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Siemens Scaling Back Creates Chance to Reload Leadership

Two years after proclaiming an end to more than a decade of restructuring, Siemens AG Chief Executive Officer Peter Loescher is back in familiar territory.

Loescher will present a plan to rekindle growth and lower costs when Europe’s largest engineering company reports earnings tomorrow. The executive said last month that Siemens needs simpler processes and must eliminate redundant functions and laggard units. He gave a first taste of his vision when he pulled the plug on the solar-power business in October.

Loescher is in his second five-year term, and has stumbled in recent years with botched takeovers, missed profit goals and an aggressive foray into renewable energy that Siemens is now scaling back. The Austrian national added complexity with the creation of a fourth division, bundling building technologies, trains and power grids into a disparate line of businesses that analysts say will probably bear the brunt of the cost purge.

“Siemens really is at a critical junction,” said Nicholas Heymann, an analyst at William Blair in New York. “Loescher is in danger of marginalizing his past successes if he fails to set the course for Siemens’ future now. Soul searching on cost-cutting or selling peripheral businesses is not enough. The road to success is doing fewer things on a truly global scale.”

The company, based in Munich, will report profit from continuing operations of 1.44 billion euros ($1.85 billion) for the fourth quarter ended Sept, 30, according to analyst estimates collected by Bloomberg. That would bring profit for the year to 5.5 billion euros, ahead of the company’s target of 5.2 billion euros to 5.4 billion euros.

Cutting Targets

Siemens cut a previous target of 6 billion euros in April, the third reduction in five years. Handelsblatt reported on Nov. 2 that the company earned about 5.2 billion euros in 2012, citing people familiar with the numbers. Sales are expected to climb 4.4 percent to 21.2 billion euros, the 10th consecutive quarterly gain, the Bloomberg survey showed.

The company has gained 8.2 percent this year, compared with a 25 percent gain for Schneider Electric SA and 21 percent for General Electric Co. Of the three, Siemens is the last company to report quarterly earnings.

Schneider, which competes in areas such as building technologies, cut its target for 2012 revenue on Oct. 25 and said it may step up restructuring as austerity measures deepen Europe’s economic slump. GE cut its 2012 sales target on Oct. 19 amid lower finance-unit revenue and reporting weaker third-quarter demand for some industrial equipment.

Low-Cost Employees

Loescher announced last month that he’d sell Siemens’s offerings in solar thermal energy and photovoltaic, three years after creating the business through acquisitions. A one-time pet project of the CEO in his quest to get more revenue from renewable sources, solar failed to live up to his expectations, forcing Loescher to backtrack and dispose of the business.

Siemens wrote down the value of the solar operations by 231 million euros last year, and the company will book an additional 250 million euros in the fourth quarter, Financial Times Deutschland said on Nov. 5, citing people familiar with the matter. Siemens spokesman Wolfram Trost declined to comment.

Among Siemens’s challenges is its focus on Germany and Europe. Compared with European peers, Siemens has the smallest proportion of employees in lower-cost countries, while the average salary per employee tops the ranking, Societe Generale analyst Gael de Bray wrote in a note on Oct. 12.

Identifying Cuts

Siemens has identified about 8,000 positions that may be cut globally, with the number potentially rising toward 10,000 by year-end, a person familiar with the plans told Bloomberg News in October. Loescher has said job cuts “are not the starting point´´ of the new program.

Siemens needs to save as much as 5 billion euros within two years, JPMorgan analyst Andreas Willi estimates. Martin Prozesky of Sanford Bernstein estimates Siemens may be able to deliver 1.5 billion euros in cuts. Savings of 3 billion euros or more would be positive, while 1.5 billion euros or less would disappoint, said Citigroup analyst Mark Fielding.

After bursting onto the German corporate scene from relative obscurity in 2007, Loescher pulled Siemens from a near-death experience following a bribery scandal, and built his reputation on making the company less complex and earnings more reliable. His fortunes started slipping early last year, with mounting charges and a botched attempt at an initial public offering of the Osram lighting subsidiary.

Two Phases

‘‘There have been two distinct phases to Peter Loescher’s tenure as Siemens CEO,’’ Fielding said in a Nov. 1 note to investors. ‘‘The cost reduction phase of 2008-11 was in our view a significant success. However, a transition to a ‘growth’ agenda since 2011 has been less successful.’’

Loescher set a goal last year to exceed 100 billion euros in sales, a target that would put the company on par with GE, his former employer. The target may require large-scale acquisitions, a risky proposition given Loescher’s track record on past deals.

Revenue this year probably reached 77.8 billion euros, analysts estimate. Loescher has said the corporate structure will not change, and that he’ll stick to his sales goal.

The CEO, who was recruited by supervisory board Chairman Gerhard Cromme, is the first outsider to run Siemens in its 160-year history. His plan for revenue growth risks eclipsing a push for profitability because it incentivizes managers to seek revenue over returns, said investors including Christoph Niesel, a fund manager at Union Investment in Frankfurt.

‘‘Loescher is not an engineer, and he seems not as well-connected within Siemens as he should be,” he said. “Siemens needs a knowledgeable steering hand, an industrial manager with technological know-how.”

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