03 April 2020 Business

How Heidelberg staged its own Great Escape

Heidelberg sprang a surprise when announcing that it had found a way to finance its future. CEO Rainer Hundsdörfer explains how that was done and what the future now looks like.

Rainer Hundsdörfer has managed what many thought was impossible just a few months ago. For the first time in almost 15 years, the German press manufacturer is debt free and so is in charge of its own destiny. Hundsdörfer says the company has pressed the Reset button.

But Heidelberg in 2020 is very different from Heidelberg in 2006, the peak year for production of print units. Two years after that Heidelberg was caught out by the global financial crisis, forcing it to seek emergency loans and into the cycles of refinancing that have followed. That now comes to an end.

Heidelberg has figuratively discovered €375 million down the back of the sofa and will use this to repay a bond before its scheduled maturity date, which would almost certainly have required further financing. Instead, Heidelberg can now use funds for its own business, not to repay banks.

The money has come from a pension trust. Hundsdörfer explains that in 2005 a cash rich Heidelberg decided to park the sum beyond the reach of corporate raiders, who would be interested in a cash rich corporate, in a separate pensions fund. For a rainy day.

That day has dawned and the trustees of the fund have been able to release the money in order to set Heidelberg on a strong financial footing. It does not affect the pensions that employees will receive. In Germany, businesses pay into an insurance system that guarantees the rights of pensioners should the company become insolvent. Had that fate befallen Heidelberg, the liquidators would have grabbed the trust fund before tapping into the state insurance fund.

Consequently, employees and dependents are no worse off with this arrangement, and the fund’s administrators were able to agree to release of the money.
“Previously the people in charge of the company didn’t think they could open the fund and were afraid that taking the money would send the wrong signal,” says Hundsdörfer. “That was stupid.

“Better to take the money now and get Heidelberg back on solid financial foundation. Now we will continue to be the leading partner for printers around the world.”

The company is not emerging unscathed. It is closing down production of its VLF press line and ceasing development and production of the Primefire 106 B1 inkjet press. It will cut 2,000 jobs around the world.

The clearance of the debt will be accompanied by clearing out loss making operations, despite the quality of the technology. For example, nobody doubts the quality of the Primefire, a B1 sheetfed inkjet press that was launched at Drupa 2016. It used Fujifilm Dimatix printheads which Heidelberg had developed electronics and ink systems for; it included inline coating and priming to cope with any sheet and the company developed a unique sheet transfer system that could cope with the widest range of materials and formats, as the feedback from customers indicated they needed.

But Heidelberg's solution was over engineered and demand for digitally printed packaging has not developed as predicted for any supplier. The unit cost per box is too high and the benefits, in terms of supply chain savings and logistics, not well enough appreciated.

In those four years, Heidelberg has shipped ten machines, used for short runs, for proof of concept and to relieve pressure on conventional presses at larger carton printers. It has not been enough. “In two years from now, the Primefire it might be the right solution for customers, but Heidelberg can’t continue to spend that money for the next two to three years. We decided not to produce the machine any longer.”

Combined with the VLF presses, this will save €150 million a year in losses with a drop in revenue of the same amount. “Heidelberg should have taken these decisions a few years ago,” he adds.

The VLF project was even larger. The first VLF machine appeared at Drupa in 2008, a Speedmaster XL162, and the company erected a vast hall in Wiesloch to build these machines. As well as a size VII machine there was a Size VI, but the largest machine in the series never appeared even though the mechanics were designed for it, increasing the cost of construction for the two presses that were available.

Around 200 presses have been built, split evenly between the formats and with 80% installed with packaging companies. The remainder have gone to web to print, publication or display printers.

VLF has remained a very small market yet we cannot afford to lose money. It’s a pity because it is the best machine in the market – no question,” he says. “But we can’t afford to lose double digital millions each year.”

Production of both press lines will cease at the end of the year, giving a ‘last call’ opportunity for printers to place orders. There is unlikely to be a rush. A second user market will continue and Heidelberg will continue to supply spares for the next 10-15 years as it does for all presses. “And we will continue to service these machines. They all have the new Push to Stop technology,” says Hundsdörfer.

Heidelberg is not walking away from these customers, he says. “We are thinking about solutions that we can offer our customers and where we can fill the gap, perhaps through partnerships.”

In terms of VLF this means working with either Koenig & Bauer or Manroland Sheetfed as the only other suppliers of VLF presses, or perhaps allowing another company to manufacture the Heidelberg machine under some kind of licence. Digital is another question.

“I still believe that digital printing is the future, but print is too small an industry for everyone to succeed.

“We have a strong partnership with Ricoh and this will continue to intensify. Labels is still attractive and active for digital printing and we will keep our digital competence.

Heidelberg has perhaps the greatest depth of competence in inkjet printing in Europe at this point in time and we don’t kill that by stopping Primefire. We are still talking to a number of interested parties that want to partner with us in digital printing and this decision doesn’t stop those discussions.”

Push to Stop is part of the future. And Heidelberg needs a future. Stemming the losses is one thing, finding growth is another, particularly as the overall market is not increasing except in packaging. The future includes digital printing, it includes meeting the large format needs of customers. Both will come through partnerships with others. The printing industry has consolidated to the point where it is no longer large enough to provide growth for all those that have supplied to compete with each other.

A case in point is in folders. It is a product line that has been under threat in the past, but which will remain a key part of the product portfolio. However, the market for folders is too small to justify the investment in developing new machines. This explains Heidelberg's attempt to purchase MBO last year, a move that was blocked by the German cartel office.

“Neither MBO nor Heidelberg is big enough to do all the investments for the future. We might need to find a partnership with Komori to develop these future technologies because the market for folders is too small to justify the investments to get the critical mass, so developments will be slower than if we had been able to do what we wanted.

“Again there are some possible partnerships if that will benefit our customers. We need to start connecting these machines into the digital workflow, to bring Push to Stop into postpress.”

The next strand of cost saving is the elimination of 2,000 posts around the world. Most will come from the sales and service units which have become bloated as the customer base they serve has shrunk through consolidation. There will be job losses at the factory, but relatively few.

The measures have been supported by trade unions and the works council with a warning that Heidelberg should not renege on a prior deal to limit compulsory job losses. This does not stop early retirement or people working fewer hours and this will be a way to reduce the overhead. The company will also shift production of all but the most sophisticated machines to China.

“We will be ramping up production in China significantly,” Hundsdörfer says. “Already around one-third of the industrial printing units are made in China, to at least the same and probably to a better quality level because quality control is stricter and customers will be more critical of a machine that has been made in China.

“We will build the standard machines in China with the performance machines and new products to be made in Wiesloch. The cost advantage of doing this is still significant.” The company has also suggested that some of the production sites might need to close, with capacity now in the main factory to take this on.

The R&D will remain in Germany, developing the integrated Push to Stop concepts and industry platform which would have been a key focus for Drupa.

This brings a shift away from JDF, where Heidelberg had been one of the founding partners but which has proved too complex and too costly for the majority of printers to implement. A more 21st century approach based around APIs is needed, allowing implementations in days rather than months.

Heidelberg had already shifted its participation in Drupa. Rather than shift the showroom to Düsseldorf, it has decided to bring printers to its showroom where it would demonstrate the full range of solutions available. Drupa would demonstrate the highlights of what it has available.

“Shows are not necessary anymore as the only way to present innovations so the importance of exhibitions is in decline. Every four years is not frequent enough to show our innovations, and we have the means of showing these by inviting printers with specific interests to our facility and can use online means to present technology to them. But Drupa is still a huge social event where printers of the world meet.”

The value of the event for capturing orders has also lessened. Most show orders are staged and “would have been taken regardless” he adds. “We can come away from the show with a nice order book, but we would have taken these orders over the year.

“That said business for our customers will be slow for the next few months, perhaps even for the whole of next year. There will be a direct impact because they will not invest for a lack of cash. And we know that if the crisis lasts too long, some of our customers will not survive. Covid-19 will bring consolidation.”

The crisis will pass. Orders are being taken in China and the factory there is getting back into full production. Demand for consumables is picking up. “Our concern now is North America and the western world.”

The subscription model, perhaps because of misunderstanding, has been criticised, but will continue. “It is about helping customers improve their productivity,” he says. It is not about enabling a printer with a weakened balance sheet to use a machine that he would not otherwise be able to afford.

“And we are working on other solutions where printers pay per use. It is something that we had hoped to have sorted out by Drupa. We are very careful when we select a customer for a subscription package. It has to make sense and that printers has to have a vision and understanding of how to make productivity gains.

“We look at their financials and we want to understand their strategy. It has to be a business model that supports them. Otherwise what you create is zombie printers.”

Instead what Heidelberg wants is a generation of digitally minded printers using automation where it makes real sense to improve interactions with their customers and to use digital means to run the business. “We can automate things like reordering ink, which is not something that the print buyer cares about. They want to know that the job will be delivered at the right time at the right price.”

Push to Stop, in the four years since its introduction, has become established and understood in prepress and on to the press, if not evenly implemented across the customer base. But it all stops at the doors to the finishing department.

“Once you pass the doors, postpress is like all the industry was 30 years ago. It is a museum, with lots of old equipment, manual processes, lots of people and no clear material flow,” he says. “One printer told me that the attitude is ‘you bind what you find’.”

This has to change. The customer’s focus is on the most expensive piece of machinery – the press. And the purpose of the press is to print, and when it is printing it is making money. Hundsdörfer wants to overturn this way of thinking.

“Their attitude is that ‘the press needs to run all the time’. But when you change to print only what you can sell that day and you start printing only at the last possible moment, you move from a push way of printing to a pull and it changes the picture completely.

“There is no longer a big buffer of work in progress between press and postpress and no finished goods in a warehouse. As a result the press may run for 10% less of the time, but the business is more efficient.

“When I studied lean manufacturing 30 years ago, the first lesson was ‘over production is the mother of all waste’. We have to change the mindset of many of our customers to a modern way of manufacturing. One of our major missions is to help our customers to get there.”

To that end, Push to Stop will became an end to end philosophy, from receipt of a file to delivery. “There is so much to do and so much potential in this industry where Heidelberg can contribute.”

Hundsdörfer needs now to steer the company through the transition period. He reckons this will take another 18 months with the impact being felt in the 2021-22 financial year.

Heidelberg has found a way out of the mire and back, it seems, to solid ground. It still needs to create its own future. Hundsdörfer says: “We need to do the right things. Next time around we will be a lot more careful.”

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Rainer Hundsdörfer

Rainer Hundsdörfer

Rainer Hundsdörfer says that the print industry needs to adopt digital ways of thinking. Customers do not care about the complexity of a printer’s operation, only the quality and cost of their job, he says. Heidelberg aims to be leading the transformation to digital ways of working.

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