German giants join forces to survive: Former rivals in the crucial machine tool industry have buried differences, writes John Eisenhammer

BLASTED by recession and tough eastern competition, Germany's once-predominant machine tool industry is undergoing an unprecedented shake-up as manufacturers seek safey in numbers.

Some of the biggest names in European machine tools, driven by desperate institutional shareholders and the heavy hand of Deutsche Bank, are overcoming long rivalries in a process of concentration that will leave the face of the industry radically altered.

Deckel and Maho, which between them account for 40 per cent of the German market in milling and boring machines, are rapidly consummating a marriage approved at the end of the summer.

Waiting in the wings is Gildemeister, another leading operator, which is already co-operating on sales with Deckel-Maho and hopes to proceed to fuller integration. At the end of September, Gildemeister's main rival, Traub, took over Heckert, the well-known eastern German manufacturer. All these companies are making horrendous losses and nearly all are heavily indebted.

'There is little doubt that if the recession continues, most would not have made it to the end of 1994 without such drastic measures,' said Michael Broeker, chief analyst at Bank Julius Bar in Frankfurt. Unlike Pittler, another big-name German manufacturer, which has given up trying to take on the Japanese on their 'own' turf of mass- produced, series machines, and retreated into specialised, niche production, the others are making a final lunge to achieve size and punch. It is a gamble born of desperation which, if pulled off, will offer dramatic proof of how a key sector of German industry can fight back.

The international recession now savaging the machine tool industry is the worst since its surveys began in the early sixties, according to the specialist magazine, American Machinist.

From 1989, the best year so far, until the end of 1992, real orders plummeted by 46 per cent. In the first eight months of this year order volume amounted to just 37 per cent of the 1989 level. Compared with DM18bn ( pounds 6.2bn) four years ago, the branch is likely to turn over only DM9bn ( pounds 3.6bn) in 1993.

The unprecedented collapse of the key European market has in effect wiped out the gains registered by Deckel and Maho during the boom years of the Eighties.

At their peak in 1990, the two companies had a combined turnover of DM1.4bn. In the year to the end of last March, combined sales had tumbled to DM633m.

The merging companies have forecast sales of DM390m for the year to the end of June next year. Against their combined turnover of DM633m up to March this year, the two companies had accumulated debts of nearly DM300m or 46 per cent, of which about a third was short-term. They got into this mess by different paths.

Both series machine tool makers, with similar products and client structures, they have been arch- competitors. Deckel was the more passive, seeking to reinforce its position by reliance on that great German asset, sophisticated engineering. It tried to move the standard machines upmarket, turning out ever more diversified products, as well as making in-house that most costly part of a machine tool, the control mechanism. 'This was a serious error, for it never mastered the technology,' said Mr Broeker. 'Moreover, the sophistication and variety drove up costs just as the Japanese, with large production volumes and low vertical integration, were getting costs down.'

Maho, by contrast, saw size as the key to beating off the Japanese challenge in standard machines. It reckoned that a turnover of DM1bn was necessary to achieve the required economies of scale. As a consequence, it went on an ambitious expansion drive during the Eighties, buying up companies in Italy and Switzerland, culminating in the building of a green-field, highly- automated factory in Kempten, Bavaria, with a production volume of DM1.25bn. Operating at full stretch, it would cover two-thirds of world market needs in milling machines. Disastrously for Maho, the factory was ready just as the market collapsed. Capacity usage at Kempten is less than one third, leaving the firm strangled by financing costs.

As the pundits prepared to salute the passing of a symbol of German industrial prowess, Deutsche Bank, the largest creditor, moved in and banged the rivals' heads together.

The influential German car industry was also manoeuvring behind the scenes. Fearful of dependence on Japanese machines, which would mean having to reveal model plans some three to four years before they came on the market, the car makers judged that the survival of traditional suppliers such as Deckel and Maho was strategically vital.

The first priority is to merge the two sales forces and to focus on the Asian region, especially China, where Deckel-Maho hopes to take advantage of antipathy towards the Japanese.

This marketing alliance will also involve Gildemeister, which started a joint-distribution company with Deckel last January.

At the recent EMO trade fair in Hanover, there was a joint Deckel- Maho-Gildemeister stand for the first time. Underlining the pressure for concentration, Axel Kemna, Gildemeister's chairman, said the final goal was a full threesome, but cautioned that this would take more time.

Deckel and Maho are cutting their combined worldwide workforce of 2,800 by about 900. 'The fused firm must get from its current level of DM150,000 per capita sales to DM350,000,' said Mr Broeker. According to the fusion report, after a frightening start this year the balance should swing from costs to savings, with the full benefits coming in three years. Between 1993 and 1997 Deckel-Maho forecasts fusion costs of DM176m and savings of DM342m. Key elements in the strategy will be to reduce quickly the number of components made in-house, notably control mechanisms, and to shift Deckel's production from Munich to the underused Kempten works.

The hoped-for turnover will, however, still be well short of DM1bn; latest estimates forecast a sales volume of DM400m by 1994/5. 'At present each firm is making about 30 machines a month. They must reach over 100 between them to take on the Japanese,' said Hans- Gunter Vieweg at the IFO institute in Munich. With the European market not expected to reach the bottom before the end of the year, there is no immediate prospect of this challenge being met.

But as things pick up during 1994, it could be a different story. 'It all depends whether Deckel- Maho manage to use the fusion to pursue an aggressive strategy, winning more market share in Europe especially, where they could enjoy significant cost advantages over Japanese imports,' said Mr Vieweg.

'In that case, Deckel-Maho could become a role model for this important sector of German industry.'