It has neither train station nor cinema, but this Bavarian town has not been bypassed by globalisation. Ambition and leverage have brought it to its deepest crisis since World War Two.

Herzogenaurach -- called Herzo by many of its population of almost 23,000 -- has a 120-year history in shoe-making. As home to sportswear makers Adidas and Puma, it came to terms decades ago with low-cost Asian rivals and shrinking payrolls.

Now its main remaining employer -- bearing maker Schaeffler Group, which provides one in two of the town's jobs -- is being blown apart by debt, brought on by an acquisitive move so badly timed it has sent town officials to Berlin for help.

The last time the town with its medieval city centre of timbered houses was in such dire straits was in 1929, the year the Great Depression began with the Wall Street crash. Its unemployment rate shot up to more than 80 percent.

It wasn't through its own strength that the town got back on its feet, said Irene Lederer, who watches over the town's museum and archive.

In the 1930s Adolf Hitler's regime created jobs through public works such as building motorways across the country, which also boosted morale after the humiliation of defeat in World War One.

No-one is suggesting neo-Nazis will take over in the cobbled streets of Herzogenaurach, but people are worried about jobs.

German Hacker, the Mayor, has never seen such a downswing. He has pencilled in a business tax shortfall of 3.7 million euros ($4.9 million) to his budget after record income of 37 million euros last year.

Had you asked me half a year ago what would be a worst-case scenario, I would have said we can't go below 10 million. A worst-worst case scenario would have meant we go down to zero, he said.

But negative 3.7 million? The computer software doesn't even take it.

Funerals will become more expensive, dog-licence fees have already gone up and the city's cleaning staff will be cut to fix the hole in the budget, said Hacker, who used to do summer jobs at Schaeffler when he was a student.

In February, 8,000 protesters staged the town's biggest ever protest march, calling on the government for help.

This is about showing politicians in Berlin that we need them at the moment, so that everything will be alright again, said Anna Steurer, who has worked for Schaeffler for 41 years.


The mess Berlin is being asked to help clear up originated last year in an audacious takeover bid by Schaeffler for German automotive parts supplier Continental AG, which with annual sales of about 24 billion euros ($32.48 billion) is almost three times bigger than the bearing maker.

The family-owned business wanted to regain its competitive edge by moving into vehicle electronics, as its bearings are no longer difficult for Asian companies to replicate at low cost.

But days before its cash offer expired, Continental issued a profit warning, knocking its stock; and investment bank Lehman Brothers went down, taking global financial markets with it.

Continental's shares slumped to well below Schaeffler's offer price of 75 euros per share: they today trade around 16 euros.

To complete the deal Schaeffler had to take on 16 billion euros in debt, which it can no longer service. It expects to pay 899 million euros in interest in the first year after the deal -- about a third of Continental's earnings before interest, tax, depreciation and amortisation last year.

The collapsed deal showed Schaeffler at least was in the grip of the hubris of the boom.

The development at Schaeffler reflects a decision-making process of the past couple of years, said Olaf Stotz, professor for private wealth management at the Frankfurt School of Finance and Management. Investments were highly leveraged and future prospects were assessed wrongly and too positively.


The humiliation has since extended to Maria-Elisabeth Schaeffler, the billionaire widow who now runs Schaeffler, who joined her workers in the February march and was visibly moved to tears by their support.

The German government has not ruled out help but has made clear it is wary of pumping cash into every company struck by the financial crisis. It is especially reluctant to help firms that got into trouble by taking big risks.

Schaeffler is not the only one queuing up for state aid. GM unit Opel, chip-maker Qimonda and various German banks have all gone cap-in-hand to Chancellor Angela Merkel, who has already approved twin stimulus packages worth about 81 billion euros.

The state could use loan guarantees to help entice investors, but a decision will depend on a restructuring plan Schaeffler still needs to present.

The company has already said it is prepared to give up a substantial stake to outside investors, but it may have to surrender majority control which could cost jobs.

That would see the company going the way of Adidas and Puma, which surrendered their independence to survive.

Adidas closed its production sites in Herzogenaurach in 1987. Puma followed in 1993 and by 1990, the founder families -- who had wanted to keep jobs in Herzogenaurach -- had withdrawn completely, handing over to foreign investors.

Puma is now owned by French retailer and Gucci owner PPR, and more than half Adidas shares are held by overseas investors.

When Puma and Adidas set up in the 1940s Herzogenaurach was home to all of their workers. Today they employ just under 10 percent of each of their growing global workforces in the town.

The jobs lost from the sportswear firms were fewer than are affected today, said Dittmar Walz, 57, born in the town.

It would be the downfall for Herzogenaurach, if Schaeffler went bust. We can't survive only with Adidas and Puma, he said.

Schaeffler employs about 11 percent of its roughly 70,000 staff globally in Herzogenaurach and a loss of independence or a potential break-up could change this, fears the mayor.

Stripping off assets would be a catastrophe ... for the jobs here and a catastrophe for the German economy, said Hacker. This is less about my town, I almost have to speak for the whole of Germany here.

(Editing by Sara Ledwith)