Globalisation and emerging countries with lower production costs are forcing corporations to move to new locations, resulting in the downsizing of some of their existing plants. The major industrialised countries are therefore facing a wave of plant shutdowns, which compares with the restructuring of their steel, coal or textile industries a few decades ago. However, instead of being dealt with by the governments of the affected countries, the current shutdowns are dealt with almost solely by the corporations themselves.
If the legal and social environments vary greatly from one country to another, the local impact can be enormous anywhere. Furthermore, any corporation has to be image-conscious and socially responsible, if only for the sake of its own remaining locations and clients.
New lease of life
The impact on the local economy can be greatly reduced by finding a new life for an industrial plant before it closes and all the assets and skills become obsolete or unavailable. What we are suggesting is an alternative to shutting down. It is an objective approach to the problem, based on our experience with several corporations facing different types of restructurings.
There are two major issues for a corporation facing restructuring: first, controlling the economic, social and political risk of such decision; and second, transforming this issue into a constructive and collaborative project with the unions, local authorities and employees.
The main objective for the corporation should be to reduce the financial, social and local impact by encouraging the set up of new activities to generate new employment opportunities for the employees. This objective will be reached more easily if the corporation has anticipated the restructuring.
Our experience shows that:
- A shutdown can sometimes be avoided through alternative solutions.
- If it cannot be avoided, the financial, social and local impact can be limited by taking into account the conversion of the plant and/or the revitalisation of the local area.
Corporations must often reshuffle their productive assets to optimise their efficiency, improve their costs, and refocus the business on new activities. These management decisions generally lead to several possible scenarios:
- The total shutting down of a plant with significant social risk in many EU countries.
- A disposal of the business to a buyer who cannot offer jobs to all employees.
- A significant downsizing of the plant with insufficient internal job transfer opportunities.
- Local resistance within or outside the plant against the project and a need to manage that situation in the best possible way.
The sale of a plant or an activity, or a downsizing can generate deep resentment in the corporation and locally. Furthermore, several factors need to be taken into account to avoid any conflict and optimise the value of the company’s assets, including the regulatory environment, the social environment, the local political environment (in particular in mainland Europe), team building for the plant management, and managing the transfer or sale of the activity. Therefore, the best practices to implement are the following:
1. Transform a restructuring project into a constructive and collective one by:
- creating a project team;
- planning for different scenarios;
- considering the feasibility of a sale of the business in order to minimise the social and local impact;
- defining a coherent and well-thought-out strategy.
2. Create a trustworthy environment with:
- the management and personnel;
- the unions;
- the state and local authorities;
- the media.
3. Optimise the financial aspect of the project by:
- evaluating the potential impact of the downsizing or closure to define adequate measures;
- launching initiatives to mitigate the redundancy and shutting down costs.
4. Protect the image of the company and its best interests by:
- presenting a structured and proactive project;
- developing a communication plan tailored to the potential sources of conflict.
We recommend that the following methodology should be used to manage these difficult situations in the best possible way.
Define a restructuring strategy.
The objective here is to help the management choose the right scenario and to identify the appropriate measures to minimise the impact of the project. The strategy should cover a study of the industrial opportunities, the elaboration of various scenarios (sale of the business or of the plant only), the preparation of a communication plan and a project costing and planning.
Evaluate the social and local impact.
The objective of this is to provide quantitative and qualitative information to the management on the economic consequences of the project. This should include the preparation of a document to be used by the management during discussions with the unions and local authorities. It should also include the identification of local hiring and internal group transfer opportunities.
Undertake a study of the plant potential for conversion to other uses.
The objective here is to evaluate the plant flexibility based on its layout, equipment and environment. The study should identify the options in terms of plant conversion. It should enable the anonymous testing of the market interest for these assets and facilitate the preparation of a marketing plan.
Once the preparation stages are completed and the management decisions formalised, one of the three following strategies should be implemented:
1. Sale of the business
- Identify a firm capable of taking over the plant and its employees.
- Consider offering compensation to the new owner through business being placed over a given period.
- Minimise the various impacts.
- Optimise the use of the assets.
- Manage at best the external communication.
- Complete the legal documentation and secure the plant’s future.
2. Sale, lease or give away of the plant
- Identify a firm with growth plans that is capable of taking over the plant and offering new jobs to the employees.
- Optimise the plant value.
- Demonstrate locally the social responsibility of the company.
- Manage as best as possible the external communication on jobs lost.
3. Local revitalisation
- Provide added value locally to launch a new collective project and protect the best interest of the company.
- Offer financial incentives to encourage the takeover of the plant.
- Recreate new business activities and jobs locally, if possible.
- Support local economic development projects, often in partnership with regional development agencies.
The scenario consisting of selling, leasing or giving away the plant is often used alone or as part of a more structured and step-by-step approach. Three phases are generally developed to optimise the conversion and value of the plant. The first is to find one or several companies interested in taking it. Be aware that it is often not easy to satisfy new industrial requirements in terms of layout, height, environment, access, etc, with an older building. It is also sometimes more advantageous to finance a new building as opposed to an existing one.
The second phase is to find a new industrial life for the site. This should include validating the potential in terms of pollution, environment and local regulations; and negotiating with investors, real estate firms and local authorities.
The third phase is to reconfigure the plant for non-industrial activities with the assistance of one or several companies. Imagine the most attractive options in terms of employment potential and economic feasibility.
In many European countries, such as France, there are strong regulatory reasons to put in place the type of solutions described above. As a result, specific solutions have been developed to manage such projects by firms specialising in economic development, real estate and financial incentives. Their objective is to find a new economic life for a plant that is being closed and to preserve the image of the company.
Jean Noel Mermet is managing director at Frenger International Ltd in the UK and Dominique Mermoud is international investment and plant manager at Sofred in France. Frenger International and Sofred are members of the HBO Network, which carries out restructuring missions throughout Europe on behalf of corporates and IPAs. (www.hbo-network.com)