Dr. Gunther Kegel, CEO of Pepperl+Fuchs AG and newly elected President of ZVEI on the effects of Corona, new industrial perspectives and the future of globalization.

Dr. Kegel, how does the corona crisis affect Pepperl & Fuchs?

We are very stable in terms of deliveries, but the development is also clearly noticeable in our demand. In the first half of the year, we expect a minus of 9 percent compared to the previous year. We were able to avoid short-time work until June, but will now have to start short-time work in large parts of the operations with 20 percent short-time work due to the weak order intake. By the end of the year, we will probably be somewhere between 5 and 10 percent down on sales. As a company, we have to be able to cope with this, even if it means we have to readjust our growth plans. Cost reductions and the securing of cash positions are currently the main focus. But as a company, we naturally do not want to lose sight of the innovation issues when it comes to “firefighting”, even if there will be delays in long-term projects.

Many companies are reporting greater acceptance for digitization. How does that look for your teams?   

We went into the home office in a cold start with 1400 people. Just before that, we had completed the rollout of a web meeting infrastructure worldwide, which has now proven to be very robust. We also launched a company-wide training program a year ago – “the digital agenda” – a learning program for 160 to 200 hours of learning and editing. To our surprise, we have also noticed that home office efficiency has suddenly increased. Incidentally, the familiarity of employees with digital media characterizes all age cohorts. The situation is difficult for employees who have small children to look after at home, but who can cope with this with admirable flexibility. The fact that daycare centers are closed for months while pubs and bars reopen was completely incomprehensible and illogical to me.

We need to solve Covid19’s psychological problem

How secure are the sites themselves?

The German electrical engineering companies had to overcome great challenges. They were exemplary in the implementation of the specified hygiene concepts, also because they were warned in good time by the early case of infection at the automotive supplier Webasto. As far as I know, there are no sources of transmission anywhere in the electrical industry. A little bit of Prussian virtue: if the Chancellor makes an announcement, we do it thoroughly. As a result, the chains of infection have been broken at the factory gates. Our 6200 employees at the 50 Pepperl+Fuchs locations worldwide have not been infected within the company so far! With caution and the determination to continue to keep hygiene and safety under control, things should now continue.

And what needs to happen to get demand up again?

In addition to rapid economic policy measures and financial injections, what is needed now above all is a positive assessment of the future. It is almost like a brain washing if the corona life risk is now placed above almost any other risk. The plan to buy a new car still makes sense in life – if you no longer have this perspective, even price reductions of 20 percent will not work. We have to solve this psychological problem of Covid19 and put the disease into the general context of life risks. We have done a lot to help each other. We need this energy now to restore a positive image of the future.

What signals do your contacts in the international markets give you?

I am quite sure that we in China already have a completely different picture of the future. The much criticized Chinese government has – albeit with reprisals – got the pandemic under control quite well. Our Chinese managers are in good spirits and are unanimous in their opinion that the economy is coming out of the crisis at full steam. Car sales in April were already at 90 percent of the previous year. There is huge investment in e-commerce and logistics. A positive mood, even if obviously prescribed by the system, seems to be working. Our incoming orders are significantly higher than last year. We have got through the crisis there and are crossing our fingers that there will not be a nationwide setback. We do not yet have this kind of dynamic recovery in Germany and also in Japan or e.g. India. The crisis in the European countries is also much more drastic. We do not expect to see a turnaround in the third quarter.

De-globalization of industry – that is unrealistic populism

How stable were and are your supply chains during the crisis? Does cutting back on global supply chains make the industry more crisis-proof? 

I think that’s just populism. Of course, there are goods in which unilateral dependence – such as pharmaceuticals – is an economic weakness.  But in industrial equipment, de-globalization is unrealistic. The level of internationalization of supply chains that has been achieved is not the result of a decision to simply “globalize”. It is the result of our efforts to serve our customers worldwide in an optimal and competitive way. The combination of production sites in America, Europe and the Far East and a sales presence all over the world seemed to us to be the optimal solution. With our products, for which we have hardly any freight costs, we want to be successful in the important sales markets. But to categorically reject value creation there and to want to supply everything from Germany as the export world champion – that will not work. We do not want to say goodbye to these markets. After all, the global structure is proving its worth in the Corona crisis. Our readiness to deliver has always been high. In eight out of ten cases we can deliver on the customer’s desired date. Despite Corona, we can maintain this level of delivery reliability and meet 95 percent of our promised deadlines. Intermediate storage and second-source strategies have helped us with the bottlenecks after the lockdowns. We have very stable global supply chains.

A new tool realism to be common in the manufacturing industry

What can an industrial future perspective look like after Corona?

The real problem is to get the economy out of a huge hole now. We don’t know which industries will quickly return to their former turnover. But what we have learned during the crisis is that the most important criterion for success is not technological feasibility, but the comprehensible benefit. There are new business models and many digital features for the product lines. But anything that does not generate lasting benefits will not last. For some of the concepts of industrial start-ups, for which no one sees a benefit and which no one wants to pay for, it will be difficult. A new tool realism should be introduced. It is a mistake in thought to assume that machines that are superior to humans in the disciplines that are difficult for them will also perfectly perform the tasks that humans usually find easy. How does artificial intelligence really provide a benefit that can be implemented very quickly? The fact that we all have to be AI experts ourselves to answer this question is the wrong approach.

Do you see this approach implemented in industrial policy measures for crisis management?

First of all, the package that politicians have put together with a hot needle is very positive. The 51 individual points already indicate the corridors in which the measures can take effect. Even the reduction in VAT can have an effect on consumers. The tax incentives for research have been doubled. Anyone who submits four million research costs can count on a million tax advantage. This is also very important for cooperation with start-ups: part of the investment risks for new ideas is covered by research funding. This is a welcome development when you consider how long industry has had to campaign for research funding in the first place!  Together with the hydrogen initiative, this is a very good industrial policy impulse. Incidentally, I consider the openness of mobility to technology to be very important. With synthetic fuels we could extend the life cycle of the environmentally friendly internal combustion engine by twenty years. Here we know the processes and must now learn to master the scaling in large industrial plants.

Interview: Hans Gäng

Dr. Gunther Kegel in Global Business Magazine: “Global manufacturing networks require free markets” (2019)