Aug. 18 (Bloomberg) -- In a conference room overlooking the Frankfurt skyline, Siemens AG Chief Executive Officer Joe Kaeser is explaining his plan to push Europe’s largest engineering company into the digital age when the phone rings on the table in front of him.
Wrong number, but the call hits home. The device is made by Cisco Systems Inc., a company Siemens declined to invest in 25 years ago, saying its innovations had no future. Cisco’s routers have since eclipsed traditional phone technology, and last year Siemens exited telecommunications -- its original line of business in 1847.
“If the model changes and we sit on the old model, then we are stuck -- Tack. It’s over,” Kaeser said, snapping his fingers.
The rapid pace of new technologies is a challenge for the CEO as he tries to update the industrial giant’s products -- from trains and gas turbines to medical scanners -- with software and digital monitoring that can predict faults in machines and fix them before they cause a shutdown. The effort puts Kaeser, who became CEO a year ago, head-to-head both with traditional competitors like General Electric Co. and ambitious newcomers such as Google Inc.
Even as he adds new digital offerings, the executive recognizes the need to preserve the industrial heritage of 167-year-old Siemens. Over coffee at Bloomberg’s Frankfurt offices last month, Kaeser noted that the company, which Chancellor Angela Merkel has called “a flagship of the German economy,” can’t simply pull up stakes and move to Silicon Valley and emulate Google.
When asked whether that means the colossus is “still Siemens” and always will be, Kaeser nodded vigorously.
“The company is a very strong brand, it stands for innovation, quality, reliability; We can’t afford to lose that,” the 57-year old CEO said. “We still have to be Siemens.”
Kaeser, who joined Siemens as a business studies graduate in 1980 and has spent his entire career there, is what Germans call a true Siemensianer -- the long-term employees who form the corporate backbone. That represents a big change from his predecessor, Peter Loescher, the first outsider to run the sprawling industrial colossus.
Loescher was recruited after a corruption scandal in 2006, triggering investigations in at least a dozen countries and culminating in payments of $1.6 billion to settle probes in the U.S. and Germany in 2008. While Loescher gained plaudits for ending the graft, he also oversaw five missed profit goals in his six-year tenure, culminating in his ouster a year ago. Loescher declined to comment.
Kaeser’s role as chief financial officer throughout Loescher’s term has led some analysts to suggest he bears some responsibility for the company’s recent financial struggles.
“He’s part of the old regime,” said Brian Langenberg of Langenberg & Co. LLC in Chicago. “If you’ve been on a team that’s been mediocre for a long time, you’re part of it.”
Kaeser says his time in Silicon Valley with a Siemens microelectronics division in the 1990s gave him insights into the importance of the company’s digital strategy. It was in that four-year stint that Josef Kaeser the Bavarian villager reinvented himself as Joe Kaeser the fan of American football and U.S. tech prowess.
He also learned details of Siemens’s failure to invest in Cisco. As a startup in the 1980s, Cisco asked Siemens to invest. The German company declined to take a meeting, seeing no future in a technology that placed phone calls over some newfangled thing called the Internet. Even as Cisco itself risks being left behind as networking shifts from hardware to software, the story has become a parable for Kaeser.
“The risk is that the incumbent is so slow and so arrogant about new technology that at the end they lose out,” he said.
The company last year hired Jim Hagemann Snabe, former co-CEO of business-management software maker SAP AG, as a supervisory board member. Kaeser says Snabe can help Siemens more fully integrate digital services into its traditional industrial goods.
Part of the push will involve seeking partners in fields such as data analytics, similar to April’s tie-up with Intel Corp.’s McAfee unit on cyber-security products for factories. That is a challenge, since some companies may simply seek to use the data acquired at Siemens’s expense, according to Kaeser.
“The last thing you want to do is have IBM in your bedroom because it’s not going to be a lot of fun,” he said.
Siemens’s experience in consumer electronics highlights the challenge Kaeser faces. Once a top mobile-phone brand, Siemens paid Taiwan’s Benq Corp. to take that business in 2006 after its market share crumbled. In 1999, Siemens folded its personal computer unit into a venture with Fujitsu Ltd. then sold the stake in 2008. Today, the only Siemens-branded consumer products are appliances made with Robert Bosch GmbH.
Even with digitalization now a pillar of future growth, convincing top managers of its importance was not easy. From 2008, Gerald Kaefer spent four years pushing cloud computing, the storage and aggregation of data and processes remotely, at Siemens.
“When I made the first presentations on cloud computing in the company, people watched with wide-eyed excitement,” said Kaefer, who now heads a group working on cloud computing and big data for industrial applications at the company. “They’d say ‘Wow, it sounds cool,’ but everyone thought it didn’t affect them at all. It took a long time.”
Yet old-line industrial goods, especially those related to energy, remain Siemens’s biggest revenue-generator. In those businesses, Siemens risks losing more ground to its old nemesis GE as production of shale oil and gas booms.
Kaeser this year sought to outbid GE for energy assets of Alstom SA, but the American company prevailed, allowing it to expand on Siemens’s home turf in Europe. During the battle for Alstom, Kaeser bought the gas turbine business of Rolls-Royce Holdings Plc, and he pledges more purchases.
Though profit continues to trail that at GE, Kaeser’s revamp is starting to bear fruit. On July 31, Siemens beat analyst estimates with a 36 percent surge in earnings helped by lower costs and increased profit from factory- and building-automation services. Kaeser is also eliminating a layer of management set up by Loescher, which could affect as many as 11,600 jobs.
“We want to get as much bureaucracy out as we can, and save a lot of money as we do,” said Kaeser, who expects to save 1 billion euros by 2016. “It’s got to have a massive cultural revolution.”
Kaeser’s data-analytics effort could pit him against Google, which is moving into the $364 billion U.S. power-sales market with tools that help utilities deliver electricity to homes and businesses more efficiently, people with knowledge of the matter told Bloomberg News. That’s pretty much the same idea behind the smart grid business that Kaeser is keen to expand.
“Smart grid is nothing but software, data and efficient use of data,” Kaeser said.
The odd man out is Siemens’s health-care business, which was expanded with acquisitions under Loescher. While it has no strategic ties to electrification and automation offerings, it’s Siemens’s most profitable division.
Kaeser has decided to spin off a hearing-aid unit and then create a new internal division for medical imaging, diagnostics and the rest of the health-care business.
That’s emblematic of Kaeser’s goal of streamlining Siemens even as he makes it more global. Five of the seven members of the managing board -- including Kaeser -- were born within a 100-mile radius of Erlangen, Siemens’s manufacturing hub deep in the Bavarian hinterland.
Kaeser has said that by 2020 a third of managers should be outside Germany. On Aug. 1, he added the company’s first board member based abroad when former Royal Dutch Shell Plc executive Lisa Davis took over the energy business. The 50-year-old, the only woman among Siemens’s top 16 operational chiefs, will be based in Houston to target key customers.
After the tumult of the Loescher years, Kaeser represents a transition for the venerable company, said Christoph Niesel, a Union Investment fund manager in Frankfurt who oversees about 1 billion euros of assets including Siemens shares. Yet he has to be careful in winning over workers and managers who are wary of yet more restructuring programs.
“He has the chance to start the Kaeser era,” Niesel said. “He’s got to make it happen, he has the responsibility, no excuses. He is Mr. Siemens.”
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