Stephan Kessel, Continental’s CEO: A Separation On Friendly Terms

“I will not deviate one inch from the chosen strategy”. These were Stephan Kessel’s words, when, back in April 1999, during a memorable press conference in Hannover, he was presented as the successor of a burnt out Hubertus von Grünberg, by the (at that time) chairman of the board Weiss. Kessel himself may have believed what he said, he may even have wanted this, yet the course into rough waters had already been set.

Many just believed they were watching the wrong movie, when Weiss not only announced that von Grünberg would retire in June 1999, but added that this plan had been known to him for a long time and that, more than three years ago, it had been mutually agreed to remain silent about it. Fortunately, at least for von Grünberg, the salary of his current contract would continue to be paid, and at the same time it was announced that, with immediate effect, he would be appointed Chairman of the Board. That Board Members should be appropriately rewarded, the strategist himself had arranged well in advance during the last annual assembly, initiating a doubling of their fees.

Actually, for many onlookers, the whole show resembled an operetta and that Grünberg had – many observers believed – personally approved the take-over of his own company Teves for far too high a price. At the time of the take-over, the company had a turnover of DM 3,800 million (Euro 1,900 m) and was taken over for DM 3,500 m (Euro 1,780 m). Or, alternatively, 18 times EBIT, or an amount of 91 cents for each Euro of sales.

However, nobody considered it appropriate to express critical remarks. Anyway, criticism would never have been tolerated by von Grünberg, and as the big man he was considered to be, he could afford to pull off almost any thinkable move, and to demand almost anything from his board. Weiss, the former Deutsche Bank manager, would make sure that the board would follow him.

Possible hostile take-over attempts would be looked at from several angles of interest. At one moment, it was decided, the share price should be (to quote von Grünberg) “sky high and intimidating” and later again, tranquillisers were handed out in the form of statements suggesting that the German car industry would not tolerate any over-powerful supplier, and would quickly tick off any overconfident candidate. Stephan Kessel, had, to put it mildly, a meteoric career.

On the one hand he realised a track record of success, first in the passenger car tyre business, later in the truck tyre business, which seemed to make him appear competent enough to run the entire corporation. On the other hand, critical sources suggested that Kessel may indeed have been fast, but also fast enough to make sure that he would be off and gone elsewhere by the time that any unresolved issues and unsolved problems resurfaced. Then again, the start was not all that special: in his interviews with the press, Kessel used to say that he never accepted a promotion, without being absolutely convinced that he was also ready for the subsequent step up the ladder.

Obviously, this was perceived as being both arrogant as well as boastful. Internal recognition was established by Kessel’s decisions to dismiss and send home von Grünberg’s confidants, Prüfer and Binder. Both gentlemen, assigned by von Grünberg to manage European Retail activities, were considered to be “super guys” in the eyes of the still-boss von Grünberg, and both ascribed to be gifted with “Harvard-like mentalities.

” Inside the Conti corporation, however, they were, and still are, summed up as being “discount stamp forgers”. To have stopped these young and dynamic managers in their tracks, even before he had officially been appointed in his new position as CEO, earned Kessel a lot of sympathy and respect. However, whilst still working in Marketing and Sales under the leadership of Willy Schäfer, who was the executive committee member in charge at that time, Kessel also attracted some criticism and mockery.

They marked him as disloyal towards Schäfer and described him as young and dynamic, capable of anticipating and immediately fulfilling each and every wish of von Grünberg. Later, in spite of this, tensions would develop from time to time between the two executive committee members. Injured pride may also have played a role.

For example, an incident that von Grünberg found hard to forget, was when he found himself facing an unpleasant session of questioning, after Kessel had written off a two digit million figure for errors and losses in Conti’s retail business. Board member Henkel immediately grabbed the opportunity to repeatedly ask von Grünberg nasty questions during a board meeting as to “how matters could have come to this disastrous situation”, as this obviously was the doing of his protégés! Kessel came across a lot better with customers, in comparison with his ever so wooden-styled, pedantic predecessor, who had problems getting along with people and did have not many friends around him, simply because, back in his days as Conti’s number one man, he fired Conti managers by the score and still carried the bloodstains. Looking back however, one has to recognise that in spite of all the turbulence, Conti’s corporate culture was strong enough to withstand all these trials and tribulations.

Von Grünberg used to live in a world of equipment and big installations and was thinking in terms of brakes and Original Equipment. In that world, he could look at the top management of the automotive industry, considering them his equals, as obviously he was seeking recognition from them too. Kessel however, not only understood a few things about brakes, but also quite a lot about tyres.

Above all, he had an open ear for Marketing and a feeling for Brands. Under von Grünberg hardly any investment was made in Brands. Von Grünberg did not earn many marks for his effort in securing Brand Equity.

His focus was on some nine global customers, the car producers. For example the Uniroyal brand was being utterly degraded and ended up in the position of a “cheap” tyre. However, Kessel then put a lot of effort into rebuilding this brand, and was more than willing to make the necessary investments, at least the most urgent ones.

That Kessel said he would “not deviate one inch” from the chosen strategy, may only have been lip service to his Chairman, with whom in the end, not only according to several journalists but also according to his close colleagues, he just could not get along. Nevertheless, his dismissal and the particular time chosen was a surprise to all. The low stock market value of Conti’s shares could hardly be all Kessel’s fault.

Despite a few existing problems, and seen within the framework of the total economic environment, the Conti results were not all that bad. Is the General Tire disaster, however, to be blamed on Kessel? Bernd Frangenberg, one of Grünberg’s corporate men, was sent to the USA with a free hand to restructure the company according to his personal preference. And the name of his game was saving, saving and cutting costs.

Frangenberg was forced to cash cow a company which had just been milked for cash. All just window dressing. To the outside world however, the CEO showed restructuring accomplishments in those days.

Successful? The first results were booked during a period of economic prosperity and they vanished immediately when the first signs of a slower economy became apparent, which is a clear indication of the fact that the actual restructuring had never taken place. Frangenberg had frequently asked for investment funds, but he never got them. This remained unchanged until the day Kessel came along, who understood very well that investment is the prerequisite for success, whilst under von Grünberg’s strategy, the necessary investment had to come from General’s own cash flow.

But that is also only a half truth. The company’s cash was not invested in its expansion, but rather in its structural conversion into new activities. The preferred strategy was to grow away from the image of the boring tyre producer and instead General Tire should acquire the identity of a high-tech steel constructor.

They were already having delusions of themselves as players in the automotive Champions League. It may well be that Kessel, not only in his association with von Grünberg, made a few other unfortunate moves. For example, he repeatedly chose the wrong moments to re-open the discussion about co-operation with Pirelli, which did not make him very popular with the Italians.

In the take-over negotiations with Siemens about Sachs, or before that with Mannesmann about Atecs, the German tyre producer was not in a position to actively participate. Also, the intention to spin off ContiTech may have been made public knowledge at an inappropriate time. The damage that the company inflicted on itself at a much earlier time, is still alive under the Conti roof: potential investors were not willing to pay a price for ContiTech corresponding to seven times EBIT, or 55 cents for one Euro of turnover.

Von Grünberg showed more courage in his day. The consequences are obvious. The company has debts of Euro 3,000 m and the stock market value is around Euro 1,500 m.

Whether auctioning ContiTech was right or wrong has never really been checked. To a 30-year old bank analyst matters were crystal clear – more inexperienced observers however still wonder whether this deal was like trading a horse for a donkey. Long term, the earnings per share would have gone down if the sale of ContiTech had been realised.

Also embarrassing for Kessel was the fact that his statement “Conti has now become the number one supplier to Ford”, was immediately and officially denied by the car producer. The following gaffe did not go down well either: according to his vision, Firestone’s market share would collapse in a landslide, and then Conti and General would move in and take advantage. None of that happened.

Instead, today the sword of Damocles is still hanging over General, because according to the NHTSA, the tyre failures with the Mercedes 550 S type, are more common than those with the frequently criticised Firestone tyre. The perception of the Continental Corporation by the public, became apparent during the recent Bosch-Michelin press conference at the IAA. A reporter asked how they planned to catch up with the three years lead of ContiTeves.

Bosch’s spokesman commented that competition was not so much about public announcements, but rather about having the right products in the market at the right time. After a relatively short performance as CEO, Dr. Stephan Kessel is already history in Conti’s books.

Financially, the 47 year-old is set up for life. Good for him. However, today the Conti corporation is more vulnerable than ever before.

Probably opportunities which may come up in the future are already lost now, because Conti has degenerated to being today’s ideal victim for a take-over. Sooner rather than later, the Conti corporation will be chopped up into pieces, in spite of the aversion displayed by the German car industry. Public statements saying that “the corporation will stick to its strategy”, sound very courageous.

They do not – thank God – enjoy much credibility. ContiTech is not for sale any more and the take-over hype is finished. What is left is an enormous burden of debt gathered by a CEO who is not in a position to handle it because he has “gone fishing”.