P&L check Siemens and the lessons for GE

The German maker of trains, gas turbines and medical scanners has overtaken its American rival in terms of profitability and growth. Siemens offers plenty of inspiration for GE’s new boss, John Flannery.
Quelle: Bloomberg
Hospital scanner or a time machine? GE needs both to catch up to Siemens.

GE and Siemens are two conglomerates, which operate roughly in the same markets but in different time zones – about four years apart.

CEO Joe Kaeser became head of the German engineering giant on August 1, 2013, after his predecessor had to issue several profit warnings. Exactly four years later John Flannery replaced Jeffrey Immelt on August 1, 2017, as GE’s boss after investors were dissatisfied with business and stock developments.

Soon after Mr. Kaeser, Siemens’ former finance head, took the reins he launched a series of divestments and acquisitions that is morphing the 170-year-old firm more and more into a holding company rather than a conglomerate. That dealmaking includes an initial public offer of the company's medical scanners and laboratory equipment division, Healthineers, which could list on the Frankfurt stock exchange by April and be worth as much €40 billion ($50 billion). It would follow the same route as other Siemens’ spin-offs, for instance wind turbine maker Siemens Gamesa, and the planned merger of Siemens Mobility with French peer Alstom.

When Mr. Flannery took over from Mr. Immelt, he immediately said he would scrutinize GE’s portfolio, which includes the production of healthcare equipment, airplane engines, lightbulbs and hydro generators. In November, during an investor update, he said GE would make a “strategic review” of almost all its major businesses. Effectively, Mr. Flannery said he might break up the group and follow in Siemens’ footsteps.

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The Siemens CEO has rejected the idea that he is breaking up an icon of German industry, a company that invented a telegraph, helped develop X-ray technology and installed Berlin’s first underground and elevated metro lines around 1900. Instead, Mr. Kaeser, who has successfully closed the profitability gap with GE and Swiss rival ABB, says he's converting the company into a “fleet of ships,” or a collection of independent businesses that can operate more flexibly than within a conglomerate.

Ignoring terminology, Siemens’ earnings speak in favor of Mr. Kaeser’s strategy. For the fiscal 2017 year that ended on September 30, Siemens raised its dividend by 10 cents to €3.70. Mr. Keaser raised forecasts twice and managed to fulfil them, delivering an 11 percent increase in net profit to €6.2 billion and a net margin of 7.4 percent on annual revenue. That’s behind US rivals Honeywell and Rockwell, which achieved 13 percent, but it’s roughly level with ABB and Paris-listed Schneider Electric.

GE, on the other hand, booked a net loss of $6.2 billion last year, cut its dividend by 10 percent and will halve investor payouts this year. The 125-year-old company faces several problems: Its power division is facing overcapacity, wind turbine prices have come down and its energy exploration business is suffering from low oil prices. GE also had to take a $9.5 billion pretax charge on old insurance products.

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Siemens’ strategy has helped to push up the company’s stock by roughly 50 percent since Mr. Kaeser took office in 2013, while GE’s shares slumped 38 percent during the same period. ABB’s shares have won around 30 percent.

In addition to spinning off businesses, Siemens has benefited from expanding its digital operations, which it organized into its Digital Factories wing. The division sells software and computers to operate production lines and power networks. Last year, it bought US-listed Mentor Graphics, which makes software and hardware to design chips. The Munich-based group also has high hopes for its Internet of Things platform Mindsphere, which competes with GE’s Predix and others to help customers gather data from their equipment. Siemens is now among the world’s top 10 software companies.

The digital and health care operations are Siemens’ most profitable, but the company faces some of the same problems that burden GE. Siemens merged its wind turbine business with those of Spanish peer Gamesa last year to create the world’s second-largest in the industry after Denmark’s Vestas. Siemens owns the majority of the Madrid-listed firm, which had to issue a profit warning last year as prices were dropping. Siemens responded by bringing in new executives and supporting job cuts, which affect up to 6,000 positions, more than a fifth of the total workforce. On Tuesday, however, Siemens Gamesa reported a strong rise in orders, which could signal a recovery.

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For Siemens’ power and gas operations, which include the 2015 acquisition of US fracking equipment maker Dresser-Rand, the German company has also announced a major restructuring. It will scrap 6,100 jobs and close two German plants as demand for large gas-powered turbines has slumped and is not expected to recover soon.

At General Electric, John Flannery has to address the same kind of problems Siemens dealt with. As a new CEO he has the mandate to take tough decisions, just like Joe Kaeser did over the past four years. With Siemens as an example, Mr. Flannery may need less time to recharge GE.

Gilbert Kreijger is an editor with Handelsblatt Global. Axel Höpner is head of the Handelsblatt office in Munich, focusing on the state of Bavaria's companies, including Allianz and Siemens. Siegfried Hofmann is Handelsblatt's chemical and pharmaceutical industries correspondent. He has reported for many years from Frankfurt. To contact the authors: [email protected], [email protected] and [email protected]