Munich, Düsseldorf The American supplier Henniges Automotive has been active in Germany for 70 years. In the small town of Rehburg-Loccum in Lower Saxony, the company produces various seals for doors, windows, luggage compartments, tailgates, sunroofs and engine hoods. Customers include the crème de la crème of the industry: BMW, Daimler, Volkswagen, Ford and Volvo. But the decades of manufacturing in Germany could soon be over at Henniges.
At the end of October, the company filed for bankruptcy for its production facilities and technical offices in the greater Rehburg area. The reason: massive decline in sales as a result of the corona pandemic and the chip crisis. Worse still: the rising costs for raw materials would finally rob production in this country of perspective, argues the parent company from the USA.
Insolvency administrator Rainer Eckert hopes to keep the company going. The wages and salaries of hundreds of affected employees are initially only secured until the end of December. How it continues after that is open. Like Henniges, many suppliers are currently fighting in whole or in part for their existence.
In the past few months there have already been a number of bankruptcies in the industry – from A-Kaiser GmbH and the Heinze Group to Bolta Werke and PWK Automotive to Räuchle GmbH and several companies in the Boryszew Automotive Plastics Group. This list is by no means exhaustive. On the contrary, it is getting longer from week to week, observes those familiar with the scene.
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“In particular, the smaller suppliers with annual sales of 50 to 200 million euros are tipping over in a row,” states Rolf Hünermann. As a partner in the Frankfurt office of the law firm Reed Smith LLP, Hünermann represents numerous medium-sized companies in need. Among other things, he works for the German-Bosnian Prevent Group, which has been in a clinch with VW for years.
Contract structure as a core problem
Hünermann recently registered a split in the market. On the one hand there would be the carmakers who are generating adequate profits despite stagnating or shrinking sales figures. The operating return on sales of BMW (12.3 percent), Daimler (11.6 percent) and Volkswagen (7.5 percent) are at record levels after nine business months. The reason: The corporations have increased the prices for their vehicles and at the same time prioritized all available chips in the production of particularly lucrative models such as the S-Class.
On the other hand are the suppliers. Large corporations like Continental and Hella recently had to cut their earnings forecasts. And smaller companies are increasingly stumbling. “That can’t just be because there are bad merchants at work here,” says Hünermann. “We are dealing with a structural problem.”
From the attorney’s point of view, the core of the problem is a contractual imbalance. While the suppliers have to keep material and personnel in stock at all times in order to prevent delivery failures and the resulting claims for damages, conversely, the binding effect of the carmaker to purchase certain quantities from their suppliers is only weak. “There is a lack of commitment here,” criticizes Hünermann.
Kai Bliesener also sees a need for adjustment between car manufacturers and suppliers. “That is a core problem,” says the specialist from the IG Metall union, who specializes in supplier issues. “After the impressions of the corona pandemic and the semiconductor crisis, the relationship between car manufacturers and suppliers has to be readjusted and designed differently,” demands Bliesener, who sits on the supervisory board of the Stuttgart filter specialist Mahle.
From the trade unionist’s point of view, something like a perfect storm has brewed over the domestic supplier landscape. In addition to the drop in sales of 30 percent or more as a result of the chip crisis, there would be exploding prices for industrial metals such as copper, zinc and aluminum. And then there is the drive shift away from the combustion engine towards electric motors. In sum, all of these fields of action are “hardly manageable”, especially for smaller suppliers, fears Bliesener and calls for all players to join forces in order to avoid impending upheavals in the industry.
New car market is down
In fact, according to an extrapolation from the CAR Institute, Germany is headed for “the worst year in cars since reunification”. Not even 2.85 million new cars are likely to be registered in Germany in 2021 – even less than in the previous year, which was already heavily burdened by corona shutdowns.
It hardly looks better worldwide. The strategy consultants of the Boston Consulting Group predict that up to eleven million vehicles cannot be built this year due to a lack of microchips. The experts at Alixpartners put the loss in sales that the industry suffers as a result at almost 180 million euros. Improvement is probably only in sight in 2023. That is why Bernhard Jacobs recently raised the alarm on a wide scale.
“Destructive market barriers, production stops due to a lack of chips and drastically increased energy costs are becoming a ruinous mix for suppliers,” warned the managing director of the Sheet Metal Forming Industry Association (IBU) recently. The situation is “extremely dangerous”. Together with his colleagues from the Industrial Association for Massive Forming (IMU), the German Screw Association (DSV) and the Association of the German Spring Industry (VDFI), Jacobs wrote a fire letter to top managers of the major vehicle manufacturers and suppliers three weeks ago.
In the letter, the representatives of the medium-sized suppliers pointed out, among other things, VW boss Herbert Diess, Daimler CEO Ola Källenius and BMW boss Oliver Zipse that there was a threat of a “significant disruption of the supply chain”. In order to prevent such a scenario, the four associations asked the auto giants to order binding call-off quantities in order to ensure a high degree of predictability.
With regard to semiconductors, her letter says: “Note that delivery schedules are legally binding. You can also avoid incorrect dispositions when purchasing materials by placing multiple orders. ”In addition, Jacobs and his colleagues ask the managers of the car companies for“ proper acceptance of the exorbitant increases in energy prices and the resulting increased production costs ”.
The two-page letter was also sent to the board members of Conti, Bosch and ZF. They are practically the last link in the supply chain before the vehicle manufacturers. Accordingly, they pass on the demands of the small suppliers directly to VW, Daimler or BMW. Conti boss Nikolai Setzer had already indicated that they were negotiating in “partnership talks” with the car manufacturers how the additional costs for missing semiconductors and rising material prices could be shared among several shoulders.
Rough tone in the auto industry
Conti is anticipating increased logistics costs of up to 200 million euros this year alone, because some chips have to be flown in. The higher rubber prices, in turn, have an additional impact of half a billion euros on the tire business. Costs that up to now had to be borne by the supplier alone. In dialogue with the car manufacturers, Setzer hopes to be able to distribute the loads more evenly in the future.
On the other hand, Rolf Hünermann from the law firm Reed Smith LLP does not consider lengthy negotiations to be a practicable solution. He sees this as a kind of “delaying tactic” used by car manufacturers to get rid of possible claims on the part of the suppliers. Because the longer the negotiations take, the lower the chances of survival for smaller suppliers. They couldn’t just exchange nice words for three to five months without immediate compensation. “As soon as there are no economies of scale, the numbers quickly turn into the red. Any reserves melt away, ”says Hünermann.
The lawyer suggests introducing a clear mechanism that regulates exactly what happens if there are significant production downtimes, as is now the case with the chip crisis. In the case of contentious proceedings, an attempt could first be made to find a solution within one month in negotiations at the highest level. “If this does not succeed, the supplier must also have the opportunity to withdraw from the contract, since an obligation to write losses can certainly not be passed on to the supplier unilaterally,” says Hünermann.
It is more than questionable, however, that car manufacturers would agree to such a contractual clause. Even the willingness of the vehicle manufacturers to negotiate adjustments to the purchase prices is currently “very low”, observes Felix Mogge, car expert at the management consultancy Roland Berger.
The costs for semiconductors have risen by 25 to 30 percent in the past few months. Instead of assuming part of these costs, Daimler, BMW and VW would sometimes even demand new guarantees from their suppliers. “The tone between car manufacturers and suppliers is currently pretty rough,” said Mogge.
However, the consultant does not expect a huge wave of bankruptcies in the short term. Most suppliers would have enough flywheel to weather the crisis. “But for some smaller companies with hardly any equity capital and little strategic relevance for the carmaker, things are now getting tight,” says Mogge.
In the case of large suppliers such as Bosch and ZF, returns would also come under increasing pressure. On the one hand because of the increased prices and a lack of volumes. On the other hand, because they would have to partially support their own suppliers.
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