Interview with Dr. Karsten Kroos

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We spoke to Dr. Karsten Kroos, CEO Automotive Technology, about the changes in the automotive segment, the impact of the corona crisis and the focus of the work in the coming months.

In May the Group announced a comprehensive restructuring of its business portfolio. What does this mean for the composition of the businesses at Automotive Technology?

Firstly it means that the automotive business will remain an important part of thyssenkrupp. All in all, our portfolio will become more focused. In the future, we will concentrate fully on those businesses which are already competitive on the product side and operationally. From this position these businesses can and must strengthen their performance and achieve further growth; where appropriate together with partners. These are the chassis businesses Steering and Damper, the Camshafts group in the Powertrain area and from logistics and plant engineering the business unit Automotive Systems as well as the two operating units of System Engineering, Car Body and Light Weight Solutions.

Which businesses will no longer be with us in the future?

The businesses being removed from today’s Automotive organization are the Springs & Stabilizers business unit and the two other System Engineering units which supply production equipment for engines and battery systems. These businesses are to be transferred to the new portfolio segment “Multi Tracks” by October 1.

Why are these businesses being transferred to the “Multi Tracks” segment?

In a nutshell: we have to focus our resources. The gap to the competition has simply become too big in those businesses. The economic downturn caused by the coronavirus crisis has worsened the situation. Under the current circumstances, we can no longer close this gap. For this reason, the plan is to seek solutions for these businesses outside the Group, either in partnerships or under new ownership structures.

In concrete terms, what is going to happen with these units now?

We are preparing the businesses for transfer to the Multi Tracks segment. This means that we are faced with a complete carve-out of significant parts of our business. In the case of System Engineering, there will additionally be a separation of the business unit. All this involves a large number of complex organizational, legal and tax issues. We have already met up with the management team of the Multi Tracks segment in the past few days and have started planning the transition. We all agree that we need to set out the main directions very quickly so that the employees from those businesses gain clarity about what is happening as soon as possible.

Restructuring programs are already underway in both the affected business units. Will they be continued?

A definite yes. The restructuring measures initiated are still necessary. Overcapacities in a shrinking market make this essential. The coronavirus crisis has made the market environment massively more difficult. With the agreed restructurings, we are now taking the first steps to stabilize the businesses. Of course, the starting position is different in each case. At Springs & Stabilizers the business needs to be “fixed” by restructuring the German sites. In addition, we have to look at whether a better market position can be developed faster together with partners. For System Engineering we first need to clearly separate the businesses in such a way that each unit can move forward in its respective segment. This separation process will come on top of the ongoing restructuring program. That’s no easy task and I am aware that we’re really asking a lot of all employees. But System Engineering’s management has taken on this task with confidence and sees it as a chance to set up the operating units in a way that will enable them to emerge from the current crisis stronger. Of course we will support this separation process very intensively from the Automotive Office.

What is the goal for the businesses that are remaining under the roof of Automotive Technology?

The task for the Automotive businesses is no less challenging. Here the main focus is to extract the necessary performance and value growth from their good competitive position. We have invested massively in these businesses in recent years but the return in the form of EBIT and cash has not been as planned. Here each business unit will have to do its homework to ensure that every unit generates added value consistently in the future. What we need is a mentality that is not satisfied with the status quo. When it comes to football, the teams don't go out on the pitch to draw. The aim is to score more goals than the opposition. With the motivation gained from that, you also win the next matches. This is how performance is fun. The motto must be: We go on the pitch to win.

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Performance has always been the issue. How are the businesses expected to achieve a performance leap now?

It’s true, performance is always the issue in our business. And that won’t change. We must not forget that we are coming from a phase of growth in many of our businesses. In the past this has helped us over some performance gaps. We have also paid dearly for some learning curves. Now it’s all about knowing and describing the specific value levers of each business and developing the right skills to leverage these potentials. That’s precisely our task in the current planning rounds. In concrete terms it’s about measures to secure our performance over the next 12 to 18 months. This is the challenge for the managements of the business units and for us on the Executive Board. In this context, all business units will have to review their performance management systems. These systems must ensure that the biggest value levers in the companies are backed by concrete measures right down to plant level and can be implemented as planned or supplemented with new measures in good time. In the future there must be no business targets whose attainability is not described and whose implementation cannot be monitored in detail.

In times of coronavirus and economic downturn, what targets can be achieved at all?

Every business unit has its targets, which are redefined annually and go into the planning of the Automotive segment. This year’s plan can no longer be maintained because of the coronavirus crisis. We have put the brake on costs in this massive downturn and will continue to do so. At the same time, however, it’s important to take advantage of times of crisis. Because at some point the coronavirus crisis will be over and then those businesses will win out that have adapted their structures to operate more flexibly and more competitively than before. The businesses must make these structural adjustments now. In these circumstances it can also make sense to enter into partnerships in order to position ourselves more strongly in cooperation with other companies. We are very open about this.

And what targets will the businesses have to achieve then?

We are dealing with the specific goals per business unit in the ongoing planning process. We are trying to map the impact of the crisis as best as possible using different scenarios. It is currently not yet possible to estimate precisely how the economic recovery will proceed. Much depends on the political decisions on the announced economic stimulus programs – especially in Europe. In my opinion, one thing is already certain: we have to prepare for a “new normal” that is at least temporarily below the previous plans. In every scenario, however, the businesses – and by that I mean every business unit and every operating unit – must earn their cost of capital and deliver positive value added. Further growth options and investments will also depend on this.

So the businesses will have to compete more strongly than before for new growth projects and new investment?

Correct. If resources are limited, we have to focus our growth on the most lucrative areas. Of course, technological and strategic aspects will continue to play a role. It is already clear, for example, that we will not be sending Automotive Systems, our axle assembly and logistics business, on a growth path. However, this business has always reliably delivered positive value added in recent years. To that extent it is in the right place under the umbrella of Automotive Technology. We will therefore continue the business on a more opportunistic basis with customers who want to invest in the expansion of our services themselves.

What about the subject of partnering? Why should we partner with other companies or potential competitors at all?

In our business you have to be able to follow the strategic growth paths of your main customers – in two ways: on the one hand, in terms of technology and quality; on the other hand, in terms of quantity to supply global platforms. Otherwise, you will gradually lose market share, economies of scale and ultimately also technological advancements. Losing follow-up orders can very quickly have a direct impact on employment in our plants. It must be clear to everyone that the competition for new business in the current economic situation will become even tougher. In such a situation, it can make sense to achieve economies of scale that you cannot achieve on your own through partnerships. The same applies to technical developments. Based on our current performance, on our own we will be unable to finance all the conceivable developments that the transformation of the automotive industry requires. Where we are no longer able to grow organically ourselves, partnerships are a proven means of expanding market position and growing further. Incidentally, this is nothing unusual in the automotive industry. The OEMs are showing us how. They are forging new alliances to jointly address the costly technology issues of the future. I can imagine similar things for our businesses. We really have no reason to hide. We have world-leading technologies and products in all our businesses, a state-of-the-art global production network and an excellent customer and project portfolio. Once this current crisis has been overcome we can go on the attack again with our automotive businesses. How powerfully we can do this depends largely on how rigorously we manage our variable and fixed costs right now.

Are there already ideas about which companies we could partner with?

At the moment, the corona crisis has also reached the M&A market. Everyone is occupied trying to get a grip on the crisis. But it won’t be long before the market picks up again – I’m sure of that. We are not unprepared, of course. As part of our annual strategy development we always look at partnership options. But here too the motto is: Performance first! Because what we can achieve in terms of performance on our own strengthens our position in every direction. The two main focal points of our work in the coming months are therefore performance management and the evaluation of possible strategic partnerships.

Strategy update: thyssenkrupp speeds up realignment

Despite the current challenges resulting from the coronavirus crisis, thyssenkrupp is continuing to press ahead with the strategic realignment it has initiated. At the core of the strategy is the transformation of the company into a high-performant “Group of Companies” with a lean management model and a clearly structured portfolio. In the future, the company’s businesses will be divided into two categories: those whose potential thyssenkrupp will develop on its own or together with partners, and those for which thyssenkrupp will primarily pursue development paths outside the Group. 

Martina Merz, Chief Executive Officer of thyssenkrupp AG: “In recent months, we have left no stone unturned in very carefully examining the individual development potential of each business for thyssenkrupp. The most important aspect of this work was to decide which constellation would offer each unit the best prospects for the future – a place under the thyssenkrupp umbrella, in a partnership or outside the company. With this reassessment of the portfolio, we have taken some difficult decisions that were long overdue and will now implement them systematically. thyssenkrupp will emerge smaller but stronger from the transformation.”

Clearly structured portfolio of materials and capital goods businesses

Based on the potential of each individual business, the following portfolio decisions were taken:

  • On the basis of its own market position and competitive strength, thyssenkrupp sees persistently good development potential in Materials Services and Industrial Components (Forged Technologies and Bearings). The company will continue to develop these businesses on its own in the future. thyssenkrupp will keep the Automotive Technology business within the Group. In line with the industry trend for collaboration, alliances and development partnerships are also conceivable on a selective basis. Given the specific market and industry situation for Steel, thyssenkrupp is pursuing performance improvement measures under a stand-alone development within the company while, at the same time, exploring possible partnerships and consolidation options. The same two-way approach applies to Marine Systems.

  • Those businesses for which thyssenkrupp sees no sustainable future prospects within the Group for various and very specific reasons will be managed separately. These units will be combined in the “Multi-Tracks” segment under the leadership of Dr. Volkmar Dinstuhl, Head of Mergers and Acquisitions at thyssenkrupp AG. For Plant Technology, the stainless steel plant (AST) in Terni, Italy, including the associated sales organization, Powertrain Solutions and Springs and Stabilizers, thyssenkrupp is seeking partnerships or a sale. Restructuring will continue at the Springs and Stabilizers business. For Infrastructure (formerly GfT Bautechnik), Heavy Plate and Battery Solutions, thyssenkrupp is examining the option of a sale or the closure of sites. Employing a total of some 20,000 people, the Multi-Tracks businesses account for annual sales of around €6 billion. In the previous fiscal year, the businesses recorded a negative business cash flow of around €400 million. From the next fiscal year, separate financial reporting is planned for this segment.

Systematic performance management in the businesses

The overarching goal of the revised strategy is to boost the performance of all businesses. Each unit has been set an individual profitability target, based on benchmark analysis. All targets are to be systematically backed with specific measures. The businesses’ management teams bear full responsibility for the results. Within the Group, capital is allocated based on the anticipated value contribution.

Elevator transaction creates capacity for action

In order to finance the realignment, thyssenkrupp decided in February this year to sell the Elevator business to a consortium of financial investors for €17.2 billion. The cash proceeds are expected by the end of the current fiscal year at the latest. Given the current uncertainty in the macroeconomic environment, the company initially intends to retain the greatest possible flexibility in using the funds. In a first step, thyssenkrupp will use the proceeds to repay financial debt along the maturity profile. The Elevator transaction will substantially improve the company’s equity ratio. This also makes fundamental structural changes possible.

In addition, part of the proceeds will be selectively used to develop businesses where respective target margins can be achieved. The exact allocation and priorities for using the funds will depend on how the corona crisis develops; today, this cannot yet be forecast with any adequate degree of accuracy.

Martina Merz: “Despite corona, the sale of the Elevator business gives us the capacity for action. We are now able to initiate the necessary restructuring and portfolio measures. The Executive Board and the businesses’ management teams are in total agreement about what needs to be done now. This allows us to systematically press ahead with the implementation.”

Aligning all areas of the organization with portfolio development

The portfolio transformation and the stronger focus on performance will take the organization another step forward. It means thyssenkrupp will evolve into a Group of Companies with efficient, independent businesses, a strong umbrella brand and the leanest possible holding. In the future, headquarters will be responsible first and foremost for governance, portfolio and investment (capital allocation) decisions. In keeping with this new role, headquarters is to be aligned with the structure and size of the Group of Companies.

“We have a clear roadmap for the future. We are transforming thyssenkrupp into an international group of largely independent, efficient industrial and technology businesses. The focus lies on industrial development and competitive financial results. With our products and services, we make an important contribution to a better and sustainable future. We combine a performance culture with entrepreneurial and social responsibility. These are the values that will guide the new thyssenkrupp,” Merz concluded.


See also

"thyssenkrupp will emerge smaller but stronger from the transformation"

Martina Merz, Oliver Burkhard and Dr. Klaus Keysberg talk about the thyssenkrupp strategy update (we-online)

Lars Förberg, founding partner of Cevian Capital, said:

“The announced restructuring plan is an important step for Thyssenkrupp to realize the full potential of all its businesses. It is now crucial that this plan is implemented with urgency and decisiveness. We have full confidence that Martina Merz and her team will openly consider all strategic options and take the necessary actions to quickly improve the operational performance of the company.”