German engineering heavyweight Siemens has announced plans for a complete overhaul of the company. Its CEO intends to make the firm nimbler, more competitive and more profitable.
German industrial giant Siemens unveiled a complete overhaul of the company on Wednesday, May 7. The company, which offers a wide variety of products ranging from gas- and wind-powered turbines to trains, medical imaging devices, factory machines and security equipment, now intends to revamp its activities in an attempt to close the profitability gap with rivals such as US firm General Electric (GE).
At a news conference in Berlin, Chief Executive Joe Kaeser, who took over the reins last year, announced his new long-term strategy - dubbed "vision 2020" - to the public and shareholders. As part of the plans, Siemens will get rid of a layer of its senior management, acquire a key business to strengthen the power generation division and spin off its aid equipment business.
Digitalization a key business
The central plank of Kaeser's strategy lies in the area of digitalization. "Gathering data, generating data, analyzing content and then drawing the right conclusions," is what will earn the company most money in the future, according to Kaeser.
While traditional businesses in the electrification sector are expected to grow by 2 to 3 percent and the market for automation by 4 to 6 percent in the medium term, growth in the areas of software and data analytics is estimated to be around 7 to 9 percent, said Kaeser, adding that "an additional focus on data will not only support the business, but also determine the future."
"Through our solid footing in the automation and software businesses, we not only get access to the data, but also a deep understanding of our customers' processes. Our machines and our automation are the origins of the data," Kaeser explained.
Electrification, automation and digitalization help industrial companies produce more efficiently.
Eliminating an entire level of management will decrease bureaucracy, speeding up decisions and saving some 1 billion euros annually, the company said. It remains unclear how many more jobs will be cut in the company, which employs around 359,000 employees globally.
The restructuring was announced shortly after Siemens released its financial results for the first three months of the year. Although net income rose by 12 percent year-on-year to 1.15 billion euros, revenues dropped by 2 percent to 17.78 billion euros and new orders declined by 10 percent, prompting the company to label the firm's financial performance as "mixed."
Markets reacted positively to the restructring news though, with Siemens shares up 2 percent on Wednesday, outperforming the German benchmark DAX index.
Focus on core business
The plan foresees a reduction in the number of business divisions from 16 to nine and from now on, there will be more emphasis on the group's digital production, electrification and automation businesses. Furthermore, the company said it was buying the gas turbine and compressor business from British firm Rolls-Royce for around 950 million euros.
At the same time, Siemens declared that it had reached an agreement with Japan's Mitsubishi Heavy Industries to merge their metals businesses by setting up a joint venture, in which the Japanese firm takes a majority stake. According to Heinz Steffen, an analyst at research agency Fairesearch, the company must become "slimmer and more efficient."
In order to achieve this goal, areas that are no longer part of Siemens' core business - such as hearing aid equipment - must be dismantled, Steffen told DW, adding that the firm should focus more on industrial segment, rather than on private consumer business.
The overhaul comes as the Munich-based conglomerate is considering making an offer to buy the power generating business of France's Alstom. If it succeeds, then the acquisition would be the largest in Siemens' history. GE is also looking to acquire the French firm and had already made an offer of 12.35 billion euros.
When asked about the bid at the news conference, Joe Kaeser did not give the impression that his "vision 2020" plan would be affected, if Siemens failed to acquire Alstom's division. However, experts raise questions on the future of the company's vehicle division.
Stefan Schöppner, an analyst at Commerzbank, explains that there have been repeated crises in the company's vehicle segment with problems plaguing the firm's trams and ICE trains business. "Siemens wants to swap these businesses with Alstom and leave total responsibility for these branches in the hands of the French company," said Schöppner.
Siemens is active in more than 200 countries around the world and it generated 86 percent of sales in 2013 - around 76 billion euros - in markets outside of Germany. "In the medium term, we want to grow faster than our five main competitors, which is also the benchmark rate for our executive board compensation," says the Siemens boss.