Deutsche Telekom

Can Germany Compete with Amazon?

70677685 t systems cloud center computer pr
T-Systems will need to be restructured from the bottom up. Source: PR

For the better part of a decade, Deutsche Telekom has been struggling without success to wring profits out of T-Systems, the company’s subsidiary that provides software and networks for corporate customers. But rather than turning around, the problem has only become worse as new competitors such as Amazon entered the market to offer companies elaborate cloud services at low costs.

Now Deutsche Telekom, the largest telecoms firm in Europe by market value, is signaling a change of course for T-Systems by replacing its CEO, Reinhard Clemens, with an American systems expert, Adel Al-Saleh, sources told Handelsblatt. He will take over the role in January.

Mr. Al-Saleh is currently chief executive of Northgate Information Systems, a British-based provider of software and technology for the human resources industry, a firm that was acquired by the legendary US buyout firm KKR and Co. in 2007.

“The market has developed more rapidly than expected.”

Timotheus Höttges, Deutsche Telekom CEO

One clue to Deutsche Telekom’s future strategy is Mr. Al-Saleh’s expertise in restructuring companies by selling off unprofitable businesses. At Northgate, Mr. Al-Saleh sold the company’s managed IT services arm to professional services firm Capita in 2013 and subsidiary Northgate Public Services to private equity firm Cinven in December 2014. That left just one division, NGA Human Resources, which Mr. Al-Saleh took over in addition to being group CEO.

That experience may come in handy, as spinoffs of low-profit segments at T-Systems have been discussed for some time. Deutsche Telekom executives declined to comment on the speculation.

But in an interview with Handelsblatt, Deutsche Telekom CEO Timotheus Höttges said that although the company had achieved some goals with T-Systems, “the market has developed more rapidly than expected,” a reference to companies such as Amazon Web Services that allow corporate clients to use off-site server farms in place of their own computer systems.

Bleeding Money-01 Deutsche Telekom T-Systems

In addition to turning around T-Systems, Mr. Höttges is steering the highly profitable US cellphone subsidiary T-Mobile toward a possible merger with rival Sprint, and overseeing another personnel shift, the appointment of Dirk Wössner, the president of Canadian mobile giant Rogers, as CEO of Deutsche Telekom’s business in Germany, which has its own problems.

Mr. Höttges noted that the lion’s share of Deutsche Telekom’s profit now comes from the US. “T-Mobile is showing double-digit growth, while in Germany, we have invested €5 billion a year and only achieve 0.5 percent growth, he noted.

Perhaps the most formidable challenge is T-Systems, which has stumbled for a number of years despite capital investments of more than €1 billion ($1.17 billion). T-Systems reported earnings before interest of just €39 million in the first half of the year, down 66 percent from the same period in 2016.

120196634 Adel al-Saleh pr smaller
Adel Al-Saleh, an American who will become CEO of Deutsche Telekom's troubled T-Systems division.

One possible solution is a combination of T-Systems with the IT services division of BT, the former British Telecom. Deutsche Telekom owns 12 percent of BT and is the single largest shareholder in the company following its sale of mobile firm EE in exchange for BT stock.

One hurdle facing Mr. Al-Saleh is that as part of Deutsche Telekom, which was privatized by the state in the 1990s, many of its 18,000 employees in Germany have retained civil service status, meaning they cannot be easily laid off. This is seen as a major impediment to selling loss-making parts of the company to other firms.

Before joining Northgate, Mr. Al-Saleh held executive positions at IBM for 19 years, including general manager for Europe in sales. Most recently he was with IMS Health, a technology-based analytics and service company in the health sector.

09 p05 Deutsche Telekom’s key figures since Höttges entry-01

Ina Karabasz writes about telecommunications, IT and security issues for Handelsblatt. Charles Wallace is an editor for Handelsblatt Global in New York. To contact the authors: karabasz@handelsblatt.com and c.wallace@extern.handelsblatt.com

We hope you enjoyed this free article.

Subscribe today and get full access to market-moving news in Europe's leading economy.