Siemens strengthened after scandal

By Daniel Schäfer in Frankfurt

Published: July 5 2009 22:55 | Last updated: July 5 2009 22:55

When he became the first outsider to take on the top role at Siemens in July 2007, Peter Löscher was faced with the daunting task of reforming the 162-year-old company in the wake of a large bribery scandal that had left it badly damaged.

Two years on, investors say the chief executive has pushed through a larger revamp than others would have achieved in a decade. In large part the scandal helped, because it eased resistance to change from the traditionalists in the organisation.

“We have been lucky to make use of a homegrown crisis to prepare ourselves for the downturn,” Mr Löscher said recently.

He has stepped up compliance, changed the organisational structure, drastically cut overhead costs and also pushed for greater diversity.

“Today Siemens is a completely different company to what it was two years ago,” Mr Löscher, 51, told the Financial Times last week as he marked his second anniversary in the job.

The restructuring of Europe’s largest engineering group has stood it in good stead to deal with the global downturn. This year the global economic crisis has hit the diversified engineering group, which makes high-speed trains, power plants, medical equipment, lightbulbs and many other products.

Order intake at its three business units has either fallen or is flat year on year. Revenues in the biggest, the industrial unit, which account for more than half of group turnover, have fallen 6 per cent in the second quarter.

Siemens managed a strong financial performance in the first three months of 2009, however, unlike its main rivals – General Electric of the US and Philips of the Netherlands.

Group revenues rose 5 per cent to €19bn ($26.6bn) in the three months to the end of March and operating profit jumped 43 per cent to €1.8bn, skewed by a writedown in the group’s energy unit in the same quarter the previous year.

When Mr Löscher took the helm, he inherited a group that was paralysed by the scandal over bribes and slush funds that had been used around the world to win contracts.

He quickly came up against a company culture in which managers habitually referred decisions to committees as a way of avoiding responsibility.

Defying the traditionalists, Mr Löscher pushed through a series of reforms. An organisational overhaul was followed by a programme to slash about €1.2bn in overhead costs that looks set to be exceeded.

A more focused purchasing strategy should bring further large savings.

But, perhaps most important, the parochial leadership style has been replaced by a system in which the chief executives have clear responsibilities. “The decision making is considerably faster than in the past,” Mr Löscher says.

“We can now concentrate fully on our customers, instead of being busy with ourselves. This is an advantage and also a good equity story for the fore­seeable future.”

Analysts are ready to acknowledge what has been achieved so far by Mr Löscher and his chief financial officer, Joe Kaeser, in their rapid restructuring. “We still believe that, looking back, the transformation of Siemens will be seen as a success,” Andreas Willi at JPMorgan wrote recently.

But analysts have also called for further action to help Siemens deal with the downturn. Many predict that Siemens will miss its 2010 margin targets in many divisions as a result of its late cycle businesses and the time lag in order inflow from the infrastructure stimulus programmes announced by governments around the world.

Siemens is hoping to win orders worth about €15bn in the next three years from these government programmes, which could cushion the drop in demand elsewhere.

However, analysts predict that more jobs will have to go. Mr Willi and Christel Monot at UBS both argue that at least 10,000 of the group’s 420,000 jobs could be slashed.

But Mr Löscher does not feel pressurised. “I want to make that crystal clear: there will not be a corporate-wide programme to save costs at the expense of the employees,” he told the FT, although he said that in some isolated areas there might be further cuts.

While the large-scale restructuring is over, the cultural change is still a work in progress.

“The change in leadership culture at Siemens is a marathon and not a sprint,” said Mr Löscher, who is an adept downhill skier. “But we have already made a good part of the distance.”