Siemens' China Lesson

| About: Siemens AG (SIEGY)

Professors Olaf Plotner and Martin Kupp, from the European School of Management and Technology, produced a case study in 2011 examining a Siemens foray into one small corner of China's emerging economy. German industrial giant Siemens AG (NYSE:SI) learned an interesting little lesson on how to save its larger interests through some trial-and-error tweaking of minor things that began to go a little off-course. The tweaking part was a necessary step in correcting a pretty good plan that began to go astray. This serves to show that even the best-of-the-best have to stay on their toes at every level and at all times.

Siemens expanded its already broad portfolio with a timely expeditionary entrance into one of China's niche segments: fire protection. Of course there's more to it than just protection. There are a lot of buildings of every sort popping up across China's landscape, from big metropolitan areas to small, outlying cities. The niche segment of making sure those buildings don't burn to the ground has created a blossoming business in the area of fire risk. Sophisticated protection systems require more than just a few fire extinguishers and smoke detectors. China, with its destructive earthquakes and the world's largest population, is familiar with catastrophe. The Chinese know as well as anyone the need for disaster prevention, management, and recovery.

In 2007 Siemens Building Technologies (SBT) had risen to global leadership in fire detection systems, specializing in higher-end systems. The China quandary was that high-end systems were at the low end of the country's large, fast-growing market in this area. Local companies were grabbing most of that market. They were succeeding because their products were being sold at 75% less cost than superior high-end products. The admonition that you get what you pay for was less important than a label reading: Made in China. In any case, the market showed sales numbers of 17 million units, which were worth over 100 million euros in 2007-2008.

Maneuvering successfully into China's new fire management market, Siemens Building Technologies strategized to offer premium equipment bundled with solutions services, a coupling of product and know-how. Bringing superior German products to the competitive Chinese market required dropping down into the low end, with greater volume to compensate for lower margins. Not exactly a new idea, but a good move at the right time. The Siemens plan called for relocating product development and management in China as part of its efficiencies strategy. Good, so far.

Where the overall plan began to hit choppy waters was in bypassing the indigenous sales teams of Siemens China in favor of a mixed sales force from the low-end product specialists and the high-end sales people, so-called "value adding" partners. This approach was a money-saving attempt to avoid time-consuming and costly training of an altogether new sales force. It worked for about two years with SBT grabbing a good chunk of market share.

The mistake was hidden beneath the surface of apparent success. Some of the 'value-added' sales people soon found that they could manipulate high-end pricing through markups they were ultimately able to "redirect" to themselves. Utilizing the partnership relation rather than a more binding full team of trained and dedicated sales people wholly loyal to the company allowed the value-added group to jeopardize the long-term strategy for SBT's China operations.

Fortunately the company was on top of things. The strong Siemens brand name and diligent management response carried it past any lasting damage that could have resulted from the flawed sales force arrangement. It turned out to be a minor issue that served Siemens in the long run. The company learned, adjusted, and used its knowledge-through-error to spread its reach in other parts of Asia and into Brazil with success.

The bottom line in this instance is, well, the bottom line! Siemens cashed in on a fractional segment of China's huge and growing economy and continues to do so.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.