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12/18/2009

Josef Frye is a tall, down-to-earth metalworker. But when he pauses in front of a memorial plaque titled "The Victims of Labor," his eyes tear up and his voice breaks. "Our company has existed since 1843," says Frye, the chairman of the works council at Acument, an auto supplier. The marble plaque memorializes the victims of work accidents that occurred in the former family-owned company during the 19th century.

After quickly regaining his composure, Frye, while giving a tour of the plant, gruffly points out that "the electroplating section" will probably be shut down. He points to warehouses and the administration building that will no longer be needed in the future.

It's 7 p.m. at the auto parts supplier's plant in Neuwied, a town in western Germany. The presses, making a loud hissing noise, pump out steel screws for Ford, Opel, Daimler and VW by the second. For many years, workers at this plant have been working in shifts around the clock, six days a week. The plant still produces 3 to 4 million screws a day, even though Acument filed for bankruptcy protection for its five plants in Germany in August.

Within one year, close to 10 percent of all German auto industry suppliers have suffered the same fate, and 73 companies are now bankrupt. In January, the auto industry suddenly slashed its orders for screws, mudguards and headlights in half. Things hardly improved in the ensuing months. Despite generous scrapping premium programs in several countries, European auto suppliers' sales were still about 25 percent lower in the second half of the year as they were in the same period last year.

An Unprecedented Plunge

This historically unprecedented plunge in orders hit an industry that already contends with slim margins in good times. Few companies have been able to build up reserves for a downturn, particularly with the auto companies constantly demanding lower prices. Now an entire industry is faltering. "Close to one in three suppliers is fighting to survive," says Götz Klink, a management consultant with A.T. Kearney.

This also means that about 100,000 of a total of 320,000 workers in the industry have good reason to fear for their jobs. "It is quite possible that an entire, competitive industrial sector will disappear in the next two to four quarters," warns Hans-Jürgen Urban, a member of the executive board of the German metalworkers' union IG Metall.

Solvent suppliers, like world market leader Bosch, have sent thousands of workers into the reduced working hours program known as Kurzarbeit. Under the program, the German government compensates workers for lost hours and also pays part of their benefits in order to make it more attractive to companies not to fire workers. The Stuttgart-based company has already eliminated 10,000 jobs, most of them in Germany.

Other large corporations, like Schaeffler-Conti, have amassed such enormous debts that the banks are forced to keep them afloat, if only to save themselves. Commerzbank, a major bank, has already lent the Bavarian company €5 billion ($7.3 billion)

Mid-sized companies with a few thousand employees don't get the same level of assistance. The worst off are those companies owned by private equity firms. "Companies financed by private equity firms were the first to be at risk of insolvency," says Klaus Bräunig, managing director of the German Association of the Auto Industry (VDA). The private equity firms, says Bräunig -- which would often acquire companies and then burden them with servicing the debt on their own purchase price -- now threaten to collapse under the weight of interest payments.

Carmakers Jump in To Provide Relief

The auto companies have set up special restructuring divisions to address the problem cases among their suppliers. The heads of purchasing at Volkswagen, BMW and Daimler are in regular phone contact when an important supplier is threatened with bankruptcy. If necessary, they agree to save the supplier -- or not.

When Stankiewicz, a supplier of sound insulation, became insolvent, the carmakers suddenly starting paying prices that were 80 percent higher than before. Christopher Seagon, the bankruptcy administrator, had made it clear to them that if they didn't pay the higher prices, he would be forced to shut down production from one day to the next. This was unacceptable to BMW and Daimler, which are dependent on the Stankiewicz parts, without which they would be unable to complete assembly of any of their sedans.

The auto companies asserted their interests in the insolvency proceedings. Private equity investors were shown the door, while Daimler and the other carmakers essentially vetoed other potential investors of the corporate raider ilk. They were only willing to promise orders to investors with longer-term interests. An international supplier that was to their liking was eventually given the nod.

Frye and his colleagues at Acument have also had their share of bad experiences with a corporate raider. In 2006, Platinum Equity acquired the company's five German screw plants. Tom Gores, an investor who clearly looks the part, is the company's founder and CEO. In 14 years Gores, an immigrant from Israel, has accumulated a fortune of $2.2 billion by acquiring, through leveraged buyouts, about 100 companies worldwide and then reselling many of them. Platinum employs 100 takeover experts who know their way around numbers, are adept at scanning key financial figures and maintain relationships with the banks that have financed all the takeovers.

"Corporate Raiders Have to Be Stopped"

Gores was never seen in Neuwied. The fact that 128 workers lost their jobs in Neuwied and another 300 at Acument's other plants is only of interest to Gores in terms of how it affects key figures. Acument has shut down entire plants in the United States. In Germany, insolvency is used as a tool to quickly bring down costs.

"The corporate raiders have to be stopped," says Wolfgang Collett of the IG Metall metalworkers' union in Neuwied. The Americans, he says, deliberately filed for bankruptcy in order to restructure the companies at the expense of workers. According to Collett, the other auto parts suppliers in his region are also having problems, but unlike Acument, they are searching for socially responsible solutions.

"The most important contribution to restructuring comes from the employees," says Wolf-Rüdiger von der Fecht, an insolvency administrator in Düsseldorf. Sales have tumbled by 24 percent this year, he says, but Kurzarbeit alone can't make up for the lost revenue. Layoffs and the centralizing of the IT departments and the warehouse, says Fecht, can reduce costs by 20 percent at automobile suppliers.

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• Part 1: Automotive Suppliers Struggle to Survive
• Part 2: 'Unreasonable' Bank Behavior