation,
and members of the Clausen family. Danfoss’ activities are divided
into three main business areas: refrigeration and air conditioning (RA),
heating and water (HW) and motion controls (MC), each a leader
within its industry. Danfoss owns a significant share of one of the
world’s leading manufacturers and suppliers of mobile hydraulics,
Sauer-Danfoss (see exhibit 2).
The Danfoss group presents itself as a leader within research,
development and production, sales and service of mechanical and
electronic components for several industries (Danfoss’ website).
 Danfoss A/S – Global Manufacturing Footprint

Generally speaking, the company’s products help to heat and cool

homes and offices, refrigerate food and control production lines. The
company’s mission statement reflects its objective: Making Modern
Living Possible. Danfoss has a global network of 118 sales companies,
72 agents and distributors, and production facilities in 56 factories in
20 countries. All together, these locations produce, sell and distribute
250,000 items per day.
Despite its global presence, the majority of Danfoss’ sales comes
from Western Europe, equaling roughly 65% in 2004. Other important
sales regions include Eastern Europe (11%), North America (8%), and
Asia-Pacific (10%). The geographical distribution of employees also
reflects Danfoss’ strong European orientation. While approximately
6,200 employees work in Denmark, 11,300 are employed outside
Denmark. Of these 65 % are located in Europe, with most working out
of Germany, Slovenia and France.

Organizational Development
Danfoss was strongly attached to its original home in Nordborg on Als,
a small island located in southern Denmark. Given its strong
commitment to local community initiatives and the business
environment, a symbiotic relationship between the company and Als
existed, particularly in Nordborg. Danfoss took pride in its long
tradition of social responsibility towards both employees and the
surrounding environment. All together, Danfoss provided over half of
the jobs in Nordborg, amounting to roughly 3500 employees, of which
approximately 550 were engineers. Due to its remote location, the
business press often speculated about the difficulties Danfoss must
have had in recruiting talented business people. However, according to
CEO Clausen, the headquarter location on Als would continue to serve
as the focal location in the future. There are no places that can match
what we have here. It would take a long time to build up the
technological foundation we possess here at Als. It is not us who are
located remotely. It is the others who are located far from us
(Berlingske Tidende 27 March, 2005).
At the end of 2004, the company hired Niels B. Christiansen, age 38,
as Executive Vice-President and COO. Mr. Christiansen came from a
position as President and CEO of GN Netcom, where he had a
successful track record in increasing sales substantially. More
importantly, he possessed a global outlook and extensive business
experience in China. One of his first tasks was to monitor Danfoss’
more than 50 worldwide production sites together with Executive
Vice-President Hans Kirk. According to Mr. Christiansen, Danfoss
 Danfoss A/S – Global Manufacturing Footprint

needed to employ a young leader with global experience and a keen

interest in industrial engineering. Having traveled four out of five days
the first six months of service, he had obtained a grasp of the
multiplicity of Danfoss’ many business areas. Mr. Christiansen then
felt equipped to explore new business opportunities and areas for
improvement in Danfoss’ global organization. He talked openly of
delegating more responsibility to subsidiary management units to
capture market trends swiftly. Commenting on his own role, Mr.
Christiansen stated: I believe my key skill is my ability to explore how
we can do things in a different or new way. Being at the helm when the
course has been set is also critical, but less challenging (Børsen 21
April 2005).

Different Product Divisions

On 1 January 2005, Danfoss officially changed the names of its core
business divisions to the Danfoss Refrigeration & Air Conditioning
Division, the Danfoss Heating Division (including Danfoss Water
Controls), and the Danfoss Motion Controls Division (see exhibit 3).
The RA division comprised by far the largest unit with respect to sales,
generating approximately 53% of Danfoss’ total sales in 2004 (see
exhibit 1). Business units within RA, such as Compressors, and
Industrial and Appliance Controls, were responsible for product
development, production and key accounts. The RA products were
manufactured at 27 factories in 16 countries (see exhibit 4) and sold to
the global market through the division’s own sales organization. The
sales organization, responsible for sales, marketing, customer support
and distribution, was organized into four global regions: Europe, the
Middle East and Africa; Asia-Pacific; and North and Latin America.
Marketed products included household refrigeration, commercial
refrigeration, industrial refrigeration, industrial air-conditioning,
supermarket refrigeration and industrial controls for manufacturers
(OEMs), wholesalers and installers.
Comprising roughly 26% of total sales, the HW division constituted
the group’s second largest division. The division offered a number of
components and solutions for the generation, supply and control of
heating with a view to optimizing comfort and saving energy in private
houses and small, commercial buildings. Water Controls included
components for the water industry in the form of valves and related
products. Product lines with the HW division were manufactured at
production sites in more than ten countries, while sales were conducted
by sales companies and agents on all heating markets worldwide (see
exhibit 4). EU markets reached a status quo in 2004, while positive
 Danfoss A/S – Global Manufacturing Footprint

market growth in Eastern Europe, Russia and China drove an increase

in net sales.
Danfoss’ third business division, Motion Controls, was comprised
of two main business units: Drives and Gear Motors. In 2004, the
division contributed roughly 18% to total sales, and factories were
concentrated in Denmark, Slovakia, China, Germany and the US.
While sales grew modestly in EU markets, areas such as Eastern
Europe, Asia, and North and Latin America were responsible for a 7%
increase in sales. Particularly in the American market, Danfoss gained
momentum after several years of sluggish growth. In fact, both the MC
and RA divisions showed double digit growth rates due to increased
sales to OEM customers.
Danfoss’ three business divisions all have a stronghold in Europe,
which was reflected in the share of European sales compared to total
sales. Within the RA division, sales inside the EU (including
Denmark) amounted to 57 % in 2004, down from 61 % in 2003 (see
exhibit 5). Danfoss actively sought to achieve higher growth outside
the EU, yet parts of the European market still provide attractive
opportunities. Major markets like Germany and France declined or
stagnated in 2004, while others - Italy, Sweden, Belgium, and England
- experienced double-digit growth rates. For the HWC division, the
accumulated European market share amounted to 70% in 2004, while
the MC division had an approximate 55% sales concentration in the
EU. The long term growth strategy for these divisions was oriented
towards market opportunities in Asia, Eastern Europe and, to a lesser
extent, the nearly saturated EU markets.

Strategy and Internationalization efforts

Until the mid-1990s, Danfoss was, in terms of orientation, more
European than global. The company established small-scale production
units in UK, Brazil, and India during the 1960s and 1970s, but these
units remained insignificant as the lion’s share of production was
located in Denmark and Germany. Until the early 1990s, 90% of
Danfoss’ revenues were generated by western European operations. It
was not until the founder’s son, Jørgen Mads Clausen, became CEO in
1996 that the globalization strategy took off. Trained as an engineer
with an MBA from the University of Wisconsin, Mr. Clausen brought
a global mindset to the position and declared his ambition of changing
Danfoss from a locally-focused company into a major global player
that was number one or two in relevant markets worldwide. Danfoss’
strategy was to optimize production locations in countries adjacent to
major markets and to expand these facilities in order to reap the
 Danfoss A/S – Global Manufacturing Footprint

benefits arising from economies of scale. While major market shares

were maintained in saturated European markets, by 1996 a presence
was necessary in expected growth markets such as China and the US.
Danfoss operated in industries characterized by mature technologies
and price pressures. Hence, locations in low cost regions were
essential. To realize its global aspirations, Danfoss invested a USD
three-digit million sum between 1996 and 2004 to establish production
facilities, increase sales presence and acquire companies.
Geographically, the US and China were the biggest recipients of these
investments.
Danfoss’ internationalization efforts can, at best, be described using
a market-to-market establishment chain. Once experienced with
exporting into a specific market, Danfoss established sales subsidiaries
and then invested in production facilities. In that sense, Danfoss
utilized its previous experience in setting up production and sourcing
units, and applied this knowledge to new opportunities. When the
company initiated in-house production of expansion valves for the
local Chinese industrial refrigeration market in 1995 and 1996,
Danfoss benefited substantially from similar activities previously
undertaken in Poland, Ukraine and Russia. In some instances, R&D
facilities were co-located with production, as the company sought
maximum synergy. First, we globalized sales. Now we relocate
production because it is important to be close to customer, if you want
to grow, which we do. A natural element of this strategy is, in some
instances, that R&D activities follow the relocation of production
(CEO Jørgen Mads Clausen, Børsen 17 December, 1996).
While Danfoss’ engagements in China were promising, not every
aspect of the company’s globalization strategy proved successful.
Danfoss, in its pursuit of a global presence, could not ignore the North
American market, which harbored eight major global air conditioning
providers - all major Danfoss customers. However, despite
considerable investments in low cost production facilities in Mexico,
from which Danfoss tried to serve the American market, the
company’s endeavors remained elusive and progress was slow. We did
not enter the US in due time and now it is almost impossible to work
up the market. Acquisition is the only avenue but it is difficult to find
acquisition targets, and when we find them, they are only available at
excessive prices (Jørgen Mads Clausen, Børsen 22 October 2003).
Danfoss failed to gain momentum in the American market, which was
largely attributable to underestimates of the challenges involved,
including product redesign, and employment and training of local staff,
while at the same time the company was closing down its production
in Nordborg.
 Danfoss A/S – Global Manufacturing Footprint

Historically, Danfoss’ major markets were European, but these

markets experienced sluggish growth, forcing the company to work up
new markets. Significantly, the company had high expectations for not
only the blooming Chinese market, but also for Russia and other
Eastern European markets. In 2004, Danfoss’ revenue in these regions
amounted to DKK 3.4 billion, corresponding to 20% of total revenue.
The sale of Danfoss products in China totaled DKK 750 million in
2004 but the company aggressively sought to meet its ambitious
objective in the big republic of DKK 3 billion in revenue in 2008.
Danfoss’ believed that the cultivation of the markets in the east would
be handled through a combination of organic growth and acquisitions.
In particular, China’s complicated market structure prompted
negotiations with potential Chinese acquisition targets. The process of
screening, valuating and negotiating acquisition candidates was
cumbersome. Recapitulating Danfoss’ strategy in China, CEO Jørgen
Mads Clausen commented: We have major ambitions in China. Having
undertaken comprehensive analytical work, we are ready to initiate.
We strive to grow 50% annually in China in the years up to 2008.
Currently, we are talking with two or three Chinese companies that we
are interested in buying. However, we need to drink a lot of tea before
the Chinese are ready to discuss prices (Børsen 3 January 2005).
To help execute and implement Danfoss’ China strategy, the
company had, along with Niels B. Christiansen, engaged Hans Michael
Jebsen on the Danfoss board. As CEO of a family-owned trading
company based in Hong Kong with a strong link to southern Denmark,
Mr. Jebsen was expected to apply his knowledge of the Asian business
environment, particularly with regard to China. CEO Jørgen Mads
Clausen commented: We are tremendously satisfied and proud that
Hans Michael Jebsen has agreed to join our board. Hans Michael
Jebsen, who was born and raised in Aabenraa [southern Denmark],
has a long and impressive career in Hong Kong that is highly
applicable to our work. His extensive knowledge of China and Asia
will be of great benefit to Danfoss. Moreover, he has shown that he
shares Danfoss’ attitude towards local community work (Børsen 11
April 2005).
As a rather new initiative, Danfoss established a China Board,
headed by Jørgen Mads Clausen and Niels B. Christiansen, which
aimed to make Danfoss’ Chinese management more adaptive to
market signals and enable it to make quicker decisions. According to
Danfoss, the Chinese management needed a higher degree of
involvement by the general management team in Denmark to prevent
bottlenecks in internal decision processes from hindering business
development in the fast growing Chinese market.
 Danfoss A/S – Global Manufacturing Footprint

Though Danfoss had set the ambitious goal of DKK 24 billion in

revenues by 2008, short-run prospects appeared somewhat bleak. The
majority of the company’s sales outside Europe was based in USD.
Considering the weakness of the dollar’s exchange rate, this would
hamper net sales growth. In addition, Danfoss had experienced
increases in costs for raw materials, such as copper, brass, steel and oil,
throughout 2004. The company held raw material prices at bay through
its long-term contracts. However, Danfoss felt the pressure from
suppliers who were requiring significantly higher prices in response to
Danfoss expansion of capacity. The effect of increasing prices on raw
materials exceeded cost-cutting efforts, and increases in product prices
were then passed on to consumers. In Danfoss’ belief, the rise in raw
material costs decreased the 2004 bottom line by DKK 100 million. If
these trends continued, they would most likely impact the 2005 result
negatively (Berlingske Tidende Nyhedsmagasin 17 September 2004).

Challenges Ahead – Changing Production Philosophy

The sales concentration and location of production sites posed a

number of challenges for Danfoss. Through its web of 56 production
facilities in 20 countries, Danfoss could meet its goal of being close to
its customers (see exhibits 5 and 6). However, would customers
continue to be where they were 20 years ago? Danfoss summed up its
short and long-term expectations as: Growth in 2005 is expected to
primarily come from the overseas markets and Asia, and China is
expected to be particularly important in future years. Europe is
expected to continue to show low growth rates and stagnation is
expected on the important German market (Danfoss Annual Report
2004).
A significant share of the manufacturing base was located within the
EU area so the question regarding to what extent the production
network was aligned with future growth was highly relevant. In
addition, the fact that the major share of production sites resided in
high cost countries could, from a cost perspective, prove
disadvantageous. This issue was further brought to the fore in the light
of the price pressures Danfoss experienced across a large portion of its
product portfolio and the fact that competitors had a more cost
competitive production set-up in terms of location. Although there was
an alignment between Euro-based sales and costs, Danfoss was very
dependent on the Euro Zone in its global outlook. The RA division
serves as a case in point to illustrate Danfoss’ challenges. In line with
expectations, sales outside of the EU grew 17% in 2004, with one-third
 Danfoss A/S – Global Manufacturing Footprint

of net sales being obtained on dollar markets. Danfoss’ Euro-

dominated cost base, in conjunction with an all-time low dollar
exchange rate, threatened the company’s competitiveness and earnings
potential. Competitors with a larger dollar cost base were better
positioned as the Euro value increased.
A second concern involved scale and scope in production sites.
Although all three divisions sold, by and large, to the same markets,
little interaction took place between them as each division handled
development and production for various product groups. All three
divisions had adopted a “one product, one plant” manufacturing
strategy and co-located R&D with the main plants. Consequently,
products and components did not flow between plants. In some
instances, especially in less developed economies, placing two distinct
product lines under the same roof would make it easier to negotiate
with public authorities. Yet, in the long-term, Danfoss had seen that
co-location led to diseconomies of scale, as R&D and engineering
teams supporting production became too specialized when production
volume increased.
Two initiatives were launched to streamline and support future
growth: 1) relocation of production units to countries with competitive
cost levels, and 2) a productivity improvement program. In terms of
the former, non-recurrent provisions totaling DKK 150 million had
been invested within the RA division to restructure the production
activities for household compressors. The factory (700 employees),
located in Flensburg, Germany, was relocated to Slovakia, a project
that would be completed by 2007. According to the Vice-President for
communication and reputation management at Danfoss, Ole
Daugbjerg, the move was imperative in order to gain competitiveness:
The last couple of years, the production of household compressors
yielded a monthly shortfall of DKK 7.5 million. Having tried out
several initiatives without the desired effect, we turn to the last resort,
which for us is offshoring (Børsen 21 January 2005). The decision
process surrounding the initiative to relocate to Slovakia illustrated in a
nutshell the company’s approach to dealing with globalization issues.
While recognizing the necessity, relocation was regarded as the last
option. In addition to the Slovakian move, Danfoss’ Chinese factory in
Tianjin was expanded to 40,000 square meters and ground was broken
in June for a new, 12,000 square meter factory in Wuqing, China. The
building project, amounting to approximately DKK 50 million, was
expected to be completed in 2005. Finally, the company devoted DKK
130 million to establish a new factory of 12,000 square meters in the
Istra region outside Moscow.
 Danfoss A/S – Global Manufacturing Footprint

The other initiative set in motion related to a new productivity

program. Based on lean manufacturing principles, the program was
implemented primarily to eliminate bottlenecks at production sites and
establish a more efficient production flow, creating a basis for
improved utilization of the production facilities. The next phase of the
program would include sales operations. Danfoss’ investments in the
program amounted to DKK 66 million in 2004.
In line with its new production set-up, Danfoss argued that
production development had gone from volume production to more
customer-adapted mass production. One visible result of this trend was
the establishment of new a business unit, Systems & Sub-Assemblies,
within the RA division. Located close to existing customer’s
production sites, Danfoss could offer system solutions rather than
component solutions. Expectations were that the new unit, based on
those seen in the automotive industry, would lead to an improved
commitment from customers and that it would become an important
element of future growth. This trend led the company to unite
different Danfoss products that comprised customer applications.
Instead of delivering single items, Danfoss aimed to hand a sub-system
over to the customer. All else equal, this development spurred a more
interrelated relationship between various production lines.
Since its inception, Danfoss had been strongly committed to
engineering and state-of-the-art manufacturing techniques. Around
10% of the employees were engineers by training. Danfoss invested,
on average, more than its competitors in production equipment. One of
Danfoss’ challenges involved gradually changing from an engineer-
mindset to a more commercial type of thinking and reasoning. Sound
engineering work was the lifeblood of Danfoss. Particularly with
respect to quality in research and product development, engineering
capabilities had proven enormously critical. However, the company’s
pride in developing product landmarks had, in some instances, been at
the expense of consumer demand and preferences. Danfoss needed to
respond more attentively to market trends and incorporate these trends
into product development, rather than producing technological
advanced items and expecting the market to buy into these
innovations. The engineering spirit permeating the company also
affected the establishment of foreign production units. Traditionally,
the company had been reluctant to apply manual labor practices. The
preference for state-of-the-art machinery notably impacted cost
structures and pay-back times, in some instances explaining Danfoss’
difficulties in gaining an international foothold.
 Danfoss A/S – Global Manufacturing Footprint

Establishing a Global Production Network

To strengthen work efforts around the global production network,

Danfoss allocated extra resources to the work conducted by Mr.
Colotla and Mr. Tandrup. The purpose of 2004’s analytical endeavors
was to define and evaluate the best manufacturing footprint options
based on such criteria as alignment with future sales, factor costs, labor
availability, supplier presence, and infrastructure. From a financial
standpoint, Danfoss was interested in how increased coordination
between different plant activities, such as production technology and
overhead, could result in savings and help maximize returns on capital.
Danfoss’ “one product, one plant” philosophy was likely to increase
complexity in operations and incurred costs that added little value for
the client. If Danfoss could find better geographical spots for its
production activities and explore coordination between them, earnings
could be enhanced. To analyze these issues, Danfoss developed a four-
step methodology (see exhibit 7).
The first step was to estimate financial attractiveness by calculating
the cash flow effect of variations in the operating costs and capital
expenditures resulting from plant relocations. In particular, Danfoss
was concerned with recurrent savings arising from factor cost and
logistical differences, and relocation costs and one time investments.
Relocating plants to low-cost regions was certainly not without its
costs (see exhibit 8). When the company decided to relocate the
household compressor business from Flensburg to Slovakia between
2004 and 2007, the company assigned a total of DKK 150 million in
non-recurrent provisions to the restructuring process to cover such
elements as severance agreements.
The second step contrasted the financial attractiveness of plant
relocations with the individual business logic of each plant. Such
aspects as the relocation’s alignment with expected market growth,
value chain linkages with R&D, and marketing and sales were
analyzed. In addition, proximity to suppliers and the impact on lead
times were considered as well, as were labor availability and potential
effects on quality. With regards to the supplier base, Danfoss saw
potential savings in buying from Chinese suppliers. To establish a web
of Chinese suppliers, Danfoss had set up three procurement offices
with a total of ten employees. The company expected to purchase
production inputs valuing DKK 1 billion from China within 4 to 5
years. Many Danish companies will lose sales to us. I am not able to
tell the exact number, but evidently the amount is significant. We can
realize substantial savings by purchasing standard supplies from
 Danfoss A/S – Global Manufacturing Footprint

China rather than from our Danish and European suppliers,

commented Jørgen Mads Clausen (Berlingske Tidende 22 October
2003).
Specific plant relocations could not be considered in vacuum
without taking the network dynamics into account, which was the
methodology’s third step. Danfoss was particularly interested in
scrutinizing the “one product, one plant” philosophy and exploring the
potential for increased coordination and scope in production, site
overhead, and R&D synergies. Moreover, given Danfoss’ Euro-centric
cost base, currency exposure along with the political and economic
risk profile needed to be investigated.
Finally, decisions on plant relocations needed to be contrasted with
Danfoss’ Nordborg vision and emphasis on the local community.
Throughout its history, Danfoss had been the embodiment of local
community engagement and played an omnipresent role in the
business environment of southern Jutland. There had been some
instances in 1999-2001 where other Danish companies relocated jobs,
mainly low-skilled, to low-cost regions like China, Mexico and
Poland. Despite the necessity to strengthen competitiveness, Danfoss
felt that to do so it would undermine its traditional culture. However,
when lay-offs of Danish workers became inescapable, Danfoss worked
and communicated openly with public and trade unions to agree on the
speed of relocation and to explore new opportunities in more advanced
positions in Denmark. The sincere responsibility Danfoss felt for local
community development, in particular for the Nordals community,
meant that number of lay-offs and the possibilities for gaining
alternative employment needed to be investigated thoroughly.

* * *
With an expected annual growth rates of 8 to 10% and a revenue goal
of DKK 24 billion by 2008, Danfoss had a valid reason to pursue cost-
efficient manufacturing solutions while simultaneously retaining the
company’s flexibility, responsiveness, and alignment with future
market demands. Historically, there had been little exploitation of
scope effects. With a cost-base heavily concentrated in the Euro zone
and prospective markets residing in dollar-zones, redesigning the
manufacturing footprint was too important a challenge to ignore.
However, a redesign potentially meant abandonment of the “one
product, one plant” philosophy which had guided Danfoss’
international activities for decades. Potentially, it also meant taking on
 Danfoss A/S – Global Manufacturing Footprint

an activity-based view in order to explore the potential for scope

effects. To reverse these mental maps or international routines could
prove problematic.
Rethinking the design and strategy of the entire production network
was strenuous. Mr. Tandrup speculated that new product-lines and
plant facilities normally constituted the best opportunities to redesign
plant structure and locations as they held no sunken costs or existing
resource commitments and few vested interests. Although each plant
had a history, Danfoss’ approach needed to encompass all plants. With
more than 50 plants in 20 different countries, the potential was
significant. Each factory needed to be evaluated in terms of the
financial potential of relocating or co-locating. In addition, Danfoss
believed that customer-adapted production would become increasingly
important - a trend that underlined the necessity to investigate potential
scope effects from co-locating plants. As the analytical work
progressed, Mr. Tandrup felt excited, as a presentation to the executive
committee of various scenarios was due the following week.

Suggested Literature

Colotla, Ian; Shi, Yongjiang; Gregory, Michael J. (2003): “Operation

and Performance of International Manufacturing Networks”,
International Journal of Operations & Production Management, vol.
23(10), pp. 1184-1206.

Ferdows, Kasra (1997) “Making the Most of Foreign Factories”,

Harvard Business Review, vol. 75(2), pp. 73-88.
 Danfoss A/S – Global Manufacturing Footprint

Exhibit 1: Danfoss Financial Highlights 2000-2004

Danfoss Financial Highlights 2000-2004 (million DKK)

2000 2001 2002 2003 2004
Profit and loss account
- Net Sales 14.797 14.384 14.923 15.434 16.345
- EBITDA 1.596 1.439 1.571 1.994 1.757
- Operating profit 717 605 721 1.109 1.083
- Income from associates and joint 98 68 107 58 138
ventures
- Financial items -73 -193 -78 -138 -121
- Profit before tax 742 480 750 1.029 1.100
- Net profit 501 332 513 744 775

Cash Flow Statement

- From operating activities 998 912 1.462 1.254 1.200
- From investing activities -1.088 -947 -559 -1.142 -919
- Free cash flow -90 -35 903 112 281
- Cash flow from financing activities 642 -165 -158 -416 -712
- Cash/Equivalents (end year) 1.148 948 1.693 1.389 958

Key Ratios
- Return on net assets 10.3% 8.9% 10.7% 16.7% 15.4%
- Net investment ratio 2.3% 8.0% 4.8% 10.5% 7.4%
- Return on sales 5.0% 3.3% 5.0% 6.7% 6.7%
- Return on equity 8.2% 5.1% 7.6% 10.5% 10.2%
- EBIT (operating profit and 4.8% 4.2% 4.8% 7.2% 6.6%
percentage of net sales)

Number of employees (headcount) 16.905 16.544 16.972 17.449 17.543

Number of employees in Denmark - - - 6.102 6.048
Sales per employee (DKK million) 0.886 0.869 0.879 0.885 0.932

Main business segments 2003-2004

9000
8000
7000
DKK (million)

6000 2003
5000
4000 2004
3000
2000
1000
0
Refrigeration Heating (incl. Motion
and Air water Controls
Conditioning controls)

Source: Danfoss Annual Report 2004

Exhibit 2: Danfoss’ Business Divisions and Organizational Structure

Executive Committee
Hans Kirk Niels B. Christiansen Jørgen Mads Clausen Ole Steen Andersen
EVP and COO EVP President and CEO EVP and CFO

Corporate Corporate
Functions Ventures

Refrigeration & Air Heating & Water Motion Controls

Conditioning Nis Storgaard Sven Ruder
Vagn Helberg Business Segment Business Segment Sauer
Business Segment President President Danfoss
President ----------------------------- -----------------------------
----------------------------- Comfort Controls Drives
Refrigeration and A/C District Heating Controls Gearmotor
Controls Owner
Burner Components Marine Systems Share
Commercial Compressors
Floor Heating (divested third quarter 2004)
Household Compressors 38.5 %
------------------------------
Industrial & Appliance
Controls Water Controls

Danfoss Services
Danfoss A/S – Global Manufacturing Footprint
 Danfoss A/S – Global Manufacturing Footprint

Exhibit 3: Product Segments

Main Divisions Product Segments

Refrigeration and Air Conditioning Controls. Product lines
within this segment include self-acting valves, electronic valves
and regulators, thermostatic expansion valves, thermostat and
pressure controls.
Commercial Compressors. Product lines specialize in large
hermetic reciprocating and scroll compressor technologies for
commercial air conditioning and refrigeration. The compressors
and condensing units are used in a large array of applications in
both businesses.
Household Compressors. Product lines include hermetic
compressors and fan-cooled condensing units for refrigerators,
RA freezers and light commercial applications, such as bottle coolers
and display counters.
Industrial and Appliance Controls. This product segment is split
in two: 1) temperature controls for the home appliance industry,
and 2) industrial controls, which encompasses products for
industrial monitoring and control systems based on the principles
of pressure and temperature measurement, electrical power, and
fluid control. Particularly within this segment, Danfoss has
attempted to developed customer-specific solutions by
cooperating closely with selected customers. Combined solutions
include using valve and pressure and/or temperature products.
This development has resulted in lower customer costs and added
value through trimmed design solutions.
Comfort Controls. Danfoss’ best known product - the radiator
thermostat - belongs to this product range. Other products are
hydronic balancing valves, electronic thermostats, and
thermostats for comfort cooling.
District Heating. Product range includes self-acting controls,
automatic electronic controls, shut-off valves, heat exchanges and
HW substations.
Burner Components. Products include a wide range of
components for oil burners and boilers, including pre-heaters,
nozzles, pumps, and igniters.
Floor Heating. Offers electrical as well as hydronic floor heating.
Water Controls. Products include butterfly valves and pressure-
reducing valves.
Drives. Products include converters for the speed control of
motors in the food, beverage, automotive, chemical,
petrochemical, textile, steel and mining industries.
MC
Gear Motors. Supplies gear motors for industrial applications with
a strong position within the automotive, material handling and
steel industries.

Abbreviations:

RA (Refrigeration & Air Conditioning Division)

HW (Heating and Water Division)
MC (Motion Controls Division)

Source: www.danfoss.com
Exhibit 4: Overview of Danfoss’ plant portfolio

Nordborg

Rest of DK

> 400 FTEs

100-400 FTEs

10-99 FTEs

Refrigeration & Air conditioning Heating & Water Motion Controls

Danfoss A/S – Global Manufacturing Footprint
 Danfoss A/S – Global Manufacturing Footprint

Exhibit 5: Danfoss Business Divisions 1999-2003: Geographical Split

Geographical split - Refrigeration and Air Conditioning

70
60 1999
percentage

50 2000
40 2001
30
2002
20
10 2003
0
Western Eastern North Asia-Pacific Latin
Europe Europe, America America
Middle East incl. Mexico
and Africa

Geographical Split - Heating and Water

80
70
60 1999
percentage

50 2000
40 2001
30 2002
20 2003
10
0
EU Eastern Europe North America Other regions

Geographical split - Motion controls

80
70
1999
60
percentage

2000
50
40 2001
30 2002
20 2003
10
0
Europe, Middle North America Asia-Pacific Latin America
East and Africa incl. Mexico

Source: Danfoss annual reports, various issues

 Danfoss A/S – Global Manufacturing Footprint

Exhibit 6: Production Locations

Country Factories and Product Lines

Brazil (120) Danfoss do Brasil (07,17)
Bulgaria (10) Danfoss EOOD (01,02,03,04,06,07,08,09,10,16,17,18)
Danfoss Inc. (03)
Canada (10)
Danfoss Inc. (2) (18)
China (210) Danfoss (Tianjin) (01,03,08,16,17)
Danfoss (Glamsbjerg) (08)
Danfoss (Appliance controls division – Nordborg) (07)
Danfoss (Floor heating – Vejle) (03)
Danfoss (Spring factory – Tinglev) (02)
Danfoss Redan (Risskov) (08)
Devi A/S (Vejle) two factories (03)
Gemina-Termix Production A/S (Sunds) (08)
Danfoss A/S (Nordborg) (01,02,04,07,08,10,14)
Denmark (3200) Danfoss Industrial Refrigeration (Hasselager) (01)
Danfoss Drives (Graasten) – two factories (09)
Danfoss Analytical (Sønderborg) (10)
Danfoss Water Hydraulics (Nordborg) (14)
Danfoss (Kolding factory) (01,04)
Danfoss (Silkeborg factory) (03)
Danfoss (Viby J factory) (03,08)
Danfoss Plastic Manufacturing Plant (07)
LPM Group Oy (08)
Finland (140)
Danfoss Bauer Oy (18)
Danfoss Socla. Desbordes – Siège Social (16)
Danfoss Commercial Compressors S.A. (17)
France (900) Danfoss Commercial Compressors S.A. (Anse plant) (17)
Danfoss Socla S.A.S Water Controls division (16)
Danfoss Socla S.A.S (only production site) (16)
Danfoss Compressors GmbH (Flensburg)1 –two factories (06)
Danfoss Industrieautomatik GmbH (Korntal-Münchingen) (04)
Germany (1800) Danfoss Silicon Power GmbH (Schleswig) (09)

Danfoss Randall Limited (03,08)

Great Britain (160) Danfoss Ltd. (Unit 1) (18)
Italy (100) Danfoss S.r.l. (Appliance Controls division – Torino) (07)
Danfoss de S.A. de C.V. (RA division) (01)
Danfoss de S.A. de C.V. (Household compressors division)
Mexico (400)
(01,04,06,09,10,16,17)
Danfoss de S.A. de C.V. (Appliance controls division) (07)
Norway (90) Danfoss Esco (16)

1
In order to maintain a competitive household compressor business, in 2004
Danfoss decided to relocate production activities from Flensburg to Slovakia.
These adjustments will cut 160 jobs in 2006 and 540 jobs in 2007, corresponding to
a 50% reduction (Danfoss Annual Report 2004).
 Danfoss A/S – Global Manufacturing Footprint

Exhibit 6: Production Locations (cont’d)

Danfoss LPM Sp. Z.o.o. (08)

Poland (550) Danfoss Sp. Z.o.o. (04)
Danfoss Sp. Z.o.o. (03)
Russia (30) ZAO Danfoss (Moscow) (03)
Slovak Republic (400) Danfoss Compressors spol. s.ro, Zlaté Morazce (06,18)
Danfoss Trata d.o.o. (Ljubljana-Sentvid) (08)
Slovenia (1370) Danfoss Compressors d.o.o. (Crmomelj) (06)
South Africa (10) Danfoss (Pty) Friga Systems Division (17)
Ukraine (20) Danfoss T.o.v. (Kiev) (03)
Danfoss Inc. (RAC division – Baltimore) (01,02,06,07,17)
Danfoss Commercial Compressors Ltd. (17)
Danfoss Drives (09)
US (300) Danfoss Graham (09)
Danfoss Water & Wastewater (04,09,10)
Danfoss Bauer Inc. (18)
Danfoss Flomatic Corporation (16)

Product lines
Refrigeration and Air-Conditioning products (RAC)
1. Refrigeration and AC/Controls
4. Industrial Controls
6. Households Compressors
7. Appliance Controls
17. Commercial Compressors
Heating and Water products (HW)
2. Burner Components
3. Commercial Comfort Controls
8. Distict Heating Controls
16. Water Controls
20. Floor Heating
Heating and Water products (MC)
9. Drives
18. Gear Motors
10. Ventures
14. Water hydraulics

Source: www.danfoss.com
Exhibit 7: Network Design Criteria

4. Compatibility with
Nordborg Vision

3. Network Logic
1. Financial 2. Individual Plant
Attractiveness Business Logic

•Supports current market

and growth •Sufficient economies of scale
•NPV and cost •Urgency and scope
improvements ¾Profitability ¾Scale in production
¾Scale in overhead •Fit with Nordborg vision
•Sensitivity analysis on ¾Competition
¾Economies of scope •Impact on local community
operational outcome •Value chain linkages
¾Currency ¾R&D •Acceptable risk profile
¾Productivity ¾Sales and ¾Currency exposure
¾Wage inflation marketing ¾Political and
¾Lean ¾Supply chain economic risk
improvements •Neutral quality impact
¾Lost sales •Sufficient competencies
•Sensitivity analysis on
relocation method

Source: Danfoss internal documents

Danfoss A/S – Global Manufacturing Footprint
Danfoss A/S – Global Manufacturing Footprint

Exhibit 8a: Recurrent Savings

Country- •Transport •Inter-country •Wage •Weighted
Specific rates custom rates inflation index of 1)
Parameters •Country labor rate, and
wage index 2)Purchasing
power
•Inflation
Material Transport Customs Other fixed
Cost impact + + + Labor costs +
Costs logistics duties costs
Plant- •Product •Geographical •Productivity •Shared
Specific weight/volume sales split and •Learning facilities
Parameters •Transport development curve
mode
Source: Danfoss internal documents
Exhibit 8b: Investment Costs for Relocation

Country- •Severance •Wage •Land and •Transport •Wage

Specific agreements inflation building unit times inflation
Parameters •Country costs •Country
wage index wage index

One-off Restructuring Transition Sale of

+ + Investments + Inventory -
Costs costs costs building

Plant- •Machine •Training and •Building •Inventory •Land and

Specific value travel size value building
Parameters •Number of requirements •Machinery market rates
FTEs •Learning value
curve

Source: Danfoss internal documents

Danfoss A/S – Global Manufacturing Footprint
 Danfoss A/S – Global Manufacturing Footprint

Exhibit 9: Production and Sourcing Cost Indices

Country Production Cost Sourcing Cost

Index Index
Vietnam 11 11-59
China (Mainland) 11 12-53
Ukraine 13 13-34
Cambodia 13 14-72
China (Coastal) 14 14-55
Malaysia 17 17-59
India 17 17-59
Mexico 21 22-75
Latvia 22 23-31
Belarus 26 27-45
Thailand 27 27-69
The Philippines 27 28-69
Czech Republic 30 30-34
Lithuania 32 32-38
Bulgaria 36 37-50
Poland 38 38-42
Russia 38 38-56
Slovak Republic 39 39-41
Hungary 39 40-49
Slovenia 48 48-49
Hong Kong 54 54-85
Portugal 57 57-64
Denmark 146 132-146
- The indices are based on UK =100
- Production Cost Index is calculated on the basis of:
o A standard company with 140 employees
o Equity capital of EUR 300.000-1.500.000 depending on country
o Standard Allowed Minutes (SAM) accumulated– measures the
amount of time allowed to perform a given task (e.g., a sewing
operation) as determined by engineering.
o Direct and indirect wages
o Yearly work time
o Productivity
o Depreciation of machinery and buildings
o Interest rate
- Exchange rate 1 USD = 1,15 EUR
- Raw material costs are assumed equal around the globe. Tax incentives,
export subsidies and special quota arrangements are not included.

Source: www.textile.dk
Danfoss A/S – Global Manufacturing Footprint