Honeymoon Ends

As Clock Ticks, Siemens CEO Faces the Music

Joe Kaeser Siemens frown afp
A mixed report card for Siemens chief executive Joe Kaeser.
  • Why it matters

    Why it matters

    If Joe Kaeser, the latest in a string of Siemens CEOs, cannot turn around the struggling company, Germany’s industrial credentials could be damaged.

  • Facts

    Facts

    • Siemens plans a major reorganization when it eliminates its sector-based divisions on October 1.
    • Part of Mr. Kaeser’s strategy includes acquisitions in the United States, where he intends to expand Siemens’ activity in the shale gas industry.
    • While European rival ABB expects moderate growth through 2020, Siemens has shrunk considerably in size and reputation over the last few years.
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    Audio

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Joe Kaeser, the Siemens chief executive, has had his hands full since taking over on August last year. Siemens is going through its biggest reorganization in 25 years, after a series of more moderate, ineffective attempts to boost profitablity.

Mr. Kaeser, who was the company’s chief financial officer from 2006 till 2013, needs to show that he is more effective than his hapless predecessor. Peter Löscher, who was leading Siemens since 2007, left the firm suddenly last year after failing to turn around one of the biggest global symbols of German engineering prowess.

But time is starting to run out for Mr. Kaeser, who has no short-term successes to show so far.

In his first year as chief executive, which ends in less than two weeks, profits will have increased by at least 15 percent, as promised, despite a negative global environment. But that is primarily thanks to the elimination of extraordinary charges, which are essentially accounting tricks.

Last year, for example, Siemens cost-cutting program reduced profits by €1.3 billion ($1.69 billion) because the company had to pay to eliminate businesses and employees. Even so, members of Mr. Kaeser’s own staff concede that Siemens’ operating performance has still been unsatisfactory.

“An improvement in operating performance must and will happen in 2015,” a person close to the program, who was not authorized to speak publicly for the company, told Handelsblatt on the condition of anonymity.

Truth be told, Siemens’ financial results are no better than during Mr. Löscher’s tenure, and a wide gap remains between Siemens and competitors such as General Electric.

Investors are beginning to lose patience.

“It’s time for Mr. Kaeser to deliver. The grace period is over,” Christoph Niesel, a fund manager at Union Investment, told Handelsblatt.

“It’s about time we saw a Kaeser effect,” said Daniela Bergdolt, managing director of the German Association for the Protection of Private Investors. Henning Gebhardt of DWS, the largest German mutual fund company, said: “For investors, it is especially important that Mr. Kaeser manages to avoid high special write-offs in the future.”

Barclays Capital analyst James Stettler, based in London, pointed to cumulative writedowns of €800 million in the Rail business, and charges of hundreds of millions on North Sea grid projects.

At the moment, Siemens is consumed with internal restructuring, which it calls “Vision 2020”. Almost all of the company’s business will be reorganized as a result of eliminating the four sectors, industry, energy, medical technology and infrastructure on October 1.

“No one seems to care about anything else at the moment. It’s settled over the company like mildew,” said an insider at Siemens who declined to be named.

The initial euphoria following Mr. Kaeser’s arrival has also ebbed among investors.

The Siemens share price rose significantly at first, but since early 2014 it has fluctuated between €90 and €100.

Internally, he still has the support of employees. “Kaeser reigns unchallenged,” said a senior Siemens executive. Mr. Kaeser’s objectives, which would have created a revolt if they had been suggested by his predecessor, are being accepted under Mr. Kaeser.

“He’s a long-standing employee with more than 30 years of experience, understanding all the operations of the company. This was not the case for his predecessor,” said New York-based Nick Heymann, co-head of global industrial infrastructure research at U.S. investment bank and asset manager William Blair. (Disclosure details below.)

 

Siemens_new-02 energy and healthcare
Progress is slow in two of Siemens’ main divisions.

 

“Vision 2020” promises a more streamlined and fast-paced approach to business at Siemens. Many view the elimination of the sectors as a very positive change. “The long-criticized partitioning of the company is giving way to a flatter structure oriented toward individual consumer markets and customers,” said fund manager Mr. Niesel of Union Investment.

Mr. Stettler, of Barclays, said, “The company still needs to prove that it will manage the project business better going forward. The announced 2020 strategy is sensible, but execution is key and at this stage the jury is still out. In order to adjust the business to ongoing paradigm shifts, Healthcare will be separately managed, and there is talk of a separate listing.”

Barclays has an “overweight” rating on Siemens and a €110 price target, because the firm is undervalued compared with rivals, and has the potential to improve profitability, for example by shedding businesses which do not make a profit, Mr. Stettler said.

It is unclear how the indefatigable chief executive intends to solve his company’s growth problems. After some hesitation, he announced a few weeks ago that Siemens will be both a better and bigger company in a few years, and yet what it lacks is a sales target. In contrast, rival ABB has just announced that it anticipates growing by four to seven percent from 2015 to 2020. But Siemens has shrunk considerably in recent years.

When it comes to organic growth, the situation is less encouraging. Revenues declined by three percent in the first nine months of the fiscal year, and there has been no significant movement since then, either.

With his bid to acquire portions of French multinational Alstom and the purchase of the Rolls-Royce turbine division, he has demonstrated that he is not averse to acquisitions. He is taking substantial risks, especially in the United States, after moving the Siemens Energy division from Erlangen near Nuremberg to Houston, Texas and appointing former Shell-manager Lisa Davis as its head. Her job is to help the company compete more effectively against GE in shale gas production – an American adventure.

Texas-based turbine and compressor manufacturer Dresser-Rand is on the list of potential acquisitions, but investors warn against overconfidence. “Shareholders will be paying close attention to how disciplined the subject of acquisitions is approached,” said DWS fund manager Mr. Gebhardt. “Acquisitions that make strategic sense cannot be undertaken at all costs.”

When it comes to organic growth, the situation is less encouraging. Revenues declined by three percent in the first nine months of the fiscal year, and there has been no significant movement since then, either. The state of the global economy has become more uncertain, and a sudden upturn is not on the horizon.

 

Joe Kaeser Siemens mikes ap
Sounds good; Mr. Kaeser’s reputation abroad is pretty strong. Source: AP

 

Mr. Kaeser aims to seek added value in electrification. This is the right approach, but other companies have discovered it as well. European rival ABB announced a strategy that resembles Mr. Kaeser’s “Vision 2020” only a few days ago. The second major issue is digitization. The Siemens chief executive was in his element at a ceremony to mark the 25th anniversary of the Amberg plant, which is seen as a prototype of the digital factory of the future. Simatic systems, which form the basis of industrial automation, are produced in Amberg.

But Mr. Kaeser has not been entirely consistent, some said. He set an irritating example with the phase-out of the hospital IT business, which Siemens never came to grips with. “The business ought to have fit perfectly into the new strategy,” a Siemens executive said.

Nevertheless, Mr. Kaeser still benefits from a substantial leap of faith.

 

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“Clearly he has put more vigor and focus into improving the overall profit levels of the company. That’s the big plus Secondly, he has begun to implement changes in the overall portfolio of the company,” Mr. Heymann of U.S. banking firm William Blair said, citing the Rolls-Royce acquisition and the focus on building out Siemens’s U.S. energy operations.

A Siemens official said Mr. Kaeser is the person who has deep understanding of the businesses and knows what he’s doing. “It is a solid performance that he is delivering,” the official said.

 

Author Alex Höpner is Handelsblatt’s bureau chief in Munich, where he focuses on Allianz and Siemens. Gilbert Kreijger also contributed to this article. Contact: Hoepner@handelsblatt.com or Kreijger@handelsblatt.com

 

Disclosure: In relation to Siemens and Mr. Heymann’s comment on the German firm, William Blair is required to make the following disclosure: William Blair receives or seeks to receive compensation for investment banking services from companies covered in this research report. Investors should consider this report as a single factor in making an investment decision. William Blair intends to seek investment banking compensation in the next three months from the subject company covered in this report.

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