Forum Gießerei-Industrie 2021 Politics, Markets, and Digitization in the Focus of German Casters
The Forum Gießerei-Industrie had to be postponed due to the COVID-19 pandemic. To shorten the time until the event in June 2021, we organized an exciting discussion round in which German industry experts of foundrymen and machine manufacturers sent a clear message to politicians and pleaded for a joint fight against the crisis.
The COVID-19 pandemic must be understood as a crisis within a crisis, commented Johannes Messer on the situation of German foundrymen. In the live webinar on November 5, 2020, moderated by Franz-Josef Wöstmann (Head of Department for Technology Forecast and Exploration at Fraunhofer IFAM), he discussed current developments in foundries, possible opportunities, and German industrial policy together with other industry experts. In addition to aspects such as digitization and entrepreneurship, the latter was a particular focus of attention, with the experts highlighting significant shortcomings and issuing concrete demands. These experts took part at the discussion round:
- Gerd Röders | Managing Director | G.A. Röders GmbH & Co. KG Druck- und Spritzguss
- Lothar Hartmann | Management Automotive | Kurtz GmbH
- Marcello Fabbroni | Director Innovation Center | Bühler Group
- Johannes Messer | Managing Director | Johannes Messer-Consulting GmbH
- Dr. Tim Nikolaou | Managing Director | Oskar Frech GmbH + Co KG
- Rolf Cramer | Managing Director | Druckguss Westfalen GmbH & Co. KG
The whole discussion can be viewed here (German language):
What is the Current Situation?
The fact that foundries are in a crisis has already been well known. According to Messer, the crisis originated in the fourth quarter of 2018, during which the aluminum foundry industry, with the exceptions of 1994-1995 and 2008-2009, recorded no growth for the first time in 40 years. As a result of various events, such as the discussion about CO2 reduction, there was an extreme decline of demand in this fourth quarter, which caused a minus of 1 % for the overall year. All the years before that, growth of 3-4 % was the classic trend. In 2019 there was an even sharper decline. Taking the 2017 figures as a basis, foundrymen had already recorded a 4 % decline. Usually, the industry would have calculated an increase of 4 % for both 2018 and 2019. This delta shows that a crisis already existed. And then the COVID-19 pandemic has started, which is not to be seen as a trigger, but as accelerator of the crisis.
As the company G.A.Röders operates in the automotive, medical, and aerospace sectors, Gerd Röders knows how the individual industries are affected: "Our strategy has always been to remain independent of the automotive industry, even though 80 % of die casting is accounted for by the automotive sector. We have benefited from this in the past because the aviation industry has always been stable throughout the crises. Today, aircraft construction is on the ground, and there will certainly be difficulties for a few more years. This has hit us hard.
However, medical technology has experienced an unexpected boom. This is due to the high demand for ventilators or parts for laboratory equipment. Therefore, we can compensate for quite a bit of what we lost in the automotive sector in the months from May to August. However, it should also be mentioned that the automotive industry has recovered surprisingly quickly".
Mechanical and plant engineering are also affected by the pandemic, but here too, the virus is only the iceberg's tip. Lothar Hartmann explains that many orders today are special projects which would have to be delivered between six and eight months. However, there was still a lead time of 15 to 18 months for complex plants and complete lines in former times. "Due to the growing demands on delivery speed, the effects of the pandemic are also being felt strongly by us," says Hartmann. In addition, large orders have been postponed or canceled. This effect is hardly present in China, but all the more so in Germany and Europe.
Also Marcello Fabbroni, who has many years of experience in die casting, is familiar with which areas are in particular demand during the pandemic and where the market is stagnating. According to him, the die casting sector has been hit quite hard, whereas the food segment has boomed tremendously, especially in basic foods. But here, too, there were declines in some cases related to COVID-19-related travel restrictions, for example, in the chocolate business. This is because duty-free stores and airports were no longer as busy as before the pandemic. Looking at the developments from a geographical perspective, China is outperforming Europe and America.
China is experiencing substantial growth and is an exception in all areas - even in die casting.
German Industrial Policy Before and During COVID-19
Why does Germany's situation look so much worse than China's could partly answer one of the most critical questions of the discussion round: What is the industrial policy in Germany, and what impact does this have on the German foundry industry? In answering this question, the experts reflected the industry's gloomy sentiment and formulated clear messages to politicians. Measures such as granting loans and an easing of insolvency law may appear helpful at first glance, but the experts criticize that these are only short-term measures that do not solve the more profound problems of small and medium-sized companies in particular.
Messer sees the core problem as a distortion of competition caused by the extremely high taxes, energy, and wage costs in Germany:
A distortion of competition has arisen which makes it almost impossible for German foundries to be competitive in Europe. This is where we urgently call on politicians to take action.
He argues that even with its high productivity, the German foundry industry, which competes with Eastern Europe, cannot compensate.
Rolf Cramer takes a similar view, citing too high costs due to tax regulations and offshore levies as major problem areas for the German foundry industry.
The political measures are a catastrophe. Whatever aid is promised does not reach us in any way. On the contrary - tax charges and high energy prices are more of a burden than a relief.
Cramer also criticizes the concrete aid measures during the COVID-19 crisis, saying that political actions will not offset liquidity bottlenecks that arose in 2019 due to construction and investment activities. Companies that were unable to generate a positive result in 2019 due to extensive investments will not be considered by aid programs (for example, KfW - Kreditanstalt für Wiederaufbau). This also applies to Druckguss Westfalen. Due to construction activities and a 30 % increase in personnel, the company made losses in 2019. The only opportunity left for the company was to go through a so-called guarantee of the federal state of NRW.
"In the end, it all came down to the fact that we spent much money on an expert opinion and have now received a state guarantee which, in addition to interest, costs another 0.5 % and, depending on the years, up to 2 %. Moreover, such a guarantee is only given if it can be covered by goods and real estate. We were able to cope with this, but in the end, it was no help. We only have an additional guarantee from the state, which we had to over-secure with the fourfold value. In other words, our situation is only providing money to others," concludes Cramer.
The insolvency law was also amended as part of state aid. This means that the German government has suspended companies' obligation to file for insolvency until December 31, 2020. Ultimately, however, Messer sees this as merely a postponement of bankruptcies. As it is unlikely that struggling companies will solve the problems within the next few months, he expects a new wave of insolvencies in the coming months.
In the first half of 2020, the automotive industry has already recorded more insolvencies than in the entire last year. It is alarming that over 25 % of these are foundries.
To overcome this problem, Messer believes that the unions and associations are responsible for bringing the matter to a successful conclusion. "Foundries may not be seen as petitioners here," he says, adding that "the unions must understand that the foundry industry cannot continue in this way."
Associations must assume their roles and tasks on their responsibility to ensure the competitiveness of the mechanical and plant engineering industry as well as that of the foundrymen. It is necessary to protect employees during the pandemic, but value creation must also be maintained.
According to Messer, even the granting of loans is only a drop in the ocean. The expert criticizes that these loans were used to finance losses and could not be used to make investments and generate value added. He also sees this as a problem in the future, as the repayments are not matched by any income. The lack of free cash flow is a significant problem that puts the German industry at a disadvantage compared to China. Although Germany has an advantage over the many Chinese foundries, which have only been established within the last 50 years, in terms of technology and know-how, this advantage is neutralized by extremely high wages, energy costs, and taxes.
We are still well-positioned and productive in Europe but we must tackle the existing problems here and now together. We urgently need solutions to make a change finally. Only if we overcome these hurdles do we not need to fear competitive advantages from abroad.
Röders is also skeptical about granting loans to companies. "A company lives with crises. That's why it's not politics that offers the best support, but equity capital," says Röders. All the more so as the debts that companies are incurring today due to the aid would have to be repaid at some point - possibly also in the form of taxes. In line with Messer, Röders, therefore, sees only a postponement of problems here too. Consequently, he believes that the best solution is short-time work and not cash injections. Instead, he calls on politicians to intervene less in the market economy.
The biggest mistake made by politicians is to push electric mobility against market demand, resulting in such an imbalance in the market economy and thus a great uncertainty.
Whether Europe is a future location for foundries remains to be seen, says Röders. He is nevertheless optimistic about the future. His conclusion: "When the die casting era comes to an end, foundries will have to change over. They must remain flexible and always orient themselves to the needs of the market.
Politics is only one of the topics addressed by the experts. Entrepreneurship was another examined issue in the discussion round. Here, the critical question was how the industry players' mentality, starting with suppliers, the subcontractor, and the customer (usually the OEM), has changed in the face of and before the crisis.
Hartmann sees a dramatic negative development here. "Until 2007, the industry had cooperated a lot based on trust - machines worth millions were produced even without a signed contract. Verbal agreements had a completely different significance back then. A certain degree of trust is still there, but today it would be unthinkable, even for loyal customers, to accept an order without it having gone through the entire administrative apparatus," said Hartmann.
If a word no longer counts for anything, work is less joyful than before. That is a great loss!
In addition, TCO (Total Cost of Ownership) and OEE (Overall Equipment Effectiveness) have moved out of procurement managers' focus over the years. These key figures provide information about how well a company is managed and were considered essential variables at the time. Today, this plays a subordinate role, especially for OEM purchasers. Instead, Hartmann sees competition between suppliers and OEM purchasers, with the lowest price winning. This is a trend that harms both machine manufacturers and foundries.
With a buyer at OEMs, you no longer talk about OEE and TCO. Today only the price counts and not the concept.
In the past, customers often asked companies to implement a concept within a given budget, explains Hartmann. As a rule, the company then optimized the concept, which increased the price but also improved the OEE. After a joint discussion, the customers usually decided to accept the more expensive implementation in favor of OEE. According to Hartmann, budgets are lower today and do not allow any room for maneuver. As a result, the only question remains what can be saved or left out to realize the order at the given price. "Whether OEE or Tier 1, the larger the company, the more extreme this behavior is," criticizes Hartmann.
The acceptance criteria with unfavorable payment terms are another complicating factor, which reduces the suppliers' liquidity. "60 days payment terms are almost normal today, but almost everyone in the industry has already allowed payment terms of 90, 120, 210 days. This is a problem because we have to pay the salaries of our employees, too. But our customers take high payment terms and low down payments for granted, which damages liquidity. Surely some companies have gone bankrupt despite a full order book because there was a lack of capital to buy new material and complete a new order," says Hartmann.
Ways Out of the Crisis - What Needs to be Done, and Where are the Chances?
While many companies' future is now uncertain, Dr. Nikolaou is convinced that the crisis is far from over. Based on his experience at Oskar Frech GmbH & Co. KG, he divides the pandemic into two phases:
1. Liquidity Phase
The preservation of liquidity includes business management measures to avoid over-indebtedness or insolvency of the company as far as possible. These include, for example, the reduction of overtime and vacation days, as well as the increase in undertime and the introduction of short-time work.
2. "Creative" Phase
According to Dr. Nikolaou, once a company's survival is secured, further measures must be taken to exploit the potential. These include adapting structures, strengthening the company's own core business, optimizing internal processes, and using technologies. However, the most important thing is maintaining one's own identity and being aware of one's role, especially in management.
Also, Fabbroni believes that equity and secured liquidity offer excellent growth opportunities. After all, they can be used to develop new machines, which enable innovation, so that new markets can be opened up. In view of this, flexibility is also a major issue at Bühler in the die casting sector.
Both the markets and customers are constantly changing. Therefore, one must adapt accordingly.
Fabbroni currently also sees enormous potential in the areas of sustainability and digitization. In the context of Bühler's membership in the WBCSD, an organization of more than 200 companies working together to accelerate the transition to a sustainable world, Fabbroni was able to observe the following:
During the crisis, the trend towards sustainability has gained momentum, especially with the focus on CO2 reduction.
For example, companies that are part of the WBCSD consortium and have committed to reducing CO2 could have closed much better on the stock exchanges.
In addition to active CO2 reduction, Dr. Nikolaou sees further opportunities for the foundry industry - and that is the transformation of the automotive industry. According to his observations, rising raw material costs, scarcity of resources, changes in the transport infrastructure, and population growth have led to the reduction of CO2 emissions being pushed forward.
"We have already commissioned a study in 2017 that will clearly show us, mechanical engineers, where this path is headed. One of the fields of action that we have identified includes electrification and (partially) autonomous driving," explains Dr. Nikolaou. According to him, the mechanical engineering changes that this entails can be seen as very positive, as it creates new application fields for aluminum, zinc, and magnesium.
The transformation in the automotive industry increases the need for sensors, screens, and surfaces in the interior. This also increases the demand for die cast parts.
This also fits in with Fabbroni's observation that the market for coating technology for sensor systems has grown enormously. Dr. Nikolaou assumes that e-mobility will experience a slight increase in the short term and strong growth in the long term - when infrastructure and battery technology are mature. In summary, the expert anticipates growth for the small, medium, and large clamping force segment and positive sales.
Druckguss Westfalen has also set the electronics/electrical sector as one of the main targets for the future market in 2016 as part of its strategic planning. The company had already been producing electronic components such as housings for distance radar for some time and had seized the opportunity to enter the electromobility market in 2018. Accordingly, Druckguss Westfalen manufactured the control housings for two vehicles on the market completely in-house, which required up to 2,200 tons of machinery. The corresponding investments were made primarily in the area of mechanical processing.
We have changed from a classic foundry to a manufacturer of finished components by having half of the company involved in mechanical processing.
While standard products such as seatbelt pretensioners from the classic automotive segment still cannot be produced at the same level as before the crisis, it is precisely these new die cast aluminum products in the field of electromobility that Druckguss Westfalen produces at full capacity. "This area is currently keeping us above water," says Cramer. A great advantage, by the way, is the automated production process. For the production of these new aluminum cast products in electromobility, the company invested heavily in automation in 2019 so that today only automated casting cells are in operation. The investments have been difficult to make because not only the machines have been purchased, but also halls have been built on a large scale. This was before the pandemic, which was the final cause of the difficulties. Nevertheless, it is these investments that pay off in times of the COVID-19 crisis.
Already in 2019, the high level of automation caused us headaches because it is difficult to start up so many new installations simultaneously. Today, it is great to see that production is running with relatively small staffing levels so that we can now concentrate on the essentials.
Beyond these promising aspects, Messer is appealing to the industry's sense of community. The expert sees enormous potential in the collaboration of the entire value chain. "We have the best parts and machine suppliers, mold makers, foundrymen, and metalworkers. And it is precisely these that we now need to bring together to acquire the products on the market jointly," explains Messer. Instead of waiting for inquiries, he advocates approaching OEMs proactively and presenting the possibilities of aluminum casting. However, he says this cannot be achieved by one company alone.
Our foundry network is excellent. To shape our future, we must all come together and work together on the right products. That is the key to success!
What Role does Digitization Play in the Future of Foundrymen?
In addition to all the challenges that the crisis has revealed, the pandemic has also brought a positive aspect to light: It has shown how vital digitization is for companies and how easy it is to optimize internal processes. This is also illustrated by the example of Oskar Frech GmbH & Co. KG. The company has several subsidiaries in Asia, making personal communication impossible during the pandemic due to entry restrictions. For this reason, the employees were forced to switch to digital alternatives - also for working in the mobile office.
We have learned to communicate via video conferences without much effort and have held training courses, workshops, and even take the approval of our machines directly with Asian customers. This has greatly simplified our processes and strengthened our communication with China.
Dr. Nikolaou admits that this improvement would probably not have happened without the COVID-19 crisis. However, he also admits that in the long run, one should not wholly give up presence. But in times when travel is limited, he sees the digital communication path as the ideal solution.
With a plant in the Czech Republic, G.A. Röders GmbH und Co KG. is also represented at a location outside Germany. Due to the dramatic developments of the COVID-19 pandemic, it has not been possible to travel to the neighboring country for several weeks. However, the number of new corona infections at the German plant in Soltau has also risen sharply, with the result that the plant has been divided into shifts, and a digital working method has increasingly come into focus.
In times of the pandemic, we have learned in both plants with a total of 500 employees to handle our ERP system even better and to work more intensively with key figures.
According to Röders, the shift operation made it necessary to work more intensively with the system and communicate quickly with employees and customers.
Furthermore, digitalization allows completely new business models to be developed independently of the COVID-19 pandemic. For example, Oskar Frech GmbH & Co. KG already implemented the smartfoundry.solutions division a few years ago. This project focuses on Industry 4.0 topics such as networking, workflow optimization, and finding solutions for machine-related problems.
There is potential in digitalization. That's why we will continue to invest in the future to generate significantly more sales through digital offerings in two to three years - also in service.
But even this topic ends, or rather begins, with a call to politicians: "Digitization is only possible with the latest technology. Network operators and politicians must finally make progress here," concludes Dr. Nikolaou.