German Industry, Flagship Businesses in Danger?

  • To make way for a major repositioning towards electric vehicles, Volkswagen is shedding some of its assets.
  • As part of this campaign, non-essential businesses are being sold, including the transmission specialist Renk.
  • A proposed buyer is arms manufacturer Rheinmetall, suggesting to some people that the future of Renk, in its current configuration at least, is highly uncertain.
  • This could have wider-reaching social, economic, and environmental consequences than either of the two groups engaged in the transaction realises.

In September, Herbert Diess made it clear to the world that under his stewardship, Volkswagen has a new agenda: efficiency at all costs. Unlike its larger rivals, Volkswagen has no need to continue to grow in order to tackle the present-day industry challenges of electrification and self-driving cars. What is needed is concentration of brand identities and an uncluttering of the asset portfolio. This will free up resources to inject into investment. VW alone is spending €80bn to buy batteries and develop the relevant technology.

“We don’t need more brands. With very few exceptions we can tap the world’s large profit segments with our existing brands,” he told reporters at this year’s Frankfurt auto show.

The reasoning behind the sale of Renk

Renk claims they are “the world’s leading specialists for pioneering solutions to control extreme forces throughout the drive train: In industrial applications, during energy production, in demanding naval applications, and tracked vehicles.”

However, what is necessary, Diess believes, is the sale of what he considers to be “non-essential businesses.” One such unit is Renk, which makes gearboxes for tracked and armored vehicles, military and merchant ships, and wind turbines amongst other special industry or energy power components.

A proposed buyer is Rheinmetall, the defense industry heavy-weight. This group has been spreading itself out through the sector acquiring companies at a startling pace and seeding international partnerships, with ambitions to dominate the defense industry in multiple key areas.

The two groups, Volkswagen and Rheinmetall, already share common businesses. Volkswagen is the owner of MAN SE, the holding company for the MAN Group; while Rheinmetall has a joint venture with MAN Truck & Bus AG, called Rheinmetall MAN Military Vehicles (RMMV).

Volkswagen also collaborated with RMMV in the development of the Amarok M Pickup, designed for the German military. Despite sharing certain commercial spaces, the two groups follow disparate ideologies: ideologies that make it difficult for them to appreciate the company that is to be traded.

An engineer of exception

Although Volkswagen is making moves to rid itself of Renk, this likely comes from a cash-now, think-later mindset. Renk is actually performing well. In 2018, it saw operating return on sales of 12 percent, with a 22 percent increase in sales. In the company’s financial report, it is predicted that next year’s sales revenue will again be over €500m and operating return on sales will continue to hold in the double digits.

The transmissions specialist is generating good revenue and has orders increasing in relation to its military contracts – a market growing under the present conditions affecting international relations. Conditions that will likely continue.

Added to this, Renk is an industry gem with a history of exceptional product engineering dating back to 1873. The company has four separate divisions, producing equipment that spans military vehicles, marine vessels, wind turbines, and power stations.

Both Volkswagen and Rheinmetall seem to misunderstand the potential value that Renk possesses. For Volkswagen, this is just another quick cash grab with little consideration for the financial loss in the long-term. To complete the transaction, the group would also need to be at ease with the potential social damage that would fall out of Rheinmetall ownership.

Rheinmetall has been making huge numbers of acquisitions over the past few decades. The trend seems to be towards focusing efforts on military divisions to the detriment of all else. Rheinmetall’s sole goal seems to be the consolidation of its military monopoly, as such, it is probable that Renk would be carved up for this purpose.

Torn asunder

Rheinmetall AG is a European defence contractor. Rheinmetall has a presence in two corporate sectors (automotive and defence) with six divisions, and is headquartered in Düsseldorf, Germany. In fiscal 2018, the company generated sales of €6.148 billion. The Group’s Automotive segment had sales in fiscal 2018 of €2.930 billion, while sales of its Defence segment for the same period came to €3.221 billion.

Given Volkswagen pecuniary bent and Rheinmetall’s single-minded pursuit of military monopoly, Renk may not survive the tussle. The differences in the giants’ strategic viewpoints makes it difficult to imagine a smooth transaction or transition for the asset itself.

The sentiment of those involved in the deal seems to be that while Renk’s “military ops are top notch, the rest is more or less a restructuring case.” Decision makers might separate out and sell off the different divisions of Renk, underappreciating its value as a multi-division engineering firm. This seems particularly probable given Rheinmetall’s typically brutish approach to acquisitions.

Not only could this be negative for Volkswagen’s finances in the long-term, but it would likely cause financial damage to the industrial area surrounding the factory in Ausburg, Bavaria, which has seen the creep of closures mounting in recent years.

The sale would be an unfortunate outcome for Renk’s workforce as job losses might well follow. Furthermore, promising areas of the business could be scrapped.

In particular, the wind turbine equipment line which contributes to alternative “green” energy production. The Standard Gear business unit of Renk that produce these products are likely the areas of the business that Rheinmetall would sell off first, having shown little interest in environmentalism up to now.

It is difficult to foresee the effects this will have on the success of this area of the business, but it will also contribute negatively to the global effort to achieve energy neutrality and sustainability for the good of the planet.

Only $1/click

Submit Your Ad Here

John Hogan

I've been retired since this year. I have spent most of my professional life as a consultant in various industrial branches, mainly on the organizational side, change management and social relations. But I am now interested in all economic subjects, and in particular industrial restructuring, whatever the sector.

Leave a Reply