"The End of All Illusions"

By Alexander L. Taylor III

AEG-Telefunken's sudden collapse jolts West Germany

AEG-Telefunken was the very symbol of the postwar West German Wirtschaftswunder. When the giant company began to rebuild in the late 1940s, it found that the destruction of battle and the loss of property in East Germany had wiped out more than 90% of its factories. But a combination of hard work and a buoyant economy helped AEG-Telefunken to restore itself and become the second largest electronics manufacturer in West Germany after Siemens. In 1981, it employed 120,000 workers worldwide and had sales of $6.6 billion.

Thus it was a jolt last week when AEG-Telefunken declared that it was insolvent and could not pay its bills. The unpaid debts amounted to $3.5 billion. In addition to being the largest corporate casualty in West Germany since 1945, the collapse of AEG-Telefunken symbolized the problems now facing the country that first gave birth to economic miracles. As the Frankfurter Allgemeine Zeitung candidly observed in a front-page obituary for the company: "This marks the end of all illusions."

The grim news coincided with further signs that West Germany remains enmeshed in a persistent slump. Last week the government statistics office reported that 5,676 companies had failed during the first six months of 1982, the highest number in 34 years, and 50% more than during the same period last year. Unemployment, which was almost unknown in West Germany during the 1960s and early 1970s, rose in July to 1.75 million, or 7.2% of the labor force. The country's gross national product is expected to rise only 1% in 1982, after declining .3% last year.

West German commentators last week were comparing the current economic troubles with the country's 1931 banking crisis, when the German stock market was forced to shut down. Some officials saw the failure of AEG-Telefunken as proof that West German companies, which had once been among the leaders in high technology, were now falling behind American and Japanese firms. Said Andreas von Buelow, Minister of Research and Technology: "At the moment we are clearly behind our rivals, and if the applications in industry of microelectronics are not considerably speeded up, our technological standing will soon be lost."

The problems of AEG-Telefunken, though, say as much about the shortcomings of one company's management and planning as they do about the changing fortunes of one of the world's great industrialized powers. After prospering in the high-growth years of the 1950s and 1960s, the giant company in recent years failed to keep pace with developments in new products and manufacturing and steadily fell behind other electronics manufacturers, especially in the U.S. and Japan. Although it was a pioneer in developing a commercially successful tape recorder in the 1930s, AEG-Telefunken eventually lost its lead in consumer products such as color television sets and electric typewriters. It also moved slowly into the manufacture of computer components. The company was involved in early work on nuclear power plants, but these projects turned into huge money losers. Finally, the firm lagged in moving its manufacturing operations out of expensive West German factories and into low-wage countries of the Far East.

In 1973, the company stopped paying stock dividends. In 1979, it received $764 million in unsecured loans and new capital, mostly from a consortium of 24 banks. The bankers also hand-picked a new chairman: Heinz Durr, then 46, a soft-spoken manager of a family-owned manufacturer of painting equipment. Last year he sold operations worth $177 million and negotiated with banks to write off millions of dollars in loans.

As late as last month the Bonn government agreed to give the company another injection of funds, in the form of export credit guarantees, bank loan write-offs and new bank credits amounting to $470 million. Events, though, were rapidly running against the troubled colossus. In June, President Ronald Reagan suddenly broadened the U.S. embargo on sales of American products for the planned Euro-Soviet gas pipeline, endangering a $260 million AEG-Telefunken contract to deliver to the Soviets 47 gas turbines that are being built under a U.S. license. Durr's ambitious program to restructure the company, called AEG '83, was stillborn when trade unions blocked the elimination of some 20,000 jobs. A British electronics firm early in August backed out of a plan to buy 40% of AEG-Telefunken's operations, and United Technologies, based in Hartford, Conn., also rejected a last-minute overture for help.

In the end the cash simply ran out. Money became so tight, by one account, that the firm stopped paying suppliers directly. Instead it sent checks by mail so that it could keep the funds in its bank account a little longer. Finally, the company had no alternative but to seek legal protection so that it could remain in business while settling its debts. That is just one small step short of formal bankruptcy.

Now that AEG-Telefunken is in receivership, a court-appointed appraiser will determine whether it can pay the legal minimum of 40% of its debts within 18 months and still remain in business. The Bonn government, which in the past has helped arrange mergers between troubled companies in the steel and automobile industries, has promised additional aid. Even if part of the firm survives, however, at least 20,000 jobs will be lost and dozens of factories either sold or shut down.

Many West German bankers and businessmen hope that the collapse of AEG-Telefunken will act as a spur for their country. They have long complained that high wages, low investment and excessive government regulation have sapped their country's economic strength. West Germany will need to return to bold innovation and good management if it hopes to succeed in high-technology growth industries of the 1980s. Those were the very areas where AEG-Telefunken failed.

-- By Alexander L. Taylor III.

Reported by D.L. Coutu/ Bonn

With reporting by D.L. Coutu

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