(Bloomberg) — Continental AG intends to become the latest German manufacturing stalwart to dismantle itself, highlighting the pressure to become more agile to weather structural issues at home and respond to mounting competition abroad.

Tracing its roots to producing rubber hoof buffers for horses in the late 19th century, the Hanover-based company plans to split into three: the core tire business, rubber components and auto parts. The moves, which Continental will pitch to investors on Tuesday, would unwind decades of diversification and reflect Germany’s shifting business model.

“Continental is a very good example of how German companies are finding it difficult to navigate the transformation,” said Stefan Bratzel, head of the Center of Automotive Management in Bergisch Gladbach, Germany. “This breakup shows one way that the model of a big, one-stop shop doesn’t work anymore.”

Once favoring sprawling structures, German businesses are getting smaller and more nimble in response to rapidly changing technology and geopolitical volatility. Industrial giant Siemens AG and steelmaker Thyssenkrupp AG already moved to split up years ago.

Automakers have shifted as well as the industry reacts to Chinese rivals and the transition to electric vehicles. After Daimler split its cars and truck businesses and Volkswagen AG partially spun off the Porsche sports-car brand as well as its commercial vehicle unit, Continental’s strategic shift shows how the supply chain is now starting to adapt.

Chief Executive Officer Nikolai Setzer wasn’t always so enthusiastic about a breakup. Two years ago, he told investors that the global automotive and industrial group would stick to its three-pillar structure, because it provided better insulation from unforeseen downturns.

That changed last August, when Continental announced plans to spin off its auto-parts unit and lowered earnings forecasts due to weak car demand in Europe. At that point, its non-tire rubber unit ContiTech was becoming more of an industrial player and drifting away from the automotive business, according to the 54-year-old executive. A second carveout would leave Continental with a tires-only portfolio, which nets the biggest profits.

“The common markets of our three sectors were reducing or diminishing over time — the sectors had different purposes, customers and products, so synergies were limited,” Setzer said in an interview. “As soon as you have different entities within a company, you have to see whether the synergies outweigh the challenges of holding them together.”

Headwinds have increased in Germany after two years of contraction and minimal growth projected this year. For Europe’s largest economy, the changed corporate strategy is not without risk. Smaller companies could be more easily swallowed by rivals or relocate to escape smothering bureaucracy and high labor costs.

That puts pressure on Chancellor Friedrich Merz’s administration to move fast on reforms that can revive prospects for domestic companies, even though hundreds of billions of euros in planned debt-financed government spending has brightened the mood.

While the carveout of parts business Aumovio is a done deal, union leaders are concerned that separating rubber unit ContiTech from the tire business would add costs and put jobs at risk. They’re threatening to use their control of half the seats on the supervisory board to try to block the move.

What Bloomberg Intelligence Says:

The restructuring will make Continental a pure-play tire business, which could position it for a rerating.

— Gillian Davis, industry analyst (Click here for the full report)

“There are considerable synergies between tires and ContiTech,” Matthias Tote, the unit’s works council chief and a supervisory board member, said in an internal memo sent to workers on Monday. Jörg Schönfelder, another employee representative on the board, said executives are moving ahead “without adequately assessing the potential risks.”

The company has already announced plans to close five ContiTech sites completely and two partially, which will cut hundreds of jobs. Despite the resistance, Chairman Wolfgang Reitzle can break the deadlock, though the tensions could spark legal challenges and delay the process.

The motivation for management is clear. With the stock effectively flat-lining over the past five years, Continental is worth about a third less than rival Michelin, which has recently moved in the opposite direction and expanded its non-tire business.

Continental’s breakup will happen in two stages with the listing of Aumovio planned for September. The sale of ContiTech — which employs almost 40,000 people globally and makes an array of rubber and plastics products — is targeted for next year.

“The auto spinoff is the right thing to do, just probably five years too late,” said Harry Martin, an analyst at Bernstein. “It’s not unleashing a lot of growth potential.”

To be sure, some German conglomerates remain intact. Robert Bosch GmbH, a major automotive supplier and industrial tech firm, is shielded from breakup pressure by its foundation ownership. Merck KGaA, which is active in pharmaceuticals and specialty chemicals, and consumer goods maker Henkel remain largely untouched.

Conglomerates once promised stability and efficient capital allocation across sectors, but sprawling portfolios have fallen out of favor as investors push for focus and higher returns. Continental’s breakup reflects a broader retreat from the model, as complexity and weak synergies increasingly outweigh the benefits of diversification.

For Setzer, Germany’s economic woes are only part of the driving force to split up. The company has seen “tempered growth” in its global markets, specifically in Europe and North America, he said. In China, the automotive unit’s sales have been falling short of the market and that’s likely to continue, according to Aumovio’s top executive.

“In such an environment where you need to adapt fast because visibility is so low, where customers can’t always give you reliable forecasts, that’s where you need small, agile teams,” Setzer said. “The better you can adapt now, the better you will profit in the future.”

–With assistance from William Wilkes and Isolde MacDonogh.

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More than 36 of Germany’s major companies are teaming up to retrain workers to fill a growing skills gap and avoid layoffs, reports Reuters.

The economy is shifting towards sustainable and digital sectors, with many vacancies in engineering and logistics, among other sectors.

The government is pledging to make it easier to attract talent from abroad by improving access to dual citizenship and apprenticeships.

Germany’s industrial heavyweights are teaming up to retrain workers in areas such as software and logistics to fill a growing skills gap and avoid layoffs among workers of all ages as the economy shifts to clean energy and online shopping.

More than 36 major companies, ranging from auto suppliers such as Continental (CONG.DE) and Bosch (ROBG.UL) to industrial firms BASF (BASFn.DE) and Siemens (SIEGn.DE), have agreed to coordinate on redundancies at one firm and vacancies at another, training workers to move directly from job to job.

Stefan Dries worked across a range of sectors before landing a job at Deutsche Post (DPWGn.DE) in the middle of the pandemic. While social distancing had made his work as a carer impossible, the postal service was hiring to meet online delivery demands.

Dries, 38, said he completed a 10-day intensive course on everything from using software for registering and tracking post to how to lift heavy packages and has since worked his way up from deliveries to manager of his station.

“Starting something different isn’t always easy financially, personally. You have to want it,” Dries told Reuters, adding that it is vital that companies advertise positions in a way that assures workers they will be trained on the job.

The scheme underscores Germany’s long-term social market economy model, which gives more influence to labour unions as opposed to free-market capitalism focused on maximizing profits.

The costs of the initiative will be shared by the companies involved on a case-by-case basis. So if a factory closes, a dialogue will begin on what to do with its workers and then involve another company which may be seeking new skills.

Continental and Deutsche Bahn, for example, have set up a partnership to retrain staff no longer needed at the auto parts maker for jobs at the railway group, with the costs split.

“We know the social cost of unemployment, and we want to avoid that,” Ariane Reinhart, board member responsible for human resources (HR) at Continental and chief spokesperson of the business-led initiative, told Reuters.

Reinhart, who said that she believed the scheme to be the first of its kind, pointed to data showing unemployment cost the German economy 63 billion euros ($68 billion) in 2020.

While German unemployment is relatively low, at 5% in March, there are warnings of a wave of job losses if companies do not move quickly to adapt to stringent climate targets and step up in areas like software in the face of new competitors abroad.

A study by think-tank Ifo Institute warned that 100,000 jobs linked to the internal combustion engine could be lost by 2025 if carmakers failed to transition fast enough to electric vehicles and retrain workers.

The initiative comes as the number of open vacancies in Germany is rising steadily, from around 320,000 in 2009 to 850,000 in March this year, national statistics show.

The number of vacancies in Germany has grown to over 800,000. Image: Bundesagentur für Arbeit (Federal Labour Agency)

Engineering, metalwork and logistics are among the sectors seeking high numbers of people in Germany, alongside care work, catering and sales.

The demand for skilled workers is coming from overseas companies too, highlighted by Tesla’s (TSLA.O) decision to build its European electric vehicle and battery plant in the state of Brandenburg, where it will create 12,000 new jobs.

This will ramp up competition for skilled workers with rival carmakers Mercedes-Benz and Volkswagen (VOWG_p.DE) who both have factories of their own only hours away. read more

Retraining across sectors and within companies is also a means of maintaining good relations with Germany’s powerful unions, who often sit on company boards and have negotiated multi-year job guarantees for staff.

“Some of these people have no prospects any more in the combustion engine world,” said Fevzi Sikar, head of the workers’ council at Mercedes-Benz’s (MBGn.DE) Marienfelde plant, where assembly line production workers are being offered retraining in software engineering. read more .

“But they are reliable employees, and it just makes more sense to retrain them … the market is sucked dry.”

Sikar said Mercedes is seeing enthusiasm among younger workers who want to become more resilient by gaining new skills. While older workers faced with a job loss or change may opt to retire early, younger colleagues need a future elsewhere.

While the scheme can provide some of the skills that Germany needs, attracting talent from abroad is also essential, Thomas Ogilvie, board member in charge of HR at Deutsche Post, said.

Germany’s new coalition government has pledged to make it easier for workers from abroad by enabling dual citizenship and improving access to apprenticeships. read more

“Leaving it to the free market is not enough – it would not be what’s best for workers, or the economy,” Reinhart said.

Germany’s federal labour agency declined to comment.