Siemens CEO to cut jobs, close offices as profits shrink
FRANKFURT, Thu Oct 11, 2012 - Germany’s Siemens may outline job cuts and office closures on Thursday to stop profits sliding as customers put off ordering engineering equipment because of Europe’s economic crisis.
Chief Executive Peter Loescher’s strategy of boosting growth with energy-saving and infrastructure products has not worked and analysts expect him to present managers with a plan of up to 4 billion euros ($5.2 billion) in savings.
Germany, Europe’s largest economy, has been resilient to the euro zone crisis, with exports from successful industrial companies driving growth.
But an expected fall in third-quarterly profits at Siemens, the country’s biggest firm by market capital and a major employer, shows the crisis is hurting demand for German goods.
“It has become obvious that the margin gap between Siemens and its competitors has opened again,” HSBC analyst Michael Hagmann said.
Loescher took office in 2007 when the company was embroiled in a bribery scandal, shed some assets and invested in growth areas. Last year, he said annual sales would rise to 100 billion euros in a few years, up from about 76 billion in 2010.
But growth has not kept up with the pace of investment as the global economy has taken longer than expected to recover. Siemens reported a big drop in new orders in July, putting pressure on Loescher to take action.
The first company outsider to take the helm in Siemens’ 160-year history, Loescher says his strategy is not wrong but it will just take some more time for the economy to recover.
Analysts expect him to announce between 2 billion and 4 billion euros in savings when he speaks to 600 managers in Berlin, some of whom may lose their jobs in the program.
He may tackle a gap between Siemens’ handful of market-leading businesses and its underperforming units – wind and solar power as well as the new Infrastructures & Cities unit, possibly by divesting some assets.
He may also shut offices in some of the 190 countries where Siemens operates to focus on the few that make the most profits.
Details of the savings plan, which German media said may include thousands of job cuts, will be published when Siemens releases financial results on November 8.
They are expected to show its quarterly gross profit margin eased to 27.6 percent, the lowest level in two years as revenue growth slowed to 4 percent.
At the end of June, Siemens had 410,000 employees, of whom 129,000 were based in Germany, making it one of Germany’s biggest employers after Volkswagen and Deutsche Post DHL.
Siemens still leads the market in some of its major products, such as software that helps automate factory production or technology for MRI scans of the human body, where it competes with rivals such as General Electric or Switzerland’s ABB.
“But Siemens’ competitors have been much more active in officially targeting cost-reduction measures,” Credit Suisse analysts said.
France’s Schneider Electric and Switzerland’s ABB have already completed big cost-cutting program, and Philips Electronics said last month it would cut more jobs as part of a drastic overhaul of its business, and French engineer has cut costs and increased prices.
Siemens meanwhile invested in areas such as renewable energy in anticipation of a long-term boom. Group spending on research and development rose 13 percent to 3.14 billion euros, or almost 6 percent of revenues, in the nine months through June.
Siemens’ solar, wind and hydro power businesses saw a 40 percent drop in new orders, hurt by a slump in German demand due to regulatory and financial hurdles that have slowed the expansion of offshore wind projects.
Also, Siemens set up the Infrastructure & Cities business last year as it expected cities strained by growing populations to seek a one-stop-shop for transportation and energy issues.
The unit, which includes security systems and train-building businesses, has so far failed to deliver.
In the nine months through June, the profit margin at Infrastructure & Cities shrank to 5.5 percent from 6.3 percent, well below Siemens’ three other core businesses – Industry, Healthcare and Energy.
“We see the formation of Infrastructure & Cities as a strategic error and a waste of management time,” Redburn analyst James Moore said.
BUYING AND SELLING
Loescher’s move to slim down the company could also lead to further divestments. Siemens has already shed a number of assets such as automotive business VDO and IT unit SIS.
It plans to spin off lighting business Osram next year, and analysts said it could put its hearing aid business back on the market after its last attempt to sell it failed in 2010.
At the same time, it will continue to invest in growth sectors such as gas turbines by making acquisitions. Sources recently said that Siemens was the front runner to buy Finmeccanica unit AnsaldoEnergia, for instance.
Loescher has been tight-lipped on what he could do to safeguard margins but has mollified anxious investors with the promise of shares in Osram once the business has been spun off and with a 3 billion euro share buyback.