October 11, 2012 8:23 pm

Siemens admits errors as it outlines cuts

Peter Löscher, Siemens’ chief executive, conceded the German engineering conglomerate had not reacted quickly enough to the global economic slowdown as he unveiled a cost-cutting plan to senior managers in Berlin on Thursday.

Mr Löscher said he was dissatisfied because the company had not performed better than its competitors this year but insisted its operational results remained “quite respectable”.

The Munich-based maker of trains, industrial automation technology and medical equipment is expected to report a €5bn profit from continuing operations in the year to September 30 – €2bn less than last year.

In response to falling margins and orders, Siemens plans to cut costs, improve its competitiveness and become more agile and less bureaucratic.

“We want to be better than the competitors. We don’t want to bob along somewhere in the broad masses of the middle field,” Mr Löscher said in comments published on the company’s website.

“We must produce at lower cost and plan, for example, to more closely integrate research, development and production to this end.”

Pressure mounted on him to take action after Siemens’ new orders tumbled 23 per cent year-on-year in the third quarter, while its gross margins have steadily declined since the start of 2011. Siemens’ stock has trailed peers such as General Electric and Schneider Electric this year.

Mr Löscher did not provide financial details of the cost-cutting programme as next year’s divisional budgets must first be worked out. Investors will be given a fuller picture on November 8.

Instead he sketched out the broad outlines of a two-year plan that will include measures to reduce costs, streamline Siemens’ sales organisation, simplify its processes and tackle non-performing parts of Siemens’ portfolio.

“We will take a close look at businesses in our sector structure whose profits haven’t met our expectations for a longer time,” he said.

Sources close to the company told the Financial Times that assets equal to roughly €15bn of Siemens revenues make no profit. A Siemens spokesman said he was unable to confirm that figure. The company achieved €73.5bn in sales last year.

Several of Siemens’ underperforming assets are thought to be in its infrastructure and cities division, set up last year. Its margins are comparatively weak and analysts are sceptical of the strategic rationale for the new unit.

However, possible divestments will not be confined to that unit and Siemens’ portfolio measures will also include acquisitions.

Mr Löscher insisted the company’s four-sector structure – energy, industry, healthcare and infrastructure/cities – would not change.

He also reiterated Siemens’ mid-term €100bn sales goal. Some investors blame the target for encouraging managers to grow their businesses too quickly in 2011 at the expense of profits.

Siemens is now being buffeted by a slowdown in China and weak demand in Europe, which accounts for more than 40 per cent of its sales.

“We clearly banked on growth in the global economy and on the recovery in the second half of the year expected by the economists,” Mr Löscher said.

“[But instead] we had to deal with a worldwide downturn . . . We didn’t succeed in adjusting to this development fast enough”.

Mr Löscher acknowledged that the company also had several “home-made” problems, such as the €500m in writedowns it booked this year because of delays in connecting offshore wind projects to the grid.

He declined to reveal how many jobs would be affected by the plan. “In a company of our size, the number of jobs is never constant. There are always adjustments in both directions – upwards as well as downwards,” he said.

Siemens announced more than 600 job cuts at its US wind turbine business last month.

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