Profitability race: ABB Drives vs S&P 500

Jukka Tolvanen

ABB drives can save energy and generate profits 25 times more than stock market average. Can this be true? Absolutely.

Energy efficiency is a very profitable business for both manufacturers and especially for the end users. Today it is quite common to compare profitability of the investments. We have all followed the development in stock market when watching evening news. Let me compare now long term profitability of Standard & Poor’s 500 Index versus ABB drives.

ABB provides tools to calculate energy savings when using variable speed drives. In practice we can achieve 30…40% energy saving easily with pump and fan applications compared to other control methods. Sometimes savings can be higher than 50% – the highest I have seen was 80%. This time I am referring a case story from Riecor Farming in South Africa. With ABB drives they achieved 40% annual energy saving. This saving equals 19,700$ and was done with 11,500$ investments to ABB drives. Now I turn saving of 19,700$ to profit and compare it to the investment. Profitability is 171%. This sounds too good to be true. The funny thing is that with ABB drives is that the risks of losing money is none. In stock market this is not the case.

So now we have the first number, 171. Let’s see what the stock market can do.

I have here two sources. Mr Warren Buffet says: “The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent”. My other source, S&P 500 Index average annual return between 1950-2009 is exactly 7,0%. So here we have number 7.

In general stock market is seen as a good and profitable investment in the long run. As my sources above proof this is the case. There has been some variations as we know in past 60 years. At the same time ABB’s energy efficient products can generate cash almost 25 times more with hardly any risk or annual variation.

If these numbers still sound too good to be true there are some reasons. Here in ABB we are promoting payback time as one of the main arguments for drive investments. We have done that for several decades. Having payback time of seven months, like this Riecor case – it really does not sound so attractive. Other reason can be local energy price. Monetary energy savings depends on local electricity price and which varies country by country. Here in Europe electricity price in Germany is relatively high, in Finland it is quite cheap. Then we need to remember that lifetime expectancy of variable speed drives is around 10 years. In stock market companies can survive hundreds of years like ABB Finland is running 126th year. With the profits higher than 100% customers want to invest more to ABB products, like in Riecor’s case.

“Past performance is no indication of future result”. This is perfectly true with stock market. With ABB drives, as long as we use electricity and there is electric motors running the world we are on the safe side no matter which economical conditions there are. How much you are earning with ABB products?

About the author

Jukka Tolvanen

Born in 1969 in Joensuu, Finland, Jukka Tolvanen studied electrical engineering at the University of Technology in Helsinki, where he received his master's degree in 1996. Tolvanen joined ABB Drives as a trainee in 1993 and full time employee in 1996. He has had several managerial positions in R&D, sourcing, sales and product management and marketing. Currently Tolvanen enjoys his time studying energy efficiency full-time. Jukka blogs about energy efficiency related matters in English and in Finnish.
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  • Tamer Shinouda

    Hi Jukka,
    Impressive viewpoint as usual :)
    Here in Canada, energy prices are soaring, particularly in Ontario. I'm working with a customer where 1 Sanitation Pump (15 HP) is 3% of his total plant consumption. With an ABB Drive, the pump can save 50% of energy, i.e. Total Plant Consumption is reduced by 1.5% just looking to one application.
    I agree, it's a way better investment...! :)
    Tamer