Heavy Metal

Seeking to Double Profits, Cost-Cutting ThyssenKrupp Forges Ahead

Heavy metal in Duisburg. Source: Reuters
Heavy metal refinery in Duisburg, one of ThyssenKrupp's traditional sites.
  • Why it matters

    Why it matters

    Three-and-a-half-years after taking the reins of Germany’s biggest steel producer, Heinrich Hiesinger is still struggling to get ThyssenKrupp back on track.

  • Facts

    Facts

    • ThyssenKrupp wants to reduce costs by the end of the business year 2014-15 by €2.3 billion ($3 billion).
    • For the realignment, the firm is planning to sell off some business operations.
    • The supervisory board will meet at year’s end to discuss the extension of Mr. Hiesinger’s contract.
  • Audio

    Audio

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ThyssenKrupp has projected earnings before interest and tax of €1.2 billion ($1.6 billion) for the current year, but that is not enough for Heinrich Hiesinger.

The steel producer’s chairman wants to double this year’s operating profit in the medium-term, Handelsblatt has learned from a source close to the company.

It would be the first time in three years ThyssenKrupp has been able to break even. But it would not be sufficient to pay a dividend and again have the financial power for acquisitions. For that to happen, Handelsblatt was told, the company really does need to redouble its consolidation efforts.

Mr. Hiesinger has urged his top managers to focus even more strongly on business development. As this alone will not increase profits to the extent required, ThyssenKrupp is planning further savings. Germany’s biggest steel producer wants to reduce costs by the end of the coming business year 2014-15 by €2.3 billion ($3 billion). The board expects further savings from a closer integration of business divisions.

For the realignment, ThyssenKrupp is planning to sell off some business operations, such as the passenger walkway division. In the long term, even the sale of shipyards for building submarines is a possibility. But that would take another few years, according to the company source.

ThyssenKrupp declined to comment.

A few hardships might be in store for the tradition-steeped company’s 160,000 employees – and its top managers will have to implement these changes. Unused business potential will have to be exploited.

Limited growth

However, growth opportunities are limited. That is why the board is planning further savings. For Mr. Hiesinger, in principle, it is a matter of integrating business units more closely. Resources are to be better utilized, and savings could reportedly be achieved in purchasing, too. Regarding the savings no specific figure was available. Details are still being worked out.

But these further savings, added to the efficiency programs already in operation, are the means with which the company aims to achieve a sustainable decrease in its costs.

Mr. Hiesinger’s appeal to the management team is a wake-up call: Anyone not pulling his or her weight will have to worry about their job. For some, this announcement has had a sobering effect, as they had thought the company was over the worst.  For most, however, Mr. Hiesinger’s words are a motivation.

But Mr. Hiesinger has still not led the company reliably back to profit. As ThyssenKrupp has no financial reserves of its own for large acquisitions, the improvement has to be made from the existing business.

Even if the restructuring of the company has been going on for three-and-a-half years, Mr. Hiesinger still has the backing of big investors for his strategy.

To achieve growth opportunities, work processes within the concern have to be improved, Handelsblatt was told. An essential element would be standardization of IT systems. Work has already begun, but will take more time to complete.

“Without a uniform system our employees cannot meet future demands,” said a manager. As the new IT installations will take time, processes cannot improve overnight. “We have to be patient.”

Even if the restructuring of the company has been going on for three-and-a-half years, Mr. Hiesinger still has the backing of big investors for his strategy. This is the case with the Krupp Foundation and also with the Swedish investment firm Cevian Capital, according to sources in the financial world and close to the company. The two investors collectively hold 38 percent of ThyssenKrupp.

“The discussions with Cevian manager, Jens Tischendorf, and the foundation are very constructive,” said an executive.

The improvement in earnings already achieved should create a relaxed atmosphere for further discussions, as does the fact that Mr. Hiesinger does not sweep problems under the carpet. In public, however, he can be expected to refrain from concrete pronouncements.

Unlike the two others restructurings, the board does not intend to announce  its objectives publicly. That applies to savings objectives, but also to the future sale of operations.

Whether Mr. Hiesinger can continue with his strategy is a matter for the supervisory board, which will meet at year’s end to discuss the extension of his contract. The support of the group’s executive committee is expected.

With the new contract, Mr. Hiesinger would remain in office until at least September 2020 – time enough to create a new steel giant.

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