TheChek News Flow

Christiane Benner, the first female head of IG Metall, warns against the country’s ‘creeping deindustrialisation’

Christiane Benner was running to become chair of Europe’s largest union IG Metall this spring when she decided to embark on a bold experiment.

As the employee representative on the supervisory board of Continental, she was locked in tough negotiations over the German automotive supplier’s planned closure of a provincial brake parts factory that was putting 600 jobs at risk.

Instead of blocking the plans, Benner contacted an IG Metall colleague on the board of local heat pumpmaker Stiebel Eltron, which has since agreed to consider at least 300 Continental staff for roles at its own expanding plant, with Continental picking up the bill to retrain them.

“This was a new way, and it needed a lot of courage both from her side and our side,” said Continental’s head of human resources Ariane Reinhart, who believes the creative fix could serve as a blueprint as Germany is forced to “phase out some industries that are no longer competitive”.

Benner, who on Monday became the first female leader of IG Metall with 96.4 per cent of members’ votes, will need courage and creativity as she steps into one of German industry’s most powerful positions at a time when it faces a crisis of historic proportions.

Energy-intensive businesses including the steel companies whose workers IG Metall represents are still grappling with the loss of cheap Russian gas. Meanwhile, the country’s carmakers are negotiating the phaseout of the combustion engine — the pinnacle of German engineering — while demand in the world’s largest car market, China, slows and Chinese electric vehicle companies begin to push into Europe.

In her maiden speech as IG Metall chair this week Benner warned against the “creeping deindustrialisation” of Germany, saying that while “there are enough jobs in green industries . . . not everything will stay the same as it is today; jobs and companies are changing”.

One consultant who has met her described Benner as a “future-oriented progressive professional”, adding that she was “somehow likeable”. He did not believe that Benner would diverge from the well-trodden path of German unions that “obviously represent the workers but also understand they have responsibility for the long-term success of the company”.

Benner, a 55-year-old sociology graduate who now speaks for more than 2mn workers, moved beyond industrial relations in Tuesday’s speech. In a full-hearted defence of Germany’s system of industrial Mitbestimmung — or co-determination, which is what gives union representatives seats on corporate supervisory boards — she attacked the rise of Germany’s far-right Alternative für Deutschland party.

“More democracy in the workplace leads to more democracy in our society. Those who experience democracy effectively in the company also have a more positive attitude towards democracy overall,” she said, as she argued that IG Metall’s job was to make Germans feel secure through their work.

Continental’s Reinhart agreed that Benner’s mission was important, saying “we need industry in Germany; it’s a base for social peace and democracy”. But she added that the balancing act would be difficult as the country’s industry fights to remain competitive, saying Benner “is in for a very challenging future — times are rough”.

Alongside her role at Continental, Benner has since 2014 held a seat on BMW’s supervisory board. She confirmed she would also join Volkswagen’s in line with IG Metall tradition, although no decision has been made on whether she will retain her existing supervisory board positions.

German companies have a two-tier leadership structure — the executive board is responsible for day-to-day management and strategy while the supervisory board oversees the hiring and firing of executives.

Daniel Friedrich, head of the north German regional office of IG Metall who has known Benner since they were both union youth representatives, described her as a “combative fighter . . . with a collaborative leadership style”.

Benner, who was born in the west German town of Aachen and raised by a single mother, will join Volkswagen at a time when it is still negotiating with its powerful works council over proposed job cuts that Europe’s largest car company has said will be necessary for the sake of competitiveness.

But Volkswagen is also a company that is making huge investments in new technologies, such as battery manufacturing — with Benner citing the enthusiasm of Daniela Cavallo, who has headed VW’s works council since last year.

“Anyone who simply destroys jobs instead of thinking about alternatives in a timely manner is driving people into a lack of prospects,” Benner said in the Frankfurt speech, in a nod to the high stakes at play in preserving German industry.

Reinhart, who said Continental had retrained 10,000 people for other careers in the past three years partly thanks to Benner, believes the “transformation of German industry is possible”. But she warned that the new union boss “needs partners like us”.

Shares in German group plunge as it also looks at ways of strengthening its balance sheet

Siemens Energy is in talks with the German government to secure billions of euros of guarantees for long-term projects after warning that losses at its troubled wind turbine business would be higher than forecast.

The Dax-listed company said on Thursday that it was in need of backstops for projects as the financial picture at its wind turbine business deteriorates. In June, the group said that overhauling the division, which has been beset by technical mishaps, would cost €1bn.

Without the guarantees, a €110bn portfolio of clean energy projects planned by the company will be in jeopardy, according to executives at the Munich-based company.

In a statement, Siemens Energy said that it was also evaluating measures to “strengthen its balance sheet”, without giving further details, and was in talks with both banks and the government.

Siemens Energy shares plunged 35 per cent, extending their steep decline since June, when the full scale of the technical problems affecting the bearings and rotors in the turbines were first disclosed.

“Their business in wind is in utter disarray,” said William Mackie, head of capital goods research at Kepler Cheuvreux. “Against that backdrop, the company’s opportunity set for financing is impaired due to a crisis of confidence in parts of the business outlook financially.” 

Siemens Energy’s disclosure that it is looking at fortifying its balance sheet “opens the door to the speculation they will seek multiple potential measures to strengthen capital, which naturally creates a violent response in the equity market,” Mackie added.

The crisis at the wind business, known as Siemens Gamesa and that Siemens Energy only took full ownership of in June, comes as the broader wind industry confronts the drag of higher interest rates and increased costs.

While Siemens Energy has disclosed few details of the technical flaws that have bedevilled the turbines, people familiar with the matter have said the problems were related to the company’s flagship 5.X turbine, along with its predecessor, the 4.X, that entered the market between 2017 and 2019.

In August, Siemens Energy warned that it expected to slump a loss of €4.5bn this year. The wind business has suspended taking orders for some onshore turbines and is being more selective in taking on offshore contracts, the company said.

Chief executive Christian Bruch described as a “bitter” moment the company’s June disclosure of the severity of the crisis.

A person familiar with the matter said on Thursday that the worsening picture at the wind business had concerned lenders. A spokesperson for the German ministry of economic affairs said the government was in “close discussions” with the company.

The group said on Thursday that its gas and power businesses were on track to meet targets this year, thanks to “excellent performance”. Siemens Energy also makes turbines for gas-fired power plants, electricity grid transformers and electrolysers.

But Siemens Gamesa has proved a calamitous inheritance. Siemens Energy was spun out of the German industrial conglomerate Siemens in 2020, a transaction that handed it a 67 per cent stake in Siemens Gamesa.

In May, Siemens Energy bought out the minority shareholders in the wind business, taking full control the next month. Siemens still has a 25 per cent stake in Siemens Energy.

The deepening crisis at Siemens Energy comes after EU president Ursula von der Leyen last month identified access to adequate financial guarantees as a major problem for the entire wind energy sector in her annual “state of the union” speech. 

Earlier this week, the EU commission unveiled its new “wind power package” of measures which includes measures to ease access to finance.

Anduril, the defense tech startup that says it’s trying to build the “Lockheed Martin of the 21st century,” laid out lofty goals to investors early last year. It would generate $200 million in revenue in 2022, up more than 50% from the previous year, on its way to $1 billion in 2026.

Achieving that ambition will be expensive. The six-year-old startup, valued last year at $8.5 billion by Founders Fund and others, told investors it expected to burn a total of $2 billion in cash between 2021 and 2026. And it expected to incur hundreds of millions of dollars in net losses each of those years as it develops and sells drones, missiles, submarines and border protection systems to U.S. agencies and allied governments.

THE TAKEAWAY

• Anduril targeted nearly $1 billion in revenue by 2026, $2 billion of cash burn from 2021 to 2026

• Shield AI expects 2023 revenue of about $165 million, up more than 90% from 2022

• Sequoia led $6 million investment in defense parts maker Senra Systems this year

Anduril is trying to reward investors’ faith with growth. In recent months, Anduril told investors it is on track to book $625 million in new government contracts this year, on an average annual basis, which would be more than triple what it generated two years ago, a person familiar with the matter said. Shield AI, an Andreessen Horowitz–backed developer of autonomous defense systems, is another defense tech firm that is growing quickly: Last month it told investors it expected revenue to grow more than 90% this year to about $165 million, even as it racks up significant losses, according to financial forecasts viewed by The Information.

Anduril’s and Shield AI’s financial forecasts and recent results, which haven’t previously been reported, explain why more venture capitalists have started to invest in defense technology startups—and why many have stayed away. Demand for high-tech defense systems is rising, thanks to increases in the U.S. defense budget and the outbreak of wars such as those in Ukraine and now Israel. Plus, SpaceX and Palantir have shown VC-backed firms can break into a sector long dominated by older government contractors.

For some investors, those factors are overshadowing the reasons many VC firms have avoided investing, including the high, multiyear cost of developing sophisticated defense systems and long timelines of winning contracts that can cloud financial forecasts.

With defense tech startups, “there has been nervousness in the venture community about the ability to successfully go to market with products into the government,” said Ross Fubini, managing partner at early-stage venture firm XYZ Venture Capital, an early investor in Anduril. “What all of these companies are showing is that there are paths to do that.”

Sequoia Capital this year joined Andreessen Horowitz and General Catalyst in investing in the sector. The firm led a $6 million investment in military parts manufacturer Senra Systems, which hasn’t been previously reported, as well as a $5.7 million investment for hydrogen-powered military hardware maker Mach Industries. Partner Shaun Maguire, who has previously led AI and crypto deals, among other sectors, and was deployed in Afghanistan while working for the Department of Defense, is leading Sequoia’s foray into defense, according to people with direct knowledge of the matter.

The mini-boom in defense tech venture capital funding began in 2021, the year after Anduril surpassed a $1 billion valuation. In 2021, firms poured more than $40 billion across more than 900 deals for such firms, more than they had invested in the previous two years combined, according to PitchBook. The number and value of deals slumped slightly last year, as venture capital funding dried up overall. But likely new funding rounds from Shield AI and Anduril this year should lift this year’s numbers.

Many VC firms are still grappling with limited partner agreements that bar them from investing in weaponry. And some investors in VC funds may not want to back startups that develop weapons for ethical reasons.

‘Abyss of Doom’

Defense tech startups may also test investors’ appetite for big losses in an era of Silicon Valley belt-tightening. Shield AI, an 8-year-old startup building software systems that serve as AI pilots to fly vehicles such as drones and fighter jets autonomously, has told investors in recent months it expects to lose nearly $70 million this year, excluding some expenses like interest, taxes and share-based compensation, according to financial statements and forecasts viewed by The Information.

“Defense tech is a very hard place to operate. I have to tell investors, ‘I have stared into the abyss of doom, death and despair many, many times,’” said Brandon Tseng, Shield’s co-founder and president. The startup, last valued at $2.3 billion, has been seeking to raise hundreds of millions in new cash in recent months.

Tseng said the company expected to turn a profit by 2025 when measured before interest, taxes, depreciation and amortization. “We’re executing the plan to get there just because we believe there has been a fundamental shift in how the markets think about these businesses,” Tseng said, referring to a focus on profits.

Anduril’s road hasn’t been smooth, either. It missed its annual contract goals by about 11% in 2021, the company told investors. One of the multimillion-dollar contracts it won in 2021, which came from the military operations unit of the United Arab Emirates, finally got done after months of negotiations. “To say this was a slog would be an understatement,” the company wrote in a regular update to investors that year.

“The vagaries of contracting timelines, bureaucratic snafus and government budgets are part and parcel of the industry we have entered, so we expect to get it wrong some of the time,” the company wrote in another update to investors last year.

The Costa Mesa, Calif.–based startup won big deals in 2022 from the U.S. Department of Defense to counter drone threats and with the Australian Navy to build autonomous submarines.

Last year it booked about $450 million of new government contracts by average annual value, according to an investor document. That beat an internal goal for the year by about 29%. Now, the company expects to surpass the financial targets it gave investors last year, a person familiar with the company said.

Existing investors have sought to grab bigger stakes in Anduril, jostling to put more money into the firm that would help it pay for more acquisitions, according to people familiar with the matter. The company has been in talks to raise $400 million to $500 million in a convertible note that would essentially value the company at $10 billion, Bloomberg reported. Founders Fund is by far the largest outside backer of Anduril, owning nearly 20% of the startup, a person familiar with the matter said.

One of Anduril’s earliest backers, Lux Capital, is now “underwriting with high confidence” that the company’s value will reach at least $20 billion in the coming years, “with the potential to be multiples of that,” Josh Wolfe, a Lux co-founder and managing partner, said.

Still, investors are valuing Anduril many multiples higher than traditional defense contractors, at more than 12 times its expected 2025 revenue. Raytheon, Northrop Grumman and General Dynamics—which are all profitable and growing more slowly than Anduril—are valued between 1.2 and 1.7 times forecast 2025 revenue.

Palmer Luckey, who founded Anduril after selling virtual reality firm Oculus to Meta, told online publication Breaking Defense that the company was better suited to taking money from venture investors than from public shareholders.

“Wall Street would look at our company and say, ‘This is still a very high-risk venture they have; they’re making these large investments in programs that may or may not pan out,’” he said, adding that Anduril was trying to change that perception.

Becky

Measure shows tensions in Congress over Biden administration’s $106 billion package

WASHINGTON—A group of Republican senators introduced a stand-alone bill that would send billions of dollars in aid to Israel but not Ukraine, underscoring the challenges facing a much larger $106 billion Biden administration proposal that includes more funding for Kyiv.

The group of GOP senators argues that separating the Israel aid would prevent the assistance from being bogged down in the House, where the number of Republicans opposed to funding Ukraine aid is growing, and now makes up more than half the GOP conference.

“My colleagues and I firmly believe that any aid to Israel should not be used as leverage to send tens of billions of dollars to Ukraine,” said Sen. Roger Marshall (R., Kan.), who is sponsoring the measure with Republican Sens. J.D. Vance of Ohio, Mike Lee of Utah and Ted Cruz of Texas.

The White House has proposed an emergency package that ties together funding for Israel, Ukraine, Taiwan and U.S. border security, an approach seen as boosting the chances for passage of the assistance to Kyiv, which has split Republicans. Minority Leader Mitch McConnell (R., Ky.) and other Senate Republicans allied with Ukraine have said they are generally supportive of the administration’s approach, but they are demanding changes, with an emphasis on substantive policies to tighten U.S. border security.

Marshall, Vance and Lee have opposed Ukraine aid in the past, while Cruz has supported it.

“Russia still needs to be defeated. Taiwan still needs to be defended,” Cruz said. “This bill is about one thing and one thing only: getting our Israeli allies the aid they need, as fast as possible.”

The standalone bill’s prospects, at least in the Democratic-controlled Senate, are dim, but it could exacerbate divisions among Republicans as McConnell tries to rally his caucus around the larger package and negotiate concessions on border policy from the administration. Any bill would need 60 votes to advance in the chamber, where Democrats have a 51-49 majority.

There is broad bipartisan support in Congress for aid to Israel, following the deadly attack by Hamas earlier this month. While Democrats back additional funding for Ukraine, some Republicans are skeptical of new aid, while others would prefer to finance weaponry instead of humanitarian aid or direct economic assistance to the Ukrainian government.

The House elected Rep. Mike Johnson (R., La.) as speaker on Wednesday, restarting work in the chamber after three weeks at a standstill. Lawmakers quickly passed a resolution saying the U.S. stands with Israel against Hamas.

Johnson was among 117 House Republicans who voted against $300 million in security assistance for Ukraine in September.

The GOP senators’ Israel bill, called the Israel Supplemental Appropriations Act of 2023, would provide $14.3 billion in aid. That includes $10.6 billion in military assistance to Israel through the Defense Department, including Iron Dome and Iron Beam systems, and funds to restock U.S. weapons sent to Israel, $3.5 billion in grants for foreign military sales, and $200 million to help shore up security for U.S. embassies and personnel in Israel and evacuate U.S. citizens in the region.

The proposed funding level for Israel is similar to the $14 billion requested for Israel by the Biden administration. But the administration put that money in a broader package that also included $61 billion for Ukraine, about $9 billion for humanitarian assistance to both conflict theaters, about $2 billion for security assistance in the Indo-Pacific and $14 billion for the border, which would pay for more-efficient processing of migrants seeking asylum, more border-patrol agents and asylum officers, and reimbursements to cities and private organizations that have set up shelters.

Congress has approved more than $100 billion for Ukraine since Russia invaded in early 2022.

Pentagon hopes security forum in Beijing next week will help restart military communications

China’s jet fighters are harassing American military aircraft and stepping up sorties around Taiwan. Its coast guard is confronting a U.S. security treaty ally in the South China Sea, leading to a recent collision.

Amid the tensions, talks between the U.S. and Chinese militaries remain largely frozen, which leads Washington to worry that a misstep could trigger a dangerous escalation.

The latest flashpoint is a clash between the Philippines and China over control of a reef in the South China Sea that could draw in the U.S. to defend its ally.

“If Manila requests American support for this mission, it brings into the picture a more serious Chinese challenge of American ships or aircraft,” said Zack Cooper, a former Pentagon official.

Scenarios could include a Chinese ship using a military-grade laser—as has happened against a Philippine ship—or locking its missile-targeting radar on a U.S. aircraft as a warning, according to Cooper, now a security analyst at the American Enterprise Institute, a Washington think tank.

President Biden said Wednesday that the U.S. stood by its legal commitment to defend the Philippines.

There are few active military communication lines between the U.S. and China, making it harder to coordinate a mutual effort to dial down tensions.

China cut off high-level military talks with the U.S. in August 2022 in response to the visit to Taiwan by then-House Speaker Nancy Pelosi.

Among the casualties were annual talks at which American and Chinese military officers discussed ways to ensure safe military encounters at sea and in the air, a forum known as the Military Maritime Consultative Agreement that had been active since 1998.

Beijing also suspended a channel between the Pentagon and the Chinese military called the Defense Policy Coordination Talks that had been used to foster cooperation and discuss crisis management.

Adm. John Aquilino, the head of U.S. Indo-Pacific Command, said recently that he has sought talks with his Chinese counterparts for 2½ years without having a request accepted.

In its latest annual report on the Chinese military, the Pentagon said the absence of communication “raises the risk of an operational incident or miscalculation spiraling into crisis or conflict.”

From China’s perspective, that may be exactly the intention. Chinese military scholars say Beijing wants the U.S. to feel the danger of taking what China sees as provocative actions such as flying and sailing close to Chinese territory or areas over which China seeks to exert control.

“If on one hand you put too much pressure on me with so much aggressive behavior, and on the other side you say, ‘OK, please come out and we will talk about guardrails or crisis management,’ it doesn’t make sense,” Senior Col. Zhao Xiaozhuo, a senior fellow at China’s Academy of Military Sciences—a research institute controlled by the People’s Liberation Army, as China’s military is known—said in June.

“If I talk with you, that will legitimize your aggressive behavior,” Zhao said.

U.S. officials are hopeful that a shift by Chinese leader Xi Jinping to re-engage over diplomacy and economic policy could lead to progress in the military sphere. On Thursday, Chinese Foreign Minister Wang Yi is set to arrive in Washington for talks with Secretary of State Antony Blinken that may pave the way for a visit by Xi to the U.S. in November.

Biden administration officials say Blinken will raise actions by China’s military in the East China Sea and South China Sea that the U.S. considers provocations.

Meanwhile, the Pentagon plans to send officials to an annual security conference in Beijing next week known as the Xiangshan Forum, where U.S. defense officials have in the past held talks with their Chinese counterparts.

“In terms of hopefully kind of kick-starting some of the military-to-military engagements, yes, I’m hopeful that we’ll have an opportunity to do that in the coming months,” said Michael Chase, deputy assistant secretary of defense for China, this week in response to a question about the Xiangshan Forum.

Chad Sbragia, who attended the forum in 2019 as Chase’s predecessor, said he had a range of meetings with his counterparts, including Wei Fenghe, China’s defense minister at the time.

Sbragia said Beijing could still move to rebuild ties even in the absence of a defense minister. Li Shangfu’s removal from the post was confirmed by Beijing this week without explanation.

If China names a successor in time, the new minister might have an opportunity to meet Secretary of Defense Lloyd Austin at a regional defense ministers summit meeting in November in Jakarta, Indonesia.

“The key now will be to see if initial outreaches can mature into substantial exchanges,” Sbragia said.

Merck, Pfizer are the latest big pharma companies to invest in this booming area

A true home run in the drug industry is when a company develops a mega-blockbuster that transforms its finances for years.

But with Medicare trying to bring costs down by targeting the industry’s most expensive drugs, a portfolio of medium-size moneymakers that can keep your name off the U.S. government’s naughty list can be a wise strategy.

That is at least one reason why big pharma is investing heavily in biotech companies developing antibody-drug conjugates. Known as ADCs, these treatments work like a guided missile by pairing antibodies with toxic agents to fight cancer. In short, they enable a more targeted form of chemotherapy that goes straight into the cancer cells while minimizing harm to healthy cells.

Earlier this month, Merck and Daiichi Sankyo agreed to jointly develop and commercialize three potential ADCs in a deal worth up to $22 billion. That came after Merck was unable to come to an agreement to acquire Seagen, another ADC company that was later snagged by rival Pfizer PFE 0.99%increase; green up pointing triangle for $43 billion. While the three Daiichi ADCs in the Merck deal are promising, they aren’t going to be massive blockbusters. Akash Tewari, an analyst at Jefferies, sees peak sales for each drug in the hundreds of millions of dollars. A drug is considered a blockbuster if revenue exceeds $1 billion annually.

A silver lining of having a portfolio of medium-size moneymakers is that it keeps your drugs from earning a spot on an ever-growing list of top-selling drugs selected later in their life by Medicare for negotiation. Under the Inflation Reduction Act passed last year, Medicare will now be able to negotiate the prices of drugs it spends the most on and that don’t face competition from less-expensive copies. “A portfolio of smaller assets feels more fitting, portfolio risk-wise, for the era of the Inflation Reduction Act,” wrote Daina Graybosch, an analyst at Leerink Partners, after the Daiichi deal.

There are other provisions in the IRA that encourage ADC investments as well. For one, because they are complex biologics, they will be protected for longer than regular medicines. Price negotiation for small molecule medicines is allowed nine years after Food and Drug Administration approval compared with 13 years for large molecule biologics. In addition, because they are so complex to make, they also might avoid competition from copycat biosimilars well after their patents have expired, explains Andy Hsieh, an analyst at William Blair.

“When you produce biologics, even a slight temperature change can give you vastly different drug products,” Hsieh says. “At least in the near term, big pharma doesn’t see any sort of biosimilar encroachment into the field.”

The growing focus on ADCs, after an era during which Merck’s financials have been dominated by a single cancer drug, Keytruda, makes sense. Sales of Keytruda, which faces patent expirations later this decade, grew 17% in the third quarter to $6.3 billion, Merck said on Thursday. That represents nearly 40% of the company’s total revenue of $16 billion for the quarter. For the year, analysts expect Keytruda to bring in close to $25 billion in sales. That makes it the bestselling drug in the industry this year and means it will likely be selected for Medicare negotiation later this decade. Merck already had its diabetes drug Januvia selected in this year’s list and has filed a lawsuit challenging the U.S. government’s plan to negotiate drug prices.

One reason most ADCs aren’t likely to become mega-blockbusters like Keytruda, a cancer immunotherapy that has earned 35 approvals across 16 types of cancer, is that they aren’t one-size-fits-all drugs. Instead, they are designed to target a specific protein that is expressed on the surface of a cancer cell. That means that each drug is made with an antibody targeting a subset of cancer. There are more than 100 ADCs being tested in humans by pharma and biotech companies.

While the first ADC was approved in 2000 for acute myeloid leukemia, interest has been lukewarm for much of the past two decades due to various technical difficulties, including the ability to properly link the antibodies to the toxic payloads. As the technology has been refined, interest has picked back up in recent years, with companies such as AstraZeneca and Gilead Sciences joining in.

New drug pricing laws have made an already appealing technology even more attractive.