05 September 1994 00:00 [Source: ICB]
On the surface, Lurgi's order books are in pretty good shape. But the company is taking no chances and is putting in place measures to ensure that costs are brought under control, including hiring east European and Indian engineers. The VDMA too is worried about German contractors' high costs.
By Dede Williams
DESPITE AN order backlog worth around DM6bn ($3.53bn), Frankfurt-based engineering group Lurgi is not satisfied with its business. In 1992-93, the company's sales rose 26% against 1991-92 to DM2bn. New order intake totalled DM3bn, up 40%. Some 43% of all new orders were from German customers, including 30% from eastern Germany.
The most substantial order was a DM1bn contract to build the new Elf refinery in Leuna, in a consortium with Technip in Leuna, in a consortium with Technip of France. But only DM600m of the total was booked in 1992-93, due to delays in the project.
Speaking in Frankfurt, chairman Jens-Peter Schaefer said the numbers are deceptive. He complained of the declining quality' of contracts to build new process plants, especially in Germany. In particular, the gross margins on chemical-related contracts are 'unsatisfactory, in the face of extremely hostile international competition'.
He added that contracts now contain fewer job hours and are unevenly distributed among the group's engineering divisions. This discrepancy has led to the introduction of short time working for 1110 employees at Frankfurt, starting 1 May.
As a reaction to the near bankruptcy of its parent company Metallgesellschaft (MG) and tougher competition in international contracting markets, Lurgi is taking steps to bring costs under control and improve efficiency.
Along with streamlining management and reorganising marketing and field organisations, strategic alliances with other engineering groups are being considered. In line with the restructuring of the MG group, Lurgi is to be converted into a holding and will trim staffing at Frankfurt headquarters by 850 this year (out of a total of 3000 in Germany and 5386 worldwide).
Part of the slack will be taken up by around 450 eastern European (150 Czech, 300 Polish) and 200 Indian engineers which the Frankfurt group plans to hire over the next three years. Schaefer said cuts in German personnel of at least 650 would have been necessary over the three-year period. However, the MG crisis has made faster action essential.
Chemical-related projects account for more than 51% of the Lurgi group's order intake in 1992-93, including contracts booked by group companies Lurgi-Oel-Gas-Chemie and fibres engineering group Zimmer AG. The energy and environment engineering arm, Lurgi Energie und Umwelttechnik, accounted for 45% of orders and Lurgi Metallurgie 4%.
With 18% of engineering contracts, Zimmer accounted for nearly all of the Lurgi group's net earnings of DM34m during the past financial year. Schaefer noted that profits were well below the DM50m average of the past three years. Lurgi's pre-tax return on sales also declined in 1992-93, to 17% from just under 2% during the preceding financial year.
In the first half of 1993-94, Lurgi had letters of intent totalling DM2.5bn and a new order inflow worth DM1.6bn. Although this figure was higher than anticipated, Schaefer said, it was 13% below the 1992-93 level. The volume of orders booked by Lurgi-Oel-Gas-Chemie was below target. But Zimmer's intake was 'markedly above target', according to Schaefer.
At a recent meeting of the German large plant contractors association VDMA, Schaefer, who is the association's president, remarked that German contractors must make 'increasing price concessions' to remain competitive. He pointed out that German engineers earn 'the world's highest wages' and that personnel costs around for 70% of firms' overall calculation in bidding for new contracts.
Against this background, German contractors even have difficulty retaining their competitiveness on their home turf, said Schaefer, adding that - already blessed with lower personnel costs - engineering firms in the UK and Italy in particular have benefited from the devaluation of their currencies and Italian firms also have access to better financing conditions. But contractors from countries with strong currencies, such as the US and Japan, manage to undercut German firms, as has become evident in eastern Germany, he said.
For a number of years, German contractors have procured equipment abroad and hired out basis engineering to firms in other countries. Now they are being forced to shift more and more detail engineering outside Germany, the Lurgi chairman and VDMA president remarked.
To this end, Lurgi last year set up a new subsidiary in Prague to perform detail engineering on environmental and energy engineering projects. There are plans to shift more work eastward.
This cost-saving is designed to help the Frankfurt group match its competitors in international bidding. But Schaefer said capacities are being transferred to Prague for other reasons too. In his words, the Czech Republic offers 'optimal' conditions, 'especially in view of the fact that engineering graduates are not only well qualified, but also unusually highly motivated and open'. What is more, 'there is not even a language barrier', as German is widespread in eastern Europe.
The advantages in India are said to be similar. Not only do Indian engineers have a high level of qualification; they can also prepare documents in English for international customers.
German contractors have begun to realise that one of their advantages, a strong technological base, is no longer enough, in today's contracting market, Schaefer asserted. He noted that new competitors are now moving into our old fields and traditional competitors have improved their process technology. We must now seek our advantage in other areas. We must react faster to changes in the market, as well as recognising trends sooner. And we must get closer to the customer.'
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