The Lessons of Grundig

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

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April 16, 2003

Dutch electronics giant Philips reported yesterday a first quarter loss of $76 million with sales plunging by one seventh. It promptly blamed tottering consumer confidence, escalating pension costs, vanishing sales of television sets and a generally grim economic outlook. The demise this week of a German competitor, Grundig, did not help.

Yet, the two succumbed to different malaises. Grundig - a 1997 Philips spin-off with plants in Germany, the United Kingdom, Portugal and Austria - was circled to its dying breath by corporate suitors, among them Taiwan's Sampo and Turkey's Beko Elektronik, one of its sub-contractors.

But both pulled out in haste when acquainted with the full picture - and especially with Grundig's $220 million in unfunded pension obligations. The biting irony of a Turkish company taking over a German one was thus avoided.

Grundig's products - increasingly regarded as commodities - were exorbitantly expensive. DVDs, TVs, video cameras, audio equipments and VCRs compete on price rather than technology. The precipitous drop in prices yielded a contraction of 3.4 percent in the global sales of consumer electronics, to $22 billion in 2001.

Belated attempts to cut costs - for instance, by outsourcing to the likes of Turkey and Hungary - were half hearted. The shedding of thousands of experienced and dedicated workers did not help.

Nor was Grundig the epitome of good governance. Its last audited financial statements are two years old and show a loss of about $160 million using the current exchange rate. This amounted to one tenth of its fast imploding sales. The company is thought to have bled another $80 million in red ink this year on $1.3 billion in turnover.

Grundig is only the last in a long list of German corporate failures: the Kirch media empire, construction company Phillip Holzmann, aircraft manufacturer Fairchild Dornier, electronics plant Schneider Technologies, engineering office Babcock Borsig, stationery maker Herlitz and airship developer Cargolifter. The Federal Statistics Office pegs the number of insolvency filings last year at 84,428.

Yet, Grundig reified the German postwar economic miracle. It was an icon of self-satisfied consumerism and the unsustainable social safety net it had spawned. Renowned for its audacious innovations and perky marketing, it flourished well into the 1970s. In 1979, it employed 38,000 laborers in 30 plants worldwide. It opened offices in France, Italy, Portugal, Spain, Sweden and Taiwan. But low-cost competitors, notably the Japanese, were already making inroads into its traditional markets. It now employs less than 4,000 people.

Grundig, like many other German companies, denied, at its peril, the painful emergence of cheaper production locales in Asia and Latin America. In the 1990s, it resisted pressures to cut costs by Philips, its holding company. Like a faded beauty, it refused to transform itself into a lean research and development or design company.

Grundig abhorred the thought of becoming the mere coordination center of overseas manufacturing and assembly facilities. It would not admit that nothing much is left of Grundig except its brand and its sales network, estimated by radio aerial and satellite dish maker Anton Kathrein, the majority shareholder since 2000, to be worth $550 million.

Ironically, even in its death throes, Grundig's products kept garnering coveted industry accolades. Last month, the Grundig Tharus 51 LCD screen has received the 2003 red dot award, bestowed annually by the Design Zentrum Nordrhein-Westfalen. It competed with 1494 products from 28 countries and was singled out for its outstanding "innovation, functionality, formal quality, ergonomic efficiency and environmental compatibility."

Still, Grundig's demise is a sign of healing. As incestuous old boy networks are crumbling under the onslaught of globalization and the financial system its strained to its limits, bank lending is being rationalized. Political meddling, though still ubiquitous, is abating. The cozy confluence of state and economic interests is waning. Grundig is a perfect example of just how pernicious these can be.

Last year, The European Commission allowed Bavaria to extend $50 million in new, 6-month, credits to the ailing manufacturer. Instead of ploughing the money into Grundig's profitable but labor-poor car radio, hotel satellite communications and office communications units - the money was misspent on its hemorrhaging TV production facilities.

But last week, according to Financial Times Deutschland, four creditor banks, including Deutsche Bank, Dresdner Bank, Bayerische Landesbank (Bavarian State Bank) and the Bavarian State Foundation for Structural Financing - refused to extend expiring credit lines and thus doomed Grundig to a timely death.

The Grundig debacle also brought into sharp relief the German postbellum invention of corporate supervisory board, composed of erstwhile chairmen of the board, deposed chief executive officers and hapless representatives of banks held hostage by previous sprees of reckless lending. These are joined by trade union or employee representatives, there to oppose job cuts and disinvestment.

Germany in inexorably pushed, kicking and screaming, to adopt the Anglo-Saxon, "heartless", model of capitalism. Its reliance on exports for growth makes it particularly vulnerable to global winds. It can no longer survive in splendid economic isolation. Gradually, it is being reduced to a mid-sized regional economic power. It is an agonizing and injurious process and Grundig is only among the first of many of its victims to come.

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