Wilhelm Segerath, chairman of the works council at ThyssenKrupp, can’t imagine the German steel and technologies giant without heat, smoke and red-hot molten metal.
“ThyssenKrupp without steel is like a living room without a sofa,” he said.
Steel-making is at the heart of the company, Mr. Segerath said, and anyone trying to get their hands on the once-lucrative business should expect resistance.
That's not how chief executive Heinrich Hiesinger sees it. He's pressing ahead with plans to merge the group’s German steel plants with Netherlands-based operations of its rival from India, Tata Steel.
Elevators and escalators accounted for €3.6 billion of group sales in the first half of this year, as much as steel production in all of Europe.
The steel market is suffering from overcapacity, with cheap imports from China pushing down prices. Profits at ThyssenKrupp’s European steel works plummeted by 40 percent, to €115 million or $128 million, in the first half of the current financial year. Also, the company’s Brazilian plants are deep in the red.
Even if ThyssenKrupp succeeds in spinning off its steel business, however, this will not solve all problems at the group, which has debts totaling almost €5 billion, or $5.6 billion. The company’s business in elevators and submarine construction also needs a solution.
Elevators and escalators accounted for €3.6 billion of group sales in the first half of this year, as much as steel production in all of Europe. Earnings after taxes, depreciation and amortization grew by 12 percent compared to the previous year.
This area of business is regarded as stable and is thought to enjoy high levels of liquidity. It is a central part in Mr. Hiesinger’s strategy for the future.
The problem is that ThyssenKrupp is currently only third in global rankings, behind U.S. manufacturer Otis and Swiss competitor Schindler. While the two market leaders generate a return on sales of 15 percent, Essen-based ThyssenKrupp has a return of just 11 percent.
Taking over another company’s elevator operations is a consideration, because the cost synergies could take ThyssenKrupp up another level.
One logical candidate is the fourth-largest operator worldwide, Finland’s Kone. According to the most recent figures, Kone has annual sales of €8.6 billion in elevators and automatic doors.
The German weekly business magazine WirtschaftsWoche reported that Kone contacted ThyssenKrupp in late 2015 about a possible merger of the two groups’ elevator activities, in which Kone would be responsible for running the new company’s operations.
But the executive and supervisory boards at ThyssenKrupp turned down the offer, saying they wanted to have control in the event of a merger.
Greater size and efficiency could prevent disappointments like the one ThyssenKrupp suffered last week, when rival Schindler snatched away a coveted major contract for elevators and escalators at the new international airport in Istanbul.
The group sustained an even harder blow with another major project at the end of April. It had firmly expected to win a €35 billion contract to supply 12 submarines to Australia, but the deal went instead to the French state-owned shipbuilder DCNS.
That defeat could give fresh impetus to a possible sale of the group’s business in warships.
Düsseldorf-based defense and automotive company Rheinmetall has been keen to acquire the marine operations since late 2014. ThyssenKrupp’s U212 and U214 submarines can stay submerged for long periods and are virtually undetectable because of quiet running engines. In addition, its weatherproof MEKO A200 frigate could prove a useful addition to Rheinmetall’s range of weaponry, which until now has focused mainly on tanks.
Despite being highly profitable, the marine operations are seen as a burden at ThyssenKrupp. Selling weapons and its previous involvement in corruption scandals do not fit the image Mr. Hiesinger is trying to promote as a clean-cut technology company.
But disagreements over price have so far prevented a deal. Rheinmetall was not prepared to pay much more than €1 billion, while Mr. Hiesinger wanted at least €2 billion. In early April, he reportedly refused to even respond to a higher offer from Rheinmetall.
“Now that the submarine deal has fallen through, we are wondering which side will approach the other first,” said an insider, who believes an agreement could eventually be reached.
“ThyssenKrupp needs the money,” the source said. “And there isn’t actually anyone other than Rheinmetall who can take over the sensitive military technology.”
This article originally appeared in WirtschaftsWoche. To contact the authors: [email protected]