Siemens' New Boss

World-class profits have been elusive. Can Klaus Kleinfeld deliver them?

Workers at a Siemens (SI ) unit that makes X-ray machines and other diagnostic equipment were shocked when, in 1998, a cocky new boss asked them to work more flexible shifts to speed production. The new guy, a 40-year-old up-and-comer named Klaus Kleinfeld, even wanted some people to work weekends, then practically unheard of. Yet employee representatives knew the unit in the Bavarian town of Forchheim was getting beat up by rival General Electric Co. (GE ), and that shareholders were nagging Siemens to dump its medical equipment unit. Everyone's job was on the line.

The negotiations were tough. But Kleinfeld won over workers, hanging around the factory asking detailed questions. He answered e-mails from employee reps almost immediately, even late at night, recalls Werner Mönius, chairman of the workers council in Erlangen, Germany, home base of Siemens Medical Solutions Div. "He was able to motivate people to pull together," says Mönius. The workers signed off on Kleinfeld's plan, which helped cut the time it took to build a $100,000-plus diagnostic scanner from six weeks to one. Siemens Medical is now Siemens' most profitable business.

And that cocky young boss? This month Kleinfeld, now 47, becomes chief executive of Munich-based Siemens, a $100 billion behemoth that operates in 190 countries and makes subways, light bulbs, power plants, auto parts, automatic mail-sorting equipment, and more. With 430,000 employees and 12 major divisions, Siemens is the rock of Germany Inc., which still needs to learn how to survive and thrive in a world where heavily taxed, slow-moving European companies operate at a disadvantage. If Siemens can reach new levels of profitability, maybe the rest of Corporate Germany has a chance, too.

Siemens Chief Executive Heinrich von Pierer and the company's supervisory board, which includes such corporate luminaries as Deutsche Bank (DB ) CEO Josef Ackermann and former Allianz Group CEO Henning Schulte-Noelle, skipped over more seasoned top managers to choose the ferociously energetic Kleinfeld. He's a prime example of a new breed of German manager, fluent in English and comfortable in settings from Tokyo to Toledo. "This generation has grown up in a much stronger international environment than the earlier one," says Hermann Simon, chairman of Bonn consulting firm Simon-Kucher & Partners. "They understand the need to be global." With his big laugh and knack for storytelling, Kleinfeld knows how to network globally as well. He sits on several corporate and charitable boards abroad, including aluminum-products maker Alcoa (AA ) and the Metropolitan Opera in New York. "I love him. He's a generous, funny man," says Beverly Sills, chairman of the Met, who gushes about Kleinfeld's ability to appraise opera performances.


But Kleinfeld probably should not let such praise go to his head. His swift rise and role as an internal consultant at Siemens, which had him parachuting in to fix troubled businesses, inevitably bred resentment in some quarters. And it will take Kleinfeld years to match the stature of von Pierer, who has become something of a national hero after steering Siemens through an age of rapid globalization. If Kleinfeld pushes for change too hard, he will face resistance from labor, the government, and even colleagues on the Siemens management board.

If nothing else, Kleinfeld should help put to rest stereotypes about dour German execs. At a November dinner in Munich with business journalists, one Italian scribe waved his Nokia (NOK ) mobile phone in Kleinfeld's face and demanded to know how Siemens can compete with the handset industry's market leader. Kleinfeld replied by snatching the Nokia phone and dropping it in a glass of water. The message: We'll drown the competition. (Kleinfeld later gave the journalist a waterproof Siemens phone instead.) But the reporter's question was legitimate. Does Kleinfeld have what it takes to fix Siemens' money-losing mobile-handset business and other underperformers?

On the plus side of the ledger, Kleinfeld inherits a company that has made massive progress under the diplomatic von Pierer, who took over in 1992. Since then, Siemens sales have nearly doubled, to $98 billion, and profit has more than tripled, to $4.5 billion, a sum analysts expect to increase by at least another 10% in 2005. Contrast that with Swiss-Swedish ABB Ltd. (ABB ), battered by asbestos-related litigation and overexpansion. Once seen as Siemens' equal, ABB is now struggling to regain investment-grade status for its debt.

In its home market of Germany, where Siemens has 38% of its workforce -- compared to 58% in 1994 -- employees are demonstrating a willingness to work longer and accept modest pay raises to keep jobs from moving overseas. Abroad, Siemens can draw on a lower-cost workforce and decades of experience to cash in on rapid growth in giant markets like China and India. In December, for example, Siemens won a $460 million order to supply locomotives to China's state railway. Profit in the fiscal year ended Sept. 30 was up 40% over 2003.

But Siemens still suffers in comparison to archrival GE, whose shares have had a total return of 423% over the past 10 years, vs. 273% for the German company. Von Pierer himself has admitted that he wasn't always able to push change as fast as he would have liked. It's not just a question of cutting costs. "In the innovation game, productivity and R&D matter more than cost structure," says William M. Castell, CEO of GE Healthcare. Siemens boasts that its engineers and scientists generate more than 8,000 inventions a year, but it needs to do more to turn those innovations into commercial products. Siemens was a leader in introducing mobile-phone handsets with color screens and built-in MP3 music players, for example, but wasn't able to translate its tech edge into market strength.

At a fundamental level, Kleinfeld must justify Siemens' existence. In contrast to GE, Siemens has not persuaded the market to value the company for more than its 12 units would be worth separately. Munich bank HVB Group figures Siemens is worth about $96 per share based on a sum-of-the-parts valuation. The stock trades at about $80. Siemens' performance is just not consistent enough, investors say.

Take the 2004 fiscal year. Some Siemens divisions recorded double-digit profit margins, such as the Automation & Drives unit, whose products are used in manufacturing and logistics, and Osram, a maker of lighting products. But Siemens Transportation Systems posted a $570 million loss because of a costly recall of defective streetcars. "You never [see] a great year when all businesses are performing well," says Henning Gebhardt, head of German equities at DWS, a big mutual-fund company. Only by eliminating the "conglomerate discount" can Kleinfeld silence critics who say Siemens should be broken up.

Can Kleinfeld succeed? He doubtless has the drive. Kleinfeld's father, a shipyard laborer who became an engineer by studying nights, died when the boy was 10. That was a "brutal" experience, Kleinfeld says, but the hardship that followed forged a determination to succeed. An only child, he stocked grocery shelves at age 12 and has held a job ever since. After studying business at Georg August University in Göttingen, Kleinfeld put in stints at a Nuremberg market research firm and at drugmaker Ciba-Geigy before joining Siemens' corporate sales and marketing department in 1987.

The new Siemens chief was a multitasker before anyone used the term. Many of his generation milk Germany's free university system for years. But Kleinfeld completed his doctorate at the University of Würzburg while working full-time at Siemens and raising a young family. (His wife, Birgit, is a teacher, and they have two school-age daughters.) "That was an extreme burden," recalls Ulli Arnold, now a business professor at the University of Stuttgart, who supervised Kleinfeld's thesis work on corporate identity and strategic management.


His stamina is already legend inside Siemens. "Working hard earns the right to play hard," Kleinfeld once told students at the University of Rhode Island, and he lives the creed. George C. Nolen, CEO of Siemens Corp., the company's U.S. unit, recalls returning from a European trip with Kleinfeld, who runs or lifts weights every day. "I was dead tired, and he runs the New York City marathon. The guy has endless energy," Nolen says.

Kleinfeld's résumé reflects ambition as well as talent. He has held 10 jobs within the company in 17 years, including building Siemens' in-house consulting arm into a power center. The unit had eight consultants when he took it over in 1995. Under Kleinfeld, it grew to 170 operating under direct control of the management board, and was involved in turnarounds of divisions such as power generation. It helped formulate and run the TopPlus program, a late-'90s drive to apply stricter standards to managers and fix or prune marginal businesses.

His job-hopping and role as an internal consultant have led to muttering that Kleinfeld is short on operational experience. "He's a bit full of himself," says one outsider who has worked with Kleinfeld. But his stint as a consultant has also allowed him to explore every corner of the far-flung Siemens empire. He enjoys regaling dinner partners with tales of his adventures, such as an all-night session with the glum managers of a troubled Japanese unit. By dawn, fatigue and sake loosened the managers' reserve: They worked out a new business plan.


Winning friends and influencing people -- and neutralizing the rest -- is crucial at a vast company where local barons have built their fiefdoms over the years. Kleinfeld was one of the main inventors of One Siemens, a program designed to get company units to cooperate better to win business. He got a chance to put theory into practice when Siemens sent him to the U.S. in January, 2001, first as chief operating officer then, a year later, as CEO of New York-based Siemens Corp. Under Kleinfeld, units including Medical Solutions and Power Transmission & Distribution joined together to supply diagnostic equipment, software, telecommunications, and power to a new hospital being built in Temple, Tex., for Scott & White Healthcare System.

Siemens used the same approach to play a major role in the construction of Houston's Reliant Stadium. Such solidarity works: Kleinfeld inherited a roughly $500 million loss when he arrived in the U.S., according to the company. By the time he left at the end of 2002, Siemens' U.S. operations were $500 million in the black on sales of $20 billion. Now Siemens is rolling out One Siemens worldwide.

Kleinfeld won't enjoy unlimited power as he tries to crunch Siemens into a seamless unit. Formally, he is not CEO but chairman of the management board, a body that operates on the principle of consensus. One board member, CFO Heinz-Joachim Neubürger, 52, also campaigned for the top post, say people close to the company. If Neubürger stays on, his control over finances could allow him to obstruct Kleinfeld initiatives (the company insists the two have a collegial partnership). Von Pierer will also remain very much a presence as chairman of the supervisory board, which also includes labor representatives.

Von Pierer promises not to be paternalistic. Still, the presence of so many gray heads on the board may act as a brake on Kleinfeld early in his tenure. Last year, Kleinfeld's fingerprints were on the decision to merge Siemens' mobile and land-line telecom businesses, a move analysts say was long overdue. But more radical steps such as further job cuts may be necessary at the communications division, which had operating earnings in fiscal 2004 of just $176 million on sales of $6.5 billion. The money-losing handset business may have to merge with a rival such as Japan's NEC Corp. (NIPNY ) or China's Huawei Technologies Co. Siemens may also need to find a partner for its large but unprofitable information technology services arm, Siemens Business Services.

Kleinfeld probably can't take such action without von Pierer's support. But he may get it. Siemens is scheduled to announce plans for the handset unit on Kleinfeld's first day as CEO, and von Pierer has said sale or closure are options. Even in labor relations, Kleinfeld has room to maneuver. Labor leaders know that they must give way on wages and hours to slow the outflow of jobs to Eastern Europe and China. "We can hinder it, but there's not much we can do to stop it," admits one top official of the IG Metall union, which represents Siemens workers.

A whole generation of young Siemens executives, keen to conquer the world and frustrated with the bureaucracy, is also rooting for Kleinfeld. Robert H. Schaffer, a Stamford (Conn.) consultant who has helped design training programs for Siemens as well as GE, says that the mid-level managers at Siemens "are as bright and as aggressive as any I have met." Bright and aggressive -- that describes Kleinfeld, too. The talent is there. But the task -- transforming the prime symbol of Germany Inc. -- is huge.

By Jack Ewing

With Diane Brady in New York

— With assistance by Diane Brady

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