Powering into the future

This time last year Siemens was in the doldrums, an elderly German multinational conglomerate struggling to keep up with the modern world. The skids were under Heinrich von Pierer, its chief executive. But twelve months later, after cutbacks and closures, he is the darling of the DAX
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Heinrich von Pierer, the chief executive of Siemens, is at last riding high. He was pleased when he announced record profit figures at the multinational's annual results meeting last week. But it was another number that really filled his heart with pride. The cause of celebration, he said, was the phenomenal rise in the company's share price. "The former 'widows and orphans' stock has been transformed into an attractive, fascinating stock that is outperforming the DAX," he boasted.

Heinrich von Pierer, the chief executive of Siemens, is at last riding high. He was pleased when he announced record profit figures at the multinational's annual results meeting last week. But it was another number that really filled his heart with pride. The cause of celebration, he said, was the phenomenal rise in the company's share price. "The former 'widows and orphans' stock has been transformed into an attractive, fascinating stock that is outperforming the DAX," he boasted.

The investors are certainly happy. Siemens stock has not only been outperforming the DAX this year, but also many of the star companies of the Internet world. Not bad for a 150-year-old behemoth whose reputation has at times seemed to rest more on its historic claims to fame than its contemporary performance.

The company which in 1848 laid the first long-distance telegraph line in Europe, and in 1926 put up the world's first set of traffic lights, has again found favour with the market. These days, Siemens' worldwide businesses still run from lightbulbs, mobile phones and trains, to nuclear power plants and microchips. But it is Mr von Pierer's enthusiastic streamlining of the group's global business empire that is winning plaudits.

It is a welcome change for the Siemens chief, who has faced routine barracking from shareholders almost from the moment he took the helm in 1992. A few months ago, there were widespread rumours his days were numbered. The company seemed a typical German conglomerate with an over-extended product range, operations in 190 countries, and low returns on investment. Some branches were withering and the technologies of the future were crying out for investment.

All that now seems in the distant past. The share price has doubled this year, on the back of a 37 per cent increase in net profits and a promise of even greater gains ahead. Mr von Pierer, aged 58, has had his contract extended by five more years.

Mr von Pierer used to say he was responsible for one million people in Germany, if one included all the family members of Siemens' employees. That was before he restructured the company, shedding 40,000 workers. A further 60,000 face an uncertain future as Siemens completes its strategic plan to cut one-seventh of its activities.

The restructuring is one of the biggest in German corporate history. It began in July last year, when Mr von Pierer produced his famed 10-point programme. Though somewhat vague in its objectives, it promised, in effect, to overturn the company philosophy of the past 150 years, and jettison branches that were not making the grade, or did not fit in core activities.

This last bit of philosophy was a jolt for the company. Siemens, after all, made everything through which electricity flowed, from the humble Osram lightbulb, to increasingly sophisticated computers and mobile phones.

The company was clearly fraying at the edges. Due to the Asian financial crisis and the worldwide glut of microchips, its chip factories were haemorrhaging money. The much-trumpeted chip plant at Tyneside had to close, and even in Germany production was curtailed. The trains were being made at a loss, because the company had signed unwise contracts at unrealistic prices. The power plant branch was being plagued with embarrassing technical defects that held up delivery. The mobile phones were bulky and unattractive.

The 10-point plan was going to cure all that. Siemens would reorganise its activities in six divisions, shed or marry off activities that were struggling, and buy in companies to strengthen the future businesses.

No one believed Mr von Pierer. A friend of Helmut Kohl and a former local politician, he embodied old Germany, had already made many promises he did not keep, and analysts concluded he would not deliver this time either. But Mr von Pierer, a former junior tennis champion of Bavaria, raised his game against all expectations. Heads began to roll, product lines were ditched, and the executives were shaking in their boots.

Even the personal style of the chief executive has undergone a metamorphosis. Once labelled a "softy", Mr von Pierer has lately been raising his voice at meetings with department heads, and has begun to speak the language of ruthless American tycoons. Gone is the man who used to stress that Germany's route to prosperity was motivated by "social responsibility". In contrast, one of the key passages in the new company philosophy is the chilling phrase "rigorous consequences". He says: "Rigorous consequences largely means creating personnel compensation systems that give our people a stronger share of success as well as greater responsibility for failure." In short, those department heads who met heightened earnings targets could look forward to a nice bonus; those who did not had to brace for a pay cut, or the sack.

After the first year of the restructuring, Siemens has just recorded a net profit of 1.86bn Euros (£1.19bn) for the year to the end of September. In certain areas, it has been lucky. Asia has bounced back, and with it the market for microchips, one of the biggest loss-leaders in previous years.

The trains continue to pose a headache, and the KWU subsidiary which manufactures power plant equipment remains a disaster zone. But there have been some remarkable turn-arounds. The medical equipment branch that was losing money three years ago is one of the top earners this year. It is perhaps no coincidence that this sector is operating under new management. As is the subsidiary that makes mobile phones. At last, Siemens has competitive products in this market, too, halving the size of the bricks it was selling only a few months ago.

Mobile phones are identified as one of the key growth areas. In Germany, Siemens is already the top player, with a 30 per cent market share, but it is only fifth in Europe and seventh in the world. High hopes are pinned on the two models released since March.

Now the contours of what Siemens might look like in a few years are beginning to emerge. The plan is to tilt manufacturing towards the new technologies, and increase the share of services in the company's activities from 25 per cent to 50 per cent.

Some lessons of delving into every area of technology appear to have been learnt. Microchips are no longer how Siemens wants to make money, and the chip-making subsidiary reorganised under the Infineon brand is to be floated off. "We can retain only those businesses in our portfolio, whose market cycles are accepted by typical Siemens investors," says Mr von Pierer. "That is, for example, the reason we are exiting, step by step, from the manufacture of semi-conductors, now handled by Infineon." Infineon is to be listed in Frankfurt and on Wall Street in the spring.

In place of hardware, Siemens is trying - belatedly - to expand its Internet presence to grab a bigger share of electronic commerce. Divestments will fund acquisitions, but the company admits it has left it a little late. Mr von Pierer wants to snap up promising ventures in Silicon Valley, but most there have become unaffordable, their share prices heading for the stratosphere.

Another piece of the jigsaw slotted into place earlier this week with the announcement that the nuclear reactor subsidiary is merging with France's Framatome, creating a new company with annual sales of 3.1bn euros . The two former competitors must huddle together because the future is bleak for nuclear energy. Negotiations in Germany between industry and the government over the phasing-out of nuclear power are at an advanced stage. In France, the Prime Minister, Lionel Jospin, is under pressure to hold a referendum on nuclear energy. Siemens is well out of the controversy.

There are persistent rumours of a tie-up between the medical technology division of Siemens and Toshiba, and some kind of co-operation deal between its transport division and Canada's Bombardier. Both are being denied, a fact that worries analysts. "They stalled talks with Bombardier, so that means they want to be in rail technology," says a Frankfurt-based analyst. "But that doesn't make financial sense." His bank is about to revise his advice on Siemens shares from "Buy" to "Hold". He added: "The trouble is that they haven't said anything about where they are headings. Once the restructuring is through, the question is - what's going to happen next?"

Mr von Pierer appears to be backing away from plans to narrow Siemens range to just two or three core activities. There are units that seem to fit in with the new direction, but make little cash, and some, notably Osram, which are cash cows out on a limb from the core activities.

The chief executive is once again making promises about troubled subsidiaries returning to profit next year. He has great plans to take Siemens to its new spiritual home on Wall Street, with a listing expected there in 2001.

Apart from the employees, and the Siemens family who hold 7 per cent of the stock, most of those people with a stake in the company are delighted by the move.