Siemens Mobile: Coming Through Loud and Clear Again

The key unit is back in the black, but for how long?

Rudi Lamprecht, the man responsible for Siemens' (SI ) mobile-phone business, grabs a green felt-tip pen and starts drawing on the wall of his Munich office. The first line heads downward at an ugly pitch. It shows how his division plummeted from a quarterly profit of $188 million at the end of 2000 to a loss of $439 million by mid-2001. "It was a rough year," Lamprecht concedes. Then he draws another green line. But this one tilts upwards, representing the division's return to a $32 million profit in the quarter ended Dec. 31. A smile breaks out under Lamprecht's bushy moustache.

Lamprecht's office wall is washable. But how indelible is the turnaround? That question is crucial for the future of the $75 billion German electronics giant, which manufactures everything from power plants to lightbulbs. The performance of Siemens' mobile-phone division is a key test of whether the stodgy behemoth can churn out hot new products capable of grabbing the attention of today's fickle consumers. Lamprecht's unit was the second largest in terms of sales in the fiscal year ended Sept. 30, 2001. And until last year, it also was one of the most profitable.

Signs are that it could be again. The introduction of several new products helped Siemens reclaim the No. 4 spot in handset sales worldwide from Samsung at the end of 2001, according to market research firm Gartner Inc. Winners include the $215 C45, which lets owners personalize their phones by downloading quirky ringer melodies and screen logos. Meanwhile, Siemens and its Japanese partner NEC (NIPNY ) are emerging as early leaders in supplying equipment for third-generation mobile telephone systems. Italian telco H3G recently placed a $600 million order. Deals also are picking up in developing markets, such as China, and in the U.S., where carriers are shifting to digital mobile systems. "Siemens did a staggering job in the fourth quarter," says Ben Wood, a senior analyst at Gartner.

That's quite an improvement from a year ago. European handset sales began to slow at the end of 2000, prompting warnings from analysts that the market was nearing saturation. Lamprecht admits he and his lieutenants took at least a month to swing into action. "We could have done better," says the 53-year-old executive, who spent 20 years at Hewlett-Packard Co. (HWP ) before joining Siemens in 1996.

In April, Lamprecht bit the bullet. He fired 2,600 workers--a radical move in Germany. Yet since he had staffed his three German factories mostly with temporary workers, Siemens was spared the lengthy negotiations with unions and costly severance packages that are the norm here. He and his managers also shut down production lines and trimmed advertising. The cost-cutting measures yielded some $700 million in savings.

Now Lamprecht can relax--a little. Handset sales are climbing again, thanks to new models, such as a combination mobile phone and personal digital assistant that sells for $960. The spectacular growth of the late 1990s won't repeat itself, but sales of mobile handsets and equipment could still boost divisional profit by 15% or 20% a year, Lamprecht figures. "How many markets are there with that potential?" he says.

The future is not all rosy. U.S. and European telecom companies are in debt up to their eyeballs and may not have enough cash to invest in the latest equipment. Besides, no one knows whether consumers will want 3G wireless service enough to pay extra for it. Last but not least, cellular handsets are morphing into multipurpose gadgets, complete with digital cameras and music players. That could favor competitors such as Ericsson (ERICY ), which has entered into a joint venture with consumer electronics giant Sony Corp. (SNE ) Neither can Siemens dream of displacing industry leader Nokia Corp. (NOK ), which sells three times as many handsets. And analysts are skeptical that the German company can do what even Motorola Inc. (MOT ) and Ericsson admit they can't--stay profitable all four quarters of 2002.

Yet if Lamprecht pulls it off, he will be on the short list to succeed Siemens CEO Heinrich von Pierer, who is expected to retire in 2004. As CEO, Lamprecht could write on the wall as much as he wants. Provided, of course, those fever lines keep heading upward.

By Jack Ewing in Frankfurt with Kate Carlisle in Rome

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