This document is an authorized copy for the course MBA 2025 - MBA 2025 - Analysis of Business Problems - SP taught

by prof. Santomá, Javier at IESE B.S.

ASN-82-E
July 2020

Elbe Composites Saxony AG (ECSA)

Thomas Klueter
Luis Palencia
Juan Carlos Vázquez-Dodero

Elbe Composites Saxony AG (ECSA)1 manufactured a wide variety of metal and composite parts
for the aerospace, automobile, public lighting and farm machinery industries. In July of 2018,
management at ECSA had to decide on a location for a new plant. Turnover that year was
expected to reach €141 million (see Exhibits 1 and 2).

The Plants
The company had three plants, all in the region (Bezirk) of Dresden in Germany. The main plant
and head office were located in an industrial park in Dresden, the capital of Saxony, an industrial
city of around 500,000 inhabitants located on the river Elbe. The two satellite plants were
located in smaller, less industrialized towns, each with around 8,000 inhabitants, close to the
towns of Hainichen, west of Dresden, and Bischofswerda, east of Dresden. Both satellite plants
were approximately 50 km from the main plant (see Exhibit 3).
The main plant had a floor area of 25,000 m2 and was equipped for stamping, drilling and similar
operations, as well as assembly. It had 500 employees, most of whom belonged to the largest
plant manufacturing union in Germany: IG (Industriegewerkschaft) Metall ("Industrial Union of
Metalworkers"), which, since 1995, had been the plant employees’ only representatives in
collective bargaining. Industrial relations in the company had been satisfactory until March 2018,
when a wage strike shut down the main plant for three weeks. Although the employees returned
to work with a new one-year wage agreement, management was unsure that the issue had been
fully resolved, as the IG Metall had said it was not entirely happy with the deal.

1 All data have been disguised to protect the company’s identity.

This case was prepared by Professors Thomas Klueter, Luis Palencia and Juan Carlos Vázquez-Dodero. July 2020.
IESE cases are designed to promote class discussion rather than to illustrate effective or ineffective management of a given
situation.

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Last edited: 27/9/22

 ASN-82-E Elbe Composites Saxony AG (ECSA)
This document is an authorized copy for the course MBA 2025 - MBA 2025 - Analysis of Business Problems - SP taught by prof. Santomá, Javier at IESE B.S.

ECSA’s two subsidiary plants had a floor area of 8,000 m2 each and were largely equipped for
automatic machining operations. Although the subsidiaries manufactured some finished parts
that were shipped directly to customers, most of the parts they produced were sent to the main
plant for further processing and final assembly. Each subsidiary plant had 150 employees. The
majority of the workers did not belong to any union; the work council (Betriebsrat) was also not
unionized.

Decentralization of Manufacturing
ECSA established its first subsidiary plant some years after German reunification in 1999, with
the second built in 2008. There were several reasons for establishing subsidiary plants in small
towns rather than expanding the main plant. Management thought that, in small towns, the
workers would be more dependent on the factory and relations between management and
workers in a smaller factory would be closer. This would result in lower absenteeism, lower
turnover and higher motivation, all of which would boost productivity. Management also
thought that having a subsidiary plant in a small town would bring savings in terms of land prices,
taxes, wages and other costs. Furthermore, they believed that it would be easier for the
company to train up supervisors and managers in a small, decentralized plant, and that the
manager of a small plant would be able to control operations more effectively with less
bureaucracy. In their view, the most appropriate size for a subsidiary plant was between 150
and 250 workers.
Under ECSA’s decentralization program, the three plant managers had full responsibility for
plant operations, albeit within the framework of policies and procedures established by the head
office. Each plant manager had its own accounting, production control and engineering teams.
Although team members reported to their plant manager, they also had to work closely with
their colleagues at the head office.
The company’s top management thought that the decentralization program had achieved its
objectives, with machining operations having a higher degree of profitability in the subsidiary
plants than in the main plant. In addition, the company’s relations with the plant employees and
local communities had proven satisfactory.
ECSA had no need to organize any large-scale training programs in either of the two subsidiary
plants, as, in both cases, it had been able to hire sufficiently qualified workers. In both
communities, the ECSA plant had replaced other manufacturing companies that had shut down
or moved.

The Contract
The surge in European aeronautical and aviation programs in recent years brought an increase
in orders at ECSA, mainly for parts and assemblies for aircraft and satellites. By July 2018, it was
clear that the company needed an additional plant and more equipment to fulfill a contract to
supply blades for wind turbines, awarded unexpectedly that year. The turbine manufacturer’s
specifications called for a size and quality of blade that could not be produced using
the company’s existing facilities, which were working at near full capacity, making parts for
regular customers. ECSA’s top management was convinced that the company’s existing facilities
would reach full capacity during the next 12 months. A preliminary study found that none of the
existing plants had sufficient middle managers or supervisors, as well as the capacity to be able
to add shifts to the plants’ operations.

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 Elbe Composites Saxony AG (ECSA) ASN-82-E
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Under the three-year contract with the new customer, delivery of the blades was due to start
on July 10, 2019; ECSA would incur a penalty of €50,000 per day if there were delays (after a
one-week grace period). Top management estimated that the company could conceivably afford
to pay the penalty, as the contract was expected to yield a level of sales per employee 15% above
the company’s average. They realized, however, that if ECSA failed to meet delivery dates, it was
unlikely to win further contracts from that customer.

Need for Expansion

After meeting with customer representatives, ECSA’s management concluded that they would
need a floor area of approximately 10,000 m2 to produce the parts for the wind turbines. This
manufacturing operation would be completely independent from operations in the other three
plants. According to management estimates, the new building would cost €1.5 million, which
the company could fund with its own resources, as it had a low level of debt. They had looked
into the possibility of renting a plant, but had been unable to find anything suitable. The builders
told ECSA that it would take four to six months to complete the building.
Management had thought that the demand for wind turbine parts might decrease in the next
five years. In fact, after the crisis of the early 2000s, the company’s production for the
composites industry had declined. During that period, ECSA had used the resulting free space
for manufacturing parts for satellites, which were in high demand, as well as new products for
the other markets it served.
After examining several market studies, management believed that the existing plant facilities
were sufficient to meet normal demand for the company’s current range of products.
Nevertheless, the company went ahead with its new product R&D program, with the expectation
that the new products would go into production as soon as the new facilities became available.
According to company estimates, equipment worth some €10 million (digital controls and other
specialized equipment) would be required. This investment would be made through an
agreement with the wind turbine manufacturer, under which the latter would loan its own
equipment for use in the new plant.
Management estimated that the new plant would require 220 workers; approximately 150 of
the jobs would be for skilled workers, while the rest would be unskilled. The supervisors and
managers would be recruited internally. It was expected that the deputy manager of the main
plant would become the manager of the new plant.
After various possible sites had been examined, the choice was boiled down to two. The first
was a few blocks from the main plant and the second, in a small town some 50 km away. The
towns in which the two existing subsidiary plants were located had not been considered because
it would be impossible to find the necessary staff, and also because management did not want
to have the workforce concentrated in any one location. Expanding the main plant was not an
option, as there was no space.

Location of the New Plant: “City” Option

ECSA management considered themselves lucky to have found a satisfactory site close to the
main plant. A few years earlier, due to an urban development program, Dresden had seen an
influx of manufacturing companies and there was not much land left for industrial use.

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 ASN-82-E Elbe Composites Saxony AG (ECSA)
This document is an authorized copy for the course MBA 2025 - MBA 2025 - Analysis of Business Problems - SP taught by prof. Santomá, Javier at IESE B.S.

The plot itself could be purchased for €250,000. Electricity, gas and water were readily available
and would cost around €450,000 per year. Air, rail and road connections were excellent. The
company estimated that the costs of inbound and outbound shipping would be roughly
the same at both sites.
A recent study indicated that there were more than 1,000 skilled workers available for
employment in the area surrounding the main plant, as well as abundant unskilled labor,
suggesting that the company would be able to hire all the people it needed. Effective labor costs
per hour in the city were €29 for skilled workers and €17 for those who were unskilled. It was
considered very likely that the employees at the new plant would immediately join the unions
that represented the workers in the main plant. ECSA management thought that fewer people
would be needed for the accounting, production control and engineering teams at the new
plant, as part of the work could be done by head office. It was estimated that if the plant was
built in the city, rather than in a rural location, they could avoid needing to hire three highly
qualified technicians, representing an average of €50,000 each per year. Working hours per year
in the sector were 1,650.

Location of The New Plant: “Small Town” Option

The other option was to build the plant in a small town with a population of around 6,000 people
in the south of the province of Saxony near Altenberg, some 50 km from the city of Dresden.
The towns and villages within a 15 km radius had a combined population of approximately
10,000. During the early 19th century, the region had been the birthplace of the German
watchmaking industry but had been deindustrialized following World War II. The local
authorities had told ECSA that there were a few unemployed people, but not very many.
The town chosen by the company had only a few manufacturing sites, with most of its residents
working in agriculture or livestock farming. Both the local council and the employment office
said that while unemployment was low, there were plenty of people who would be willing to
leave agriculture (in which they often only found part-time work) to work in the factory, where
they hoped to have better employment and working conditions.
ECSA management realized that if they ever needed to sell the plant in this location, they might
have difficulties finding a buyer. The ECSA representative who visited the town reported that
the local authorities were favorably disposed toward the company’s proposal but somewhat
concerned as to what would happen to the plant if it did not get enough orders.
The plot could be bought for €100,000. Electricity, gas and water were available and were
expected to cost €600,000 per year. The transport infrastructure was considered good and
would not cause any issues, as the plot was adjacent to the main rail line and had easy access to
a main road.
The company had conducted a mail survey to test workforce availability within a 15 kilometer
radius, sending anonymous questionnaires to all addresses in the area. Recipients were asked
to state whether they would be available for work if a new factory opened in the town, and also
what experience they had in this particular type of work. Seven hundred people indicated that
they would be available. Of these, 5% said they had one or more years’ experience in similar
jobs, while 10% said they had six months to one year of experience. (A person could not be
considered skilled until she or he had at least six months’ relevant experience.) The rest had no
experience in this kind of work. ECSA management estimated that per-hour labor costs would

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 Elbe Composites Saxony AG (ECSA) ASN-82-E
This document is an authorized copy for the course MBA 2025 - MBA 2025 - Analysis of Business Problems - SP taught by prof. Santomá, Javier at IESE B.S.

be €27 for skilled workers and €16 for unskilled workers. The availability of services, shops and
housing was considered adequate.
ECSA management expected that relations with the workers’ committee in this plant would be
as smooth and conflict-free as they had been with the committees in the two subsidiary plants,
where, unlike in the main plant in Dresden, the main national union had no significant presence.
According to labor experts, it took half as long to turn an unskilled worker into a semi-skilled or
skilled worker if it was done through specialized, intensive courses at appropriate training
centers. To train employees, ECSA could take advantage of a newly launched, government
sponsored training program, which would cost, after deducting subsidies, approximately €5,500
per worker per month, including remuneration, travel, expenses and fees. The training would
be given at 10 of the many specific professional training centers (Agentur für Arbeit) in Saxony
(the closest one being 20 km away in Dippoldiswalde). The German government encouraged
(but did not require) companies that applied for employee subsidies to locate their
manufacturing facilities where there was a labor surplus, or where the local economy was most
likely to benefit.

The Decision
ECSA’s CEO was struggling to put her/his thoughts in order before presenting his/her proposal
for the new plant location to the board of directors. What should (s)he propose? What
arguments should (s)he use?

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 ASN-82-E Elbe Composites Saxony AG (ECSA)
This document is an authorized copy for the course MBA 2025 - MBA 2025 - Analysis of Business Problems - SP taught by prof. Santomá, Javier at IESE B.S.

Exhibit 1
Revenue and Net Profit, 2008-2018, in Thousands of Euros

Year Turnover Net profit1

2008 135,150 7,050
2009 135,450 7,350
2010 130,350 6,600
2011 120,150 3,600
2012 130,350 5,400
2013 135,300 6,150
2014 135,000 6,000
2015 120,450 3,750
2016 130,500 6,450
2017 130,050 5,700
20182 141,000 7,200

1 Taxes on gross profit: approximately 30%.

2 Forecast.

Source: Information provided by the company.

Exhibit 2
Projected Income Statement for 2018, in Thousands of Euros

Sales 141,000
Cost of sales 86,010
Staff costs 38,070
Depreciation and amortization 2,115
Factory overhead 1,920
General expenses 2,115
Operating profit 10,770
Financing costs 1,410
Taxes 2,160
Net profit 7,200

Source: Information provided by the company.

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 Elbe Composites Saxony AG (ECSA) ASN-82-E
This document is an authorized copy for the course MBA 2025 - MBA 2025 - Analysis of Business Problems - SP taught by prof. Santomá, Javier at IESE B.S.

Exhibit 3
Location of the Main Plant (Dresden), Existing Subsidiary Plants
(Hainichen and Bischofswerde), and Proposed New Subsidiary Plant
(close to Altenberg)

Main plant
Subsidiary plants
Proposed new location

Source: Information provided by the company.

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