When the giant industrial concern ThyssenKrupp releases its annual results on Thursday, the focus will likely be on the company’s unprofitable steel division, which is being merged with Tata Steel UK and hopes to return to profit by cutting thousands of jobs.
But ThyssenKrupp’s Achilles heel is not in its steel business. Rather it is found along the wharves and dry docks in the northern city of Kiel, where the skeletons of dozens of ships and submarines under construction by ThyssenKrupp's Marine Services line the shore.
Despite all the evidence of feverish activity, ThyssenKrupp’s shipbuilding division is in a mess. Sources at the company told Handelsblatt that the division suffered an operational loss in the financial year 2016-2017, and that the dire situation is unlikely to change going forward. As a result, company sources told Handelsblatt that division chief financial officer Evelyn Müller will depart the firm by the end of the year.
If every dry dock in Kiel is occupied with a ship or sub under construction, how could the company be losing money? Because of technical and planning bottlenecks and delays, almost every ship is finished well behind schedule. The company actually loses money every time the Dom Perignon bottle smashes on a hull at launch. “No submarine is delivered on time,” said one source at the company.
This sloppy management convinced the Australian government to award a €34-billion contract for a fleet of new submarines to France’s DCNS shipyards in 2016, a huge blow to ThyssenKrupp’s ambitions. After that fiasco, company management promised a complete overhaul of its business – but nothing much seems to have happened.
Now the division is unsellable.
One reason for the division’s poor performance is that it was starved for new investment by the group’s executives, who hoped to sell the business. But the timing was not right and “now the division is unsellable,” said one source at the company.
The lack of investment means the firm is using old equipment. One source said that plans for new ships were sometimes drawn on paper rather than using computer modeling, which is quicker, cheaper and more accurate.
An example is the delays that have beset an order from Turkey for six submarines. The first sub should have been delivered in 2015, but so far none of the subs is even finished. “The order has blown through every cost and time limit,” said one executive.
Because of these delays, ThyssenKrupp is contractually obliged to pay the Turkish government a penalty, now thought to be over €100 million, according to the employee. Other delayed projects also have resulted in huge penalty payments.
A bigger headache may be the shipyard’s business with Israel, the company’s largest customer. It is currently building a submarine and four corvettes for the Israeli navy. ThyssenKrupp’s local representative, Michael Ganor, has become a prosecution witness in a corruption scandal involving six Israeli senior officials, including Prime Minister Benjamin Netanyahu’s personal attorney. The former chief of Mr. Netanyahu’s office has been arrested for taking bribes from ThyssenKrupp to help promote the €2 billion contract
The scandal could prove to be more than an embarrassment for the shipbuilder. Under the contract with Israel, if corruption is found to be involved in the awarding of the contract, Israel can back out of the deal without paying, leaving ThyssenKrupp with unfinished ships.
Martin Murphy specializes in the automotive, defense and steel industries for Handelsblatt and Charles Wallace is an editor with Handelsblatt Global In New York. To contact the authors: [email protected] and [email protected]