German Go-Getter

Siemens’ strategic success outshines troubled GE

Manufacturing Operations Inside Siemens AG Gas Turbine Factory
Wiping the floor with the Amis. Source: Bloomberg/Krisztian Bocsi

For many years, General Electric was Siemens’ role model as well as its biggest competitor. The American juggernaut led the way in profitability, and its management culture was admired worldwide.

But today GE seems to offer a terrible warning: Faced with whirlwind technological changes, industrial conglomerates making poor strategic decisions will be hit hard. At the end of October, Lawrence Culp — GE’s third CEO in a year — announced $22 billion in third-quarter losses, with dividends slashed to almost nothing.

By contrast, Siemens is thriving. When announcing the 2017-18 fiscal year results, CEO Joe Kaeser confirmed the company exceeded targets for a fifth consecutive year under his leadership, with overall net profit at €6.12 billion ($6.95 billion), revenues up a steady 2 percent and new orders jumping 8 percent to €91 billion.

In addition to increasing dividends, the Munich-based company announced €3 billion in new stock buybacks. Profit warnings, common under Mr. Kaeser’s predecessor, are now a distant memory. All good news ahead of a major restructuring next year, when five industrial divisions will merge into just three.

Power and gas running out of it

However, Siemens’ power and gas division continues to cause massive headaches. Operating profits for the fiscal year crashed from €1.6 billion to €377 million. For the third quarter of 2018, the division racked up losses of €138 million. One big consolation is that GE’s headaches in this area are far bigger. Almost all of the US firm’s recent $22 billion loss was due to a write-down in its power unit.

The backdrop to both companies’ problems is a collapse in the market for the large turbines used to generate electricity from natural gas. With fossil fuels rapidly falling out of favor and squeezed by cheaper renewables, both companies find themselves with serious overcapacity.

A decade ago, when the gas turbine market was booming, both Siemens and GE expanded to produce 400 gas turbines a year. But global demand has since shriveled. Worldwide, a total of 100 new turbines were sold last year. The result is a brutal price war, with every new turbine sale racking up more losses.

2018-11-09 – Siemens results G S26 Siemens-01

At the moment, service contracts are keeping the business alive. Industry sources suggest that without service contracts, the power and gas divison could have lost close to €1 billion last year. With little prospect of a market recovery, the company now intends to cut more than 2,000 jobs in the sector.

A permanent withdrawal from gas turbines seems a distinct possibility. Siemens CFO Ralf Thomas indicated this week that demand will determine future investment, with little enthusiasm to pour R&D resources into a moribund sector. In the longer term, Siemens may prefer to get rid of the division. But given global overcapacity, buyers could be thin on the ground.

Strategic success

This is a problem for Mr. Kaeser, but not a huge one, since the rest of the company is ticking along nicely. Of Siemens’ seven other divisions, six increased profitability during the last fiscal year. In the third quarter of 2018, overall revenues climbed 5 percent to €22.6 billion, beating out Swiss competitor ABB, which increased revenues by 3 percent. GE’s revenues fell 4 percent, to $29.6 billion.

Siemens is not only getting the better of rival conglomerates. Most of its divisions are outperforming competitors in specialist fields, now seen as a key competitiveness yardstick. Siemens and its subsidiaries are winning market share in important future sectors, including renewable energy and health engineering.

The trend is clearest in industrial digitization, where the digital factory division outshone expectations, growing at twice the rate of the market as a whole, building on Siemens’ strong position in automatization and industrial software.

All this reflects well on Mr. Kaeser’s strategic plans, not least since rivals are coping so much worse. Still, challenges remain for his remaining years as chief executive. Within the company, considerable anxiety surrounds the upcoming restructuring: it should take effect in April, but many details remain unclear.

Agility versus stability

Strategically, Mr. Kaeser must strike a balance between agility and stability. Industrial digitization demands faster decision-making than older technologies — the response will be new, looser corporate structures.

But this risks weakening the bonds that hold this huge company together. A future economic downturn might tempt Mr. Kaeser’s successor, who takes over in 2021, to sell off entire divisions, especially if under pressure from aggressive investors.

This week, Mr. Kaeser acknowledged the extent of the changes, and the risks involved: “We’re touching the company’s DNA. We all respect it, but we also know that now is the right time to take this fundamental step.”

The CEO made clear that many traditions will remain, including a loyalty to the company’s German roots. In a highly symbolic move, the company last week announced a €600 million investment in a new industrial and scientific campus, to be built in Berlin on the site of Siemens’ historic nineteenth-century factory complex.

Axel Höpner is head of the Handelsblatt office in Munich, focusing on Bavaria-based companies, including Allianz and Siemens. To contact the author:

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!