German giant Siemens AG (SI) is a great lesson in diversification (read my previous SA article: SIEMENS' CHINA LESSON). The strategy of a broad global presence (190 countries) in several sectors covering a vast array of products defines Siemens. Siemens is a German company in a troubled land, Europe, but it is its China footprint that is helping to maintain stability in an unstable world during unstable times. Non-eurozone countries are becoming more and more important for German exporters according to Siemens (F20).
In this challenging global economy one way companies like Siemens seek to grow is by cashing in on emerging markets. Emerging markets are still performing far ahead of developed economies. On a national scale, Germany's exports will continue to contribute significantly to maintain at least a modest showing of growth despite deep recessions elsewhere in euro-area economies. For Siemens, the ability to ride out instability in Europe and the broader surrounding region (Mid East, Africa) by maintaining a strong footing in Asia and the Americas offers a hedge of protection.
Siemens began doing business in China in 1872, 25 years after the company's founding. In the 141 years that have since elapsed, it has expanded its China footprint dramatically. Siemens operates throughout China in all of the company's segments: industry, energy, healthcare, and infrastructure and cities. What started with China's first telegraphs, buses, and x-ray machines has evolved and expanded to include modern renewable energy innovation, state-of-the-art healthcare, technology, and much more. Siemens has pioneered its way through three centuries of Chinese history, which includes the country's isolationist posture during the restrictive Mao regime from 1949 into the mid 1970s. China has valued the Siemens products portfolio as much as Siemens has valued the China market.
It would not be a stretch to say that there is currently a China push by Siemens. If not an outright push, current strategy underscores sustainability. Given the uncertainty of Europe, Siemens is investing heavily in its continued long-standing commitment to the China relationship. China is on its way up; Europe is on its way down. At least for now. Despite a recent China slowdown (seven consecutive quarters of reduced expansion before increasing in Q4 2012), the world's second-largest economy is looking at continued annual growth in the high single digits following double-digit growth to 10.4% in 2010. The country's 30-plus years of growth at an annual rate of about 10% makes for investable bedrock to a German company that has been there a lot longer than those 30 years. Siemens' Asian entrenchment was not planned that way when it began back in 1872, but it is proving a good move in the 21st century marketplace.
The upshot on the global picture is that it makes a lot of sense for Siemens to continue to invest heavily in China, which it has been doing and is doing. In terms of its global revenue, Siemens gleans about 20% from Asia, the bulk of it out of China. That compares with a 51% revenue portion from Europe, 14% of which comes from Germany. The remaining 29% is derived from the Americas (statistics: annual report, pg., 21).
The importance of a Siemens China footprint can further be seen in its investment in Research and Development. Siemens has always been strong in this area, consistently allocating more than 5% of total annual revenue to Research and Development. In China R&D has grown to include a staff of over 2,000 in at least 16 R&D centers covering 65 operating companies and 65 regional offices across China (figures based on Siemens' consolidated companies in China). Of the 57,000 Siemens patents worldwide, there are approximately 3,400 active in China. The company is the world's leading energy technology and solutions provider in its China Energy Sector and the world's leading supplier of medical solutions in its China Healthcare Sector.
In 2011 Siemens produced record operating results. There was a slight decline overall in 2012 despite a steady quarter-by-quarter increase, with total revenue ending up 7% higher year-over-year at euro 78.3 billion. The decline was due in part to a 10% drop in orders as a result of ongoing European uncertainty and a cautious eye on the U.S. fiscal cliff issue. Counterbalancing those problems, strength came from operations in China and other parts of Asia, helping to offset declines. The company clearly states that China "continues to be a major growth engine."
Despite the drag from fears related to the company's geo-segmental Europe, C.I.S., Africa & Middle East, and concerns from the U.S. fiscal cliff issue, these two operational regions still posted revenue increases for 2012. Emerging markets, as expected, led the way with a 7% increase accounting for 33% of all total revenue. The China/Asia region provided an 8% increase.
What all this means in share prices is relative safety with good upside moving forward. Share prices on the New York exchange began to move steadily upward from the $80-$85 range in mid 2012, breaking the $100 level and staying there from October onward to the current $111 level analysts were calling for in 2013. As for dividends, the company has shown steady increases since the financial crisis began in 2008. Dividends rose from $2.11 a share in 2008, to $2.25 in 2009, $3.68 in 2010, and $3.90 in 2011 and 2012.
Siemens has managed to keep its feet firmly on the ground despite facing challenges not of its own making. A large China footprint has helped.