Commentary: Siemens Was Smart To Bail Out Of P Cs

The computer wars of the 1980s produced some costly flops in Europe: France's Groupe Bull, Italy's Olivetti, Holland's Philips Electronics. By 1997, Siemens-Nixdorf Informationssysteme was the only European PC maker challenging leaders such as Compaq and Dell. After three years of restructuring under CEO Gerhard Schulmeyer, the Munich company looked as if it would keep carrying Europe's flag in PCs. But on Apr. 30, parent company Siemens said it would sell SNI's PC production to Taiwanese rival Acer Inc.

Appearances aside, Siemens' decision is not a defeat for European technology. Churning out low-margin PCs won't help Europe in the high-tech markets of the 21st century. Siemens' decision to let PC production go is a sign that Europeans are learning the virtue of outsourcing hardware production. It also shows that Europeans at last grasp the validity of shareholder value as a management principle. Europe's managers must stop trying to win in all markets if they are to win in those for next-generation products and services.

IMPOSSIBLE TASK. U.S. companies grasped this truth a decade ago. They let everything from commodity memory chips to consumer electronics shift to Asian producers without losing technological prowess. Prodded to innovate in the face of competition, they sometimes rebounded in the same industry. In other cases, they outsourced and invested elsewhere.

SNI's exit from PC production was not a desperate move. Indeed, its turnaround under Schulmeyer has been admirable. In the fiscal year to Sept. 30, SNI reported revenue growth of 13%, to $8.6 billion, while pretax profits more than doubled, to $58 million. But trying to beat global competitors such as Dell and Compaq at their own game was an impossible task. Schulmeyer nearly quadrupled sales over four years, but Compaq's volume, 11 million units, dwarfed SNI's 1.4 million--less than 2% of the global market. "To win, we would have had to enter the global game much earlier," Schulmeyer admits. "It's a game based on volume, purchasing power, and logistics."

Together, Acer and SNI will have five times the purchasing power that SNI had alone, meaning lower component prices for bigger orders--and bigger margins. Siemens will sell Acer-built PCs under its own brand name and focus on corporate buyers while Acer handles the consumer market.

With PC production unloaded, Siemens can concentrate on developing its strength in higher-margin computer services. Although Siemens will continue to design and sell servers, Unix systems, and mainframes, services will make up about 80% of its computer operations. The market for global computer services is growing at a healthy 20% clip. Margins, though under pressure from growing competition, run to 20%, far higher than in PC manufacturing. Through the alliance with Acer, Siemens will gain new exposure to Asia and the U.S. That should boost the bottom line and please Siemens' shareholders, who have been demanding higher returns for years.

To succeed in computer services against giants such as IBM, Hewlett-Packard, EDS, and Andersen Consulting, Schulmeyer will have to maintain his effort to speed response times. "There are competitors in more markets playing with more muscle," says Will Cappelli, director of services and network systems at London-based market researcher Giga Information Group. But learning to beat the best in systems integration and network solutions plays more to Germany's strengths than low-cost manufacturing does. Moving into services, says Simon Pearce, PC analyst for International Data Corp. in London, "is an opportunity for Europe to shine."

The Acer deal is not the only change in Siemens' strategy. Its board also decided to merge SNI with Siemens' $21.5 billion telecommunications business. The Internet revolution is blurring the boundary between computers and telecoms. The merged operations will be a $28 billion information and communications goliath, with units focused on services, networks, and products.

Making this move pay off will be tough going. Nimble players such as Cisco Systems Inc. are poised to run circles around Siemens. The biggest risk is that any potential synergy between computer and telecom experts at Siemens will be stifled by the bureaucracy and inertia of a big organization. If Siemens can create a lean, flexible organization and add speed to its technology skills, it has a chance of holding its ground in tomorrow's computer markets.

Before it's here, it's on the Bloomberg Terminal.