He's Putting Siemens on the American Map

With $80 billion in sales and a product portfolio that ranges from power plants and medical equipment to fluorescent lightbulbs, Siemens (SI) is the General Electric Co. of Europe. In revenues, it ranks with the likes of IBM (IBM) and AT&T (T). And yet, until recently, the 154-year-old industrial giant was barely known in the U.S.

Siemens President and CEO Heinrich von Pierer is doing everything in his power to change that. Over the past five years, he has spent about $9 billion on acquisitions in this country, turning the U.S. into Siemens' largest market. With 80,000 employees and sales approaching $20 billion, the U.S. unit is also Siemens' single largest operations center.

Last March, Siemens cross-listed shares on the New York Stock Exchange and set up a country headquarters in New York. The company also shelled out about $25 million to boost its U.S. profile, kicking off a slick TV ad campaign, and sponsoring the U.S. Open. Despite the recession that is now biting into the key industrial and telecommunications markets that fueled Siemens' growth in the 1990s, von Pierer is upbeat about the company's U.S. prospects. He recently met with Industrial Management Editor Adam Aston to talk about Siemens' recent successes and its near-term challenges.

Q: Last year was good for you, even though a recession was gathering strength. What comes next?

A: In fiscal 2001, Siemens' revenues in the U.S. grew by 23%, to $18.9 billion. We're somewhat insulated from the downturn because some of our groups--such as power generation, infrastructure, and medical solutions--operate in stable, noncyclical markets. Other groups are more cyclical, such as our information and communications divisions. Overall, we are beginning to see the early signs of recovery in the U.S. economy. But it will be a slow rebound, and certain sectors--including information and communication--will lag behind others in rebounding.

There are some bright spots, too. We're optimistic about our businesses with long-term cycles. High order backlogs in transportation systems and power generation are good indicators of continuing growth in earnings. At the medical solutions group, we expect the positive developments to continue. And while Europe is in recession, we expect substantial growth there by mid-2002.

Q: Siemens has announced worldwide staff cutbacks of 4%, or about 17,000 people. Are you closing businesses as well?

A: We discuss this in terms of a red-, yellow-, and green-light strategy. In the past seven months, out of a total of 110 business units in the U.S., 24 were identified as red and targeted for improvement. Twelve have hit their goals. We did cut the number of automotive-electronics-production facilities, and we changed some managers. Because of the downturn, we've had to add a few more red lights, but I think we've made tremendous strides in getting our U.S. business on track. The catalyst for this change is improved dialogue between Siemens' U.S. operating companies and the global groups in Germany.

Q: Is China still proving to be an exception to the otherwise dreary worldwide outlook?

A: I'm especially pleased about China. In the past fiscal year, we reached our goal of making China our third-largest market, after the U.S. and Germany, with sales of some $3.5 billion. The growth is coming mainly from our three main infrastructure businesses: power transmission and distribution, transportation systems, and telecom. We're now among the top three suppliers of cellular infrastructure there.

Q: Even before the current recession, you weren't satisfied with the performance of your U.S. operations. What's the problem?

A: There are several factors. Building a business is like taking off in a plane. When you're starting, you use more fuel to get off the ground. Among the businesses that we bought, for example, we've had to write off a lot of goodwill and other acquisition-related expenses up front. And some of our business units in the U.S. simply haven't reached the critical mass necessary to make a profit.

Q: Last March, Siemens listed on the NYSE. How has that changed your practices?

A: Our biggest change has been to adopt U.S. generally accepted accounting principles for financial reporting across hundreds of companies worldwide. It was a tremendous amount of work.

It wasn't like an initial public offering, though--we weren't raising money. Given how quickly our presence in the U.S. has grown, it's good to have shares trading here. At the time, we co-listed about 12% of shares. Eventually, we would like to see about 15% of our shares worldwide held by Americans. Another reason we did this was to create a sort of acquisition currency. We haven't yet used it, but it's an important option.

Q: Yet in recent years Siemens has been on the acquisition trail in the U.S....

A: Yes. We've spent about $9 billion in the past five years. One of our most successful acquisitions so far has been the power generation arm of Westinghouse--not their nuclear operations, but the power line and power generation businesses, as well as their fuel-cell activities. In a way, it was a reverse takeover. We stopped our own R&D efforts in fuel cells and focused on Westinghouse's design.

We did the same thing with Westinghouse's power-services business, a unit that maintains power plants. We were never successful in this line in Germany. But I found that our Westinghouse friends had a lot of experience and enthusiasm for this business. So we transferred what we call the "center of competence" for worldwide power services from Berlin to former Westinghouse managers in London. This is a good example of how a merger amounts to more than just installing managers at the acquired company. It's a fusion of resources.

Q: When an acquisition such as this one involves the relocation of operations away from Germany, does that help lower Siemens' costs?

A: Yes. But that's not necessarily the driver behind such decisions. The main reason to fold Siemens' operations into Westinghouse was because the Americans understand the power-services business better. They're more entrepreneurial.

As far as cost and flexibility are concerned, it's expensive--and often difficult--to lay off workers in Germany. This lack of flexibility can be a problem for fast-growth companies. In the U.S., if your business is expanding you hire more workers, and if it slows down you let some go. We don't have this hire-and-fire mentality. Some German companies simply choose to grow more slowly to avoid hiring problems like this. But you can't just look at the absolute cost level. Productivity is more important. Germany's work force is a highly skilled group.

Q: Traditionally, Siemens' U.S. operations have been loosely organized. Has this slowed your growth here?

A: We need to create a single Siemens. But it's very difficult. We need to strike the right balance between centralized control and our historically decentralized presence here. We want to promote an entrepreneurial culture--here, in Germany, and worldwide--and that culture won't flourish in an overly centralized environment. One of our most important aims is a coordinated, or matrix, approach to sales. It means that Siemens' many divisions can offer a single face to each customer: energy, telecom, lighting, technical services, and so on.

Q: Has the recession quenched your appetite for further acquisition?

A: There are some areas of the business we want to grow. One is the telecom sector--but this is very tough right now. It's cheap, but you can't buy just because it's cheap. The business has to fit strategically, and it must be profitable. We're also still looking at opportunities in factory automation, an area where Siemens is already a world leader. In sub-segments such as process automation, we'd like to be stronger.

Q: You spun off your Siemens semiconductors division in 1999. Will you follow the example of Nokia and IBM and outsource your cell-phone and electronics manufacturing?

A: A company can't outsource 100% and still maintain quality. You create too many interfaces: R&D, design, manufacturing, and marketing--all these people need to work together closely to build advanced products. So, no. Not 100%. But I believe in--just to give you a number--30% outsourcing. We need to do this to reduce production costs on lower-end goods, and to learn what our competitors are gaining from their outsourcing strategies.

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