Two subsidiaries of one of the Western Cape’s largest engineering firms, Cape Manufacturing Engineering (CME), would face liquidation, unless the group received some financial assistance, nonexecutive chairperson Ewald Wessels said on Tuesday.

The company said that it had approached the Industrial Development Corporation (IDC), proposing that the development finance organisation buy a 51% stake in its subsidiaries CME Foundry and CME Automotive.

CME owns a 90% stake in CME Foundry, and 100% of CME Automotive, both of which had been put under pressure by the economic crisis in 2008.

Wessels told Engineering News Online that it had, to date, received positive feedback from the IDC, which had sent a team to undertake a due diligence early this year.

However, the team would only submit its proposals to the IDC’s credit committee for a decision on February 27, said Wessels.

IDC Metals, Transport and Machinery Products Strategic Business Unit head Setlakalane Molepo confirmed that CME had applied for funding with the IDC.

"The IDC team is currently conducting an investigation into the viability of the business. Once this process is completed, a decision will be communicated to the applicant," he commented.

The group had to start a process with labour organisations for the temporary layoff of staff and suspension of these operations until it could secure financing.

Wessels explained that the group had first approached the IDC for emergency funding in October last year.

“The CME group’s financial resources have been drained by the after effects of the group’s rescue in 2005 of Gearings Foundry and, more recently, by the economic turmoil of 2008,” he commented.

The group had bought Gearings Foundry in 2005, after it had gone into liquidation in 2004.

Wessels said that the closure of the foundry would have affected a number of European automotive assembly plants, and subsequently would have also affected South African component suppliers, prompting it to take over the company.

“Considerable progress has been made in recovering from the events of 2005 and CME Precision is currently profitable, though cash has had to be used to rebuild working capital. CME Foundry and CME Automotive were expected to be cash positive in 2008 but the events of that turbulent year prevented the projections from being realised,” said Wessels.

Electricity cuts by Eskom, increases in the price of ferrous scrap, which is the main feedstock of the foundry, higher prices for minerals additives and the economic slowdown had all impacted negatively on the businesses in 2008.

In addition, CME Foundry had been supplying flywheel castings for the Ford Motor Company of Southern Africa’s (FMCSA’s) RoCam production line, which was terminated in 2008, owing to a massive slowdown in vehicle sales worldwide.

FMCSA’s Port Elizabeth plant had been the sole supplier of the 1,3-l RoCam engine to the global Ford group. It also manufactured the 1,6-l RoCam engine and was the only RoCam production plant outside South America.

“As a result, the group will not be able to finance the ramp-up of production that is required to meet the requirements of several new contracts that have been landed by CME’s marketing efforts in the last two years,” said Wessels.

He added that the subsidiaries had received new business from the GT group in the UK for the supply of Volvo and Scania components, from Volkswagen of South Africa, as well as from railway part supplier Pandrol, which was supplying some of the parts manufactured by CME for the Gautrain rapid-rail link project.

These parts would have to be imported from Australia if they were not manufactured by CME, which would added to South Africa’s trade deficit, noted Wessels.

Further, with the new business lined up, the subsidiaries were expected to pass the breakeven point later this year, while all overdue amounts to creditors could be paid within the next 18 months to two years.

“It is vital to keep the two companies in business, especially as the management and employees of CME Foundry and Automotive have done a first-class job in turning the situation around and, despite the global recession, they expect to generate good results in the financial year that commences in March 2009,” commented Wessels.

The proposed offer to the IDC would allow the group to exit the foundry industry, which Wessels reiterated it had entered by force of circumstance.

It would return to precision engineering, an export-orientated business, which was expected to do well in light of the weakening of the rand against foreign currencies leading to South African exports becoming more competitive.

If the 51% was bought by the IDC, the remaining 49% would be transferred through a broad-based black economic-empowerment (BBBEE) scheme.

An 11% stake would be made available to a proposed employee and community trust, while 14% would be made available to a black economic-empowerment company that would be formed by black members of CME’s management and supervision team.

A further 14% would be made available to other members of management who did not benefit from the first two share transfer schemes, while 10% of the shares would remain in the hands of current minority shareholders.