Member Article

The sale of Renk, a symptom of a feverish industry

Immediate and impending shifts in the global industrials market demand monumental innovation. This, combined with an unenviable catalogue of risks and factors specific to Germany, is leading companies like Daimler, BMW, and Volkswagen to extreme lengths in an effort to shore up against an escalating industry storm. One approach taken has been a confused mix of reasonable restructuring prescriptions and confounding sell-offs.

Stormy conditions

“The [German] auto sector is really facing death by a thousand cuts. In isolation, no individual factor looks like it will sink the market, but you pile it all up and, at some point, it will be a problem — we just don’t know when,” Linda Kong Ting, a director at Sun Life Investment Management, said only last year.

To understand the decisions that are being made, one need only consider the immense pressure being exerted on German auto makers by U.S and Chinese trade war tariffs, local clean air legislation, an imminent disorderly Brexit, public climate panic, and a possible national recession.

Added to this, the Dieselgate scandal, so far representing a €30bn price tag of refits, settlements, and provisions for Volkswagen, has continued to cast black clouds over the industry. Charges put forward by a German prosecutor in September reignited the incident, with two current Volkswagen directors, CEO Herbert Diess and non-executive Chairman Hans Dieter Poetsch, as well as former CEO Martin Winterkorn, facing indictment for market manipulation related to the cover up. The new charges unfolded even as emissions scandal consumer lawsuits against Volkswagen continue in the U.S and Germany.

“The German car industry is in a really critical situation,” explained Stefan Bratzel, head of the Center of Automotive Management. Finding the required financing for a threshold industry shift will require massive overhauls of spending, structure, and conceptual focus for the largest German auto groups. “All of them have had to reduce costs because they need the money for investment,” Bratzel said.

Deindustrialisation, the flattening of the German auto-industry

The Big Three, Volkswagen, BMW, and Daimler, are pivoting hurriedly towards electric and self-driving vehicles. They hope to catch up with Silicon Valley players, like Tesla, Uber, and Google, who are leading the way in the development of disruptive auto technologies. Despite a huge number of patents submitted in Germany, by all accounts, the Americans are at least two or three years ahead. Auto industry expert Ferdinand Dudenhöffer is quoted as saying that Tesla’s lead “is easily four to five years. Range and driving pleasure are unmatched.”

The transformation of the auto industry could cost German firms around €100bn, according to VW’s CEO, Herbert Diess. This means that the car makers are having to get both creative and pragmatic in their strategies, explaining the emergence of unlikely partnerships between bitter rivals. First BMW and Daimler joined forces on the development of self-driving cars, and soon after Volkswagen and Ford followed suit. Many groups are also looking to reduce their overall footprint, cutting jobs, selling companies, and flattening their company holding structures.

The question of Renk

“Reducing complexity has its value in terms of the overall group structure,” Volkswagen’s chief financial officer, Frank Witter explained in an interview. With 12 brands, Volkswagen is aiming to significantly trim down its operations, cutting model lines and drumming up plans to sell off a sizeable portion of the group’s units. The group will leverage the resulting capital into research and development for electric vehicles and self-driving technology.

While this strategy has a clear, underlying logic, less clear are the tactics deployed in its execution. In part, this might be a result of Volkswagen’s now legendary boardroom politics which have stymied and stifled governance strategies in the past. It seems that the pressure from an ongoing scandal, infighting, and an unkind sales environment, has begun to affect decision making at the top.

One symptom of this is the impending sale of the transmission specialist Renk. After a halted sale in 2017, Volkswagen said that it wanted to keep the company.

Widely regarded as a Volkswagen jewel of precision industry, the military vehicle and wind turbine transmissions maker, valued at as much €800m, has seen strong sales in recent years, and orders increases of 23 percent in the first 6 months of 2019. Last year, works council chief, Bernd Osterloh, made clear in an interview that there had been a lot said about not selling the company.

“When taking over MAN, Ferdinand Piech and I promised the workforce of Renk and Diesel & Turbo that we will not sell these divisions. The executive board also gave its word,” he said.

Insiders close to the sales process described Renk’s military contracts as “top notch” according to Reuters, pointing to the value the company brings to the Volkswagen banner, and highlighting the many future avenues for exploration.

Renk enjoys, among other contracts, a large ongoing British Army order for Ajax branded tanks, which runs until 2026. Combined with the recent acquisition of Hortsman, the British armoured and tracked vehicle suspension systems producer, Renk has scope to carve out a strong position in the military equipment sector.

Spending in this industry is on the rise in the EU, particularly following the Russian annexation of Crimea. Further pressure to up defence contributions has also been exerted on NATO member states by U.S president Donald Trump. Total military expenditure in Europe increased by 1.4% to €326bn in 2018. As such, Renk’s future sales outlook is promising.

Given the transmission specialist’s insulation from the volatility of the auto sector and its profitability and prospects, in the long-term Volkswagen might be better off holding on to the company. Some believe that the move to sell is a sign of desperation and a short-term mindset, demonstrating Volkswagen management’s inability to make sense of the confounding and flagging German car market.

This was posted in Bdaily's Members' News section by Lin .