ThyssenKrupp Tata

A European Giant Emerges From the Wreckage

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Breaking up an icon: CEO Heinrich Hiesinger. Source: Reuters

A grand plan to break into the US steel market brought ThyssenKrupp, a maker of steel, elevators and submarines, to the brink of bankruptcy in 2010. Setting up plants in Brazil and Alabama in 2005 created €12 billion ($14.3 billion) in losses, while cheap steel imports from China sent the company reeling.

An experienced Siemens manager, Heinrich Hiesinger was brought in to revive ThyssenKrupp, an icon of German industry, which had produced gun and mortar shells during the Franco-Prussian War of 1871 and specialized in smooth running railroad car wheels without welds. ThyssenKrupp’s three-circles logo is an homage to the train wheels, which helped turn the Essen-based company into an industrial giant in the 19th Century.

With those glory days in mind, Mr. Hiesinger started as CEO in January 2011. He knew his job would be tough because German labor laws give special rights to steel workers, making it complicated to take quick action.  It took him three years to divest the company’s Alabama operations and in February he agreed to sell the Brazilian plant, which was originally seen as a supplier to US customers.

The 57-year old engineer, son of a farmer, announced another ground-breaking deal on Wednesday. After almost two years of negotiations with Tata Steel, a UK subsidiary of the giant Indian conglomerate, Mr. Hiesinger signed a memorandum of understanding to merge ThyssenKrupp’s remaining steel production operations with those of Tata, creating the second largest steel company in Europe after ArcelorMittal.

“It is the only option to create a viable future for our steel business.”

Heinrich Hiesinger, CEO, ThyssenKrupp

“It is the only option to create a viable future for our steel business,” Mr. Hiesinger said in Essen, where ThyssenKrupp has its headquarters. “We want to avoid a scenario that our team of steel workers keeps restructuring itself into oblivion.”

Steel companies around the globe have been pushed to the edge of insolvency by the downward pressure on prices caused by massive exports from China’s many state-owned and subsidized steel producers. The Asian country has been dumping its steel on the European and US markets, hurting ThyssenKrupp, Tata Steel and peers such as NSSMC from Japan and Nucor, the biggest US producer.

Mr. Hiesinger, who worked at engineering conglomerate Siemens between 1992 and 2010, believes that only a merger can give the new business a chance to survive in the long term. The 50-50 percent joint venture will also help to realize his strategy of turning ThyssenKrupp into a specialized engineering firm that makes car parts, escalators and submarines.

The new company, ThyssenKrupp Tata Steel, will have its headquarters in Amsterdam. They expect the merger to create €600 million in synergies, primarily by up to 4,000 cuts in jobs. The deal became possible two weeks ago when the UK pension regulator agreed to Tata’s plan to separate its pension program from the company.

21 p5 ThyssenKrupp A Conglomerate-01

Achieving the projected 4,000 job cuts could be difficult because Tata agreed last December to preserve all of its steel worker jobs at its plant in Wales. The company had tried to sell its European steel business in 2015 when steel prices collapsed.

For ThyssenKrupp, breaking up with the steel business will not be an easy task for a company steeped in tradition. Friedrich Krupp founded the company in 1811, when he started making English cast steel and expanded production to tanner’s tools.

But Mr. Hiesinger denied the agreement with Tata was the beginning of the end for the German company’s steel business. “Steel is one of ThyssenKrupp’s roots. By establishing a joint venture we are creating synergies and remain tied to steel. This solution fits ideally with our corporate culture,” the CEO told Handelsblatt.

For Tata Steel, a subsidiary of the Bombay-listed, family-controlled Tata conglomerate, the potential combination of its European steel business with those of ThyssenKrupp offers the chance of a turnaround from its disastrous 2007 purchase of Corus Steel, which was a merger of British and Dutch steel plants, just before prices for steel cratered. Tata had seen the Anglo-Dutch business as the stepping stone to becoming a truly global steel company.

Whether the deal will go through depends on several factors. ThyssenKrupp’s steel employees fear job losses and loss of influence in decision making. “We continue to reject this merger,” said Knut Giesler, a regional head of the steelworkers’ union, IG Metall. “Jobs and locations have to be secured,” he said. “We currently don’t see these guarantees.”

The employees and unions hold half of the seats on ThyssenKrupp’s board of directors and could theoretically block the merger. Under German law, board members have to approve important strategy changes, but faced with a threat to close the loss-making steel business if the merger is not approved, Mr. Hiesinger will argue that the joint venture may be the employees’ best chance.

Such a radical proposal has already been aired by Jens Tischendorf of Swedish private equity firm Cevian. The Swedish investment firm owns a 15-percent stake in ThyssenKrupp and Mr. Tischendorf sits on the company’s supervisory board. Cevian has proposed even more drastic measures, such as spinning off ThyssenKrupp’s valuable industrial solutions business, which makes mining equipment, naval vessels and assembly lines.

 

Sven Afhüppe, Handelsblatt’s editor in chief, and Martin Murphy and Martin Wocher of Handelsblat contributed to this story. Gilbert Kreijger, an editor based in Berlin, and Charles Wallace in New York adapted this story for Handelsblatt Global. To contact the authors: kreijger@handelsblatt.com

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