Corporate Profile: 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

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 (pounds 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.

Fact File

Market capitalisation: 66.7bn euros (pounds 42.1bn)

Turnover: 68.7bn euros for the year to 30 September 1999

Net profit: 1.86bn euros

Key Executives: Heinrich von Pierer, President and CEO; Volker Jung (Information and Communication); Edward G. Krubasik (Industry); Hanz-Joachim Neuburger (Finance and Real Estate); Gunther Wilhelm (Energy)

Number of employees: 440,000 world-wide

The Story Of Siemens: From Telegraph Lines To Mobile Phones

1847: A Prussian lieutenant, Werner Siemens, invents improved telegraph technology and sets up a joint company with mechanic Johann Halske

1848: The company lays the first long-distance telegraph line in Europe, from Berlin to Frankfurt

1853: The company starts construction of the Russian State telegraph network

1847: Siemens discovers dynamo-electric principle, which leads to the manufacture of the first dynamo

1870: Indo-European telegraph line from London to Calcutta is completed

1879: Its first electric railway is presented at the Berlin trade exhibition

1881: The company's first electric tram starts in Lichterfelde near Berlin

1884: Siemens patents the coaxial cable

1923: The company establishes its Japanese subsidiary in Tokyo

1925: Construction of the Shannon hydro-electric power station in Ireland

1926: World's first traffic lights erected on the Potsdamer Platz in Berlin

1939-45: During the Second World War, Siemens makes huge technological leaps with the mass production of electron microscopes and unveiling of a particle accelerator in 1944. The company was an important part of German war effort, and had thousands of "forced workers"

1945: Germany's defeat brings break-up of Siemens' Berlin plants by Allied powers, and loss of the east and central German operations and subsidiaries abroad. The company forfeits 80 per cent of its resources

1953: Important breakthrough in electronics when Siemens develops zone refining process for the production of ultra-pure silicon

1959: The company's first transistorised computer "Siemens 2002" goes on sale

1962: Its first electronically-controlled telephone exchange is launched in Munich

1973:1973 Start of Siemens' production of large-scale integrated circuits

1978: Contract for nine generators for the largest hydroelectric power station in the world at Itaipu, on the Brazil/Paraguay border

1989: Siemens reorganises into five groups, two independent divisions, two groups with their own legal form, and 12 central departments

1993: "Eurosprinter", the locomotive with the modular construction, is unveiled

1997: The Tyneside semiconductor chip manufacturing plant (left) opens, only to close just 14 months later with the loss of most of the 1,000 jobs

World's first GSM mobile phone with colour display is introduced

1998: Start of company

reorganisation under "10-point plan"

Dec 1999: Siemens nuclear power subsidiary forms joint venture with Framatome's nuclear power interests

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