A German Dynasty Sells Assets to Survive

(Bloomberg) --

On the banks of the Ruhr river that flows through Germany’s industrial heartland lies a vast ornamental park with manicured gardens and exotic trees. At its heart sits a neoclassical manor with copper-green roof and Grecian pillars: Villa Huegel, the former home of steel magnate Alfred Krupp.

Villa is a misnomer -- the place is more a palace than a residence. There are wood-paneled library rooms, elaborate Flemish tapestries and glittering chandeliers dripping from coffered ceilings. The mansion is a tribute to Krupp’s vast wealth and status as champion of Germany’s breakneck industrial revolution in the nineteenth century. If the Ruhr valley was the economy’s engine room, Villa Huegel was its command bridge.

Today, Villa Huegel is a mausoleum of a bygone era. The storied Krupp name has been folded into the portmanteau of the Thyssen and Krupp steel dynasties that merged in 1999 but got little tangible done after that. Once on par with German engineering stalwarts like Siemens AG and Daimler AG, Thyssenkrupp is fading away as Germany’s sputtering economy and management missteps force the company to sell off units to plug holes in its balance sheet.

Individual units may well fight on for years, but the bell has tolled for the conglomerate whose steel made the spire of the Chrysler building, powered the Nazi war machine and built the machines that drove China’s rapid growth in the late 20th century.

The decline and fall of the Thyssenkrupp empire is a source of concern for politicians who see an omen for the German economy which until now held on to well-paid blue collar jobs. On Nov. 14, Germany releases economic data that may show Europe’s largest economy slipped into recession in the third quarter.

Breakup Risk

“This basic principle of the social market economy has always been particularly pronounced at Thyssenkrupp,” said German Labor Minister Hubertus Heil of the Social Democratic Party, a political group that’s seen its relevance similarly wane as Germany drifts away from old mass employment industries that formed its political bedrock. “Social responsibility must not be sacrificed to short-term investor interests in the stock market value.”

The growing crisis at Thyssenkrupp is making investors’ and workers’ interests in a break-up increasingly aligned: the company needs the cash to pay pensions and keep itself afloat. The foundation that oversees Villa Huegel and is a big stakeholder relies on dividends to meet its outlays, including research grants, cultural bursaries and tending the manicured property.

Executives in Essen are currently in talks with suitors for Thyssenkrupp’s most prized asset: the elevator division, a 15-billion euro ($16.56 billion) unit that’s drawn interest from several parties. The firm is also looking at selling its automotive-components operations where profits are falling due to Germany’s worsening car sector. Its heavy plate steel division –- the successor of the Krupp steel mills that fortified Adolf Hitler’s tanks and battleships – is also on the chopping block.

3G Capital Is Said to Bid for Thyssenkrupp Elevators

‘Downward Trend’

“This is the continuation of a downward trend that started after World War II,” said Albrecht Ritschl, a professor of economic history at the London School of Economics. “German heavy industry has never been fully viable under world market conditions, owing to its location atop coalfields that were plentiful but expensive to exploit.”

Along with its debt, ignominies for the one-time swaggering giant keep stacking up: the firm tumbled out of Germany’s blue-chip DAX index in September and was replaced by jet-engine manufacturer MTU Aero Engines AG. It’s an exit emblematic of how the industrial future of Europe’s biggest economy rests with high-tech, high-margin players rather than steelmakers.

The company’s crisis has put it in the cross hairs of activist investors pushing for change. Sweden’s Cevian Capital AB is the second-biggest shareholder behind the foundation. A spokeswoman for Thyssenkrupp referred to a statement from CEO Martina Merz in September, when she said the company would continue with its strategic realignment as it seeks to regain confidence of investors.

Chinese Competition

Thyssenkrupp’s demise points to larger fault lines running through Germany in the twilight of Angela Merkel’s long reign as chancellor. In the short-term, the export-led growth model faces threats from U.S. President Donald Trump’s unresolved trade war with China. Further out, Asian challengers are increasingly competitive in the advanced manufacturing niche that previously proved a rich vein for German jobs.

The Made in China 2025 plan has helped firms become the hottest competitor for many German manufacturers, according to a survey from the German Chambers of Commerce. Thyssenkrupp has seen margins at its car-parts businesses steadily decline as that competition from Asian challengers intensifies.

“Europe will have trouble remaining in the game against an ambitious Chinese state, which will continue helping its companies in key industrial sectors in order to make China an advanced, sophisticated economy,” said Philippe Le Corre, an expert in Chinese and European economic relations at Carnegie Endowment for International Peace.

Steelmaking, Thyssenkrupp’s heart and soul, is facing an existential crisis in Europe. While the cost of permits to emit carbon dioxide steadily rise, cheap imports from abroad continue to crush prices. An attempt by Thyssenkrupp to merge its steel operations with the European unit of India’s Tata Steel Ltd. was scrapped amid European Union antitrust concerns.

Bad Decisions

Still, many of Thyssenkrupp’s wounds are self-inflicted. A 2005 decision to conquer the American steel market haunts the company to this day. Management spent more than 12 billion euros for a steel mill in Brazil and a plant in Alabama. Depleted from a downturn in the global market and cost overruns in Brazil, Thyssenkrupp was eventually forced to pull the plug a decade later, a retreat that racked up a total loss of more than 8 billion euros, ranking as one of the biggest failed investments in German corporate history.

The combination of flawed business decisions and rising costs have led Thyssenkrupp to burn cash in 10 out of 13 years since 2007, according to data compiled by Bloomberg. Despite a sustained economic boom in Germany, the firm’s overall cash outflow amounts of 5.1 billion euros in that time. Its pension deficit hit 743 million euros in the first nine months of 2019.

Add to that management chaos and ballooning administrative costs at the firm’s Essen headquarters. Chief Executive Officer Guido Kerkhoff was ejected after less than a year after failing to sell off units, the same fate suffered by his predecessor, Heinrich Hiesinger, who stepped down amid pressure from activist funds Elliott Capital Management and Cevian.

And as Villa Huegel still basks in a glamorous past, hosting award ceremonies and classical concerts in the ballrooms, austerity is starting to bite at Thyssenkrupp’s headquarters a 20-minute drive north of the Ruhr river. Here, office workers on the campus of what was once Germany’s biggest company have been told to display their frugal side and think twice before ordering logo-emblazoned electric blue pens and notebooks.

To contact the reporters on this story: William Wilkes in Frankfurt at wwilkes1@bloomberg.net;Eyk Henning in Frankfurt at ehenning1@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Benedikt Kammel

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