Ex Post Analysis of the Internationalisation of ThyssenKrupp in Brazil

Table of Content

List of Abbreviations

List of Figures

1 Introduction

2 Analysis
2.1 Reasons for internationalisation
2.2 Problem statement
2.2.1 The Decision.
2.2.2 The Building Process
2.2.3 Environmental Damage
2.2.4 Consideration of Sale
2.3 Critical reflexion

3 Conclusion

Bibliography

I List of Abbreviations

illustration not visible in this excerpt

II List of figures

Figure 1 Development of the ThyssenKrupp stock price in comparison to the DAX

1 Introduction

In 2006 ThyssenKrupp ordered the construction of steelworks in Brazil in context of its internationalisation. It was the largest industrial investment carried out by an privateowned company in Brazil in the past ten years. In the beginning the costs of this project were calculated to 3.2 billion Euros. ThyssenKrupp planned the production of costefficient pre-products. Those should be processed for example in Germany or the USA. The competitive advantage followed from lower production costs were supposed to secure sales, which should cause a rise in the value of the company.

During the time of construction it was realised that the originally calculated costs would be exceeded. The costs of construction increased remarkable due to several problems in building. A remediation of defects was absolutely essential. At the opening of the steel production plant, conditions diverged significantly from past management planning. Assumed effects as a consequence of the installation of the work did not occur. To the contrary, financial statements were increasingly negatively affected. Furthermore, share prices dropped, rating agencies questioned creditworthiness due to the existing debt burden and the chief execute officer resigned. Finally, since 2012 the company strives to sell the recently established steel work, which constituted an overwhelmingly problematic internationalisation project.

The aim of this paper is to analyse the process of the internationalisation progress of ThyssenKrupp in Brazil. In chapter 2 there will be the analysis of motives for the realisation of the internationalisation project by the time of the decision-making. The analysis of developed problems tells us why the expected success did not result from the transaction. Which factors led to failure? Finally a critical reflexion of the turned out challenges is carried out and shows potential for optimisation of this internationalisation transaction. The paper ends with the conclusion.

2 Analysis

The continuous and intensive change of markets due to globalisation is a huge challenge for the management of every enterprise. Changes are affected by dynamics, insecurity respective the lack of predictability and an increasing complexity¹. This is why it is necessary to constantly review and conform decisions made. Based on this it is possible that companies decide on transnational transactions. To acquire competitive advantage it is necessary to analyse precisely how to internationalise².

2.1 Reasons for Internationalisation

To retrace the process of the building of the steelworks in Brazil, the ThyssenKrupp Companhia Siderúrgica do Atlantico (TKCSA), an analysis of motives is required. In order to ensure the long-term success of the company as well as to keep the competitive advantage a constant monitoring and adaptation of business models and functioning is fundamental. Against this background the planning of die TKCSA occurred in 2006. It applied to be an integral part of the global growth strategy of ThyssenKrupp³. A study of IBM confirms that the increase in sales in new growth areas is an important factor for business success in a networked world. Those could be found in the rapidly developing economies of emerging markets⁴. Brazil is the sixth largest national economy of the world and offers therefore a great key market for steel products, for example for the infrastructure - bridges, rails and buildings⁵.

However, the internationalisation is not only to develop new sales markets. It is also about the integration of foreign countries in the chain of economic value added. The TKCSA was drafted as a production facility. It contains a harbour, a coke plant, a sintering plant, two blast furnaces, two BOF converters two ladle treatment stations, an aluminium heating furnace, two continuous caster machines and a power plant. 3.500 employees shall produce up to five billion tons of steel slabs in a year; two billions for further processing in Europe, three billions for refinement in the United States. The main factor for choosing Brazil as location was the expectation of cost benefits⁶. The harbour as delivery point over the Atlantic Ocean as well as the railway lines of nearby iron ore mines for securing supplies in resources guaranteed logistic preferences.

Combined with lower labour costs there was a result of potential savings up to 55 Dollar per tonne in contrast to a production in Germany according to a McKinsey study⁷. Pursuant to Porter the strategy of cost leadership forms a competitive advantage as a distinctive feature in a highly competitive market⁸.

2.2 Problem Statement

2.2.1 The decision

ThyssenKrupp CEO Dr. Ekkehard Schulz and managing director Dr. Karl-Ulrich Köhler met the president Luiz Inácio Lula da Sila in Brazil. The Brazilian government wanted new industrial areas; thousands of jobs should result from it. To ensure, ThyssenKrupp commissioned a feasibility study by McKinsey. The costs for the construction of the new steelwork amounted 1.9 billion Euros referred to this study. The risk seemed manageable as measured by the expected profits. In 2005 the board of management approved the first budget⁹.

2.2.2 The Building process

In September 2006 there was the groundbreaking ceremony of the TKCSA. In May 2007 at the 20th Brazilian Steel Conference, ThyssenKrupp’s Dr. Hans-Ulrich Lindenberg declared that the first slab would be produced in March 2009. He concluded his presentation with the sentence: “Actual situation - in budget, on time!”¹⁰. The board of management gave way to 2.4 billion Euros for the investment project. Production should begin in 2009¹¹. In November 2006 the investment budget increased to 3.2 billion Euros due to the integration of the harbour, the coke oven and the power station¹². Up to this point the management was contented regarding the development of the project. The work for the preparation of the land was completed. The construction proceeded¹³. But there were already difficulties in the building area. It was located in a mangrove swamp; a fixation with poles was necessary. A multiple of originally planned stakes had to be anchored in the ground, which cost another three-digit billion Euros range¹⁴. The executive management decided to continue the further construction on a low-price level. The contract for the construction of the coke oven was therefore concluded with the Chinese company Citic. Citic promised cost savings to the amount of 60 million Euros compared to ThyssenKrupp’s subsidiary company Uhde¹⁵. However, the accomplishment did not correspond to the required quality standards. Citic defaulted and the remediation of defects was completed by Uhde at last. That led to additional costs of about 500 to 700 million Euros - instead of the cost savings that were calculated first¹⁶. The management reacted with further saving measures.

In 2010 the first part of the steelwork was completed. That was a delay of one year. The production started although there was no operating permit existent. Residents of the surrounding area complained about ashes, skin irritations and breathing difficulties. The dust that was caused by the implementing had to be cleared by an installation of a filter system. The costs amounted to 20 million Euros¹⁷. In spite of doubt regarding the natural environment the governor of Rio allowed the accelerating of the second blast furnace in 2012.

The state invested 300 million Euros at least. In addition there have been tax exemptions of about 700 million Reals since 2007.¹⁸

2.2.3 Environmental Damage

The TKCSA project changed the course of the river Rio Guandu for its construction to use it as a water route. That led to the disappearance of fishes, the livelihood of many fishermen. Since 2006 they all claim compensation. During the construction of the harbour toxic sediments were dispersed. Thereby the fishermen had heavy losses, partly up to 80 percent. In seven class actions over 5700 fishermen are still turning against ThyssenKrupp.¹⁹

As shortly mentioned in chapter 2.2.2 the steelwork still emits heavy metalliferous dust in its environment, which enters the houses of residents. It contains graphite, zinc, natrium, manganese, potassium, phosphor, calcium, aluminium, vanadium, titanium, sulphur, nickel, magnesium, copper, chromium, cadmium and lead. Increased cases of disease were reported²⁰. In view of this there were first public demands of politicians in 2011 to close the steelwork immediately. In 2010 the public prosecution department filed a lawsuit against TKCSA. The responsible persons are charged with environmental offence, they have been threatened with 19 years of arrest²¹. The lawsuit still continues. Back then the environmental minister of Rio, Carlos Minc, said that as long as the environmental audit is not finished the company wouldn’t get its operating permit²². Today ThyssenKrupp still did not get it. Only due to a bilateral contract with the federal environmental protection agency the TKCSA is preliminary allowed to produce.

2.2.4 Consideration of Sale

As a result of depreciation of billions of Euros, costs explosions due to reconstructions, protesting fishermen, residents, environmental and human rights activists, politicians and media ThyssenKrupp struggles with the continuance of the TKCSA. The new board of management, leaded by Dr. Hiesinger, stated 2011/2012 the fundamental changes in conditions of the internationalisation project. That made clear that the original aim of a leadership in quality, costs and margin could not be achieved any more. Since the decision to realise the TKCSA the labour costs have increased steeply. Moreover the exchange rate of the Brazilian Real compared to the US-Dollar changed significantly. For this reason the aimed exchange rate compensation for hedging exchange rate risks was not realisable. Besides the prices for raw materials rose.

[...]

¹ Cp. IBM Institute for Business Value (2010), p.14

² Cp. Schmid, Stefan (2006), p. 9

³ Cp. ThyssenKrupp AG (2010A)

⁴ Cp. IBM Institute for Business Value (2010), p. 14

⁵ Cp.Zeit Online (2011)

⁶ Cp. ThyssenKrupp AG (2006), ThyssenKrupp AG (2010B)

⁷ Cp. Zeit Online (2012)

⁸ Cp. Porter, Michael Eugene (1996), p.62

⁹ Cp. Handelsblatt GmbH (2014)

¹⁰ Steel Times International (2010)

¹¹ Cp. ThyssenKrupp AG (2006)

¹² Cp. Handelsblatt GmbH (2012A)

¹³ Cp. ThyssenKrupp AG (2007), p.53

¹⁴ Cp. Zeit Online (2012)

¹⁵ Cp. Zeit Online (2012)

¹⁶ Cp. Zeit Online (2012)

¹⁷ Cp. Zeit Online (2012)

¹⁸ Cp. Zeit Online (2012)

¹⁹ Cp. Handelsblatt GmbH (2014)

²⁰ Cp. Russau, Christian (2012), p. 28

²¹ Cp. Russau, Christian (2012), p. 23

²² Cp. Russau, Christian (2012), p. 24