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GERMANY: Mittelstand supplier says steel prices damaging prospects

By SupplierBusiness.com | 12 October 2004

In the financial year to 30 June 2004 leading German hinge and convertible roof systems supplier, Edscha raised sales 4% to €985.8m but pre-tax profits fell 10.7% to €24.4m. 

Edscha is one of a group of small- and medium-sized German suppliers that have traditionally been able to make good margins in the automotive industry from their strong market position in a narrow niche - in Edscha's case, hinges and convertible roof systems. It also makes pedal assemblies and provides engineering services.

Between '99 and the 2003/04 financial year, sales at Edscha had grown 13.5% on a compound annual growth rate, despite the poor performance in 2003 and 2004. Similarly EBIT grew by compound annual growth rate of 9.3%, again despite the pressure at the end of 2003.

But in 2003/04 Edscha said that its raw steel prices had increased by about a third by the end of its financial year, and that the dollar had devalued by 17%.
In addition there has been an unusually massive price pressure from the carmakers, Edscha executives said.
The company said there had been some costs associated with the squeeze-out process as the ownership of the company was shifted to Edcar Beteiligungs GmbH & Co KG in January 2004.

Sales in 2003/04 held back by engineering business
The group's largest business, hinge systems, saw sales up 4.2% to €576.3m in 2003/04. Edscha is global market leader in the automotive hinge business, and the company said that growth in South America and Asia were the reasons for its growth in this area.

A small part of the growth in the hinge system business was due to the first time consolidation of Anhui Edscha Automotive Parts Co Ltd, a production joint-venture in China.

Edscha saw the strongest growth in its convertible roof systems business, with sales up 6% to €219.3m. Edscha produced over 189,000 roofs in 2003/04. Current products include the Audi TT, BMW 3 Series, Land Rover Freelander, Opel Astra, Volvo C70, BMW Z4 and the Smart Roadster.

Sales were pushed up by volumes for the BMW 6 Series convertible and the Chrysler PT Cruiser convertible. Margins in the convertible roof business rose 43.6% (EBIT) to €22.8m.

In contrast the vehicle design business division (IVM Automotive) saw sales fall by 27.9% to €77.6m, as a result of postponed and cancelled projects. The vehicle design business made an operating loss of €4.8m (6.2% of sales). Edscha said that there has been  "at least a temporary reversion of car makers to in-house development".

Other leading design and engineering companies such as Bertrandt and Ricardo have also experienced a tough year in 2003/2004, but the prospects for the business area have been improving, says Edscha.

Outlook stable despite drop in convertible volumes in 2004/05
At its results presentation in Düsseldorf one board member said that Edscha expects sales in 2004/2005 to be "nearly stable" for the group as a whole.
The company expects a drop in sales of roof systems due to the run out of key models in 2004/05. 

Edscha doesn't expect new product launches in the convertible business area to start to drive sales up again significantly until 2006/2007, but management said that the order backlog now stands at €1.8bn for this division. Since July 2003 Edscha has won four new contracts for soft and hard top solutions, including two at new customers.

Company has also won a first contract for the development of a complete convertible, including the series development of the roof system for a new customer. Edscha is also working on the total glasshouse, looking at pillars and roof concepts including passenger protection.

Edscha is looking for recovery in vehicle development sales in 2004/05. Through IVM Automotive, Edscha's engineering activities, the group has been offering new capabilities to the industry, including sliding doors, front-end development including pedestrian protection, and new door and pillar concepts.

Edscha has been responsible for complete development of vehicles, taking them through to readiness for series production, most notably the Audi Pikes Peak SUV.

In other product areas Edscha said that it won Hyundai as a new customer for its hinge business in 2003/2004 and developed new sliding doors and electrical drives for rear doors. The pedals business has the braking and accelerator pedal module for the planned PSA/Toyota small car, which will be assembled in the Czech Republic.

Profitability still under pressure
In May 2004 Edscha introduced a package of measures under "Mobility 2005" to adjust to the problems of rising steel prices, the weak dollar and weaker orders and pressure on prices from OEMs.

The central development centre for the driver controls division was relocated from Hengersberg in Germany to Portugal, and Edscha closed its Sindelfingen location at the end of June 2004, looking for a greater concentration of its supplier base and more outsourcing.

Edscha aims to reduce personnel costs by 5% and purchasing volumes are to be reduced by €15m in the first year, and €30m a year after that.

At that time Edscha management believed that it would enable the company to increase its EBITDA to at least €130m in 2004/2005. However last week Edscha said that "due to the ongoing and dramatic price increases in raw materials, and in particular steel", the company said it would be unlikely to achieve this objective.