GERMANY: SEA CHANGE AT SIEMENS.

GERMANY: SEA CHANGE AT SIEMENS. - As the competition policy of the single market gathers force, Siemens's trend towards globalisation is becoming a vital part of its policy. It means a painful readjustment for a company with a strong homogeneous culture.

by Aziz Panni.
Last Updated: 31 Aug 2010

As the competition policy of the single market gathers force, Siemens's trend towards globalisation is becoming a vital part of its policy. It means a painful readjustment for a company with a strong homogeneous culture.

Twice a year, Siemens does a remarkable thing. Before the world's press, in German and English, with simultaneous translations in other European languages, the company's chief executive and finance director allow themselves to be questioned on every aspect of the group's businesses. With 391,000 employees, Siemens employs more people than any other company in Europe. Its £31.4 billion revenues derive from over 50,000 products manufactured at 400 sites in 40 countries. The questions therefore range widely, over pension fund liabilities, new factories built or closed, semi-conductor components, or rumours of contracts in the offing. Not all the answers are brilliant, but as a demonstration of management confidence and competence it is mightily impressive.

The exercise is revealing too, not only for what it says about the business, but for the social concerns expressed in the questions. Inevitably in the past two years, the questioning has focused on jobs, with undercurrents of anxiety about Siemens's global ambitions. And as the recession has deepened, so, too, has German parochialism, with fears expressed that investment in, for example, Saxony could deprive Bavaria of funds.

Siemens needs to be sensitive to these fears. As Europe's largest electrical and electronics company, it can be neither immune to the problems of these industries in Europe, nor indifferent to the huge opportunities developing in Asia and South America. But these opportunities will exact a price, and that price could be an even more profound change in the nature of the company than it currently suspects.

Last year's annual report articulated something of the problem. 'Europe is facing not only a recession,' it said, 'but serious structural problems as well. Development trends in microelectronics are reducing the value added by hardware production, often making software the crucial competitive factor. In addition, the emergence of Eastern Europe has made low-cost production locations available in our own backyard, creating a whole new market reality.' The implications of that statement will reinforce the fears expressed at the Siemens conferences. With German labour costs now the highest in Europe, and a perception that productivity gains from technology and disciplined work are increasingly difficult to obtain, the implications for employment in Germany are necessarily serious. For even if Eastern Europe's low productivity and quality militates against its competitiveness, Siemens's manufacturing centres in countries such as Britain are clamouring for greater shares. 'If you compare our production capabilities, absolutely like for like in a number of products,' says Jurgen Gehrels, chief executive of Siemens (UK), 'we are about 50% of Germany's manufacturing costs.' The readjustment being forced on the company is very painful. A job for life has been central to its employment philosophy. Until the current recession took hold, Germany's booming economy could finance that policy. But East European labour costs are 10% of German levels, and Far East costs even lower. Without the financial support of its huge cash balances (£8.4 billion last year), built up from years of prudent financial management, and some extremely profitable infrastructure contracts in telecommunications, power stations and railways, Siemens could well have a serious problem on its hands. Thus although its average operating pre-tax margin in recent years has been a meagre 2%, this was doubled by interest receipts and investments. In the year to September 1993, these financial returns in fact accounted for 60% of the group's pre-tax profits of £1.1 billion (down 9% on 1992).

Excluding these financial receipts, operating profits virtually halved last year to £453 million, a 1.4% pre-tax margin. The workforce was reduced by 22,000 after a 14,000 reduction the previous year (though the group total in 1992 actually increased after acquisitions). Overall earnings are expected to be down by 10-15% in the current year. Siemens has been aware for some time that its profitability is too low. In the late '80s it instituted a major reorganisation aimed at decentralising management decision-making by creating 15 executive groups out of the previous seven large corporate groups, and dispersing the large central corporate services to the smaller operating groups. An important consequence, it was hoped, would be to bring management closer to the customer. But the primacy of the operating groups was moderated by an international matrix, with country managers also taking responsibility for co-ordinating local interests - a source of not infrequent tension. It was this structure which Dr Heinrich von Pierer inherited when he became chief executive in 1992.

That appointment also reflected the need for a cultural change in the drive for higher profitability. Siemens has been, and is, dominated by engineers. It places great store on technical achievement and production quality, and its chief executive has generally been an engineer. The election of von Pierer, an economist and lawyer, to head the company was seen at the time as a commitment to greater commercialism.

How great that commitment will turn out to be is evidenced by von Pierer's recognition of three fundamental trends. The first is that 85% of Siemens's business is conducted either in global markets or in markets that show an unmistakeable trend towards globalisation; second, that significant improvements in manufacturing will depend on reducing manufacturing 'depth'; and third, that software is increasingly the crucial commercial factor.

They sound innocuous enough. But in the medium-term they could revolutionise the shape of the company: much depends on the extent to which Siemens's top men can control the logic of change in their industries before change is forced on them by these external realities. When von Pierer ran Siemens's power generation group (KWU), he was described as an ambitious manager with an eye constantly on the bottom line. KWU was indeed one of Siemens's more aggressive operating groups, constantly reviewing its headcount, its costs and its margins. Now as group chief executive, von Pierer projects more of a human face than his predecessor, the magisterial Dr Karlheinz Kaske, and is reputed to be a good communicator. But though he is more approachable, he is, in some ways, less forgiving. 'You can make a mistake once with him,' says an executive, 'but only once.' Von Pierer and finance director Dr Karl-Hermann Baumann make an interesting duumvirate. At 53, von Pierer is five years younger and appears more attuned to political nuance. Both have been with Siemens for about 25 years, and their knowledge of the group's businesses reflect their different responsibilities, the one qualitative, the other quantitative. The annual budget negotiations between the operating groups and the centre are with Baumann rather than von Pierer.

Recession has undoubtedly concentrated minds at Siemens's elegant 1825 head office in Munich. Its full impact, so far as Siemens is concerned, will be mitigated by the urgent requirements of the former East Germany for power, communications, transport and industrial re-equipment. But this virgin market will provide only a temporary breathing-space in the battle for jobs in Germany, particularly as the competition policy of the European single market gathers force. Siemens's global drive thus remains a vital part of its policy, despite the potential loss of some jobs abroad.

In many of its markets - telecommunications, power generation, transportation - the main areas of growth are Asia and South America, and in Asia particularly, the competitive edge is increasingly obtained by companies able to offer local manufacture. 'In the medium term to 1995/96, we aim to triple our business volume in this region to around £7 billion a year,' says von Pierer. 'Southeast Asia is joining our European home market and North America to become Siemens's third business area.' The Americas currently account for 15% of Siemens's sales, Southeast Asia and Japan 10%, with orders in Southeast Asia up by 50% last year. The company has manufacturing facilities in India, Pakistan, Malaysia, Singapore, Taiwan and Japan. But the route being taken for accelerated growth here, as in East Europe, is joint ventures. In Eastern Europe the company has signed 29 joint ventures. In China and the Association of Southeast Asian Nations (ASEAN) countries it has agreed 20 such deals with more being negotiated, to supplement its 30 sales companies. The group now employs 16,000 people in the region (4% of total employees).

The problem will be to make the alliances work. Unlike direct investments where expatriates can operate normal internal disciplines, joint ventures require new skills of co-operation. Siemens's success has in the past been built on its homogeneous culture, with a strong German/Eurocentric bias, to the extent that few of its top line managers are non-German (though country managers are local). It would be incorrect to say that there was any policy against the promotion of non-Germans, and the international commitment of the group is undoubted. But it has yet to develop a systematic rotation of significant numbers of its international managers into its German operations.

Joint ventures raise different concerns. Integration is less of a problem but co-operation can be fraught with misunderstanding, especially where technical development might be involved. Certainly, access to the market is easier, and these deals enable both sides to develop understandings and to learn the pitfalls of the marketplace. But growth could be slower in the medium term.

Siemens's core businesses - telecommunications, power generation and distribution, electronic communications and industrial systems, medical systems, and transportation - highlight both the opportunities and problems of technology today. But there are two important differences which distinguish these businesses from many of their competitors: first, the company has money; second, it has an exceedingly productive R and D programme which has been consistently well funded. This has in turn meant that Siemens's products have tended to be market leaders, even if at the top end of the price range.

In telecommunications, for example, Siemens's EWSD switch has proved to be one of the world's most reliable public switches, having been sold to 157 telecoms administrations in 68 countries. Although first-phase investment in digital switching in Europe is virtually complete, demand in Asia over the next six to seven years is estimated at £500 billion by the International Telecommunications Union. Eastern Europe and South America are also big markets, funds permitting. In Europe and America, however, mobile radio developments, and the new generation of Integrated Services Digital Network (ISDN) and broadband technologies which will enable text, data and moving images to be transmitted over existing networks, will create enormous opportunities. Siemens equipment is on trial with five regional telecoms operators in America, and it is the only European manufacturer being tested in Japan. A cross-frontier private network based on ISDN, the first such system in the world, has been commissioned by Ford of Europe to interconnect eight of its European locations. Another important development is the British Telecoms contract obtained by GPT (where Siemens partners GEC 40/60) for asynchronous transfer mode (ATM) equipment for a commercial metropolitan area network.

In the short term, however, profits are bound to be affected by price erosion and European single market pressures. It has been estimated that Deutsche Bundespost Telekom (DBT) specifications have enabled Siemens to charge £400 per line for new exchanges, compared with £70 per line for the UK's System X. It isn't a wholly accurate comparison, but Siemen's margins have undoubtedly come under pressure. 'On average, taking transmission and switching together, prices have decreased by about 6%,' says Dr Erwin Hardt, president of the Public Communication Networks group. 'Our share of turnover with the DBT is currently about 33%, and we expect this to fall to between 20-25% by the year 2000.' The real problem, though, may arise when DBT is privatised.

Although telecommunications is Siemens's biggest and most profitable business, number three in the world after Alcatel Alsthom and AT and T, power generation and transmission is coming up fast. 'For the third consecutive year, we have managed to achieve new orders amounting to nearly £3.5 billion, roughly 60% above our long-term average of £2.1 billion,' says Adolf Huttl, president of KWU. 'This is mainly the result of shifting our emphasis from nuclear to conventional power plant business and more specifically the extraordinary success of our gas turbine and combined-cycle or CCGT power plants (in which the hot waste gases are used to produce steam for conventional turbines) such as the ones we have just built at Killingholme and Rye House in England for PowerGen. Thus whereas five years ago 70% of our business was nuclear with 30% conventional, today the ratio is reversed. We have also succeeded in penetrating large markets like the US and Southeast Asia, and have also benefited from East German orders.

'In Eastern Europe,' Huttl continues, 'given the existence of fully-fledged, local power plant equipment industries, we do not focus on the export of complete power stations but on co-operation with local industries. For example, we have set up a joint venture, Interturbo, for gas turbines with Leningrad Metal Works in St Petersburg which has already started manufacture, and the joint venture, Interautomatica, with a number of Russian partners in Moscow. On this basis, and with a Finnish-German consortium, we have secured the first-ever, western technology-based combined cycle power station ever ordered in Russia. A few days ago, we sold the second gas turbine to Hungary and received a letter of award for a CCGT plant in Kazakhstan. We have also established an accord for industrial turbines with Russia's largest manufacturer of such equipment, the Kaluga Turbine Works.' Rail transportation is another strong business. 'In the past four years, the volume of trade in traffic technology has grown fourfold,' says Wolfram Martinsen, president of the transportation systems group. 'This reflects the rebirth of rail traffic noticeable all over the world, and the market is increasing by 8% a year. We have grown even faster because we are a system integrator and can tender for overall contracts including signalling and routing technology.' Sales last year grew by 32% to £1.4 billion, with orders up 25% at £2 billion following a 16% increase in the previous year. Eastern Europe is a potentially large market, but restricted by lack of money. 'In East Germany, however, the Federal government and German Railways have plans to modernise and extend the rail network,' Wolfram adds. It is unlikely that these will be significantly affected by privatisation.

Siemens is essentially an electrical/electronics systems business, with semiconductor technology as one of its core competences. It is in this latter area that some of its most acute problems lie. The two business groups, semiconductors and the computer company, Siemens Nixdorf, are currently the major loss-makers. In 1993, SG Warburg's annual investment tome on the company stated: 'Our major concern remains that Siemens as a group has sustained huge losses from this (semiconductor) segment for many years with no prospect of actually earning a meaningful profit, and that the justification for this is always the dependence of other divisions on semiconductors for a proprietary edge. Yet only 15% of divisional sales are internal.' The company, however, points to the 33% increase in orders last year and a book to bill ratio still running at 1.1. It has underlined this confidence by announcing a £920million grant-assisted investment in a new, semiconductor research and production plant at Dresden. However, there have been confusing signals about the future of the plant. Semiconductor executives have argued for some time that although memory chips and microprocessors have become commodity items dominated by Japan and the US, Europe's place is in logic chips used to control specific applications such as automotive or environmental systems. But the preliminary information on Dresden suggests 64-and 256-megabyte memory chips will be produced there.

The big loss-maker remains Siemens Nixdorf Information Systems (SNI). Formed by merging the mainframe Siemens computer business with the minicomputer Nixdorf company in 1990, SNI is the largest computer company in Europe with sales of £4.6 billion. But it lost nearly £200 million in 1992, and £150 million in 1993. In March last year, von Pierer said that he expected SNI to achieve breakeven in three years. Drastic cost-cutting and redundancies have enabled the company to keep somewhat ahead of the erosion of prices and margins, and its standard products are at last very competitively priced. Losses this year are nevertheless expected to be around the £110 million mark. A useful indicator of progress is that SNI (UK), in a very competitive market, produced a small profit last year. The recruitment of Gerhard Shulmeyer, one of ABB's top executives, to take charge in October, with von Pierer becoming chairman of SNI's supervisory board, are further indicators of Siemens's determination to get SNI right.

Every business of course has its own on-going programme of improvements and rationalisation. Siemens spends £3 billion a year on R and D, representing 9% of worldwide sales, plus a further £2.6 billion in capital expenditure. Some 48,000 employees (12% of the total) are involved. Although inevitably, in recession, the accent on improving profitability has been on costs, 'cutting costs alone is not enough', insists von Pierer. 'We don't want to cut costs to the bone. Providing innovations and ensuring their rapid translation into the kinds of products and systems our customers need will decide the future of our company. Our aim is to shorten innovation cycles by half.' A company the size of Siemens can only succeed in innovation and efficient production if these attitudes permeate its working culture. Certainly von Pierer appears to have been impressed by a US survey which showed that companies that have consistently adopted a time-saving approach were able over four years to achieve annual productivity increases of 18% and cut reject rates and throughput times by 75%. The production and logistics department, headed by Professor Walter Kunerth, a member of the group's managing board, is thus extremely influential.

Applying its manufacturing expertise to the development of higher value systems is another fundamental approach. The automation group, for example, is therefore bidding for turnkey projects, and has scored some notable successes such as the £115 million mail-order warehouse for Quelle in Leipzig, and the £380 million parcels handling network for the German Post Office.

Innovation is part of Siemens's traditions. The first electric street lighting in the world, and the first commercial power station, were installed by William Siemens (later knighted) at Godalming, Surrey in 1881. But today's trend towards software applications and systems integration will emphasise the different skills of marketing in addition to the company's manufacturing expertise. This is already reflected in Siemens's employment structure, with under 40% now employed in manufacturing, compared with over 50% in the 1970s.

There are also new social pressures, both national and international, from which engineers have traditionally shied away; pressures such as the integration of nationalities, the devolution of power and of employment prospects, and these carry significant commercial rewards as well as penalties. It is still an open question as to how Siemens, with its strong homogeneous culture, will be able to cope in this new environment. But if intelligence, resources and systematic application can find a way, then Siemens surely will.

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