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World famous, profitable, no debt – and bankrupt

At first glance any relationship between the bankruptcy of mass automaker General Motors and that of family-owned coach-builder Wilhelm Karmann seems remote, writes Selwyn Parker.

After all, publicly-owned GM went down with $172 billion in liabilities while Germany-based Karmann, legendary for its Karmann Ghia version of the Beetle and other iconic shapes, has collapsed into insolvency with practically zero debt.

About the only connections, you would think, is that they're both in the automotive industry, are victims of the general downturn and are more than a century old. (In fact Karmann, founded in 1901, is seven years older).

Yet the collapse of the two businesses has a common origin. As analysts on both sides of the Atlantic point out, both GM and Karmann were far too generous to their employees in terms of redundancies, sickness and retirement benefits and other entitlements. Eventually, that generosity brought both of them down in Karmann's case in April, two months before GM.

As the company itself admits, it was the downturn that revealed the profligacy of those entitlements. "The sheer unexpected drop in revenue led to the inability to finance the social plan that was agreed with labour representatives," Karmann said in a statement in April. Revenues of €1.3 billion in 2008, plus a global reputation, weren't enough to keep the firm afloat in its present shape.

What pulled the trigger was the exorbitant cost of a programme of 2,240 redundancies half of its German workforce considered essential to save the business.

Germany's commercial law did not help. Because Karmann, the largest independent automotive company in the country, could not pay for the layoffs, it was forced to file for insolvency.

Many auto fans will hope Karmann survives in some form. Its influence on automotive design has been profound for the best part of half a century, starting with its association with Volkswagen. A specialist in cabriolets, it designed and built  the VW Beetle cabriolet, the Karmann Ghia, the Ford Sierra for the US market, the latest Audi A4 cabriolets, the Mercedes-Benz SLK hard-top and the Chrysler Crossfire among many others. And, as it works through a restructuring, it's building the soft-top Mini.

Karmann's problems started mid-2007. Volkswagen, severing a long relationship, bowed to union pressure to build its new Golf Cabriolet in-house. Then Austrian competitor Magna Steyr beat it to the contract to construct the new Mini wagon.

The Crossfire has proved a slow-seller. And the contracts to build the Audi A4 cabriolet and the Mercedes-Benz CLK convertible began to run down.

According to German media, a contributing factor was an inability by the three major shareholding familie the Battenfelds, Bolls and Karmanns to work together. They say the various members, including Wilhelm Dietrich Karmann, grandson of founder Wilhelm and head of finance, simply did not act decisively enough to deal with looming problems. According to insiders, the grandson is "a very analytical man" who has trouble making up his mind.

Eventually the families had to face the music and in February they agreed to stop assembling complete vehicles at one plant in Reine where the Audi A4 was produced with the loss of 500 out of 753 jobs. Biting the bullet again, they laid off all but 2,050 employees, reducing the workforce by three quarters compared with two years earlier. Because the firm is officially insolvent, many of them have not been paid compensation.

The families remain hopeful that a much-reduced Karmann the cabriolet version, if you like will survive. They aim to regroup around two main divisions vehicle engineering and roof systems. The former has successfully pitched for outside business instead of serving merely as an in-house technical unit while the latter is undoubtedly a world-leader, making retractable soft-tops and hard-tops for a variety of brands including Bentley and Pontiac G6 convertible.     

Perhaps more in hope than anything else, Karmann will maintain a specialty vehicle unit and is working on six electrically-powered test vehicles with another German company, EWE AG. You never know, the firm could work the old magic all over again and come up with a design that could make these utility vehicles glamorous and desirable, just as the Karmann Ghia did for the practical but unremarkable Beetle all those years ago.

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