Photo Gallery: ThyssenKrupp Faces Major Restructuring

Foto: Helmut Reuter/ dpa

Mismanagement and Losses ThyssenKrupp Steels Itself for Radical Shakeup

German steelmaker ThyssenKrupp has just posted a loss of 4.7 billion euros and huge writedowns on mills in the US and Brazil. The supervisory board, responding to an internal report that exposed major errors and cover-ups, has sacked half the management board. The group faces a tough restructuring.

When Jürgen Claassen, a member of the management board of German steelmaker ThyssenKrupp, went on trips with journalists, they lacked for nothing. On one such excursion in 2006, to Brazil, reporters were taken to a steel mill, mangrove forests and the Copacabana. They were dining happily at the first-class Marius Restaurant in Rio when a local filmmaker approached the manager.

According to eyewitnesses the man, who addressed Claassen as "dear Jürgen," said that he had a very special insider's recommendation for a last drink in Rio de Janeiro. After a brief exchange, Claassen agreed and rounded up the small group.

Soon afterwards, the TV and print journalists found themselves in a bar where young women were offering the men their services. Some outraged members of the group reportedly said that this was out of the question. By his own account, Claassen had also concluded by this time that the filmmaker's tip was "not very convincing." The men had a beer, says Claassen, and then "left as quickly as possible" -- without having done anything else, of course.

Until a few weeks ago, such stories would have caused an upset at the deeply traditional company. But now Claassen's questionable trips with journalists are the least of ThyssenKrupp's problems. It faces charges that billions in losses and bad planning were covered up for years, and that supervisory board members deliberately gave out false information. In fact, the very survival of the steelmaker, which has been around for more than a century, may be at stake.

Three Board Members Dismissed

In a meeting at 4 p.m. last Wednesday, on the 13th floor of company headquarters in the western German city of Essen, ThyssenKrupp Supervisory Board Chairman Gerhard Cromme drew the consequences, and promptly fired half of the management board. Cromme told surprised board members Edwin Eichler, Olaf Berlien and Claassen that they had until Dec. 31 to clear their desks, and that the company would issue a corresponding statement to the financial markets and the press that very evening. After the adverse developments of the past, Cromme said coldly, ThyssenKrupp needed a new beginning.

Cromme's unusual step dates back to a secret meeting of a handful of top managers in mid-November. The meeting was proposed by CEO Heinrich Hiesinger, the man Cromme had lured away from electronics giant Siemens two years earlier. Hiesinger, according to Cromme's plan, was to replace experienced steel expert Ekkehard Schulz as the group's chief executive and rebuild ThyssenKrupp.

Hiesinger, an engineer by profession, had hardly moved from Bavaria to the industrial Ruhr region when he was confronted with his first crisis. His predecessor had had two steel mills built, one in North America and one in Brazil. Costs had skyrocketed to several billion euros above the original estimates, and production deadlines had to be delayed from month to month because of technical glitches and incompetent planning.

At the same time, old and new scandals popped up in many different parts of the company. For example, for years ThyssenKrupp had colluded with competitors over the price of railway track, to the detriment of the German railway company Deutsche Bahn, and there had also been illegal collusion on deals involving elevators and escalators. Although the cases have long since been closed, the defrauded customers are suing ThyssenKrupp for millions in damages, and the resulting litigation is constantly dredging up new, unsavory details about the steelmaker's business practices. The accusations relating to collusion on elevators and escalators refer to events in 2004, long before Berlien took over the management of that division in 2009.

CEO Hiesinger recently told confidants that it was clear to him from the start that heading ThyssenKrupp would not be an easy task. But that it could turn into an ongoing restructuring of the company, with an uncertain outcome for both ThyssenKrupp and its employees, is something the 52-year-old executive only realized a few weeks ago.

Secret Report Highlighted Failings

That was when Hiesinger, in close cooperation with Cromme, had a report prepared on the situation within the company. Interestingly, the report was prepared by experts without the knowledge of current board members. Former CEO Schulz, who still has an office at the plant in Duisburg two years after his replacement as chief executive, and watches everything that goes on in the company like a hawk, was also kept in the dark.

Hiesinger initially presented the report to a very small group that consisted of Cromme, 99-year-old Krupp Foundation chairman Berthold Beitz and a senior attorney with the Linklaters law firm. The supervisory board was informed on Nov. 20.

The board members were shocked by what they heard, namely that the company doesn't seem to have overcome its severe crisis. In 2011, ThyssenKrupp had already been forced to write more than €2 billion ($2.59 billion) off the value of the two plants in the United States and Brazil. Expectations that it would have to write off an even higher sum in the fiscal year that has just ended were confirmed on Monday night when the company released a statement reporting a €4.7 billion ($6.08 billion) annual loss due primarily to a writedown of €3.6 billion on the steel mills in the US and Brazil.

The two plants, which are now in operation, are in the red. According to internal estimates, the plants, instead of generating the anticipated profits, are likely to post losses of about €1 billion this year.

The internal report attributes the losses to unrealistic budget figures used by the former executive board. According to the report, the steel prices and proceeds used as the basis for short-term and medium-term forecasts were figures that hadn't existed in 30 years. The scope and consequences of these massive planning errors were apparently covered up for years.

Cromme was stunned by the internal report. Members of the supervisory board allegedly said that they had obviously been "lied to and deceived" for years. A day later, Cromme initiated the staffing consequences that in his view were unavoidable.

At first only Eichler and Head of Industrial Operations Olaf Berlien, who were responsible for the steel business, were to be let go. But when the Essen public prosecutor's office launched an investigation into Claassen's use of company funds for what it called luxury trips two weeks ago, the longstanding confidant of both Beitz and Cromme could no longer be kept on.

Since then, parts of the investigation have been dropped, and Claassen says he can clear up the remaining charges.

Management Shakeup Has Bought Cromme Time

Cromme's tough action followed mounting pressure on him to sort the troubled company out. In recent months, the supervisory board chairman has often been forced to answer critical questions. Was he truly unaware of bad planning and corruption at ThyssenKrupp? Could he have been involved himself? Or did Cromme, with an eye to protecting his own career, apply different standards to ThyssenKrupp than to industrial group Siemens? He has been a member of Siemens' supervisory board since 2003 and a few years ago forced the then supervisory board chairman, Heinrich von Pierer, to step down following similar problems. Cromme now chairs the supervisory boards of both Siemens and ThyssenKrupp.

Cromme's rigorous cleanup has bought him some time. Whether this will be enough to save his skin will also depend on the legal opinion the company has requested from the law firm Hengeler Mueller. Its job is to determine whether board members like Eichler, the former head of the steel division Karl-Ulrich Köhler and Hiesinger's predecessor Schulz deliberately deceived the supervisory board. If so, they could even be forced to pay damages.

The initial results, say company officials, suggest that this is the case. It is unlikely that the next annual shareholders' meeting in January will vote to exonerate the old management board. Schulz stresses that he and his team have done nothing wrong.

Hiesinger has the most difficult job. In addition to saving the company from financial ruin, the CEO, working with a new management team, has to try to rebuild the old steelmaker into a modern technology company.

He has few options. There is no money to acquire new companies that could make ThyssenKrupp less dependent on the cyclical steel business. On the contract, Hiesinger has to pay off debt first. For this reason, all hopes rest on the sale, in a process begun a few months ago, of the two steel mills in the United States and Brazil, which were built for about €12 billion.

But the process is proving to be difficult. According to internal calculations by the steel division, the current offers range from €1 billion to just under €3 billion. This is far from the anticipated proceeds from a sale, and it limits Hiesinger's options even further.

The executive board will have no choice but to gradually but consistently reshape the company, as it had already announced a few weeks ago at a meeting of senior executives. Areas like elevator sales and maintenance, systems development and services are to be strengthened. Steel production, on the other hand, is to be downsized and made more resistant to crisis.

To that end, Hiesinger imposed rigorous savings programs worth about €2 billion. He told management that no part of the company is to be spared.

This is bad news, not just for ThyssenKrupp employees. A few journalists will also have to start getting used to tougher times ahead. There probably won't be any more luxury trips at the steelmaker's expense.

Translated from the German by Christopher Sultan

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