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EUROPE: Germany: "Downturn in production systems" report

EUROPE: Germany: "Downturn in production systems" report. 39-page presentation by Roland Berger.

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backEUROtalk October, 2008

Restructuring in Europe 2008

Effects of the subprime crisis on Western vs. Central and Eastern European companies' restructuring needs.

European corporate executives think the consequences of the subprime crisis for their own companies are less severe than for the economy at large. That was one of the results of a recent study by Roland Berger Strategy Consultants. The study surveyed board members and managing directors of more than 2,000 companies in Western (WE) and in Central and Eastern Europe (CEE). Of those surveyed, only 17% in WE and 12% in CEE expect a strong impact on their own companies, while 34% (WE) and 24% (CEE) consider the subprime crisis a major problem for their domestic economy. However, the majority of companies in the study are expecting lending terms to get worse and economic growth to slow down. The most important topics for the future are strategic issues such as growth both in foreign and domestic markets, and further cost reductions. 81% of WE and 76% of CEE companies said that they expect to see a need for restructuring in the next two to three years.

"In general, companies seem to underestimate the direct effects of the subprime crisis on their own business," says Michael Blatz, Partner and Head of the Corporate Performance Competence Center at Roland Berger Strategy Consultants. "They see their own company as considerably less affected than the national economy." While only 17% of the WE and 12% of the CEE companies expect direct negative effects of the crisis, 34% and 24%, respectively, believe it will have negative consequences for the domestic economy. The arising indirect effects such as deteriorating credit terms or the overall economic slowdown are regarded as more dangerous than the direct effects. In general, WE is more aware of the coming problems.

Credit crunch is a threat to growth and investment

Strategy topics such as growth and further cost reductions are on the agenda for many companies. In WE, growth in foreign markets tops the list of future topics, while in CEE the extension of market share in domestic markets is deemed more important. In numbers, 40% of WE companies are attempting to grow internationally and 29% want to expand their domestic market share. With CEE companies the respective numbers are 28% and 34%.

"The indirect consequences of the subprime crisis will make it harder for companies to reach these strategic goals," notes Roland Berger Partner and study author Max Falckenberg. "Getting financing will become more difficult, thus endangering growth." Bank loans are still one of the most important sources of financing.

Three-quarters expect to see a need for restructuring in the medium term

During the last three years, 83% (WE) and 69% (CEE) of the companies surveyed underwent restructuring. 81% (WE) and 76% (CEE) expect that they will have to restructure in the next two to three years or consider restructuring to be an ongoing task. Key external factors such as competitive pressure, economic slowdown and globalization make restructuring more likely.
Major reasons for restructuring are the realignment of processes and an uncompetitive cost base. Of the success factors for reorganization, management commitment is considered most important in both WE and CEE.

Major operational restructuring actions include boosting sales and reducing personnel costs. The latter is carried out more frequently in WE (70% of the respondents mention it) than in CEE (50%). To reach the set goals, in WE mainly layoffs and fluctuation are used while in CEE partial retirement plans and severance agreements play a more important role.

Companies respond slowly

Compared to the 2005 survey, the lag between the first signs of a crisis and the start of reorganization has even increased: "In both WE and CEE, more than 50% of the enterprises started their reorganization more than twelve months after its need became visible," says Falckenberg: "Especially the percentage of companies with a response time of more than 24 months increased compared to 2005: In WE it jumped from 14% to 32% and in CEE from 19% to 36%."
Most reorganization processes take more than twelve months in both WE and CEE, with 41% of the reorganizations in WE and even 50% in CEE taking more than 18 months. Compared to 2005, the duration of reorganization processes has become shorter in WE and longer in CEE.

Brief summary
- Only 17% (WE) and 12% (CEE) of the respondents believe that the subprime crisis will have a strong impact on their own business
- More than 2,000 companies in Western Europe (WE) and Central and Eastern Europe (CEE) surveyed
- Successful reorganization efforts significantly improve both operations and financials
- Management commitment and quick implementation are deemed to be the most important success factors
- 81% and 76% of WE and CEE companies, respectively, expect to see a need for restructuring in the medium term
- Reducing costs remains the most important restructuring action, especially for staff, materials and overhead costs

To download 25-slide 'review' presentation, please click here.

Source: Roland Berger - GAI

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