Siemens not so German after all

ELECTRONICS: Siemens chief prides himself on driving a global firm determined to be at home everywhere it operates

Mr Heinrich von Pierer is starting 2002 in an upbeat mood. As chief executive since 1992 of Siemens - which this week announced first-quarter profits substantially up on the previous three months - Mr von Pierer is one of Europe's most powerful industrialists.

With products ranging from power stations to mobile phones, and with 450,000 employees worldwide, the company is a bellwether of global industrial trends as well as an icon of corporate Germany.

Yet after Siemens received plaudits for sharpening up its operations in 1999 - followed by a big rise in profits the following year - it appeared to slip back in 2001.

Operating profits were halved and Europe's biggest electrical goods company would have slipped into a pre-tax loss without gains from disposals. Forty per cent of Siemens' activities, particularly IT-related businesses such as telecoms systems, are, by Mr von Pierer's own admission, suffering from difficulties caused in part by the worldwide downturn.

This year, the company will complete the shedding of 17,000 jobs, a process it began in 2001.

Mr von Pierer, however, is confident that the company is on track to meet tough, self-imposed profit goals for 2003 and 2004.

Mr von Pierer's strategy boils down to preserving Siemens's conglomerate status - albeit with closer inter-divisional links through IT - while striving to become more international and to push up shareholder returns.

"Our relative strength is that we are in a range of different businesses which are subject to different economic cycles," Mr von Pierer says. "The validity of this approach was not appreciated by everyone a few years ago. Many of the financial analysts then were telling me to sell the medical systems business because we would never make a profit on it. Now it is one of our better-performing operations."

Last year, for the first time, the US became Siemens's largest market, accounting for 24 per cent of its business. German customers - who accounted for more than a third of revenues five years ago - represented only about one-fifth of the business.

"If you look closely at Siemens, we are not so German," says Mr von Pierer. "In Germany we are a German company, but if you see our operations in Brazil, you will think we are a Brazilian company. In China we are a Chinese company. This is one of our strengths. We have the ability to take in and manage the attributes of individual cultures - and so become a global company."

Mr von Pierer hopes Siemens illustrates such time-honoured corporate German values as concern with quality, reliability and long-term thinking.

"But if people think that German businesses have an aversion to shareholder value, we are not a very good representative of such companies. . . To improve profitability and market capitalisation is the main goal."

This approach was signalled in 1998, when Mr von Pierer introduced a 10-point plan to increase earnings and crack down on underperforming businesses. It seemed to work: net income rose from €1.2 billion (£0.95 billion) in 1999 to €8.9 billion the following year - but fell back to €2.1 billion in 2001 on sales of €87 billion.

The company's shares quadrupled between late 1998 and early 2000, then fell steeply until last September. Since then they have rebounded, as indications emerge that 2002 could see a slow economic recovery.

In the past four months, Siemens's shares have noticeably outperformed the rest of the German stock market. They have also outperformed those of arch-rival General Electric (GE), the US industrial goods company whose 14 per cent operating margins Mr von Pierer dreams of emulating.

He points out, however, that despite the two companies' similar conglomerate status and historical roots, more than half of GE's activities are in financial services, while several other operational areas are not strictly comparable.

"If you look at the profits details of businesses where our products overlap - such as lamps and medical equipment - you will see we are getting closer to GE's operations, though clearly GE is ahead," he says.

Mr von Pierer believes that, like the US rival, Siemens gains from a broad spread of activities - something the company was widely advised to dilute by jettisoning "old economy" divisions such as power generation at the height of investor enthusiasm in IT stocks in 1999 and early 2000.

Even though many analysts still believe Siemens has too broad a spread of activities, Mr von Pierer says he is glad he ignored the calls for Siemens to follow the route of Marconi, which in recent years has quit most of its former industrial businesses and concentrated wholly on telecommunications equipment, with of course disastrous results.

Luckily, Siemens followed a more "cautious" route, Mr von Pierer says. However, he acknowledges that Siemens could have moved more decisively with regard to Infineon, the company's separately listed semiconductor subsidiary. Siemens recently cut its share to less than 50 per cent, in effect removing the company from its consolidated operations.

Here, he says, Siemens acted - albeit "not fast enough" - on advice that it should remove itself from a highly cyclical business.

Mr von Pierer, who on Saturday turns 61 and is likely to step down in 2004, says his company's global span will help protect it from downturns in specific countries.

While Siemens's reliance on the US may look like weakness given the current economic difficulties, Mr von Pierer expects demand in North America to pick up in the second half of 2002.

Mr von Pierer knows his most important goal is to restore the profitability of Siemens's three IT- related divisions: telecoms equipment, mobile phones and business services, which made a combined operating loss, including asset write-downs, of €1.43 billion last year.

Mr von Pierer says Siemens's IT-related operations, even though they may be in trouble financially, include some technology leaders. The firm is especially strong, for instance, in mobile telecoms networks, a profitable field, although it is doing less well in handsets.

In line with its 1998 plan, Siemens remains determined to increase its returns on assets. It is demanding cost cuts at headquarters and only sanctioning increases in capital investment that are tied to better profits performance.

Mr von Pierer is far from complacent. Conditions in the first half of 2002 will be "adverse", he says, although the world economy could improve later. But he is taking nothing for granted. "You can't just sit back and say you hope the overall economy will pick up. We are prepared for the worst." - (Financial Times Service)