If no investor can be found for an insolvent industrial company, the decision is made to close it down. In this case, however, "shutdown" does not mean an immediate standstill at the plant. Rather, it means a carefully managed phase-out of production. In order to achieve the best possible result for everyone involved - employees, customers, creditors and suppliers alike.
We spoke to Thomas Schulte, interim manager/managing director at pressmetall GDC Group GmbH, and Axel Gerock, quality manager and consultant for restructuring and turnaround. As a well-rehearsed team, they accompanied, among others, the phase-out of the pressmetall plant in Gunzenhausen in Middle Franconia and were able to conclude the process with unusually good results.
Mr. Schulte, you have already managed several outproductions as an interim manager. What are the reasons for initiating such a process?
Thomas Schulte: As a rule, companies initiate the process of shutting down after an M&A process has failed. The last potential investor has withdrawn his offer, meaning that in the event of insolvency the creditors' committee has only one option left: to close the company. Unfortunately, there is normally no alternative to this. Production is then the next step in the implementation.
Axel Gerock: It can also happen that a business unit is spun off. Let's take the example of a foundry: If customers no longer need castings, but only plastic parts, then a part of the company will have to close down. The spin-off process then proceeds in a similar way to insolvency.
What are the next steps then?
Thomas Schulte: I would like to illustrate this using the example of pressmetall GDC Group GmbH: Unfortunately, the company could not be sold to an investor after a previously initiated restructuring process, so its closure was decided. However, customers in the automotive sector (OEMs = Original Equipment Manufacturers) cannot shift their production to other suppliers overnight. So they entered into an out-of-production agreement with us, specifying their exact requirements on a weekly and monthly basis. In return, they assumed a large part of the costs, but also expected deliveries to be made on time.
Are you observing a trend here? In other words, can we expect more outproductions in the future?
Thomas Schulte: As hard as it sounds, insolvency also offers the possibility of market adjustment; the reduction of any existing overcapacities. Through redistribution, the remaining market participants can get a little more of the pie. In certain sectors, we simply have overcapacities; the automotive sector is one of them. From five suppliers, the pie is then suddenly divided among four, because the market cannot grow indefinitely. This naturally makes the remaining companies more dependent on one OEM.
Axel Gerock: We have seen virtually no structural change for three years. This is partly due to the suspension of the obligation to file for insolvency and the state support for companies under the Corona aid program. As a result of the flood of money via KfW, there are now many "zombie companies" that actually no longer have a right to exist on the world market. In my environment, there are also fears that diversification has not been initiated sustainably enough in the course of this development. And that these companies will therefore remain stuck in their old field of business. If no more investors can be found to pick up such companies once again, they will run into insolvency and possibly final closure.
Thomas Schulte: I would like to mention another point in this context: At present, certain parts volumes are simply not available in the market. To take an example from the automotive sector: This year, around 800,000 cars will not be able to be built because the chip shortage is clearly noticeable on the global market. This means that not only OEMs but also suppliers will not be able to produce. This particularly affects series manufacturers, where otherwise huge numbers of units have rolled off the production line.
Doesn't this apply to other industries as well?
Axel Gerock: It mainly affects the automotive and automotive supplier industries. Suppliers sometimes generate up to 80 percent of their sales from supplying parts to OEMs. The tsunami does not necessarily have to come. But there is a risk that the postponed structural change will cause a hard slump in the market. In the past, many companies were bought of insolvency because they still had a good core. That is increasingly no longer the case.
When do you come into play as an interim managing director and quality manager in production?
Thomas Schulte: As a rule, the following happens: The moment it is decided and officially announced that production will cease, the managers leave the sinking ship and look for new tasks, because there is no longer a future for them in the company. Then we are brought on board: managers who can deal with the "crisis" situation and have experience with the countless stumbling blocks that lie in the way until the plant is closed down and beyond. The common objective is that there is a good ending for everyone involved - even if at the end of the day there is job loss.
So the first thing is to build trust with employees?
Thomas Schulte: Exactly, Mr. Gerock and I have already been through this together twice. Open communication with all parties involved is crucial - and in this case, I really do look at the employees first and not at the creditors' committee or the creditors. You have to stabilize the company, keep the executives on board and try to motivate the entire workforce until the end of production. Motivation is very often something between the thumb and the forefinger here, in the sense of it being about a retention bonus. As we said at the start, customers bear a large part of the production run costs, but they also expect punctual delivery. And that only works if you have qualified and motivated employees.
How do you divide your responsibilities in the production process?
Thomas Schulte: In the case of pressmetall, as the sole managing director, I bear responsibility for the entire output, including personal liability for any errors. So I work more in terms of the overall strategy - in close consultation with Axel Gerock, who then implements the whole thing operationally on the store floor.
Axel Gerock: A sure instinct also applies to the quality assurance apparatus. You can reach the production employees constructively if you make it clear to them what is happening and what it ultimately means for them personally if too much scrap is produced. If the insolvency assets are reduced, the share that the employees ultimately receive from them also dwindles. It is therefore important to treat employees sensitively. They should feel that they are being taken seriously. Agreements must also be made with customers. For example, to ensure that a customer will still accept parts even if the quality is perhaps not one hundred percent. On the supplier side, there is a constant need to appease any unwillingness that may arise due to losses caused by insolvency.
That means you work hand in hand in the process?
Axel Gerock: Exactly. We usually have a brief exchange over breakfast: What arrangements have been made with customers? What is planned with regard to the release of employees? Etc. These are issues that also have consequences for production. If you have to lay off twenty percent of your workforce just before Christmas, this also has an impact on indirect areas. Processes then no longer run as they should for liability reasons alone. You have to make sure that you keep the holes as small as possible and always work with safety nets
That can also lead to problems, can't it?
Axel Gerock: Yes, there are two scenarios here: On the customer's own side, there is the over-disposition you mentioned: The customer fears that the insolvent company will no longer be able to deliver according to demand in terms of output. He then orders larger quantities in excess of the agreement made so that a bottleneck does not occur. Later, he may discover that enough is being produced after all and try to cancel the additional goods ordered. Of course, the insolvency administration is not playing along here. This, in turn, can lead to a search for defects in the products in order to get rid of the overdisposition via the issue of quality.
The second scenario has already been mentioned by Thomas Schulte: The reduction of the number of suppliers. In the meantime, the OEM has looked for another supplier and is now trying to get rid of the delivery already ordered, even though the parts are in accordance with the drawings and specifications. In this case, the only thing that helps is to keep your backbone. In one case, the customer wanted to return nine truckloads of ordered goods. We were able to reduce the return to three Euro grid boxes. Through quality assurance, meticulous documentation and the close involvement of employees with a high level of expertise in discussions with the customer.
It is also important for OEMs to ensure what is known as an all-time supply: manufacturers must be able to keep spare parts in stock for 15 years.
Thomas Schulte: Tools usually end up being scrapped at the end of production. Because they are no longer needed. Or because they no longer meet the customers' current product requirements. You can no longer make a racehorse out of an old horse. At the pressmetall plant in Gunzenhausen, we ultimately had to scrap well over a thousand die casting dies. Of course, this also means that there is only a limited number of spare parts left. The end customer may be left with the short end of the stick later on. As a rule, however, a solution can be found by the customer in such a case.
In the pressmetall example, you controlled the production process through several lockdowns. Did that create additional problems?
No, we didn't suffer any losses, quite the contrary. The OEMs had to secure their production and ordered what they could. Demand suddenly shot up as early as November 2020. It was a matter of producing all-time requirements, securing requirements for current series production and also ramping up production at new suppliers.
The bottom line was that we had almost 50 percent more output in Gunzenhausen in seven months than had been agreed at the start of production. A more than satisfactory result.
Speaking of which, when do you consider a production to be successful?
Thomas Schulte: When you are better than the agreement - as we are in Gunzenhausen. When there is no line stoppage or break in the supply chain, and when every employee can be proud of what they have achieved.
What advice would you like to give to companies that are about to go into production?
Thomas Schulte: Open, honest communication with all employees is crucial. Managers in particular should be closely involved in the process in detail. This brings tangible added value for the entire team.
And what tip do you have for OEMs?
Thomas Schulte: To operate an overarching preventive risk management system right from the start. That means taking a much stronger preventive approach instead of reacting too late. Every OEM who has had to pay a supplier as part of a production run says to himself afterwards: "That cost a lot of money. I call this, casually formulated: Learning through pain. It doesn't help to send out questionnaires to suppliers once a year. You really have to go out to and get into the companies, as Axel Gerock and I do. You have to be on site and analyze the processes there - both on the financial side and on the operational side. To see how well my supplier is doing. Insolvencies are really expensive affairs, especially for the large OEMs.
Isn't preventive risk management a given for large manufacturers?
Axel Gerock: You would think so. But many big and well-known German automotive suppliers have not yet found an alternative supplier even twelve months after insolvency proceedings have been initiated. Of course, there are also companies that have a plan B in their pockets and are able to react immediately. But in our experience, these are not widely spread. Most of them are somewhere between the two alternatives just mentioned, and the Plan B those in the middle have to offer is usually not very mature. Decisive adjustments could be made in advance, both on the OEM side and on the side of the various supplier levels. In view of the expected structural change, this could become very important in the near future.