ZF’s Outdated Corporate Structure Costs Sommer Job

Some things just don’t make sense – like poverty in a land of plenty or home-grown terrorists shooting up schools and concerts or the notion of “beautiful, clean coal.”

The corporate world is not immune to such nonsense, as we saw a few months ago when ZF CEO Stefan Sommer resigned suddenly from Germany’s fastest-growing automotive supplier. He had been driving the train at high speed – and then he wasn’t.

His replacement was named recently: Wolf-Hennig Scheider, who had been chairman and CEO of another major German supplier, Mahle, since 2015 and brings three decades of experience to the job. His public debut will be March 22 at the annual meeting in Friedrichshafen.

Scheider steps into a hornet’s nest at ZF, where he will find he doesn’t answer strictly to shareholders or a board of management or even the company’s 140,000 employees worldwide.

There’s really only one boss Scheider needs to keep happy: Andreas Brand, the mayor of Friedrichshafen, a city of 60,000 people in southern Germany that is home to ZF and the Zeppelin Foundation, which owns 93% of the company.

As the town mayor, Brand is a member of the supervisory board that controls the foundation. It’s stipulated that the mayor has no power over daily operations at ZF. But the simple truth is he wields enormous influence over every aspect of the company because he can force immediate change at the highest levels of management with shocking speed, as we saw recently.

Brand and Sommer did not get along, and the disagreements intensified as the mayor opposed certain acquisition bids led by Sommer. Brand also voiced concerns about the company’s debt load and its impact on city coffers.

As mayor, Brand has been concerned about the town’s future and job opportunities. Like many other European and American cities, Friedrichshafen has lost manufacturing jobs as industries have found it increasingly difficult to compete with operations in low-cost parts of the world, whether in Eastern Europe, Mexico or Asia.

Sommer speaking at ZF technology event in Friedrichshafen last year.

Like every major supplier, ZF has participated in this transformation, keeping thousands of blue-collar jobs in the home market while also setting up shop elsewhere when that makes better economic sense. Brand wanted more manufacturing jobs at home.

Perhaps he does not understand the auto industry’s need for “just-in-time” shipping of components so vehicles can be assembled quickly and efficiently, without piling up expensive inventory of parts waiting to be installed.

It’s for this very reason ZF and so many others have vast networks of assembly operations in China, where vehicle sales are much more robust than in Friedrichshafen, Detroit or any other city with a long history of manufacturing.

Automakers are susceptible to these same market swings. Just talk to General Motors about its financially draining experience with Opel, which it sold to PSA, or in Korea, where its Gunsan vehicle-assembly plant is slated for closure later this year because it is grossly underused. Consider Adelaide, Australia, where ZF opened an axle plant in 2007, only to close it within a decade as vehicle assemblers left the country.

These are wrenchingly difficult situations and the loss of jobs is not to be taken lightly. But companies must be nimble and do what’s best for the bottom line.

Sommer Bolstered Portfolio

For several years, Sommer bolstered ZF’s portfolio by partnering with one company after another to ensure a seat at the table as electrified, connected and self-driving vehicles come to market.

The biggest deal came in 2015, when ZF sealed its $12.4 billion acquisition of TRW, a company much better positioned than ZF with the electronics and technology necessary to enable radar-based adaptive cruise control, self-steering, collision avoidance and braking, in addition to airbags and seatbelts for occupant safety.

The integration of both companies into the world’s second-largest automotive supplier has been proceeding, and the sharing of best practices and joint development of breakthrough technologies has happened rapidly.

Until the acquisition, ZF’s primary products were transmissions, axles and suspension systems – not exactly high-growth segments promising long-term profitability. Sommer understood this and he wasn’t afraid to identify manufacturing plants whose product portfolios needed significant updating to stay relevant – whether in Germany or anywhere else.

Aren’t these the tough-love actions top executives occasionally must take? Isn’t it better to stoke employees to innovate and be open to education and training to learn new jobs, rather than instilling false hope among the working class that good money still can be made pushing the same button on the same machine day after day?

It seems Brand has a different perspective, and he’s wondering why all this growth at ZF hasn’t meant a flood of manufacturing jobs in Friedrichshafen. Odd that he doesn’t recognize the arrival of new engineers and other white-collar positions in ZF’s hometown to support the growing company and – let’s not forget – the local economy.

So with Sommer gone, the company should be taking a new direction, right?

At last month’s 2018 CES in Las Vegas, a tech-and-mobility fest that Sommer viewed as enormously important, ZF board member Michael Hankel said the company isn’t shifting strategy, and that the ZF 2025 plan Sommer helped hatch five years ago remains in place, although the pace could slow.

“There’s some question how fast we can go, because we also have to implement resources and we have to make it manageable,” Hankel said.

Listening at 2015 media event are Sommer and Giorgio Behr, who left ZF as supervisory board chairman on Nov. 29 due to power struggle. Nine days later, Sommer resigned as well.

ZF must embrace disruptive changes in areas such as manufacturing, he added. “We have to be more scalable and more flexible because… we do not know how fast e-mobility will come,” or how long conventional components will remain key to the product portfolio.

Boy, that sounds an awful lot like Sommer, even though he’s been gone for weeks.

Look, I understand corporate politics can be messy, and that good leaders run afoul of their bosses and move on all the time. But Sommer was well respected within the company and spoke with authority, even willing to criticize American plans to scrap free-trade agreements or build a wall with Mexico, based on Germany’s bitter experience with its own.

More to the point, he was pushing ZF to embrace artificial intelligence, advanced vision systems and central supercomputers that could serve as the brains behind the first generation of autonomous vehicles – not only cars but trucks, buses, ships and agricultural and construction machinery.

Sommer was on the right track, but he’s gone because a corporate structure dating to the early 1900s (when the company was much smaller and making gears for Zeppelin airships) places inordinate power in the hands of a town mayor.

Is that any way to run a multinational company?

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