Steel had its ups and downs, but life was much simpler for ThyssenKrupp when that was its main product. As it is poised to merge its steel production into Tata’s European operations, the company must now figure out how to make money with its industrial products – and that is proving to be a challenge.
Ironically, an upswing in steel buoyed ThyssenKrupp’s fiscal first quarter results, contributing €160 million ($199 million) to the overall Ebit (earnings before interest and taxes) of €444 million. Steel’s contribution was a sharp increase from the €28 million in the year-ago quarter. In fact, it was the company’s best first quarter since Chief Executive Heinrich Hiesinger embarked on the restructuring to get ThyssenKrupp out of steel.
The company’s elevator business remained the most profitable and that is the sector ThyssenKrupp is relying on to drive sales and earnings growth in its post-steel phase. But delays in getting to the point that will keep shareholders like private equity firm Cevian Capital happy are emblematic of the challenges faced by the restructured company.
Elevator order books are full but ThyssenKrupp’s margins at 12 percent are well below those of competitors Otis and Schindler. A cloud-based maintenance service developed with Microsoft keeps elevators running with real-time maintenance and commands high fees from customers who like the nearly 100 percent availability.
It’s moving forward, but the real takeoff feeling isn’t there yet. Marc Gabriel, analyst, Bankhaus Lampe
ThyssenKrupp also has high hopes for its innovative, cable-free elevator, the Multi, which allows several cars to travel in the same shaft and for the elevator cabins to move horizontally as well as vertically. However, these will go into service only in 2019/2020 so that the heavy investment in development, including a specially built test tower, won’t pay off for years.
Likewise, auto components like its electric-assisted steering or damper systems are popular with customers. There are €8 billion in orders on the books for the electric steering system alone, but margins remain thin as the company ramps up production in new factories around the world. “It is difficult to obtain a positive earnings contribution in such a situation,” product manager Karsten Kroos said in an interview.
Once the factories are operating at full capacity, the company hopes to boost margins, currently at 5 percent, up to as much as 8 percent. A downturn in the auto sector could crimp ThyssenKrupp’s expectations, but that seems unlikely as the sector has been in full swing for years.
The third major industrial sector in the slimmed-down company presents the biggest challenge. Mechanical and plant engineering is in a slump. Sales in the first quarter dropped by a third, order inflow was down 28 percent and operating earnings cratered 72 percent to a measly €12 million.
The company began last summer to cut costs, starting with a 10 percent cut in the workforce of 20,000. Management hopes to see positive results in the second half of the current year, but analysts expect it to take two or three years to get up to the 6 to 7 percent margins targeted by the company.
“You can’t expect miracles,” said Bankhaus Lampe analyst Marc Gabriel. “It’s moving forward, but the real takeoff feeling isn’t there yet.” It will take some time yet, he added, “But you have to have the time.”
Martin Wocher is a Handelsblatt reporter in Düsseldorf. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the author: [email protected].