Fixing the German dynamo

LONG-LIVED companies can change radically over time. Nokia, for example, began in 1865 as a pulp mill; recently it sold its mobile-phone business to Microsoft (see article) and now it mainly makes networking equipment. By contrast, Siemens has been quite consistent. The Economist first wrote about the company in 1868, when it joined a consortium to build a telegraph cable from Britain to Russia and India. In an 1882 article about another tech boom—the spread of electric lighting after the perfecting of the dynamo—we noted that Siemens was hedging its bets by making both alternating- and direct-current ones. To this day, when asked to sum up his firm’s business in a word, Joe Kaeser, its chief executive, says, “electrification”.

Mr Kaeser is nonetheless hoping to remake Siemens, at least partly. After electrification, he likes to add two more words: automation and digitisation. The engineering giant is to focus on doing these three things profitably. Businesses that do not fit these criteria will be fixed or sold.

The reconfiguration of Siemens is a big project. The company employs 360,000 people in dozens of countries, and its position at the heart of Germany’s industrial economy makes change at home sensitive. It manufactures everything from hearing aids to gas turbines, from trains to software. Analysts wonder if it is in too many businesses. It is not doing so badly—analysts reckon that its operating margin is about 11%. But it suffers from comparison with its American archrival, GE, whose industrial side had an operating margin in the most recent quarter of 15.5%.

Mr Kaeser’s predecessor, Peter Löscher, was brought in from outside in 2007 to clean up after a bribery scandal. He strove to hit a target of increasing annual revenues by around half, to €100 billion ($135 billion). Siemens began taking orders it could not complete on time and on budget, and missing profit targets. Last July the supervisory board showed Mr Löscher the door and put Mr Kaeser—who had been involved in many of the big decisions as chief financial officer—in his job.

Mr Kaeser is liked by analysts, and unlike Mr Löscher he is a longtime Siemensianer, having joined in 1980. He faces three tasks: to slim the company’s bureaucracy, fine-tune its portfolio and execute projects better. He has made a big start on the first and some progress on the second. The third will take the most time.

At times Siemens conforms to a German stereotype of valuing process at the expense of results. So, in May, Mr Kaeser began a reorganisation. Under his predecessor there were six layers of bureaucracy between the managing board and the project leader on a billion-dollar contract. Mr Kaeser is simplifying things by merging the group’s 16 divisions into nine, and removing an intermediate layer in which the divisions were grouped into four sectors. This will affect 11,600 jobs, though Mr Kaeser was annoyed when he announced this only for it to be reported that they would all be cut. He hopes to redeploy many of the workers concerned, though some will have to go—the reorganisation is part of a billion-dollar savings plan—and Mr Kaeser has yet to satisfy either nervous staff or impatient analysts by being more precise.

Siemens’s health-care business, which makes body scanners and other hospital equipment, will gain a special, mostly independent status. It is the most profitable of the four former sectors, but has the fewest synergies with the electrification-automation-digitisation chain. Mr Kaeser has raised the possibility of listing it separately. Andreas Willi of JPMorgan, a bank, thinks this a canny move, relieving Siemens of part of the “conglomerate discount” that markets impose on sprawling companies, but letting the company wait for the most profitable time to list it.

Train departures

Elsewhere in the portfolio, Mr Kaeser says frankly that almost €15 billion of Siemens’s revenues, about 18% of the total, come from businesses making no profits. The electricity-transmission side is struggling, but cannot be sold if Siemens is to be present in the whole electrification chain. The train rolling-stock business has also been under pressure; it seems more dispensable. Some strong businesses will go, too: airport logistics, parcel handling and hearing aids are doing well, but do not fit the vision.

In June Siemens (alongside Mitsubishi Heavy Industries of Japan) lost a contest with GE to buy parts of Alstom, a French rival in turbines and rail. Some analysts saw the offer as defensive, improvised and complex. But one says that Mr Kaeser assured him privately, “I know what I’m doing,” hinting that he did not necessarily want to win the deal. Partly because the Siemens-led alternative was on the table, GE had to make concessions, and ended up in a complex set of joint ventures, in some cases with the meddling French state as a partner. Asked about his motives, Mr Kaeser says: “At any given point in time in the process I was always focused on doing the best for Siemens—whatever that means,” allowing himself a grin.

Still, Siemens lost an opportunity to bulk up its turbines business by absorbing part of Alstom’s. So, how else might it now seek to grow? Mr Kaeser concedes that the company slept through the revolution in shale oil and gas. But a trimmer Siemens will have capital to spend on developing things like pumps for oil exploration and gas-liquefaction terminals. Mr Kaeser says that more gas turbines will be sold next year in North America than in the next ten years in Europe. So, surprising observers, he has hired an experienced but relatively little-known American, Lisa Davis, from Shell to run the revamped energy division, and has based her in Houston.

Trimming and adding are all well and good, but Siemens must also improve its operations. Here another German stereotype, of efficient execution, does not apply. The company is innovative (spending 5.7% of revenues on research and development, a figure GE’s industrial side has been striving to catch up with) but its poor execution of projects has been a millstone dragging down profitability. Whether in trains or offshore wind, expensive and embarrassingly public problems have resulted in a series of special charges, one of which was a €287m hit for failures in a transmission-grid project in Canada earlier this year. According to Ben Uglow of Morgan Stanley, another bank, Siemens’s contract losses, writedowns, restructuring and other charges have totalled $34.5 billion since 2001, knocking huge dents in profits (see chart).

Those familiar with the firm say that when problems have surfaced, engineers have been afraid to report them to the higher-ups, instead continuing to throw time and money at them. Some analysts believe the earlier bribery scandal made a once-entrepreneurial company more inclined to nervous, process-oriented box-ticking. Mr Kaeser says that he wants to turn that around, giving managers “ownership”, rewarding them for reporting problems early while punishing them for letting things get out of control. A fancy new database by SAP, another German technology firm, will give Siemens executives an instant look into almost any project the company is working on. Such transparency is necessary—but not sufficient.

Cultural change is needed if Mr Kaeser’s reorganisation and portfolio improvements are to do Siemens any good. The company is not in crisis, as he rightly said when he took over. But it could clearly do better. The problem is that what it most needs to do is the hardest for the boss to decree. The markets gave Mr Kaeser a nine-month honeymoon in the form of a rising share price after he became boss, but that is over. Now they are waiting to see whether he can make the company run as efficiently as the machines it makes.