Indians hold the skills of Germany’s automotive industry in high esteem. Many of them make all reasonable efforts to become a direct vendor to a German OEM or one of the large tier-1 suppliers. While there are not many effective instances yet in the market one cannot fail to see rapid progress in the wake of India’s industrial growth and the recent appearance of more German OEMs on India’s automotive stage.

As a result, Indian entrepreneurs analyse how they can have their share in this evolution. A manufacturing footprint in Germany is one possible option. The financial and economic crisis has landed many German suppliers in trouble, many were forced to declare insolvency. Their number is estimated at more than 100. In some cases the crisis has but curtailed a previously built-up overcapacity. Or, companies were hit whose cost structures anyway were no longer competitive in the global market.

But in many instances suppliers were required to file for bankruptcy who, just one closing before, had presented a bright balance sheet. In the fourth quarter of 2008, their business volumes virtually collapsed and there was no way to cut costs fast enough in order to remain afloat. When restructured by means of an insolovency such a company makes an attractive candidate for takeover provided the clients keep faith with it.

Germany’s law offers two basic variants. The more frequent way is an asset deal, which has the insolvent company’s assets carried over onto a clean balance sheet of a new company. Since 1999, another way similar to the American chapter-11 procedure is offered, which provides further interesting possibilities (Insolvenzplanverfahren). At first sight, many investors prefer a straight asset deal which allows them to be king of the castle after takeover. But, right during this critical phase, practical issues come up: local management, continuity of client relations, exposure to Germany’s labour laws, motivation of personnel etc. They can, together with the difficulties of intercultural cooperation, jeopardise the new start. The second procedural option, i.e. the Insolvenzplanverfahren, may be advantageous for its possibilities to continue with the old management and, worth considering in the case of family owned companies, together with the previous owners.

The procedures are detailed by law. An insolvency administrator, appointed by court, is responsible for their consummation. Being the process owner, he is the investor’s first and most important partner. The need for a comprehensive due diligence goes without saying. Still, verifying the object’s qualities in all detail would fall short. What good is a bargain if the previous clients’ business gets lost? We strongly recommend to talk to the main customers as soon as possible - in the automotive industry there will be but a few - and to assure oneself of their endorsement. What matters is that they stick to their running business as well as to pending contracts.

As many German vendors have been confined to serving domestic clients, an Indian investor may well open the door to an additional economic zone for them. This is a trump card since OEMs and tier-1 suppliers have long adopted a global view.

If he does not plan to finance the deal on his own the investor should also involve a local bank in a timely manner. Always reluctant to take risks, a bank will be even more reluctant vis-à-vis a non-German investor. More than 50 percent debt capital will be difficult at the outset.

Also, the works council should be tied in at an early stage even though many regulations of the German labour laws are mitigated during an insolvency. The workforce should come to a good understanding with the new owner. Since he is not likely to liquidate the given industrial site, an Indian investor normally is very well received.

Generalising with due care: Taking over an insolvent supplier may well be an attractive gateway into the German automotive market, since one buys an ongoing business together with a capacity tailored to need and avoids the risks of a start-up or a share deal. The investor must direct his attention to an early accord with all parties involved and he should be aware of the stringent time pattern of the insolvency procedure.

UBF.B GmbH
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Phone: +49 30 / 311 60 43 30
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