Grundig Urgently Needs Fresh Funds

Grundig AG's first-quarter performance suggests that the restructuring program it introduced last year is beginning to pay off, but time is running out for the tradition-rich company if it's to avoid serious financial problems.

Chief Executive Hans-Peter Kohlhammer has until the end of June to find a financially strong partner for the company. That's when the company's credit lines run out, and Kohlhammer is not relying on the banks to provide further support. "We need fresh funds, and these can't be obtained via credits," Kohlhammer told Handelsblatt.

Reports suggest that the Nuremberg-based company, best known for its televisions and radios, is in talks with three possible investors, but there's no prospect of an agreement in the immediate future.

Grundig's majority shareholder, Anton Kathrein, is prepared to cede up to 49% of the company's capital. Kathrein took over an 89% stake in Grundig in 2000, when it was close to insolvency.

A Grundig insolvency this time around would deal a further blow to Bavaria's image as Germany's economic powerhouse. Already, two of the state's big companies, Kirch Media and aircraft maker Fairchild Dornier, have had to file for insolvency.

For state premier Edmund Stoiber the timing could not be worse, in that he is running as the conservative chancellor candidate in September general elections, and his reputation as a strong economic manager is seen as one of his main advantages over his rival, Gerhard Schröder, the incumbent chancellor.

Details provided by Kohlhammer suggest that Grundig turned in an encouraging performance in the first quarter of 2002. In a weak market, the company's sales came in around 10% below what it had planned, he said, without providing any details. But the net result improved on expectations. "We were closer to breaking even than we expected to be," he said.

Clearly the restructuring program that the company introduced last year is now beginning to bear fruit. Kohlhammer introduced a revamp of the product mix, with a shift in focus towards high-value, premium-priced items. But the costs of this program caused the company to incur an estimated loss of 160 million euro for full-year 2001 on sales of around 1.3 billion euro. Final figures will be presented at the end of May.

The company expects to remain in red figures for full-year 2002. And the social costs of the restructuring were high. Last year, Grundig made one sixth of its workforce redundant and shifted its television production from the group's home city of Nuremberg across the border to the Austrian capital, Vienna.

Overall, fewer than 5,000 people now work for the company. At its peak, when the company was one of the stars of Germany's post-war Economic Miracle, it employed 40,000.

Grundig's works council chief, Dieter Appelt, said he wants to avoid a repeat of the kind of cutbacks that the company made last year. He urged the management to close its negotiations with investors soon. "The pressure is maddening," he said.

The Grundig chief was unwilling to say what kind of financial demands would be made of a prospective partner. "A financial partner should co-finance our expansion," was all he would say.

Grundig is planning a market offensive, particularly in Asia, where the company is currently barred from selling its own products under the terms of its divorce from Philips NV in 1997.

The Dutch giant had taken over Grundig at the start of 1990s in what proved to be an unsuccessful effort to turn around its fortunes. Grundig now plans to get round this ban by forging alliances with local partners, and has already signed one agreement, Kohlhammer said.

Kohlhammer sees this regional expansion as a matter of life and death for his company. Right now, Grundig is too small to compete on international markets, but with the help of a partner it sees itself assuming the size that's needed.

Kohlhammer admitted that Grundig had originally tended towards a strategic partnership, but because of the current market weakness, the companies it had in mind had all been preoccupied with their own situation.

On Wednesday, industry association Gesellschaft für Unterhaltungs- und Kommunikationselektronik presented figures that showed just how weak the consumer electronics market was last year.

The market was worth a total 20 billion euro in 2001, a contraction of 3.4% from the 2000 level, whereas growth of 0.7% had been expected.

Sales of the classic consumer electronics that Grundig produces declined by 2.4% after weak sales over the Christmas period dampened all hopes of year-on-year sales growth.

For this year, the sector is expecting 0.9% growth in classic consumer electronics sales, provided that Christmas brings the industry better cheer this year.