Siemens Climbs Back

The German electronics giant has embraced speed, innovation, and the art of pleasing customers

Siemens used to make the toughest telephones in the world. You could chuck one against the wall, pick it up, and still hear your boss screaming on the other end. No wonder: It was constructed by engineers so bent on quality that they designed and produced their own screws. Early mobile phones took workers at the German giant a painstaking 13 hours to produce. Problem was, hardly anybody wanted to pay for that kind of gold-plating. No surprise that, by 1998, Siemens had slipped to ninth place worldwide among mobile-phone makers and was losing money at it.

Flash-forward to 2000, the city of Kamp-Lintfort in northwestern Germany. Siemens C35i mobile phones slide off an assembly line as though they were cinnamon buns, one every seven seconds, still warm as they plop into Styrofoam packaging. Each phone requires all of five minutes to produce. True, you probably don't want to chuck your C35i against too many brick walls. But it retails in Germany for $230--half the price of the comparable Nokia 7110 while offering lighter weight and longer battery life. "Siemens gets it," acknowledges a senior Nokia Co. executive. "They're making great progress."

Led by such products, Siemens is on track to triple its sales of mobile phones this year, to 30 million. It has already passed Alcatel and Ericsson to take the No. 3 spot behind Nokia and Motorola in Europe, and analysts expect the business to double its pretax profit margin, to 10%.

Siemens' mobile-phone business exemplifies the changes that are making competitors take the Munich company seriously again. The German manufacturing conglomerate, which makes everything from gas-turbine generators to streetcars to light bulbs, has always had great engineers. But it only recently found out that it takes more than that to beat competitors such as General Electric Co. and Nokia. "In the past we developed our products, then threw them over the fence and hoped somebody would catch them," says Rudi Lamprecht, who gets credit for turning around the mobile-phone business. Siemens has since learned that success also requires marketing, up-to-date design, and ruthless attention to costs.

The process was a painful one for the $61 billion company. But the payoff is obvious. Profits, which sank by two-thirds from 1996 to 1998, are suddenly soaring. Led in part by the mobile-phone business, net income doubled in the first quarter--not counting one-time gains--to $694 million on sales of $17 billion. The share price has doubled from 1999. Analysts are upgrading Siemens' shares, saying they're worth up to 30% more than the current price of $133.

It's a triumph for Siemens CEO Heinrich von Pierer, 59, who barely a year ago faced calls from investors to resign. It's also a triumph for German industry. Siemens' problems are Germany's problems. Its faults were typical of dozens of German manufacturers: great engineers, iffy marketing. High labor costs and taxes. Overregulation. Complacency after years of government coddling. If Germany's "sleeping giant" can prosper in the global economy, so can dozens of other German companies that face the same challenges.

The big question: Does the turnaround have staying power? Some fear it could deteriorate into a lackluster sequel. The "Siemens turnaround story" has been sold by company executives at least twice since the 1980s. But each time, just when the company seemed on the verge of success, the turnaround was derailed by some nasty surprise, such as a downturn in the chip market or the Asian financial crisis. And Siemens faces the ever-present menace of the efficient and ruthless GE, backed by its rich financing arm, GE Capital. Although it's working hard to bolster its engineering prowess with services, Siemens has a long way to go before it reaches GE in getting close to customers. For profit, it has nothing to match GE Capital.

Some of Siemens' recent success is just luck. The weak euro, which puts the mark at a 14-year low against the dollar, makes many of its products cheaper overseas and handicaps U.S. competitors in the European market. Asia, which accounts for 11% of sales, is growing again. Siemens still has to prove it can prosper even when conditions aren't so balmy. "It's fantastic what Siemens has accomplished," says Elisabeth Weisenhorn, co-head of equities at DWS, the fund-management unit of Deutsche Bank, which owns 3.9 million Siemens shares. "But they can't afford to stand still."

If anything has changed at Siemens, it's the company's attitude. Von Pierer is trying to hard-wire the ideas of speed, innovation, and customer-pleasing products into the company's collective consciousness. Joint committees of engineers and marketeers oversee new-product development. They have learned to cooperate on grabbing customers' attention while outsourcing manufacturing jobs not essential to the company and jumping on new ideas, even if the competition comes up with them first.

Thus the mobile-phone unit no longer builds its own screws. Mobile-phone chief Lamprecht recruited people from Procter & Gamble Co. to teach Siemens about selling to consumers. Following competitors such as Cisco Systems and Nortel Networks, Siemens has sold several plants that make its telecom equipment to independent suppliers. The Medical Engineering unit has copied GE in selling services and software instead of just equipment. It now links digital X-ray imaging equipment with Siemens' expertise in telecommunications and computers. That way, doctors can view patient X-rays from terminals anywhere on a hospital network. The new approach is paying off: In the quarter ended on Mar. 31, Medical Engineering boosted pretax profits 46%, to $108 million.

The story of Siemens' remaking is also the story of von Pierer's evolution from a benevolent leader to a taskmaster. When he took over in 1992, Germany was still riding the high that followed reunification with the East. Most of Siemens' customers were governments or public monopolies that bought big-ticket items such as trains, power plants, and telephone systems. The ministries didn't worry too much about cost: Siemens' biggest customer was the bloated German telephone monopoly, Deutsche Telekom.

Then the orders from the rebuilding of east Germany started to taper off. International competition sharpened, and prices fell. Siemens changed, too. It cut its German workforce by 17% and sold off businesses worth $2 billion. It stripped out layers of middle management and tried to foster innovation. By 1995, the company was crowing about its amazing transformation. But then the dollar plunged against the mark, making Siemens products too costly to compete overseas.

And as much as Siemens had changed, competitors were changing faster. They were cutting costs and getting closer to customers, which now were more likely to be corporations or consumers than governments or monopolies. The computer and telecommunications industries began to move at Internet speed, and Siemens' cautious engineers couldn't keep up. Productivity gains of as much as 10% a year were canceled out by price declines--a continuing danger. In 1998, company shares fell 23%, while net income slumped two-thirds from its 1996 peak of $1.36 billion. "This wonder machine wasn't ticking, and people realized something was wrong," recalls Gerhard Schulmeyer, CEO of Siemens' U.S. unit.

Indeed, investors were starting to ask if von Pierer was tough enough to cope with Siemens' problems. He was known as "the good guy from Erlangen," a former politician who served on the city council of his hometown in the 1970s and once thought about running for a seat in the German Parliament. Trained as a lawyer, von Pierer spent most of his career in a Siemens unit that builds power plants--experience that provided good training in running big projects but very little in marketing or deal-making. As Siemens' CEO, he cultivated friendly relations with workers and preferred to build consensus rather than give orders. That benevolent approach was very much in step with tradition at Siemens and most German business. But it didn't make von Pierer popular with investors. They clamored for a ruthless cost-cutter in the manner of Jurgen E. Schrempp, CEO of DaimlerChrysler, and began openly to demand that von Pierer resign.

By 1998, Siemens' situation had become critical, von Pierer admits. The volatile semiconductor business turned against Siemens. As the unit racked up losses, von Pierer realized he would have to close a chip plant in North Tyneside, England, that had opened with much fanfare only 15 months earlier. The telecom unit was in trouble because Siemens failed to see that mobile phones were becoming fashion accessories for the masses rather than technology for the elite. Siemens lacked the right products for the burgeoning market. And there were quality problems with a new gas turbine, damaging Siemens' power-generation business.

Usually the extroverted von Pierer likes to consult other executives before making major decisions. But this time, he acted almost alone. He retreated to his office in a 19th century former palace in Munich. Working with Communications Director Eberhard Posner, he drafted a 10-point plan to get Siemens back on track. It called for the company to sell or close poor-performing units if it couldn't turn them around and make acquisitions that made all the remaining businesses leaders in their field. It set much tougher profit targets for managers. By the end of 2000, Siemens wanted to be in shape to face the world's most cold-hearted investors: Americans. The culmination of the plan was a listing on a U.S. stock exchange by early 2001. Siemens started crawling back.

TENSE MEETINGS. Looking for the right turnaround formula, von Pierer admits he has stolen a page or two from John F. Welch Jr., CEO of archrival GE. For example, Siemens now holds quarterly meetings where top managers report on the state of their businesses. The manager with the worst performance goes first. The CEOs and CFOs from Siemens' 14 business units gather for two days in Feldafing, a wooded suburb of Munich, in a concrete building with comfortable but Spartan accommodations. They sit in a half-circle and get grilled by von Pierer. Neckties are optional, but the mood last year wasn't exactly relaxed, says a Siemens executive who attended. "Von Pierer's not one to yell, but he can say things that make you pretty hot under the collar," he says. Some 60% of managers' pay is tied to performance.

No one has yet nicknamed him "Chainsaw Heinrich," but von Pierer has cut jobs. He avoided massive layoffs, yet through early retirement or sale of businesses, he has whittled Siemens' high-cost German workforce by almost a third, from a peak of 253,000 in 1992 to 179,000. And managers aren't exempt. Since the appearance of the 10-point program, he has shed a fifth of the top 100 managers. He still prefers to work by consensus. But now, he's more willing to override subordinates.

To his credit, von Pierer has managed all that without suffering a major strike in more than six years. On the contrary, employees have made concessions, such as agreeing to work on weekends for weekday pay. As in Germany as a whole, Siemens workers have been savvy enough to realize they have to be flexible to compete. "One has to be realistic," says Ralf Heckmann, chairman of Siemens' workers council. Workers also have realized that a high share price is in their interests: It helps defend against an unwanted takeover.

Siemens' top layer of management underwent a revamping, too. Krubasik joined Siemens from consultant McKinsey & Co. in 1997, while Heinz-Joachim Neuburger, a corporate-finance specialist at J.P. Morgan in Frankfurt, became chief financial officer in 1998. Both are credited with putting more focus on profits and stock performance. "If you had asked a Siemens manager five years ago: `What is the stock price?' I'm sure you would have drawn a blank," says U.S. chief Schulmeyer.

In line with von Pierer's 10-point plan, Siemens has gone on a buying and selling binge to focus more on businesses where it stands a chance of being world leader. For example, Siemens is trying to bolster its marginally profitable transportation business by joining with France's Alsthom to produce a new high-speed train. That will spread out the huge development costs and ensure a bigger market. Meanwhile, Siemens has made acquisitions in areas where it sees big growth, such as telecommunications, auto electronics, building management systems, and medical software.

In April, Siemens spun off its Infineon semiconductor unit, which helped distance it from the volatile boom-or-bust chip industry and raised $5.4 billion in a stock offering. Von Pierer is planning to raise more capital for acquisitions by selling a minority stake in Siemens' U.S.-based Unisphere Solutions Inc. unit, which makes telecommunications equipment. And he has sold businesses that made power cables, electronic components, automatic teller machines, and diesel locomotives. Meanwhile, it transferred its troubled PC business to a joint venture with Fujitsu Ltd.

Investors like the new look. At the annual meeting on Feb. 24, an overflow crowd packed Munich's Olympiahalle. True, some shareholders came to collect the "wurst dividend," as Germans refer to the free food. But they also wanted to applaud von Pierer for doubling their money. Come Oct. 1, Siemens will start reporting according to U.S. accounting principles.

Von Pierer promises more good news. A massive e-commerce push will let Siemens conduct 50% of consumer-oriented sales online within a few years, saving billions, he says. And he hopes to sell a host of new information-technology services to corporate clients.

Siemens is betting much of its future on telecom. Hundreds of billions of dollars are at stake as telecom companies build next-generation mobile networks and upgrade their fixed-line networks to handle broadband multimedia services. "That makes companies such as Siemens a lot more relevant," says Jeffrey C. Smith, CEO of Tumbleweed Communications Corp., a Redwood City (Calif.) maker of e-business software that works with Siemens.

TOUGH RIVALS. Maybe. But telecommunications is also a volatile, unpredictable business with costly consequences for any company that misreads a shift in technology. The competition is the toughest in the world. To prevail in those businesses, Siemens will have to vanquish the likes of Nokia and Cisco. And it has a ways to go before it can really compare with such corporate stars. As a conglomerate, Siemens faces an automatic disadvantage. "Its senior management must inevitably have more on its mind than communications, while they're competing with managers who have only communications on their minds," says Morgan Stanley Dean Witter analyst Angela Dean.

Take Unisphere Solutions. Siemens created the Chelmsford (Mass.)-based unit by buying three startup companies last year and combining them. That was a smart move that has helped Siemens compete with Cisco in supplying Internet plumbing. But teaching Siemens the rules of the New Economy hasn't always been easy, says Unisphere COO Tom Burkardt. He complains that Siemens is still burdened with too many middle managers who resist change. It's like an Oreo cookie, says Burkardt: "The guys at the top and the guys at the bottom get it. The problem is the creamy filling."

Von Pierer, who won't hit Siemens' retirement age until 2005, seems to recognize the danger. "In Germany, competition was like a wind. Now, it's a storm. And it will become a hurricane," he says. "You have to move fast or lose." If von Pierer succeeds in making Siemens into Germany's first New Economy conglomerate, it will likely be because he followed his own advice.

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