CORPORATE LEGAL RESPONSIBILTY

AND INDUSTRIAL RELATIONS

CASE REPORT
FAG Kugelfischer - A German
Restructuring

Submitted to: Prof. Patturaja Selvaraj

Submitted by: Group 11
1

On 27.02.2015

LETTER OF TRANSMITTAL
Prof. Patturaja Selvaraj
Indian Institute of Management
Indore, 453331

29th July, 2015

Subject: A report on FAG kugelfischer - A German Restructuring
As instructed by you, the required case, FAG kugelfischer - A German
Restructuring, has been analysed by our group and the analysis, along with
the recommendation, has been documented in the following report. In case
you require any additional information regarding the same, we would be
available at your convenience.
Yours sincerely,
Group 11:
Raj Aryan
Rashi Gehlot
Sadhna Meena
Siddhant Sumon
Sonal Sathish
Srishti Sinha

TABLE OF CONTENTS

EXECUTIVE SUMMARY
SITUATION ANALYSIS
PROBLEM STATEMENT
OPTIONS
CRITERIA FOR EVALUATION
EVALUATION OF OPTIONS
RECCOMENDATIONS
ACTION PLAN

4
5
5
6
6
6
7
7

EXECUTIVE SUMMARY
The report is prepared to analyze the possible decisions Neukirchen can take to
restructure an important German company given its legal restrictions and provide
possible solutions. FAG Kugelfischer is the leading manufacturer of ball bearing in
Germany and the fourth largest in the world. Due to the saturation of the industry
in early 90s and the competitors entering emerging markets of Asia, FAG
Kuegelfischer is facing a lot of difficulty to survive. Also the quality of the products
and the expensive German workforce of the company is increasing its cost and
reducing its profit. Also their latest acquisition of the East Germanys DKFL was a
big disaster and also their poor management practices worsened the issue. So their
banks have advised them to take the help of Neukirchen, a well known business
executive in Germany who was famous for his business turnaround capabilities. He
followed an American style restructuring model which did not have many fans in
Germany and also lot of legal restrictions. This report proposes three alternative

courses of action for the company.

Cut the labour cost to increase the operating profit
Sale of some of its plants to reduce the Debt burden
Negotiate with the Workers Council upon a Social Plan
These three alternatives are carefully evaluated based on certain criteria.
The best option appears to be negotiating with the Workers council upon a
social plan.

SITUATION ANALYSIS
Kugelfischer in the early 90s was the largest manufacturer of ball bearings in
Germany, and the second largest in Europe. It was unique from its
competitors because of its historical roots and its size. It had a history of 100
years and therefore the name stood for stood for a traditional and down toearth business among its customers. Kugelfischer was known for the quality
of its products and also for its technological superiority. Additionally, the
costumers valued the services Kugelfischer offered them upon purchase of
the actual product, e.g. quick delivery, quality control, technical assistance,
and customized product design. Good R&D and quality German workforce
played a good role for its competitive advantage. But the quality standards
used in the production process and high labour cost for its German workforce
made it difficult for the company to match its competitors. The Swedish
producer SKF was the market leader in the ball bearing market, followed by
two Japanese companies NSK and NTN and Kugelfischer was in the fourth
position. The ball bearing business almost got satirized in the early 90s and
many companies started investing in the emerging markets such as Asian
markets, but Kugelfischer was interested in acquiring East Germanys largest
ball bearing producer DKFL. The poor performance of DKFL forced the
company to layoff half its employees by 1995 and they also realized that the
technology of DKFL was outdated .Finally the acquisition failed and led the
company into serious financial difficulties and also the poor management
practices of the company worsened the situation. The banks of Kugelfisher
started worrying and they advised them to take the help of Kajo Neukirchen,
a well-known business professional who was famous for successful
turnarounds. His work was mainly focused on improving the lives of
shareholders rather than the stakeholders, which have more value in
Germany. So his deeds and views were immensely unpopular among German
politicians, labour leaders and general public. He followed more of an
American style restructuring which involved a lot of downsizing of operations
and laying off significant number of employees which were very uncommon
in Germany. There are lots of rules regarding restructuring of companies in
Germany, if the company decides to layoff many employees, they have to
inform the Workers council and also explain the situation leading them to. So
legally it is difficult to carry out the restructuring steps of Neunkirchen, even
though it is the appropriate way to do it.

PROBLEM STATEMENT
How can Neukirchen restructure the company with the given legal
restrictions?

OPTIONS
The following are the options that can be implemented in order to address
the problem:
Cut the labour cost to increase the operating profit
Sale of some of its plants to reduce the Debt burden
Negotiate with the Workers Council upon a Social Plan

EVALUATION CRITERIA
The criteria that have to be kept in mind to evaluate the stated options are:
CRITERION
Success of the venture
No clash with legal requirements
Interests of stakeholders

WEIGHTAGE
3
2
1

EVALUATION OF OPTIONS
The stated options are evaluated on a scale of 1 to 5, with 1 being the least
desired and 5 being the most desired:
S.NO.
OPTION 1
OPTION 2
OPTION 3

CRITERION 1
3*4
3*2
3*4

CRITERION 2
2*2
2*4
2*4

CRITERION 3
1*2
1*2
1*1

TOTAL
18
16
21

RECOMMENDATION
On the basis of evaluation of the options done by taking the respective listed
weights as base, we conclude that the option that should be implemented is
for the company management to negotiate with the Workers Council on a
social plan that would include severance payments for people being laid off,
with the terms of possible assistance in finding new employment and also
the provisions for retraining. Implementing this option would include ensure
success of the venture, along with compliance with the restructuring laws of
Germany.
IMPLEMENTATION
The company management should first inform the Workers Council of what it
wishes to do, and the reason why it wishes to do it. In this case, the company
management would inform the Workers Council of its decision to lay off
certain amount of workers and the reason why they have decided upon it.
The company management then will have to come to an agreement with the
Workers Council regarding a social plan which would include severance
payments for people being laid off, with the terms of possible assistance in
finding new employment and also the provisions for retraining. Since no
specific formulae exists to determine the amount of severance pay, in case
of FAG Kugelfischer, the compensation would typically be based on the age
of the employees and his/her family status, along with the number of years
the employee has served the corporation and his/her gross monthly pay.