Tackling challenges!

Continuity and evolution are two sides of the same coin

Change in the Group’s top management: Armin Papperger, since 2012 the Head of Rheinmetall Defence, took up the position of CEO of Rheinmetall AG on January 1, 2013. He succeeds Klaus Eberhardt, who successfully led the Group for 13 years. The post is associated with continuity and evolution at the same time. Papperger is a Rheinmetall man through and through. The 50-year-old graduate engineer began his career in 1990 in quality management in the Defence sector. After occupying various management positions, he was elevated to the Management Board of the Defence sector in 2010, becoming Chairman there at the beginning of 2012. Since then, he has also been a member of the Executive Board of Rheinmetall AG. As a classic home-grown success story, the Papperger name stands like no other for the evolution of the Defence sector. Under his direction, significant progress has been made both with the internationalization of the business and with strategic acquisitions. In the following interview, the new CEO looks back at 2012 and explains the upcoming challenges for the future.

Mr. Papperger, you are a “Defence man” through and through but now bear overall responsibility for the Automotive sector and KSPG as well. Is it merely a question of time before you wish to dissociate yourself from automobile supply or can you find some satisfaction in the twopillar strategy?

AP__First and foremost, I am a businessman and an engineer. I would like Rheinmetall to earn good money with the highest technological performance, top quality and unconditional customer orientation. To start with, I can see the great business potential of our Automotive sector in that respect. In 2012, revenues at KSPG increased slightly despite the weakness of the western European automotive market. The North American market is coming on in leaps and bounds, and Asia remains a boom region that is doing an enormous amount of catching up in terms of vehicle ownership. I am confident that our expertise in consumption and emissions reduction puts us in an excellent position to benefit more than average from global market growth over the years to come. I intend to work with my Automotive colleagues to take this opportunity. In other words, Rheinmetall is based on two very solid pillars. Consequently, we will maintain the two-pillar strategy and concentrate on profitable growth in both sectors.

With regard to 2012, the Association of the German Automotive Industry (VDA) referred to industry development with “light and shadow” and a “challenging year” in 2013. How do you assess the development of KSPG?

AP__That point is succinctly made, and our Automotive sector did overall well in this market environment in 2012. Staying with the metaphor, our strategy of internationalization meant that we were able to compensate very well for the economic weakness in Europe, or the shadow currently cast over the automotive market. The fact that the Automotive sector did not increase its earnings in comparison with the strong previous year is to do with extraordinary effects. Both one-off start-up costs in the truck business and the relocation of production lines from Brazil and the USA to Mexico had a negative effect on earnings in 2012.

With regard to 2013, the VDA’s assessment is that 2013 will be anything but a sure-fire success; rather, it will be a year of great challenges. We have therefore set the course necessary to position ourselves as competitively as possible through cost reductions and further site optimization.

With regard to the future, where do you see the greatest potential for the Automotive sector?

AP__There is growth potential throughout almost the entire range of our product portfolio. It is particularly evident in our Mechatronics products. With these, we play a major role in helping our automotive customers comply with the emissions standards that apply not only in Europe but almost worldwide.

I should add that approximately 90 % of our Mechatronics business is still European. This means that we still have a great deal of room for expansion in the dynamic growth markets of Asia. Our Hardparts business will stabilize too, and we want to expand the Motorservice area, in other words the aftermarket business.

Let’s talk about Defence. 2012 was not an easy year for the Defence sector. The first effects of the cost-cutting measures in the USA were felt in the budget, while defence expenditure in Europe is tending to stagnate or even decline. Has Rheinmetall Defence already achieved as much as it can in terms of growth?

AP__The strong level of incoming orders that we have says otherwise. Organic growth did abate in 2012, but, as in the Automotive sector, we rolled up our sleeves and tackled the challenges head-on. For one thing, we will continue to grow organically from our order backlog and through acquisitions and new joint ventures, while we are also currently implementing a program for reducing costs and boosting efficiency. That will cost us EUR 40-50 million this year but should result in a lasting increase in our competitiveness and earning power. We are aiming to achieve a return on sales of 10 % again from 2015.

However, we are not simply slamming on the brakes with regard to costs. Much more than that, we are also intensifying our sales activities in countries that are major partners to Europe and NATO and are continuing to invest heavily in modernizing their armed forces.

Aside from your traditional customers from Europe and NATO, which countries will take on particular significance for Rheinmetall Defence in the future?

AP__Australia is an example of a strategically important market for us with a great deal of growth potential. The country assumes a lot of responsibility within the United Nations and regularly participates in international missions. With our new company, Rheinmetall Defence Australia, we now have a strong team on location that, having achieved its first breakthrough in the vehicle business, is now working hard to establish Rheinmetall as a player to be taken seriously in the fields of simulation, weapons and munitions.

Naturally, there is also still plenty of room for us to grow in Asia and South America. However, the states of the Gulf Cooperation Council are continuing to invest heavily in the modernization of their armed forces due to their special strategic significance. This provides opportunities for growth that we will seize.

Which technical innovations do you expect to provide new growth momentum in your Defence business?

AP__That’s a long list, but I can name a few examples. In recent years, we have put a lot of investment into the Simulation and Combat Training Center business unit. That has already paid off. After Germany, we have won both Russia and a customer in the Middle East for our state-of-the-art combat training centers. Another example of our innovative strength is the MANTIS air defence system, which was handed over to the German Armed Forces in 2012. MANTIS protects troops not only from airplanes and helicopters but can take out even the smallest targets, such as artillery and mortar rounds, which present a particular threat in current conflicts. The capabilities of MANTIS make it the only system of its kind in the world. A further example is the Gladius equipment for soldiers, which was ordered by the German Armed Forces in 2012. Gladius is pure high-tech, providing individual soldiers with a level of information superiority never before achieved and allowing individual infantry groups and their vehicles to be included in network-enabled operations. Incidentally, all three of the examples that I have mentioned show how important the German Armed Forces continue to be as a reference customer for us.

Returning to your role as CEO of the Group, what are the focal points of your work for the coming year?

AP__We have set ourselves clear targets for the next three years. Our Rheinmetall 2015 program has three central themes. The first of these is cost efficiency. Between the two sectors, we need to reduce our costs by EUR 50-70 million. We need to do this to increase our competitiveness and to achieve returns on sales of 8 % for Automotive and 10 % for Defence from 2015.

The second theme is increased internationalization. That means that we need to pay closer attention to the growth arkets outside Europe. We are well on the way to doing so already when I think of KSPG’s commitment in China with 3,500 employees, for example, but we could still do better there in some areas. With mechatronic products, for example. This is why we are currently building a new factory for pumps in China. And, last but not least, we must not stop making new products ready to market.

Although we have a well-stocked product pipeline in both sectors, we cannot allow ourselves to be complacent – nor shall we.