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October 17, 2006 6:30 pm

Exit from mobile phones rebounds on Siemens

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Hundreds of workers gathered outside Siemens’ headquarters in Munich this month to protest against possible job losses and to hurl abuse at senior management of Europe’s largest engineering group. The demonstration was nothing out of the ordinary in the hurly- burly world of German labour politics – except that the workers belonged not to Siemens but to BenQ, a Taiwanese company to which the group sold its mobile handsets division last year.

The storm in which Siemens finds itself might seem almost incomprehensible viewed from outside Germany. But since BenQ decided in late September to put the division into insolvency, the outcry – against Siemens – has been huge and has still not subsided.

Politicians right up to chancellor Angela Merkel have lined up along with trade union officials to berate Siemens for what they see as irresponsible behaviour – and with such fury that some believe Klaus Kleinfeld, chief executive, may not survive in his job.

Did Siemens’ responsibility to the workers end when it sold the company, handing over hundreds of millions of euros and thousands of patents to BenQ in the process? Apparently not, even after Siemens set up a €35m ($44m, £23m) solidarity fund for its former staff. On Friday, ministers from Bavaria and North Rhine-Westphalia – where the two BenQ Mobile factories are based – will meet to discuss how to get more compensation out of Siemens.

The crisis has focused squarely on the issue of workers’ rights versus those of shareholders. The balance of power in Germany has for decades tilted towards workers, part of the famed Mitbestimmung (co-determination), the postwar social compact that gives workers influence at the highest levels of companies – with typically half the seats on a supervisory board. German companies bear a larger burden of social costs than their counterparts in most other advanced countries.

The political consensus behind ­Mitbestimmung remains formidable. Next month a government-appointed expert panel will make recommendations on reforming the system but it is unlikely to urge radical change.

However, a new generation of managers – for which Mr Kleinfeld has been a poster boy – have tried to change the decades-old status quo, initiating deep restructurings at companies from Deutsche Bank and Allianz to DaimlerChrysler and Linde.

Benefits bills

For German managers, the fruits of these efforts are obvious: they have been increasingly able to make aggressive acquisitions abroad as their relative competitiveness increases. But the Siemens-BenQ affair is worrying both investors and executives. Siemens’ travails suggest that no matter how international German groups become, they will always be hemmed in to some extent by the political and social constraints of their homeland. Not only are investors and managers questioning whether Siemens’ attempt to turn itself around will work but, more broadly, they are concerned about the future of restructuring in Germany.

Leif Östling, chief executive of Scania, the Swedish truckmaker fighting off a hostile takeover attempt by Germany’s MAN, says the backlash against Siemens underscores his fears over Germany’s commitment to corporate governance. Siemens-BenQ “is a very big worry”, he says. In Germany, “you compromise always on shareholder value and creation. That is why you have so many big privately owned companies”. Union involvement “in many ways is paralysing companies from doing what they need to do”.

Henning Gebhardt, head of German equities at DWS, Germany’s largest fund manager, says the restructuring of German companies will go on, “even though the reaction, particularly of politicians, was extremely strong and I’m afraid that other companies may be put off doing what is necessary”.

Siemens’ troubles started in early September when a German magazine reported that its top management was to receive a 30 per cent pay rise next year. The news was met with disbelief not just from workers – Siemens is shedding 5,400 from its information technology services business and has asked many others to work longer hours for no extra pay – but also from politicians upset about the seeming greed in a country that still aims to be egalitarian. Even shareholders were staggered, believing a stagnating share price in no way justified the increase, even though there had been no boost to executive pay for three years. “There is no way they deserved a pay rise,” one top-10 shareholder says.

In the midst of this public relations fiasco came BenQ’s decision to place BenQ Mobile into insolvency. The country’s tabloid press quickly christened Mr Kleinfeld “The Ruinator”, using a picture of him grinning inanely. Politicians and unions accused Mr Kleinfeld of putting shareholder value above social responsibility.

Just three days after the insolvency of BenQ Mobile, Mr Kleinfeld sought to control the damage by saying he and his colleagues would forgo the pay rise for a year – helping contribute €5m to the €35m solidarity fund for the workers it got rid of last year. “It is terribly weak,” says the chairman of another large German engineering group. “Now whenever the unions or politicians see something they don’t like, they will call for blood. The whole BenQ situation makes me worry about how bold German managers will be in doing the necessary things to stay competitive.”

There are parallels in other companies. Deutsche Telekom is cutting 30,000 jobs but directors say 60,000 were initially planned, until unions and the government, its biggest shareholder, intervened. DaimlerChrysler considered selling its lossmaking Smart small car brand earlier this year. But people familiar with the sale say one reason it was aborted was that Daimler – which would have, like Siemens, had to pay a large amount to any “buyer” – was worried that if Smart collapsed later, the group would still be held responsible and its image would suffer.

But speak to other German executives involved in deep restructurings and it is easier to dismiss Siemens as an anomaly, an extreme case that does not fit in with their experience. ­Porsche, for example, shed 2,000 of its 8,000 workers when Wendelin Wiedeking, the current chief executive, took charge in 1992. But he insists: “You have to take the workers along with you. You have to show the remaining people the path forward, not just say you’re firing thousands of people to please the stock exchange.”

Gordon Riske, the American chief executive of Deutz, the German engine maker, agrees that restructuring is still possible in Germany if approached sensitively. When he joined in 2000 his first task “was to stop the bleeding”. He closed a foundry in Cologne, the group’s home town, as well as a factory in the union stronghold of Mannheim. Like Mr Wiedeking, he says it was tough but possible if you were open and honest with workers and showed how the rest of the company could have a future. The difference with ­Siemens, he says, is that it is earning “a good amount of money” and had shortly before the sale persuaded employees at the handsets division to work 40 hours for the same pay as they had received for a 35-hour week.

“Restructuring is still possible if you go about it the right way. It has to be clear what is being done and why it is being done . . . If you don’t do it soon enough the pain is much greater afterwards,” Mr Riske says.

This, he and many others suggest, was Siemens’ biggest problem. Mr Kleinfeld’s predecessor, Heinrich von Pierer, now chairman of Siemens, balked at solving the handsets problem for several years. Investors say it was clear from about 2002 that the company failed to understand the market or the product but because of the potential pain Mr von Pierer backed away from a restructuring or sale.

Investors were not expecting a quick result over the lossmaking division when Mr Kleinfeld took over in January 2005. But within months he had found a buyer who was promising to safeguard jobs, at least temporarily. Investors celebrated – Mr Kleinfeld became known in and outside Germany as a market-orientated manager unafraid of tough decisions. He was the only German to appear in Business Week’s recent survey of top managers.

A person involved in the sale to BenQ says it was the best option: “It was by a long way the cleanest and cheapest way of doing it. Viewed from a financial perspective, what has happened now is not so dramatic – it’s just another €35m. But from a strategic point of view, it’s catastrophic. You do have to ask questions about Kleinfeld’s management and communication that he allowed it to become such a crisis.”

One of Siemens’ leading shareholders says of Mr Kleinfeld: “His contract comes up for renewal soon and the supervisory board will have to review the damage to the company and its image. I think it’s really open as to whether he can carry on.”

A senior Siemens official plays down such talk, saying: “There is no other way to bring the company forward [than what Mr Kleinfeld is doing], otherwise we put the whole company at risk and nobody wants that.” He adds that negotiations to find a solution for the handsets division were already under way under Mr von Pierer – and, aside from telecommunications and IT services, the other 10 divisions of Siemens are doing well.

But the collateral damage from the affair continues to spread. Unions are tying their agreement to a reorganisation at the new problem-child of IT services to more action from Siemens over BenQ Mobile. Werner Neugebauer at the IG Metall union calls the directors’ pay restraint a drop in the ocean, adding: “I have the impression this is much more about getting the management out of the firing line.” There are also suggestions that a sale of the company’s enterprise telecoms business is being delayed by worries among potential buyers over the sensitiveness of restructuring a Siemens unit so soon after the handsets upheaval – something Siemens denies.

While the union outcry was to be expected, managers worry about the way politicians attacked Siemens. The conservative Ms Merkel used her Unification Day address to call on Siemens to “assume responsibility” for its ex-workers.Coupled with the willingness of both the federal and state governments to consider buying a stake in EADS, the defence and aerospace group, and the suggestion that the city of Hamburg could purchase part of Tui, the tourism and shipping company, some wonder whether this marks a renewed attempt by politicians to interfere in industry. “It is worrying,” says one leading German non-executive director. “But if you look at how inept they have been at it in the past, there is maybe less room to be concerned than in other places.”

In any case, the advice from investors and managers to Mr Kleinfeld is to stay the course. “The worst thing for Kleinfeld to do would be to give up on what he is doing. He has to press on with restructuring the company and making it more competitive because the competitors are not standing still,” says Mr Gebhardt of DWS. Siemens directors have told investors privately that they are so dismayed by the response that, if it continues, they will accelerate rather than scale back their restructuring efforts and the simultaneous slow move out of Germany.

From poster boy, Mr Kleinfeld has in many people’s minds rapidly become the bogeyman of German capitalism, replacing Josef Ackermann, Deutsche Bank’s combative chief, from this unwanted position. But a Deutsche Bank executive urges the Siemens boss not to give up. “If I had any advice, it would be that you won't be remembered for your social graces but you will be judged on your record. Sticking to your guns is the key thing.”

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