Siemens' Worldly Ways

CEO Kleinfeld says that in energy, health care, and infrastructure, the German conglomerate is poised to capitalize on global "megatrends"

Siemens, the Munich electronics and engineering giant, has long been known as competent but a little slow. Profits rarely measure up to those of rivals such as General Electric (GE). Klaus Kleinfeld, who took over as CEO in early 2005, is trying to change that. The 48-year-old marathon runner has set tough targets for all Siemens (SI) divisions, which make products ranging from X-ray machines to fuel injectors to turbine generators. And he has sold underperforming units such as the mobile handset business.

In a lengthy interview with BusinessWeek editors David Rocks and Eric Schine, Kleinfeld described how he plans to exploit Siemens' global presence to profit from "megatrends" such as demand for infrastructure in developing countries. Edited excerpts of their conversation follow.

In the past you have spoken about various megatrends affecting society and the world. What do these mean for a company such as Siemens?

Let's look at what's happening on this planet. One thing is the demographic shift: population growth, aging, and urbanization. People are moving into the cities in hopes of getting a better life. That's happening massively all around the world. And if I look at what's needed, I suddenly see all of our technologies in there.

It's not that we are tailoring our strategy around the megatrends. But they give us a tailwind. We see this and we can jump onto it and say let's ride this wave. And it's a long-term wave and it's a long way to the shore.

But how does Siemens take advantage of that tailwind, those trends?

The way I would phrase it is, "How do I capitalize on them?" And I think there are three areas where we can capitalize very, very nicely. One is energy and environment. The second one is health care. The third one is the whole area of public and industrial infrastructure. India has 1.1 billion people. You see today already 350 million of them are considered middle class. That means they have an apartment and they send their kids to a reasonably good school.

So now what's next? They say, "We have a motorcycle; now we want to go for a car." That triggers a whole chain of things for us. There is a huge car manufacturing industry exploding in India. We are very strong when it comes to automotive electronics. We are also very strong when it comes to helping infrastructure and traffic management. And with more people moving into cities, what does it trigger next? Telecommunication infrastructure, water infrastructure, mass transportation.

What about energy and the environment?

The best way to protect the environment is increasing efficiency. We are working very hard to make our gas turbines more efficient. We are very good when it comes to power-saving lights. We have formed a group that can go into a building and do an analysis of the consumption of power, and then come out with a suggestion of how you make it more efficient.

For instance, in an airport, we look at combining the heating or cooling system with the scheduling system. A gate only gets heated or cooled and lit about 15 minutes before it is used. The rest of the time it's blocked off.

We've pretty heavily invested in clean water. We are building a wind factory in Iowa that will employ 250 people. In thermal energy there's a lot of excitement. That is very smart—part of it you can use for electricity, part of it you can use for heating. And in the U.S., we have some waste energy plants where we burn trash.

How big a business is this? Aren't these technologies still a niche market compared with gas- or coal-fired power plants?

Yes, they are. But wind will cover 5% or 6% of the total energy supply. Then it's not really a niche anymore. But it's also important to make gas turbines more efficient. And the biggest issue is how you turn coal into energy without all the pollutants coming out.

That's why coal gasification has become such an important breakthrough.

You can use the gas, or liquefy it and use it as diesel to drive cars and trucks. And you can split the CO2 out before burning. Then you can pipe it into existing oil pipelines and pump it down into old oil fields. CO2 can dissolve oil, so you can use it to get more oil out of old fields.

The third trend you mentioned is health-care demand. What's the potential and where is the growth?

Today we have 6 billion people on this planet, and very soon we will see probably 9 billion. With every individual comes a need for health care. And the fastest-growing segment today is those who are 80-plus. We are all living longer, which by itself shows that medicine has done us some good. But at the same time, we know that prolonging life is only enjoyable if you are healthy.

So for Siemens, how do you exploit this opportunity?

One way is the IT system. The foundation of it is the electronic patient record. We believe with this we can get the cost down and the quality up. In reality, the high-tech information system that exists in many hospitals is when a doctor passes the nurse a little note. Unfortunately, many nurses do not dare ask the doctor what exactly they mean. That's where a lot of the errors in the system stem from.

Nurses today are under unbelievable pressure. If a tired nurse is putting together the pills for the evening for the patient, you have no idea how often the nurse just takes the pill, boom, is tired and takes the same pill and puts it into the next bucket. We have connected our system to a very simple cupboard for the medications, with tiny doors and a handheld scanner. The computer shows the physician's order, says this is the medication, and then the nurse points the scanner at the door and if it doesn't match the medication, the door won't open.

That involves a lot of software. How big is Siemens in software?

When I started in '87, we still had a lot of electro-mechanic engineers. Today we have roughly 55,000 R&D people and, of those, 33,000 are software engineers. So, more than Microsoft has.

But this is different types of software. There's software for health care, a lot of application software, which is comparable to the Microsoft stuff. But a lot of the software is built into the system. For instance, a gas turbine runs so fast that the blades are literally glowing. You have enormous numbers of sensors sitting on there and you have enormous amounts of software in the background.

Does Siemens have to exist as Siemens? What is the point of this incredible sprawling conglomerate? What do medical devices have to do with trains and gas turbines? Would it be smarter to break it up?

This whole discussion of conglomerates is an indication that I'm truly getting old. Because it's now the third time that I'm seeing this going from black to white. You can almost set your clock to it.

But the fundamental question doesn't go away: What is the value that Siemens has? And I think there are very good answers. Last year we bought a company that is a world leader in gearboxes. Sounds like a very unsexy industrial piece. So what happens? We integrate it into our industrial automation business. The company was catering to, say, 20 countries. But we opened up 190 countries to that product. The products are very good, and suddenly we're sold out. That's a synergy that comes from the sales force.

Do your people who sell medical devices really know how to sell gearboxes?

No, no, but this example really shows us the synergy in the relevant business group. If you want to go to a high level, we are the only company that sells a concept like Digital Airports or Digital Hospitals.

We can have a discussion with a hospital provider who wants to build a new hospital and say look, let's discuss the diagnostic equipment. But we have more than that. Let's discuss the therapeutic equipment. We have more than that. Let's discuss lab equipment. That's not the end. Let's discuss the whole IT infrastructure of your hospital. We are not at the end. Power consumption, there's a big issue in a hospital because it's a huge building. Telecommunications. We know how to do this. So when you look at a hospital today, everything other than the concrete we either have in our portfolio or we have great knowledge to bring to the table.

On the R&D side, our center in Princeton does pattern recognition. It sounds unsexy, but in reality it is super. You can apply pattern recognition to medical images, but you can apply it to all kinds of other images, too. So we developed an intelligent algorithm to distinguish between a frogman coming out of the water or just the tide coming in. And now, it's in use at the launch site at Cape Canaveral.

Another area for synergy is people. One of the reasons why I joined Siemens is because I knew it was very international and I knew it was in many businesses that looked interesting. That's why I joined. And that's attractive for a lot of the high performers that we have.

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