Struggling German Family Is Down to Its Last $16 Billion

(Bloomberg Opinion) -- If you’re looking for a company that encapsulates the wrenching changes that are set to upturn Germany’s economic model over the next decade or so, you could do worse than study what’s happened to Schaeffler AG.

On Wednesday, the family-controlled automotive and industrial components group scrapped its long-term earnings targets, announcing 900 job cuts and the closure of several factories. The shares tumbled 8 percent, bringing the decline since January 2018 to a wretched 55 percent.

Schaeffler also owns a hefty stake in tire and car parts giant Continental AG, but those shares have nosedived too. Hence, though Maria-Elisabeth Schaeffler-Thumann and her son Georg remain two of Germany’s richest people, their combined $16 billion wealth as estimated by the Bloomberg Billionaires Index isn’t as eye-catching as it once was. Theirs probably won’t be the last German industrial fortune to suffer a bruising this decade.

Struggling German Family Is Down to Its Last $16 Billion

Like many of Germany’s export champions, Schaeffler is trying to make the leap from a world dominated by highly precise mechanical components (its most famous product is the humble ball-bearing) to one controlled by automated and electric systems. “In the coming years, the sector will change more extensively than in the 130 years since the automobile was invented,” Schaeffler’s annual report notes, rather ominously.

Right now, more than 60 percent of Schaeffler’s sales relate to the combustion engine, according to analysts at Berenberg. Those sales haven’t suddenly disappeared, but engines are slowing becoming hybridized, and will eventually be displaced by fully electric motors. Schaeffler’s “e-mobility” sales increased by 18 percent last year – the company provided the e-axle transmission for the new Audi eTron – but they’re still a small proportion of the total.  

Making this transition efficiently is hugely difficult for any company. There’s a danger that plants are left with excess capacity; and it isn’t straightforward asking employees who’ve made one thing all their lives to start producing something entirely different. Capital becomes an even more precious resource: Do you invest in the products that deliver high profits today or the ones that are likely to be in demand tomorrow?

It’s doubly difficult to pull this off when important automotive markets like China are slowing – partly for cyclical reasons, but also structurally as more city dwellers decide a car isn’t necessary.

Plateauing demand is bad news for carmakers, who are splurging heavily on new technologies and have struggled with new emissions testing procedures. Their response, one assumes, has been to try to squeeze their suppliers’ margins even more. It’s a vicious cycle, and not one that will end any time soon.

In fairness, Schaeffler generates sufficient cash to service its 2.5 billion euros ($2.8 billion) of net debt and remains comfortably profitable. It’s just that those profits aren’t nearly as impressive or reliable as they used to be. On average, the company has achieved an operating margin of about 12.5 percent during the past decade. Now it has to make do with 10 percent, and 2019 will probably be worse still.

It’s understandable that the company didn’t commit to new medium-term earnings targets. Profit is all but impossible to predict in such a volatile environment. But that uncertainty explains why a stock that’s priced at just five times estimated earnings, and which yields 7.5 percent, hasn’t found more buyers.

Germany remains one of the world’s great workshops, but its industrial engines need new parts.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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