Questionable licensing agreement with Norad support

By Morten Rønning
Norwatch

The sheltered workshop Kongsberg Industri (KI) had assembled "Kongsberg" wrenches for 25 years. The blanks were forged in Germany, but screws of required quality had to be purchased all the way from Japan. As this production failed to turn a profit at the beginning of the '90s, the Norwegian Agency for Development Cooperation (Norad) helped the enterprise to find a partner in India that could manufacture the wrenches under license. KI received NOK 89,000 from Norad for feasibility studies, and another NOK 220,000 for training of Indian engineers. The final result has been a debt reduction of KI's bankrupt estate, while the Indian partner is left with the financial problems.

Important purchase contract
Under the agreement, 100,000 wrenches, worth NOK 1.5 million, were to be purchased yearly for 3 years. KI, in which the municipality of Kongsberg was the principal stockholder, kept the rights to the Scandinavian and Swiss markets. Toptek was to pay royalties for wrenches the company sold on its own.

According to Toptek's Managing Director, Mohit Goel, production capacity for the machines is 10,000 wrenches a month. Thus the plan was for KI to purchase 83% of the production. This was a decisive factor in order to secure profitability for Toptek in this agreement. The company had to buy the screws for the wrenches from Japan, which is very costly for an Indian company.

When Toptek lost 83% of its sales, the agreement, which cost the company close to NOK 1 million, soon turned out to be a liability for the company.

Immediate bankruptcy
The production equipment was shipped to India in May 1995. Previously, Indian engineers had been in Norway in order to become familiar with the production process. Later on, Norwegian engineers followed up the work by assembling the machines and starting up production in May - June 1995.

According to the Brønnøysund Register Centre (Norwegian Register of Business Enterprises), bankruptcy proceedings were instituted on behalf of KI on 17 August the same year. Toptek was not informed by KI about the bankruptcy and about the canceling of the purchase contract. It was only when Toptek tried to contact the company in early fall due to production problems, that the switchboard operator told them that the company was bankrupt.

- It was as if they just waited for the machines to be installed before they went bankrupt. But that's business, and we cannot blame anybody, says Managing Director Mohit Goel of Toptek Hardware to NorWatch.

- Isn't it surprising that just two months earlier they failed to tell you about the company's financial state?

- They should have known this. - Do you feel that NORAD should have followed up the situation for Toptek after the bankruptcy in Norway?

- That would have been very nice, but we haven't heard from them, says Goel.

Development cooperation?
In the Norad magazine Ressurs 1/95 Managing Director Kolbjørn Bremnes of KI says that even if the company's sales of wrenches the last years have been under 50,000 units, the project is expected to be economically viable.

- The finished wrenches from India will, in fact, cost us less than what we previously paid for the forged blanks from Germany, Bremnes told Ressurs. At the same time it was underlined that even if KI would prove unable to increase sales, the company would still be left with NOK 1 million.

- And that is a million more than we have presently, Bremnes tells Ressurs.

Managing Director Mohit Goel of Toptek suggests to NorWatch that his company's loss in connection with the agreement with KI amounts to NOK 600,000.

Insolvent in 94
The former Managing Director of Kongsberg Industri, Kolbjørn Bremnes, tells NorWatch that the contract with Toptek was part of a process to restructure the Norwegian company. - Even if the company had financial problems, everybody involved in the project was convinced that it would be a success, says Bremnes. He underlines that he left the company in March 1995, half a year before the bankruptcy. According to the auditor's report for KIs estate in bankruptcy, the company was insolvent as early as 1994, the same year that the contract with Toptek was signed, and the year before it came into force. The directors' report for 1994 points to the fact that KI had not built up a stock of wrenches prior to moving the equipment to India in order to meet the demand for wrenches in the mean time, the way the board had decided. In its last accounting year, 1994, the company had a loss of more than NOK 2.5 million; thus the stockholders' equity had been lost. The aggregate negative result for the period from 1991 until bankruptcy proceedings were instituted was NOK 9.5 million. The auditor's reports for '93 and '94 point to the fact that further operation of the company "depends on significantly improved results, further debt financing, and an injection of new capital." In spite of this, company management assessed the situation as being favorable enough to honor the agreement with Toptek Hardware. Director Halvard Lesteberg of Norad says to NorWatch that the bankruptcy of Kongsberg Industri is regrettable. - At the time, Norad thought that the company had a future, but this turned out to be wrong, says Lesteberg, emphasizing that Norad's role in the contract only implied feasibility studies and support for training. However, no matter how you look at it, Norad's support benefited KI first and foremost, while Toptek had to pay the price for an agreement which almost immediately turned out to be worthless.

Unusable machines
Toptek Hardware has for two years unsuccessfully tried to find other customers for its "Kongsberg" wrenches, now sold under its own name. The company has tried to find local manufacturers for the screw that previously had to be imported from Japan, but has not found any products that can match the Japanese quality.

The Norwegian tool wholesaler Markt & Co. has received a sampling order of wrenches in order to assess the possibilities for sales in Norway.

When NorWatch visited Toptek in February, the company could inform us that 4,000 wrenches were on their way back from Norway, due to failure to meet required quality standards. The Indian market is dominated by tools manufactured in such Asian low-cost countries as Taiwan and Korea.

Toptek Hardware, and its affiliated company Mascot (India) Tools & Forgings, have chiefly manufactured open-end wrenches, pliers and chisels. Thus the machines from KI cannot be utilized for alternative production.

Kongsberg Industri
In 1994 KI signed an agreement with the Indian company Toptek Hardware to sell equipment for wrench production, with an associated 3-year purchase contract. Toptek paid close to NOK 1 million for the contract.

In the spring of 1995, two months after the equipment had been installed in India, KI went bankrupt, and Toptek lost approximately NOK 600,000.

According to the auditor's report, KI was insolvent as early as 1994, which means that the purchase contract with Toptek was based on far too optimistic estimates.

Norad supported the transfer of production to India with more than NOK 300,000.

The municipality of Kongsberg was the principal stockholder of Kongsberg Industri.

Norwatch Newsletter 5/98