BUSINESS

End of an economic miracle

IAN AUSTEN August 23 1982
BUSINESS

End of an economic miracle

IAN AUSTEN August 23 1982

End of an economic miracle

In the field of technological achievements, AEG-Telefunken AG has an impressive record. Its development of the tape recorder and breakthroughs in television, radio and radar helped make it Europe’s third-largest electrical manufacturer. But AEG’s reputation is another matter. In recent years, many Europeans have come to associate the electrical mammoth’s name with washing machines fraught with breakdowns. Still, last week when AEG Chairman Heinz Dürr signed court documents putting the company into receivership, he sent shock waves through Europe—and the business world.

The concern was not limited to the company’s 160,000 employees or to its banks, which are currently owed $2 billion by AEG. Most West Germans, in fact, interpreted their country’s largest business failure in 37 years as the end of the Wirtschaftswunder—the postwar “economic miracle.” What’s more, the country’s weakened economic morale was dealt a further blow the same day that AEG floundered. The government announced that in the first six months of this year, corporate bankruptcies rose by 50 per cent—another postwar record.

But for AEG, the immediate question is how successful Dürr’s move will be in averting the demise of the 99-year-old firm. While the company has never been closer to death than it is now, it is not the first time recently that AEG has been on the financial critical list. Only three years ago, the company was tech-

nically bankrupt after a disastrous foray into the nuclear power industry and the decline of its appliance division. But it was saved that time by the good gracesof its bankers, who swept in with new loans shortly before the natty Dürr—armed with ambitious reorganization plans—took over. His scheme: find strong partners to pick up part of the research costs in high technology areas while increasing the volume of consumer goods business through joint ventures.

The plan sounded good, but little of it became reality. Two and a half years later, Dürr has been left with a string of heavily indebted and profit-losing divisions after selling off portions of the company’s most profitable parts. Dürr did manage to put together a joint venture with the Japan Victor Corp. and Britain’s Thorn-EMI to make video recorders, butother loss-making consumer electronics operations still drain that part of the company’s trade.

While the future looks bad for the appliance operations, one of the company’s bright spots has always been the area of so-called capital goods: products for military, industrial, energy and transportation use. Unfortunately, that is also the area in which Dürr’s partnership dreams received the poorest reception.

Despite the disdain of German industry for the British economy, Dürr found himself in the U.K. knocking on the doors of the highly profitable General Electric Company (which is not

connected to its U.S.-based namesake). Those talks fell apart after GEC ran into a barrage of opposition from trade unions and some German industrialists. Dürr then looked to a U.S.-based conglomerate, United Technologies Co. But three days before Dürr’s trip to court, that company also backed off.

In the end, the firm found itself once again looking to its banks, the courts and the government for help. Under AEG’s proposed survival plan, the banks would have to let the firm erase 60 per cent of its debt. After that, if the company is to have any future, AEG would require $500 million in new loans. In providing the needed cash, the banks would have some support. The coalition government led by Social Democrat Helmut Schmidt has promised to guarantee up to $290 million in loans. But beyond that, the government has been decidedly cool. After he announced the guarantees, Economics Minister Otto Lambsdorff noted that saving corporations “is not the business of public authorities.”

Although it is little consolation to anyone involved, AEG’s problems are common throughout Europe. The 10 member countries of the European Community have all been swept into a wave of postwar record bankruptcies. Not only that, but the EC says the Continent’s future in the electronics industry is very uncertain. In fact, the community recently implored competing firms to put an end to their duplication or face extinction at the hands of the Japanese and Americans. Unfortunately for West Germany, the shakedown may be off to a dramatic and disastrous start if Dürr’s plans once again wind up in failure.

IAN AUSTEN

David Fouquet