Siemens Aktiengesellschaft - Analyst/Investor Day

Apr.11.13 | About: Siemens AG (SIEGY)

Siemens AG (SI)

April 11, 2013 7:30 am ET

Executives

Mariel von Drathen

Siegfried Russwurm - Executive Vice-President, Member of Managing Board and Chief Executive Officer of Sector Industry

Ralf P. Thomas - Corporate Vice President and Chief Financial Officer of Industry Division

Anton Huber - Chief Executive Officer of Industry Automation Division

Ralf-Michael Franke - Chief Executive Officer of the Drive Technologies Division

Dirk Hoke - Chief Executive Officer of Industry Solutions Division

Analysts

Andreas P. Willi - JP Morgan Chase & Co, Research Division

Peter Reilly - Deutsche Bank AG, Research Division

Michael Hagmann - HSBC, Research Division

Fredric Stahl - UBS Investment Bank, Research Division

Daniela Costa - Goldman Sachs Group Inc., Research Division

James Moore - Redburn Partners LLP, Research Division

Olivier Esnou - Exane BNP Paribas, Research Division

Gael de-Bray - Societe Generale Cross Asset Research

Hans van den Berg

Volker Stoll - Landesbank Baden-Wurttemberg, Research Division

William Mackie - Berenberg Bank, Research Division

Guenther Hollfelder - Baader Bank AG, Research Division

Timm Schulze-Melander - JP Morgan Chase & Co, Research Division

Ben Uglow - Morgan Stanley, Research Division

Michael Hagmann - Nomura International plc

Wasi Rizvi - RBC Capital Markets, LLC, Research Division

Mariel von Drathen

[Presentation]

Good afternoon to all of you. It's a pretty crowded room. A lot of people joining us today. I'm very glad to have you here, welcome in Hannover. Welcome at the Hannover Messe. Welcome also to the ones that see us online on the webcast. Thank you for joining us. We have spent some time at the Hannover Messe this morning. I hope you enjoyed the tour. I really do hope it wasn't too technical, but it should have given you a very hands-on experience and show you the breadth of products and solutions that Siemens Industry is providing to its customers. We'll be spending the afternoon today going through the different businesses. You will have 5 presentations. We'll have a number of Q&A sessions so hopefully, enough time for you to ask all the questions that you have and learn more about the Siemens Industry business.

We'll talk about the markets obviously. We'll explain to you in what markets we are active where we see our strength, but also where we see areas of improvement. We will talk to you about what Siemens 2014 means for the Industry sector. We'll give you details on what is being implemented and what is laying ahead of us, very similar to the way we did at the Capital Market Day Energy in Charlotte in December, so you'll get the details there. Just for your information also, what we will do on the 2nd of May, when we will come out with the Q2 numbers, we will also provide you some more details on how we implement Siemens 2014 in the remaining sectors, so that, following the May 2 event, you will have a complete picture of what we are implementing to reach our target profit that we had announced for 2014.

Some housekeeping items. I would ask you to please make sure that your mobile phones are put on mute and make sure that we don't disturb the presentation or the Q&A. Also as this event is being webcast, I'd ask you to please make sure that you wait until you have the microphone to clearly say your question, so that everyone, also the ones seeing us on the webcast, can follow this properly.

In the conference book at the end of the booklet, you will find some small biographies of the management team. Ziggy Russwurm will, throughout his speech, also present his team so that you have all the details. Before I actually ask Ziggy to come over here, I'd like to draw your attention also to the Safe Harbor statement that you should all find in your booklet and online. Of course, the statements which will be made this afternoon are based on current expectations and assumptions of the Siemens Industry management team and with that, do contain certain risks and uncertainties.

Well, you've met Siegfried Russwurm already this morning at the Hannover Messe. I think, there would be a lot of things to say about him, but I think what -- he best convinces when he's actually talking and presenting to you, as he did this morning. Ziggy joined Siemens in '92 as a production engineer and he has helped within Siemens in Germany and in Sweden a number of positions, beyond also only the Industry sector but at Industry, he was also the head of MC. And the last, before becoming the Head of Siemens Industry, he was responsible for Corporate Human Resources. He is a member of the managing board and beyond that, also responsible for the region: Europe, Middle East and Africa. So you can see a wide breadth of experience, but also responsibility within Siemens.

With that, I hope we'll all have an interesting afternoon, and I'll ask Ziggy to please join me here. Thank you.

Siegfried Russwurm

Well, thank you, Mariel. A warm welcome to you ladies and gentlemen, on behalf of the Siemens Industry team. It's our first Capital Markets Day for the new Industry sector, because this organization, as it stands right now, is only 18-month old. But this part of the Siemens business has a long tradition as being the market leader in the Industrial Automation and Drive Technology business. What we want to do today is to show you that we have the technical depth, the customer breadth, the vertical know-how and the innovation strength to stay in that position as a leading player in the Industrial Automation and Drive Technology business of a new definition, and we will continue to deliver value to our customers. Well, Hannover and -- while Hannover, while I like the video that we have just seen, I hope that you could grasp some of the content and feel some of the excitement about it across the street on the booth.

During the course of these 5 days, we have about 100,000 visitors on our booth of all kinds. Yes, students, but a lot of engineers, a lot of CTOs, CEOs or even heads of state like President Putin on Monday. And while we don't sign contracts typically on such a show, it has an impact on our business. Last year, for example, we had an expert team of Volkswagen at our booth. We were able to convince them about the ease of engineering and energy efficiency of our material handling solutions, and it led to a major order for Ralf's Drive Technology business. I love being in Hannover because it's the direct side-by-side comparison. It's the direct competition. You clearly can see what else on offer, and we are able to show, year after year, that we have the best products and the best solutions for our customers. And that's why I plead guilty, that's why I've suggested to have this Capital Market Day right here in Hannover. And again, while I do apologize for the crowded booth, I like it because it was thousands of customers on that booth. Apologies for that.

Well, as you can see, this year's lineup was again pretty exciting and we just sketched 4 images for the 4 main stations of the booth tour. It's not just having NX as a viewer on the iPad. It's our way to help our customers in design, in planning, in engineering, in product execution and ultimately, also in service. The Hannover show is also a good opportunity for me to explain, at the very beginning, a characteristics of our business. We typically talk about a lot of our business as short cycle. And indeed, the order cycle literally counts in days for a large part of our business. We are processing thousands of orders a day at a pretty modest order size in average, as you can see. Our -- along with our own sales and service team, distributors like Sonepar and Rexel play a big role there. Many of the deliveries are done overnight. Much is done via electronic ordering, without any human being even touching it. But while the delivery cycle may be short and counting in hours, the customer interaction is much more deeper. There is much more longevity in the customer interaction because the customer typically decides on the automation partner for a machine for the lifetime of this machine. And when we're talking machine, that could be as big as this fiber machine from our longtime customer Oerlikon Barmag. It has 49 SIMOTION D425 controllers. In total, 336 server access [ph] each with the SINAMICS S120 server drive and the SIMOTICS motor and the SCADA-System SIMATIC WinCC to steer and control this monster. There is no way to change the automation partner of such a machine during the lifetime. It would be at least extremely cumbersome. So the good news is every order for our customer, Oerlikon Barmag, is an order for us. It has its up and downs, but it is not that we start from scratch every day. And actually, 80% of our total business is recurring product and system business. So a long-lasting sticky customer relationship. The crown jewel of such a relationship is when the customer agrees to a strategic partnership, like BMW has done recently. They have selected Siemens and given us a contract to be the global sole automation provider for the next 15 years. And just to put that into perspective, this is, I guess, for the next 3 innovation cycles. So a big decision for a carmaker, a great business for us. And what gives the confidence for a company like BMW to do that? That is our recipe for success. It is long-term compatibility. You have seen the new TIA Portal. You can open an automation project from the mid-90s with this portal solution. It's open interfaces because our customers don't like it to be taken hostage, to be locked in, in an unfair way and we don't do that. We have open interfaces at all our components and it is innovation leadership, which we have proven over the course of the last decades. With these arguments, we are able to convince customers and we are increasing our installed base literally every year.

Over the course of that time, we have added more intelligence, ultimately, more software to our offering, because it is about intelligent engineering, intelligent surveillance, intelligent reaction. And this is about the intelligent combination of software and the real automation, the real world of automation and hardware. This is what we are doing and I'll come back to that little icon in the upper right corner of the slide later on in the presentation.

Well, I've talked about the new sector. This is the organization as it stands today. You see a big difference to the old Industry sector 3 years ago. The organization is now solely focused on industrial customers. You see our 2 big divisions, Industrial Automation and Drive Technologies, both undisputed leader in their fields of activity since many years, both in an order of magnitude of EUR 10 billion of business volume. We have brought together all our service activities in order to bring expertise together, but also focus it. And while we are operating Customer Services as an own entity to give it a priority, it is an integral part of our offerings to our customer and therefore, it doesn't make sense to break out the numbers for Customer Services alone.

On the right hand, you see the business unit, Metals Technology. It reports directly to me. It has a special business model. It is a leader in its field and I'll talk about it in a second. They all rely on one global sales and service delivery team, one common development platform, one common innovation roadmap and, believe me, to bring them those 100,000 people to one common goal is fun for me every day.

Metals, I promised to talk about that a little bit more explicitly. It is special, first and utmost, because it's dealing with one single vertical, metals. Metals is a promising business, has a strong market, EUR 25 billion with an underlying growth of 4%. We are in a leading position in all the segments in that, have 1,300 customers and 8 out of the 10 biggest steelmakers around the globe are on our customer list. But as you all know, it is typically not a business where we have a double-digit market -- margin. But it runs on an attractive asset base. You typically get premium payments from your customers, so the return on capital employed is very attractive. And in that respect, it is highly accretive to the sector Industry's results.

Well, after introducing the organization, let me talk a little bit about how we see the business situation, how we believe that the markets will look like in the near future and what we are doing to perform under these market conditions. You've seen the numbers of the last quarters. You've seen that the overall customer demand currently is not strong. Customer orders have declined over the course of the last year. And while overall business volume was still flat for fiscal '12 in the first quarter, i.e., from December to October -- to December -- October to December, we have seen that both orders and revenue was down. And while I told you that customer transaction can start and stop quickly, we have to be able to react in a flexible manner to these ups and downs, and Ralf will explain to you later on what we are doing in order to cope with that situation. But frankly, all these reactions, all these counteractions have their lead times, so you could see the pressure on the margin.

Looking forward, we will see some quarters more, where market conditions will not be strong. Q2 and Q3 will not be strong. Let's see how Q4 is running. We will expect and we will see then an uptick. But we don't sit and wait and say, well, there will be an uptick in orders and then all will be fine by the aggression [ph]. We are acting decisively to bring Industry to ambitious top line and margin levels, both on a competitive and on an absolute basis. More or less, this is what this afternoon is all about.

Let's look at the market from a regional perspective. What you see is that we believe that the average market growth has a CAGR of, let's say, 4%. Each year, by each specific industry is somewhat impacted, but the underlying growth, what we see, is about 4% year after year. And we have broken out some countries that seem to be very important for us. First and utmost, China. China is important not only due to our direct business that we have in China, but also due to a significant part of business that we have, the customers. For example, in Europe, where then the machine is exported to China. China currently, and most likely for the next few quarters, is not a spot of strength. It is an area of weakness and we see that. We are not surprised. As a new government, they will get their act together for the new 5 years plan. They will communicate. They will make decisions. And what I learn from customers when visiting China, is there is still quite some uncertainty about the steering of the new government.

And with that, there is uncertainty in investment making. We are convinced that, on the long run, China is the place to be, absolutely. It is a strong homogeneous domestic market, so we will see continuous growth. Maybe with 2 losses [ph] which are more profiled as in the past. The one is environmental aspects. We all have seen the news about the air pollution in China during this winter, so there is undoubtedly a focus on ecological footprint of industry. And the second is that more and more Chinese companies are growing up and competing with multinationals in higher-end markets. And as a consequence, if you want to be in aerospace, you need aerospace technology. You need sophistication. So it's not that the Chinese market is a low-end, an entry-level market only. For me, the Chinese market is a reflection of the world market. We see all kinds of business there. The good news is many Chinese customers that have started to make business with Siemens with our entry level products are now growing within our portfolio towards our high-end offering. And some of you may remember that, in summer 2011, we had a special Capital Markets Day on our SMART offering. This was one of the underlying assumptions, why we have this broad portfolio. Our customers are growing up with us. So China, no doubt for us, a place to be and stay and to invest.

The U.S. on the more long term is on a growth trajectory, literally fueled by unconventional Oil & Gas. Now short term, this obviously seems to be somewhat bumpy on this road. On the one hand, there are discussions on whether this unconventional gas should only be used in the U.S. or exported and there are different opinions, obviously, about that. The sequestration does its part to some industries in the U.S. that are strong, but that are strongly impacted also by the investment of the government. And manufacturing renaissance, as what is talk of town in the U.S., that's the good news for us. That takes investment money, that takes product innovation, but that also takes then a growth in factory automation and, not the least, multinational companies don't want to miss the opportunity in the United States. They are investing there. So again, on the long run, we see a good business climate there, although currently, it is a little bit bumpy.

And Europe is in the tough spot currently. Germany, in itself, is on a growth trajectory, albeit on a lower level. Now Germany seems to be the home of production technologies. So for many also multinational companies, technology decisions about production technology are taken in Germany before they are deployed around the globe in a global footprint. And therefore, our focus in Germany definitely is on high-end technology. In a nutshell, we see an underlying growth trend. Ups and downs maybe the new normal and, again, we have to cope with that, but the underlying trend with this 4% CAGR seems to be intact.

If we look on the market from a different perspective, on different industries, different verticals, you can see here a pretty impressive list of those verticals, where we are strong and we are enjoying to go with strong customers and their growth prospects.

Let me just mention a few. Chemicals. There is significant investment into chemicals, especially in emerging countries, greenfields but also brownfield refurbishment in the developed countries. In the U.S., we see both greenfield and brownfield in the expectation of cheap energy, because energy cost is decisive for chemicals industry. As the CEO of a chemical company recently told me, "Ziggy, can Siemen's help me to make my existing plants as effective as my new plants." And guess what? We were able to help.

Food and Beverage is a highly interesting and growing vertical. Definitely in those countries where you have a big and growing population along with industrialization, with urbanization, you can't feed people in cities just from the market. You need food and beverage industry. But this industry is getting more and more sophisticated. The CTO of a big beverage company told me that their standards are getting closer to Pharma, more or less, every quarter. And that's the news for us because we are good in Pharma as well. That's the next vertical.

You all know that in pharmaceutical industry, for a long time, production was seen as a side issue, a necessary evil that didn't move the needle that much. This has changed. There is a growing trend to professionalize production in Pharma. And that's quite understandable because for Generica, the manufacturing costs are a significant aspect of the P&L of the pharmaceutical company. And again, we have a strong offering in that.

Automotive, believe it or not, it is a growing vertical, definitely. Definitely in the BRIC countries, where growing middle class exists and for them, still owning a car is a symbol for "you made it." But there is also investment in automotive, for example, in the U.S. A lot of U.S. carmakers are investing into highly efficient powertrain lines. Take the example of one of our customers, a German machine builder, Heller. They are a strong player, one of these hidden champions for machines that do powertrain lines. They have a special technology to provide the cylinder walls in a classical [ph] combustion engine, with a specific surface treatment that reduces fuel consumption. This technology is integrated into the Heller machine and it's enabled by the superior capability of the SINUMERIK CNC from Siemens. So a great win-win situation, great business for us and a great opportunity for carmakers around the world to cope with emissions.

You will see me taking examples from the automotive industry quite frequently over the course of the next minutes. Don't get that wrong. It's not that our exposure to automotive is extremely high. As a matter of fact, it is about 15%. But the automotive industry, and especially production in automotive industry, is still a spearhead. It is pilot for new production technologies, and many of those technologies are then adopted to other industries and deployed on them. It is important. It is the technological spearhead, as I said. And guess what, we are #1 in this vertical.

And last but not least, Machine Building. You might not see that much of those companies because most of them are still privately held. But those machines that build machines, they are the innovation foundation of many technological aspects. And that's a good business for the technology leader that Siemens undoubtedly is. So we are leveraging our competence in those verticals. I'll come back to that. Making things, you read the motto of our -- both making things, helping our customers, doing so is the core of our business. And after a long period, where manufacturing was seen as a kind of old economy, it has higher attractiveness now again. Almost everyone, everywhere is talking about a manufacturing renaissance, or as our British colleagues call it, a rebalancing of economy. And those of you that are coming from Great Britain know that the British government is investing a lot of money into this manufacturing catapults to rebalance the economy. Manufacturing is attractive again. But today, it is highly competitive. A modern manufacturing plant is closer to a hospital than to the dusty hall in Charlie Chaplin's Modern Times.

The paradigms of manufacturing are still the same. It's about productivity, it's about time and about flexibility. But today, they are somewhat spelled differently than 20 years ago, when I started as a production engineer. It's still about productivity but less about working hours. It's more about input factors like energy or materials. Time is still the most precious commodity but it's not just the time to produce something, it's even more the time from concept to hitting the market. So time to market is even more important sometimes, and we can help with our technology. And finally, to cope with the ever more changing world with bigger volatility, with more differentiated customer wishes, that adds a degree of flexibility that customers can't cope with without the help of modern industrial IT and industry software. So these are still the target categories that our customers are geared for. These are the targets that the industry is geared for and the good news is this is what our customers are willing to pay for. This is our profit pool that we are harvesting.

Now let me briefly address these 3 categories. Energy, it is an issue of -- the CEO of a converting company recently told me that 50% of his total cost is energy and we started, obviously, an energy-saving concept for one of his production plants to give him an idea what we can do. The CEO of a big Nordic pulp and paper company told me that he has about 30% of his costs for energy. If you add the cost for water and for emission, you are in the order of magnitude of 50%, and you will understand why we are designing a DCS system for him for his newest plant, with 38,000 control nodes. And the German glass manufacturer, F-Glass, a big one in the middle of Germany, they have done an energy harvesting project with us, so that they generate 60% of their energy needs from the waste heat of the glass oven. All these 3 cases have one thing in common. If a business case at today's energy price, let's say, it has a payback time of 3 years, you're definitely on the safe side, because everybody knows, with some ups and downs, in the long run, the energy price will have only one direction, up. So whatever is a safe business case today can only be better in the future. And we have a broad portfolio, from consulting services to the real products in execution, as you have seen, to cope with that energy question.

Time. The -- a well-known camera manufacturer is using our PLM software and has been able to reduce time-to-market for its models by 40%. They are simulating the whole process chain. They do the digital design and the digital test of the whole camera. They observe the design. They engineer the manufacturing process in the digital model before they ever got one single part from their sub-suppliers. The whole engineering process counts in weeks rather than in months. It's much less expensive. And the CEO of that company visited me on Monday here in Hannover, and he told me that this model keeps him in business, because before the copycat from another country can even copy his current product, he has the next on the market. So his way to deal with copycats is, "I'm faster in my time-to-market," enabled by our software. And we had a wonderful discussion about how we can help him even more and how we can even more increase our business.

And finally, flexibility. Ford Motors is a long-standing customer for us. For about, well, close to 20 years, they are using our CNC SINUMERIK and our PLC SIMATIC for their powertrain business in all projects worldwide, just recently North America and in Asia. Well, you know the Henry Ford quote, "You can have that car in any color, so long as it's black." Customers today want to configure their dream car on the back [ph] with all the details with millions of possibilities and then delivery time is never short enough. And I have learned that, even in the U.S., the times are over that you go to the car dealer and just pick one car that's on exhibit there. Customers want to have the choice. The only way for Ford to cope with that variety of customer requests is, well, let them help, by Siemens, in bringing production planning and product planning together. With our software, with Teamcenter, we are helping Ford to cope with that flexibility, to be able to provide their customers exactly that variety in a short delivery time, as you see here on that slide.

Now you may remember these 5 steps. This arrow, this icon from our booth. It's our belief that the optimization along that life cycle is the next S-curve in productivity. Don't get me wrong. We want to and we need to and we have the best offerings in every single step. We have the best software for design. We have the best equipment for planning, for engineering, for the execution and for the services. But the total should be more than the sum of the parts. Optimizing the symbols -- the single steps comes into saturation. The next S-curve, and Anton will talk more about that, is to have a more holistic view on the whole life cycle. It's intelligent networking. Its bringing more intelligence to the whole plant. This is, again, where the industry is going and this is what customers are asking for and are willing to pay. Makes them more productive, more cost-effective, more flexible and even more creative.

Well, having looked at the market, regional, from a vertical perspective, from the technology trends, what is our consequence? What are our strategic levers in order to perform even better and to achieve profitable growth? Well, that's pretty simple. Number one is our vertical competence, where we want to exploit the growth pockets in those verticals that I have shown to you. The second, that's industrial IT and software. We see those worlds coming together. We see the digital world merging with the real world. Don't get me wrong, we will never be a software company. You, hopefully, have seen the difference. We can bring those 2 worlds together. Software helps our traditional business and vice versa. And we are in the lead in that change of the industry and we want to stay in that as well. The third, we want to use our huge installed base to grow our software business. And number four, as emerging markets, we will expand our regional footprint and we will especially focus on those emerging countries and their growth and profit pockets. These are the main levers for profitable growth. And I'd like to talk a little bit more about those 4 before I come to our actions, how we make sure that with overall [ph] profitable growth, we have the right bottom line results. I'll come to that in a minute. We have a clear strategy along these 4 directions and we are executing.

So let me start with the vertical competence. It literally starts with expertise. We have thousands of experts in our troops, who, as I call it, not only talk the language of our customers, they understand the dialect, because the language in a brewery is much different from a dairy. And what we are doing is we are preparing, in our Food and Beverage group, pre-configured solutions for certain tasks in the Food and Beverage industry. They are repeatable, they are scalable and they are flexible. And we are making then, customer-specific solutions out of that. The good news is those pre-configured solutions, like the optimized bottling plant or trans [ph] line for powertrain manufacturing, they are built from platforms and products that you have seen on our booth. They are made out of the SIMATIC controllers. They are made of the SINAMICS drives. So we enjoy all the economies of scale in the product development and in the production, while towards the customer we have pre-configured solutions that are, in very short time, adaptive to the customer's specific needs.

A good example for this first lever is our customer Coca-Cola in, guess what, in Vietnam. Our Food and Beverage team, together with our colleagues on-site in Vietnam were able to replace a competitors product from the bottling line of Coca-Cola in Vietnam. As a result, the yield of that bottling line went up by 20%, avoiding the need for a greenfield investment for Coca-Cola. The OpEx went down at the same time, so it was a great investment case for Coca-Cola and it was a great business for us. And the good news is there are many bottling lines of that kind all around the globe, not only from Coca-Cola.

I've talked about the digital and the real world. We are the firm believers that the digital world, the product design, the production design, ultimately software, is in deep interaction with the real world and ultimately, the real automation, making things ends up with real world. And that's why we are investing into this area, into this convergence between the real and the virtual world. We have started with UGS in 2007. Since then, we have added 8 more technology specialists in order to broaden our portfolio of software, and you got some idea about that on the booth tour, up to the last acquisition in January, or announced in November, or closed in January, the acquisition of the Belgian company, LMS. We are bringing the real and the virtual world together. We have invested, in total, about EUR 4 billion into that. So the jury is out, is that the right strategy? The best jury for me is the customer. Customers are buying into that concept. One example is Daimler. Daimler has decided to change from a competitor to Siemens PLM software for all their 20 development sites, both for Daimler passenger cars and trucks. And they are taking their big suppliers along onto one uniform global software platform. With our Teamcenter, with our NX, with our software platform, we make the engineering results available to all locations of Daimler all around the globe, always in one consistent platform. That speeds up the innovation pace at Daimler, that reduces the error rates. It is a huge project that we're doing. It's perfectly on time, and Daimler has started the first serial production on that in the year 2012. The good news for us is now it's expanding to the ecosystem of the suppliers. So while getting that contract from Daimler was a pretty interesting and challenging exercise, now there is this whole funnel of suppliers of Tier 1s and Tier 2s, who -- well, they argue if Daimler has chosen that, it can't be that bad and they are joining us. So it is really a great business for us.

The markets in this industrial IT and software is growing at 8% per year. That's double the growth rate of the overall industrial market. And if you take the subsegments of PLM software, so the typical CAx tools, collaborative product data management, like Teamcenter, and digital manufacturing, like Tecnomatix, in this part of the market, we are a clear #2. And to the question on whether that works within Siemens, the best argument is to look at numbers from UGS in 2007 and how they have developed until 2012. Now we see that the number of customers has grown by 30%. The number of seats has more than doubled and the structural effect goes along with that the number of, what the former UGS guys called, the mega customers, those with more than $10 million annual turnover, have doubled as well. So we were able to use the synergy factor between our classical automation business and the industrial software. It is very successful for us. And just to show that this is not only a synergy between industrial automation and our PLM software, I have chosen an example from Volkswagen, where Volkswagen has retrofitted a press line that is 17 years old, and this body shop press line has a lot of the motion controls, inverters and drives from [indiscernible] business. We have analyzed this press line, 17-year old. We have made all the manipulation for that. All of the software in a digital space, we have verified the movement. And just to give you an idea, you see these transfer of the parts from 1 press to the other. And as you can easily imagine, the time was coordination. What time do you need to transfer the part and when does the press move is of the essence.

In our simulation, we used the same motion control software in the simulation as in the real machine. The precision that we achieved, or the deviation between the movement in the simulation and in the real machine is less than 1%. So we could really squeeze out the last second out of that movement. It was all fully digitally prepared. We could change that whole press line within very short time, without the usual trial and error in slow motion, and the results was great. Volkswagen saved 40% of energy. That was the original thing, but due to that very precise motion control, we were able to increase the punch frequency from 14 parts to 16 per minute. That doesn't sound spectacular, but in an 8 hour shift, this is 1,000 parts more for Volkswagen. So a good business is, believe me, and a classical example for doing more with less. So the synergy between our industrial software and our classical automation business is not only to industrial automation, but also to the motion control part of Ralf's drive technology.

Industrial services is a highly attractive market, EUR 26 billion annual volume, 4% underlying growth. Not -- pretty sticky. You are close to the customer and that's why we have brought together all our service activities, all maintenance activities, all the formerly dispersed product-related services, into one organization. As I told you, that's an integral part of our offering, but we operate it on its own to provide focus. We've followed the well-proven model within Siemens. You know that from the healthcare sector and from the energy sector. And while we can't be too specific about the numbers, just to give you an order of magnitude. In that first year of existence, that service business grew by more than 10%. Great thing to have. Dirk will tell you more about that, but I couldn't resist to tease the audience at least with one example, and this is the example of the Chilean miner, Codelco. Codelco is the biggest copper producer in the world and they have award us a contract for the Andina copper mine. It's a really huge mine, where we are doing all the service, all the maintenance. Our service is not selling service technicians by the hour. Our service is technology based. That's the only way to justify it, technology-based, high-value services. So we are talking with Codelco about up time. We are talking about condition monitoring. We are talking about condition-based monitoring -- maintenance. We are talking about energy efficiency services, about industrial IT security consulting. This is the way we want to do service. The deal with Codelco, the initial term is 5 years, and we are pretty sure that we will get even more than this 5 years. And not to forget, in that mine of Codelco, whenever somebody decides on a new controller or a new motor, we are extremely close to that.

Finally, the regions. If you look at that pie chart on the left-hand side, you see that our global footprint is emerging. The numbers in brackets are those from 3 years ago. And as you can see to the actuals, there is a growing trend towards emerging markets. What we have today is about this 4 quarter storyline: 1 quarter in Germany, our traditional home market; 1 quarter in the rest of Europe, Middle East and Africa; 1 quarter in the Americas; and 1 quarter in Asia and Australia, a big bunch, as you can see, that is in China. But this is not only a footprint in sales and service. We have also adapted our manufacturing footprint, and even more importantly, our key R&D sites distributed around the globe in this manner. And we will continue to do so.

With this footprint in emerging countries, we are serving our traditional multinational customers when they are expanding to these regions, Coca-Cola in Vietnam was a case in point. But we are also serving customers from these emerging countries that are building up their own footprint in their home market first and then, maybe expanding. So the way how we are doing that is the principle of our twin factories. Each of our technology spearheads in Germany has at least 1 twin factory in one of these emerging countries. We share the same standard processes so customers can rest assured that they get the same quality out of that. It gives us great flexibility in terms of business continuity. It gives us great possibilities in balancing demand and capacity. So no compromise on quality.

Nanjing, you heard about that in 2011. Chengdu is the latest addition to that list. We are building or have been building the most modern electronics manufacturing, a fully digital factory. So we use all of our wonderful technology, all production lines are fully planned digitally and optimized while the production is running on the old process. We have started, in February, to run that and it's not only our production twin of our award-winning factory in Amberg, that's also a development site. Because the second aspect of Nanjing and Chengdu at the same time, we have engineers there who know the requirements, who know the boundary conditions in these emerging markets better than their colleagues in Germany or in the U.S. So this twin factory concept serves 2 ways, to be close to the market in delivery, but also being close to the market when it comes to customer requirements and serving them. And frankly, if you would ask me, the customer proximity from being close to the market is, for me, more important than the cost difference that we can achieve because, frankly, pick-and-place machine has the same capital costs in Chengdu as it has in Amberg. So customer proximity is even more important. It is a focus for all of our business units, as you can see. And sometimes, for certain products, the production that's left in Germany is going down. You will see that in one example of our industry 2014 program, where the production, then, will only be in the twins in emerging markets.

So the levers are clear for profitable growth, but on the other hand, there is no way to hide it, our profits should be better. We should have and we will have industry-leading margins and this is what Industry 2014 is all about. This is our share to the Siemens 2014 program. Our commitment is EUR 1.1 billion productivity in the fiscal years 2013 and 2014. And if you look at the transition bridge, the math is as follows. I told you that customer markets are not strong in the moment, so we do not bet on the aggression [ph] effects. They are rather moderate. There is not much what we can do on the usual cost and merit increase. The pricing part of the equation, that's a better game. We have been pretty successful in the past of keeping customer price change to a very moderate level and that's not a -- well, not a mystery. It is due to our strong innovation pipeline, and we will continue to do so, as in the past. And then the remainder is EUR 1.1 billion in productivity. Under these boundary conditions, we will achieve on uptick in margin of 150 basis points, that would then be 13.5%. If we add the portfolio effects of selling the water business and adding LMS, we add another 50 basis points, that should bring us to 14% margin. Well, EUR 1.1 billion productivity, that is easily said. We are following the same scheme, the same structure as the Siemens 2014 program. The majority of the EUR 1.1 billion is cost savings. There is no doubt about that. About 40% of it is material related, both purchase price savings and design-to-cost activities. And while Ralf and the division CEOs will go more into the details of their actions, I wanted to give you some idea of what we are doing on this one slide.

We are adjusting manufacturing capacity, and some examples is that mechanical drives has reduced their footprint in Germany from 4 factories to 2, and with the reduction of about 500 FTEs. The standard motors in Germany, the remaining ones are transferred to the Czech Republic. So in that case, the twins have taken over in Guadalajara, in China and in the Czech Republic, affect about 200 headcounts. We are reducing plant capacity in India according to market demand. We have relocated or are in the process of relocating the linear motors manufacturing from Munich to an existing plant, reducing the number of plants by one and reducing the fixed costs related to that. And we are closing a plant in Pakistan with 170 FTEs. But it's not just shrinking. We are investing and Chengdu was just one case in point that we are increasing capacity in China. If we go down, counterclockwise in the PLM process, in product design, there is a significant lever on the one hand in the process itself. To streamline the process allows us to cope with an even broader portfolio of innovation ideas that we have and design-to-cost is a continuous exercise that should bring about 25% of the total savings that we need for our productivity bridge.

Going -- continuing procurement-related savings. We will continue with all the good virtues around procurement. And as we do that in a very consequent manner, our best assumption is that this will bear about 15% of the overall saving. But this would all go to the operational processes, and you can imagine that there is some room for improvement also in sales and administration. So we went through a program in our headquarter. We are reducing, frankly, bureaucracy. We were cleaning out the corner, the effect, that we are currently discussing with the German's Workers Council, is about 500 FTEs alone in our headquarters. We are addressing our go-to-market. There are 3 categories. We are active in 190 countries, and many of them we are serving by our partners, so we have scrolled through the remaining ones. We have identified 23 more, where we'll go from own troops to a partnering concept. We have identified 18 countries where we will have a lean set up with all the details. More complex projects in these countries, once they occur, will be done by neighboring hubs, or with the support from headquarter. And for all the traditional strong markets, so that nobody can fall into complacency, we have done something, what we call a fitness program, to clean up the last corners. The total effect of that exercise, all around, is about 1,700 FTEs. So there is substance behind that. It is, yes, about cost savings but it's not rocket science. It is about execution. We have done that before and we will do it again. There is no doubt about that. And one element of this 2014 program, that you have heard from others within Siemens as well, is strengthening the core. And while strengthening the core, there is the flip side of the coin. It doesn't make sense to continue businesses where we have only limited synergies and we don't achieve our aspirations in growth and profit. And this is why we have decided to step out of the water treatment business, biological, chemical stuff, in total EUR 1 billion of revenue, 4,500 people. We have decided to sell that. The carve out is making good progress. There is significant interest from potential buyers and I am absolutely confident that we will find a good new owner for this business right on time.

There is a foundry, I guess, what's that about. Well, and the high times of wind business, it was good to have own capacity. Today, it's more about flexibility so we have readied that business for sale. That's a little bit more than 500 people. We are in promising talks with potential buyers, so this could be done pretty soon. And there is a variety of businesses where we don't achieve a global scale, global competitiveness. You may call it cleaning up. Solar inverters we have exited. There are some special activities in Germany, no global scale, no global benefit. We were ramping that down, and low-margin product-related services, things where we sell the service technician by the hour. That's not what we want to be in. So we are ramping down that business. There is not much to sell. It's just close it. The effect, about 1,000 FTEs. That's the flip side of the coin. The positive signs, strengthening the core. Yes, it's strengthening our software offering. You have seen how LMS was integrated on our booth. We have inked the agreement on the 8th of November. We have closing on the -- I think, it was on the 3rd of January, beginning of January. It was a great addition to our offering. LMS, what they are doing is they have sophisticated test and measurement algorithms and equipment and they have Mechatronic simulation. And this Mechatronic simulation becomes more and more important in product development and in production development, provided you can prove that the simulation is right. Therefore, you need that verification against the test results. So the beauty of LMS is they are joining exactly our claim of bringing the real and the virtual world together, because they simulate and the very verify with the test results.

As a company, with the revenue in the last year of EUR 190 million, 1,200 employees in more than 40 offices close to the customers all around the globe, there is huge synergy potential. It's a growth engine. They have a very attractive growth record and a very attractive record of their operational excellence. It fits perfectly. It closes the loop of product and production design. Customers have applauded to that and we are going along. It's really a great addition. It makes us even stronger in our offering along the entire process of our customers.

So let me summarize. Industry sector of Siemens is in a strong position. We have an unbeaten technological strength. We have a broad customer base. We have a long tradition and credibility with our customers. So going forward, we will leverage the growth momentum of the industrial IT and industry software business across our entire portfolio, and you have seen on the booth how we are doing that. We will accelerate our growth in our technology-based services portfolio. Dirk will go more into the detail. We are committed to EUR 1.1 billion of productivity. The activities, the actions, the measures are developed bottom up. We have a crystal-clear process to monitor that, to follow that and frankly to enforce it. And as we are doing that, this will bring us to an improved margin of about 14% of sales in 2014.

And with that, we are expanding the strength of Siemens. We will expand even more the productivity gains that we have for our customers. We will continue to open new technological markets. And yes, we will continue to deliver value to our shareholders. This is the team that you will see on stage. We are committed to make that happen. I believe it's the best team in that business envelope [ph] , and you can check that with us.

And with that, I would like to conclude. Thank you for your attention and hand over to Ralf and his presentation. Thank you.

Ralf P. Thomas

Now. Thank you, Siegfried, and welcome, ladies and gentlemen, also from my side. Just back in March 2010 when we met the last time, it feels like a very long time ago. At that time, the former Industry sector was a broader, more diverse set of businesses, everything from trains to LED. Today, industry is more focused, serving industry and manufacturing customers around the world with one single mission, helping them drive their efficiency and productivity. This focus is an added strength for the sector as a whole. It allows a greater degree of sharing best practices and vertical know-how. So much has changed, but a lot hasn't changed. The areas of our businesses that we run are extremely attractive from any perspective, but market conditions continue to challenge us. They test us and we have to strive every day to improve our performance.

As I said already and as Siegfried has been mentioning before, we run world-class businesses at Siemens Industry. And while every quarter is important, our focus is on long-term performance and value creation. To ensure that we are on a value path, we have a clear set of financial priorities that govern our decision-making processes. I'll go into more in detail but to touch on some briefly, first focus point is to control our assets tightly and maximize our productivity in order to drive capital efficiency. As you know, we have stepped up our productivity drive in order to achieve our targets for 2014, and set a basis for consistently higher performance levels in 2014 and beyond. As a manufacturer, we look constantly to improve flexibility in personnel, industrial footprint and geographic profile. This allows us to manage better the shifting levels of demand from our customers. On the other side, we target our spending very carefully. We go for the best returns only. More specifically, we've grown our sales forces in dynamic markets and greatly expanded our software, controls and automation offerings. Where we see opportunities for acquisitions, we've made them. And where businesses don't make sense, we exit. And if you take a look, generally, at how we've performed, you can, again, get a feel for how good our business is even in tough times, and how consistent we have been in making it work well.

Let's have a look at the last couple of years. In 2008, the market moved down more sharply than anyone would have guessed. The impact on our short cycle businesses was extreme. Within days, the order intake dropped by some 30% to a new low. And yet, even within these extreme conditions, we were able to stabilize our EBITDA margin quickly despite onetime charges. That shows you a flexible, fast-reacting organization as we are.

In fiscal '11, we were able to boost our EBITDA by EUR 1 billion and increase the corresponding margin to 16.8%, near the upper end of our margin corridor, driven by the significant revenue growth, along with a highly attractive profit conversion. Entering fiscal '12, we were geared up for further growth, as we saw solid revenue growth in the first half of the year combined with encouraging signals from China by the end of March. But we were affected by less favorable market conditions in the second half of the year, which was particularly evident in China and Southwestern Europe, 2 of our most important markets. The rather unexpected market [ph] and revenue burdened our profitability, particularly in the third quarter 2012, as the implementation of our contingency measures had an average lead time of 3 to 6 months.

In Q4 2012, we were able to bring back our EBITDA margin by leveraging our "be prepared" culture, with bottom line impact from contingency measures of approximately EUR 100 million. Apart from that, EBITDA development in fiscal '12 was also held back by a less favorable business mix as well as market challenges from our Renewable Energy offerings. The economy was challenging. To manage these swings, and not only single quarters, we reacted quickly and executed on our short-term contingency measures. In parallel, we worked on our cost structure and improved it over the full cycle, and the success can be seen on this slide. Our margins have been holding up very well. Indeed, consistent and powerful cash flow is another strong point of our industrial businesses.

As you can see here, we provide a stable cash contribution despite a volatile business environment and selective investments, such as our twin factory ramp up in China, Siegfried has been mentioning. On a rolling 4 quarter basis, we constantly delivered cash flow on a level above EUR 2 billion during the cycle from 2009 to 2012. We are good in managing our assets and we are disciplined with where and how we invest. Our key levers are a continued focus on asset management improvements and a diligent investment prioritization.

The following 3 areas are the most important to our working capital management. First, in addition to our day-to-day activities to optimize our inventory levels, we manage the flexibility of our supply chain by maintaining a balance between quality, productivity and availability. Taking an example, we successfully maintained our ability to deliver our products on time, when some semiconductor suppliers were struggling with shortages as a result of the March 2011 Japanese earthquake. Furthermore, in addition to a considerable number of consignment stock, we are stepping up our efforts to move more purchasing volume to vendor-managed inventory. This simplifies processes and helps us to keep a minimum of inventory on our own balance sheet. Second, managing down accounts receivable with a strong focus on overdues to minimize our risk exposure is sort of religion at Industry meanwhile, and part of the daily work of our business units, clusters and country managements. Third, we're undertaking major efforts to integrate not only our suppliers, but also our distributors into our supply-chain network. With regard to our distributors, we improved our insight into their future demand by getting direct access to information about their stock levels of our products. This helps us to be more demand driven in producing our goods and keep our inventory levels low.

Now let us take a look at how revenue, profitability, cash and capital efficiency have been developing more recently. On the top line, you can see how economic activity picked up sharply in 2011 by 13%, while the growth rate moderated to 2% in 2012. Last fiscal year included the deliberate meltdown of low-margin, noncore businesses, with an estimated revenue impact of minus EUR 400 million. A look at our EBITDA margin development reveals, again, the stability I have already been mentioning before. The average margin of 14.4%, from 2009 through 2012, is in the upper half of our target range. Our cash performance has been always a solid and reliable high level. Even without profit effects from purchase price allocation, the average cash conversion rate, over the displayed period of time, has been close to 1 despite an average growth rate of 4%.

Our return on capital employed is a key highlight throughout the cycle. With a ROCE of 25% last fiscal year, we are clearly above the Siemens target range of 15% to 20%. The development in recent years shows that we are on track in transforming Industry in a higher value business. It is clear that capital invested into our sector, ladies and gentlemen, is well-invested money. ROCE and EVA are core KPIs for me and the management team, for allocating our limited funds and for each and every investment. Our first quarter's results indicate that the market environment is still challenging, affecting both volume and profit development. First quarter orders and revenue declined by minus 9% and minus 3%, respectively. From a geographic point of view, we still recorded slight revenue growth in the Americas, which was more than offset by lower revenue in Europe, Middle East and Asia, Australia. We delivered first quarter EBITDA of nearly EUR 650 million compared to EUR 694 million in the prior-year period. The decline was due largely to the Drive Technologies division, where weaker demand is short cycle businesses led to a less favorable business mix.

With respect to cash performance, we more than doubled our free cash flow compared to prior year quarter. For seasonal reasons, the low cash conversion rate is not surprising. In 2013, I can assure you the Industry sector, again, will deliver more than EUR 2 billion in cash. As Siegfried has been mentioning before, we expect the demand will bottom out at the end of fiscal '13, with corresponding revenue growth in the beginning of fiscal '14 again.

Let's have a look at our revenue development by region. Overall, we see an average of plus 4% per annum from fiscal '09 to fiscal '12, which equals double GDP growth in the same period of time. In Asia, Australia, revenue climbed by EUR 1 billion. This was mainly driven by China, but we leveraged our competencies in vertical key markets.

Moving to the Americas, you see similar aspects. In the U.S., we grew by EUR 400 million, mainly driven by our higher-margin automation controls and software businesses, while our wind business declined. Another growth contributor was Brazil, where we also grew revenue by about EUR 300 million, mainly stemming from our Metals business.

In Europe, Middle East, we gained EUR 800 million, benefiting from the demand of our export-oriented customers. Within Europe, I would like to highlight our success in Russia, where we achieved revenue growth of 19% per annum.

Now let's take a look at our investments in innovation. As you can see on the left-hand side, we are spending around 6% of our revenue every year in R&D. The majority of our product portfolio has not yet seen the peak of their life cycles yet. And we constantly bring new and innovative products onto the markets. Some of them you have seen during the booth tour. This explains why our R&D spending remains on a constant and material high level. I can assure you that the allocation of R&D funds is done very, very diligently. The majority of our R&D investment in fiscal '12, more than 60% went mainly into software, automation and controls, which are the crown jewels of our business portfolio. The main recipients of these funds were TIA, SIMATIC, SINAMICS and our PLM software development. In line with expanding our global manufacturing footprint, we are also pushing our R&D investments onto the emerging markets. From fiscal '09 to fiscal '12, we increased our R&D staff in emerging countries by 50% with a strong focus on China and India.

Turning to our SG&A development. On the last Capital Market Day, I pointed out that we have run SG&A costs pretty tightly. But as I have been saying many times before, we will make investments into markets where growth will come. And indeed, after the last downturn, when markets picked up again and developed more favorably, we geared up for more growth.

As you can see on the left-hand side, SG&A cost growth from EUR 2.7 billion in 2009 to EUR 3.3 billion in 2012. Thereby, we clearly set our focus on leveraging our higher-margin businesses. After the successful implementation of the SG&A program, we invested over EUR 300 million in our crown jewels: automation, controls and software business. The other focus is benefiting from the business dynamics in fast-growing markets. This is -- for this, we doubled our SG&A investment in the BRIC countries and increased our sales force by over 1,000 employees. However, the story becomes different when we look at the development in the advanced economies. Here, our SG&A costs increased by EUR 300 million, mainly due to merit increases despite a sales force reduction of about 800 employees. The attack on SG&A costs never ends. My target is to get these down again on 2009 levels. I will walk you through our improvement levers when I come to the main productivity measures that's a part of Industry 2014.

Similarly to our differentiated SG&A approach, we allocate our limited CapEx funds towards the highest returns only. Disciplined capital allocation remains on top of my key priorities. Each investment in this area is subject to a stringent prioritization and approval process. As you can see here, our CapEx development is rather stable. The increase by 3% per annum over the last 4 years is -- 5 years is clearly within the ballpark of inflation rate, with an overall investment ratio constantly below 100%. As strictly as we allocate our money, we are also aimed at markets with the strongest return opportunities. Only fast-growing markets and leading technologies attract our funds. We predominantly invest in long-term value propositions such as our crown jewel businesses. When it comes to the regional split, the 80% CapEx share of the advanced economy is related to recurring investments in our capital intensive best-in-class factories. Mainly located in Germany, these lead factories ensure close collaboration with our local R&D functions. First rate examples are our industry-leading electronic work in Amberg, as well as the motion control factory in Erlangen. These highly competitive, highly efficient plants serve as models for several other twin factories around the globe, as Siegfried has been pointing out. In contrast to the rather flat development in the advanced economies, we have persistently expanded our footprint in emerging economies, as underlined by an average investment ratio of around 140% over the last 4 years. In order to extend our production capacities, get closer to our customers, reduce logistics costs and benefit from lower labor costs, we increased our CapEx spending in those regions by 14% per annum.

Now China. China is a key market for us, of course. Let me provide you with some insights into our success stories here. Throughout the past decade, we have achieved impressive top line growth, with revenues up 28% from fiscal '09 to fiscal '12. In order to reinforce our footprint in China, we have been adding resources for decades there. Looking at our investments over the last 4 years in more detail, you can see a boost of more than 70%. Our sales force has been strengthened significantly. And since 2009, we more than tripled our China R&D expenditures. The most recent proof point in this is the successful launch of production in our new electronic works in Chengdu. We invested roughly EUR 50 million to build it up as a twin factory for our lead factory in Amberg, with identical processes, quality and logistics performance. We do expect Chengdu to contribute more than EUR 200 million in additional revenue per annum over the long term. In its final configuration level, we expect to employ about 700 colleagues in various functions at that new site, including manufacturing, procurement, IT and R&D, of course. Overall, we reaped the benefits of low-cost sites along the entire value chain for both source and make processes. As for make, including Chengdu, we have established 10 factory locations spread across the whole of China. Coming to the sourcing part, we achieved the localization rate of more than 85% at our Chinese manufacturing sites, thanks to our local-for-local initiatives.

Now let's zero in on what is ahead for Industry from a CFO's point of view. Let's talk about ensuring our profitability performance, year in and year out. A goal for me is to keep driving down the breakeven point to protect our margins. From 2009 to 2012, we pushed breakeven down by 500 basis points, while maintaining the drop-through margin of 60% to 65%. This was achieved by a mix of measures. First, we adjusted our headcount capacity, and about 8,300 positions in total were cut through restructuring measures. On headcount, we also made some major shifts towards emerging markets. Our increased presence there allows us to benefit from attractive labor cost rates in a highly flexible labor environment. Just to give you one example, the number of our employees in BRIC countries grew by nearly 5,000, there in China alone by roughly 3,000. And as I mentioned before, with our asset management and CapEx discipline, we were able to keep our CapEx focused and our asset base low despite the revenue growth.

What are the challenges and actions ahead? To begin with, we continue to take out layers of complexity and cost of our processes. We have started 2 distinct projects in 2 different areas. First, we are tailoring our support functions and processes to the streamline sector organization. We are also moving to make our footprint fit our business plans more specifically. We have prepared our Wittgensdorf Foundry for sale and we outsourced the Nuremberg Logistic Center, thereby reducing the workforce by approximately 650 people. This is to name a few only. There are also steps on the regional level to streamline. By implementing our go-to-market approach, we will increasingly utilize partners in smaller countries. And for bigger countries, we have initiated dedicated efficiency programs. All of these measures will result in improved business structures with enhanced cost flexibility. We continue to be very close to our customers, supporting demand changes faster and earlier. By lowering our fixed cost base and becoming more flexible, we are prepared for a better response for market dynamics.

As Siegfried has been pointing out before, we are shaping our business towards higher performance with a profit target of around 14%, which includes a divestment of water technologies. This translates into an EBITDA margin at the upper level of our corridor. Reaching the 14% target is based on 2 main developments. First, after revenue decline in 2013, we expect business climate to support a moderate growth in 2014, especially in our short cycle businesses. And second, the delivery of gross productivity gains of EUR 1.1 billion. Here is how we are tackling the challenges of achieving the EUR 1.1 billion and ensuring top performance for 2014 and beyond.

The Industry 2014 program is speeding up the pace of our efforts to be a performance leader for the medium and long term. Siegfried has been elaborating on some of the measures already in execution. And as you know, we have already started the transformation activities in the fourth quarter 2012, the severance charges in the DT's business of about EUR 20 million. While there is some bottom line traction already, the major impact of around EUR 800 million will be generated in fiscal 2014. Most value-added measures, representing 60%, take time, as they require more detailed planning and more consultations with labor representatives. The other 40% relate to material. This is not only getting lower purchasing prices, but also replacing cost-intensive materials and components with solutions providing the same functionality and quality at lower cost.

Coming to the organizational split, DT will be the biggest contributor, driven by the optimization of its manufacturing footprint and lower demand in its renewable businesses. IA will add about 35% to productivity, mainly by streamlining its portfolio. As part of that, we ramped down the solar inverter business and closed the electronic design manufacturing. So the divisions concentrate on their business specifics. Our sector-led initiatives will contribute about 25% with our process optimization and go-to-market program. Of course, all this costs money. Right now, we are looking at EUR 370 million in transformation charges for Industry in total. This is below the initial expectations. We achieved that by getting some restructuring activities done more efficiently, for example, finding redeployment opportunities within Siemens. That results in a reduction of charges while maintaining savings on the same level. Most of the charges for the program are personnel related. Approximately EUR 40 million of noncash charges are related to expected asset impairments. Charges will impact cash flow in 2013 by around EUR 130 million, with another EUR 190 million in 2014. The team you'll see here presenting here today has spent a lot of time outlining to their organizations the need for speed and the commitment for action here. This is on the very top of our management agenda. While the program focuses on delivering in 2014, we also note that this will enable us to push through even longer range, towards consistently higher margin performance against competition.

So let me summarize how this will work from a financial perspective and how I, as the CFO of the Industry sector, see our priorities. First, we will further increase our cost flexibility by driving down the breakeven point by another percentage point per year to protect our margins. The main levers for optimization are manufacturing footprint, regional sales set-up and internal processes. Second, we have a strict regime in place to allocate our capital. We continuously look for the biggest bang for our buck. We always seek the fastest growth opportunities and keep our innovative edge, and we continue to actively manage our portfolio. Third, a stringent execution of our program 2014, where are well on track at the moment. Fourth, achieving and maintaining the targeted profitability level of 14% with the EUR 1.1 billion in gross productivity and a streamlined portfolio. This means being able to perform through the ups and downs of customer demands. With our "be prepared" culture, we always have contingency plans in place for both unexpected downturns and market upticks.

Cash might be the last topic on this list, but it definitely enjoys highest priority on my agenda. And with our contribution, we boost not only the value for Siemens Industry but also for Siemens in total. We have great businesses and long-term customer relationships. Therefore, we will be able to participate not only in the next upswing, but also in the ones to come, thereafter, with a highly attractive profit conversion. We are prepared for whatever is ahead, not just next year but also for strong performance in the years thereafter. Thank you very much for paying attention to me and now, Siegfried and myself will be happy to take your questions.

Question-and-Answer Session

Mariel von Drathen

Thank you, Ziggy. Thank you, Ralf. I would like to take the privilege of having a microphone and ask the first question. I know this is normally not the way it works and you will have ample time to ask your question, but I'm sure one of the pressing questions, Ziggy, about the Industry sector is we heard a lot about the businesses and your vision and we'll hear more about the divisions after the break. But what exactly is your short-term outlook? How do you see Q2? How do you see Q3 and the impact of the global environment on your business for this fiscal year?

Siegfried Russwurm

Well, as I said, it's a challenging environment for industry, especially in Asia and predominantly in China, and as we know in Europe. And China, unfortunately, will remain weaker, or weak longer than what I originally expected. In the short term, Q2 and Q3, I would not expect that there is a pickup in China, predominantly in the short cycle business, because there is still quite some uncertainty about governmental decisions. And this is predominantly, as I said, in the short cycle, secondary is industries, i.e., industrial automation, motion control. And those businesses are those with our best conversion rates. It cuts both ways, so we will suffer from negative scale effects in these businesses for the next 2 quarters to come. We expect orders to pick up in quarter 4, again, and we should then see the revenue and the positive digression [ph] at the beginning of the fiscal year. And frankly, we should not forget that's now the practical aspect of all our restructuring. Ralf has elaborated on the onetime costs that we have, severance payments, et cetera. These things are not the most productive ones in manufacturing. If you are telling people that you want to close or significantly reduce the manufacturing, there is a loss in productivity that will also burden our results in those quarters, where we are running through these restructuring efforts. It is an operational process. We will handle that most professionally, but we will have limited fun in the next quarters to come.

Ralf P. Thomas

So we do expect, for these reasons, that IA & DT will not have the same marginal level as in prior quarter and in the quarter of prior year. We will have, most likely, transformational charges in the area of EUR 50 million in the second quarter, and there will also be an impact from the consolidation of our lately acquired software company, LMS. We started consolidating them in the second quarter, and we'll have an impact of purchase price accounting to the magnitude of EUR 25 million there. I thought for helping you out in feeding your models, it may also be interesting to hear that for the full fiscal year '13, we expect EUR 75 million of PPA for LMS. And then from 2014 onwards, the level will be EUR 45 million. This is preliminary and should help you feed in your models as I said.

Mariel von Drathen

Thank you, Ralf. so let's start with Q&A and I will start on my right, third row. Andreas Willi, please.

Andreas P. Willi - JP Morgan Chase & Co, Research Division

Andreas Willi from JPMorgan. The first one on your cost savings, the EUR 1.1 billion, that's up to about 3% productivity per year, which looks, to me, pretty standard for an industrial business. Maybe you could give us a comparison what productivity was running the last few years, so we can judge that better in terms of the step up that you're targeting. The second question on your comment on trading, having spent the last 2 days here at the fair, you're at the more bearish end of what others are saying. Maybe you could give us a little bit more information, maybe on some of the verticals that you see the sequential weakness and also, if it is continued sequential weakness, kind of what magnitude are we talking about?

Siegfried Russwurm

Ralf, would you comment on the productivity number?

Ralf P. Thomas

Yes, of course. I mean, the question is whether or not this is on levels that we have been achieving in the past. Of course, as all our competitors, we are pretty much targeting mid-single digits in this -- in that area. However, we intend to be specific and focused with our activities. So referring that to sales is probably not the best yardstick for us because we address a certain part of the cost base. And with our value-add measures, we, of course, refer that to total cost minus procurement, if you will, and material. And from that perspective, we see ourselves rather in the area of 5%, which is quite challenging over the period of time, given that framework.

Andreas P. Willi - JP Morgan Chase & Co, Research Division

The EUR 1.1 billion includes the material as well?

Ralf P. Thomas

The EUR 1.1 billion includes the material as well. It's 60% of value-add measures. It's another 40% material. And within that, the lion's share is in design-to-cost measures, things that will keep us rolling for a longer period of time. So it's not only getting cost of material down.

Andreas P. Willi - JP Morgan Chase & Co, Research Division

How does it compare to 2011 level as well?

Ralf P. Thomas

In 2011, I mean, picking on that particular year, we, of course, had a lot of momentum from growth. So as you saw on the slide, there is no growth momentum tailored into that. This is purely cost efficiency.

Siegfried Russwurm

With respect to different industries and what we've seen on the fairground here, to a certain extent, you have noticed that this morning, we have a heck of a lot of visitors that want to understand how they can cope with the future. Industrial production is not in the best shape currently, from the market conditions, so we have a lot of customers that ask us how we can help them to increase their productivity, for example, in their engineering. If you look at the different verticals, there is a pretty diverse future. Food and Beverage is booming all over the globe, and has been so over the last cycles as well. We have not seen Food and Beverage being down in 2008, 2009. The other extreme might be currently the metals business, where there is overcapacity and there are a lot of questions on the environmental impact of these steel plants, for example, in China, and which to survive and which to shut down in order to safeguard, for example, the capital of Beijing. This has a negative impact on that market, so there is a broad variety. We definitely don't see a kind of cliff, as what we have in late 2008. And it's moderate, it is in decline. Yes, it is, but I would not foresee any kind of artifact of that size that we have in late 2008.

Mariel von Drathen

Okay, next question. Peter Reilly here in the second row and then Michael Hagmann.

Peter Reilly - Deutsche Bank AG, Research Division

It's Peter Reilly from Deutsche Bank. Three questions, please. You talked about spending EUR 4 billion on software acquisitions. Can you help us -- EUR 4 billion, as you said on various software and IT companies, UGS and so forth. Can you talk about what the return on capital has been like, because you also talked about having a strong focus on capital efficiency? Obviously, it's going to be a lot less than 25%, but if you help us understand what the returns have been like. And secondly, the metals technology business. It's in your sector, but it's managed separately. Who decides whether to keep it or sell it? Is that something you're just looking answer for the corporate head office or could you decide to exit the business? And then, lastly, the examples that you have given on high-level PLM contract wins at Volkswagen, BMW, Daimler. They're all Germany car companies. Do you have a -- I mean, are you finding it more difficult to sell that concept globally outside of Europe, or is it just a coincidence you've chosen those 3 examples to highlight your success?

Siegfried Russwurm

Okay. Well, Peter, let me start with the latter 2 questions. The easier is the PLM thing. It is not an easy decision for a carmaker to do that. Actually the Daimler guys have challenged us with the benchmark of more than 2 years until -- to come to that decision. The head of engineering and research called it a combined heart and lung transplant of their company. So it's not an easy decision. We have big customers also outside of Europe. From the big American ones, we have 2 that are significant customers. I've quoted Ford Motor Company that builds on Teamcenter. If I dare to say call it, Fiat, Chrysler is building on our MES offering globally. So we are successful not only with the typical Europeans, but frankly, as long as the German car manufacturers are the successful ones in their industry, I'm not shy of approaching them as customers. To the metals business, there is a formal answer to that and there is a content answer to that. The formal answer would be the Supervisory Board of Siemens decides on that portfolio, because the matter would be significantly higher and anything what we on the board or what I personally could decide. But there is a content answer to that. As I've told you, from a return on capital perspective, this is a highly attractive business and has been so over the cycle, if we look at that. Furthermore, it is highly synergetic to our Mechatronic offerings. It is a blended showcase, for example, for our PLM software or our control software. A steel plant is all, it's batch, it's content [ph] process, it's discrete, so we have a significant pull through of our products and solutions in -- within the metals business. So there is no need to speculate on that. And Ralf, would you comment on the...

Ralf P. Thomas

The first question you have been posting about the investment rationale for LMS, and that is clearly that our investment hurdles are going to be met. You know that 15% cash on average assets employed after 5 years is that what we strive for and we will definitely reach that with an acquisition. On top of that, you also should see that in the bigger frame of grooming our portfolio. I mean, at the moment, we definitely drive profitability on an EBITDA level within the range of 11% to 17%, clearly to the upper end, with these investments. They are at the upper end and, therefore, moving the portfolio into that one is definitely getting us into that direction. And what we also should not forget, these investments, including former UGS investment, they are cash accretive from day 1 on.

Mariel von Drathen

Okay, we'll continue over there with Michael Hagmann, please.

Michael Hagmann - HSBC, Research Division

Michael Hagmann, HSBC. First question is you highlighted the strength of the portfolio on the discrete side and, obviously, on the hybrid side. There is a big spot of weakness, which is obviously Oil & Gas. So you're missing out on one of the biggest mega trends that we're seeing, which is shale. What are your deliberations there? What are your thoughts? You can't just be sitting there and not trying to close that gap. And the second is I'm going to try, as Peter, to get a bit more out on PLM. You gave a couple of indications on how that business has been progressing, but you didn't give a hint on revenue or profitability. If you could give us a hint on this one, that will be much appreciated.

Siegfried Russwurm

Well, Michael, as you requested a hint, I will be happy to do so. The PLM business is currently the second best performing business unit that we have, so it's clearly above average. And it has a growth rate that is, I think, 3% above the average of some other -- of the other business units. So both from a top line and from a bottom line perspective, we have a lot of fun with this business. And with respect to our portfolio towards process industries, it is what it is. I don't think it would be wise to now have a frontal attack to a hot portfolio element, where we see while the typical 5 suspects that owned the big installed base. I don't want to trigger any speculation that we buy 1 of the Big 5. Definitely not in the hype of the current market and indigenously, you are dealing with installed base. So we rather gain share in hybrid, where we can build on our synergies than rather run a frontal attack into an area where we currently only active in some specifics. We are doing good business with our gas chromatographs, for example, around the shale gas. We are doing good business with our large drives in that area and we are doing good business with data systems to monitor and control pipelines, but it doesn't make sense to invest a lot of money into a DCS system for a refinery when you are not in the game of the big players.

Ralf P. Thomas

Just for clarification when we talk public [ph] profitability, we talked EBITDA margins, of course.

Siegfried Russwurm

Sure, sure.

Mariel von Drathen

Okay. And then we have Fredric Stahl and we'll continue with Daniela Costa afterwards. Fourth row.

Fredric Stahl - UBS Investment Bank, Research Division

Fredric Stahl from UBS. I was wondering what you're doing differently this time when it comes to cost cutting in order to ensure that you keep the costs and don't start spending once this program is finalized next year?

Siegfried Russwurm

Well, there is a misperception which I'm encountering sometimes, that we are trying to get rid of people which we recently hired. This is not the case. It's not that we did spend on the wrong side. We will put more emphasis, as a matter of fact, on flexibility, on driving our breakeven point down in that. But the deliberate investments, they will come. We are investing in innovation and we are investing into new markets. Maybe it's fair to say that we have more rigor on mature markets, as for example, in Western Europe, where we are driving down our sales efforts because we don't see that the market will grow anymore. But it's not black and white.

Mariel von Drathen

Okay. We can have the microphone again fourth row with Daniela Costa.

Daniela Costa - Goldman Sachs Group Inc., Research Division

You mentioned on the beginning of the presentation that 80% of the business was of some recurring nature, and you also showed that creating [ph] #1, #2 positions in most of the areas. So I was looking for your insights on why is the pricing then on the bridge still negative? Is this something structural about the -- in automation industry or is it some deliberate actions to gain even more share or is it something else?

Siegfried Russwurm

Well, even if we are the partner of choice for such an elephant like this pharma [ph] speeding [ph] machine, the pharma [ph] purchasing is trying to negotiate price with us every year. So it takes quite some effort to convince them that we have a continuous stream of innovation that we feed also into existing contracts. That's one part of that. So for quite a bulk of our business, we manage the pricing part to be flattish, so to say, so it's 0-point somewhat. We have some structural effects. There are some of our products where there are only a few competitors and the performance is expressed sometimes in one number. If you think of Ralf's wind gears, for example, the only qualifier is how many megawatt can you transfer in that. And definitely the pricing pressure on a product like wind gears in a situation like we have with renewables and wind with the end of the PTC in the U.S., that was nothing that was in the 0-point somewhat number. And if you take the average across our portfolio, I think with the price change on the customer side that we typically have in this, while we try to keep that below 1%, we are dealing quite well with that. I'm pretty proud of that.

Mariel von Drathen

Okay. Well, then we'll continue in the second row with James Moore.

James Moore - Redburn Partners LLP, Research Division

I have 3. It's James Moore from Redburn. On the organic sales growth front, you've talked about a difficult second and third quarter. And you've helped us with a moderate growth over the 2 years. I wonder if you could just give us a feel for what you think the growth environment looks that for the year, whether we're talking flattish for the year or a negative that's going to be offset by a positive next year. It sounds like the message, I'm just trying to get the scale. And secondly, you talked about the EBITDA margin being down Q-on-Q and year-on-year. I think you said Q-on-Q as well, I couldn't quite catch it. I think against the 14.0% you did last quarter, could you help us as to whether that's a 13.8% or a 10%. And thirdly, on Chinese penetration, I think we all understand that there is a story of high-wage inflation in China. There's been good secular growth despite the cyclical weakness that we're seeing at the moment. Where are we, in penetration terms, on the big Asian automation story? Are we 5 years in, 10 years in? Is it nearly finished? Is there another decade to go? How should we think about that?

Ralf P. Thomas

So let me start with the growth question. The first part of your question. The chart that we are displaying is for 2 years, '13 and '14. So it seems to be a wash on that chart, and what you may expect that we will have a moderate decline current year and moderately coming back next year. So with regard to productivity, that will definitely not help, that was my answer to Andreas. So from that point of view, you may expect decline current fiscal year in revenues moderately. And that happening in our short cycle businesses definitely will lead to deleveraging margins there, which we will not be able to compensate for. I have been mentioning in my presentation that we did adopt and continue doing so having a "be prepared" culture in place. We have contingency plans and we have been ready to execute. Nevertheless, the lead time of these measures will still take 3 to 6 months. So don't expect that, in each and every quarter, when we see market dynamics we can compensate via that.

Siegfried Russwurm

Well, on the EBITDA question, I'm tempted to say, let me think about that for 3 weeks and I'll come back with an answer.

Ralf P. Thomas

Around 2nd of May.

Siegfried Russwurm

It could be. The China question is a very valid one. I typically describe China as a full reflection of the world market. On the coastline, you have a high-end market with all the same qualifications that you have in the Western Hemisphere. Not the least, the wages are, by and large, the same. You pay the same for an engineer or qualified operator of a big machine. Frankly, we pay the same that what we pay in Europe. Whereas the middle or Western part of China, you still have emerging industries. So we have it all. The good news is we have a broad variety of offering in China. It's not only that we are offering emerging or entry-level products. We have the qualification. We have troops on the ground. We have solution partners that can help our customers that are emerging in China. And if they are -- well, they're claiming they're one of the 2 nations on the globe that bring people into the orbit. And to produce this kind of equipment, you need high-sophisticated technology and high-sophisticated automation. One thing is for sure, the hype around China, the 20% growth rates fueled by a boom, for example, in solar module factories and stuff like that, that is over. This exaggeration, and if you read the last news about the new Chinese government, as I claim, nothing happens by coincidence in China, we will not see, in all likelihood, these 20% growth rates. But if they manage to let their economy grow by, let's say, 8% of this 7.5%, that was the last public indication, and if it's substance as a big homogenous market can do that, I'm absolutely sure that China is a growth country for the long run, and one of the growth locomotives on the globe. But the ups and downs, that we never saw in China because the underlying growth was 20%, and then the ups and downs were just a ripple effect, they will be more noticeable, if the underlying growth is, let's say, 5%.

Mariel von Drathen

Okay. Any more questions? We'll continue on the left side with a hand, but I don't see a face. Olivier Esnou, and then we'll continue on the right.

Olivier Esnou - Exane BNP Paribas, Research Division

First question, it would be great if we could have a bit more granularity on your sales by market. You kind of gave automotive 15%, which is slightly less than, I think, Joe Kaeser used to say. And if we could have a little bit more details about the other end market, Food and Beverage, Oil and Gas, Chemicals, for the overall industry sector, please? Second question, I think I heard Mr. Thomas saying that you wanted to bring down SG&A back to the 2009 level. Did I understand well? What does that mean? You're talking percentage of sales, which is about a bit more than 100 bps, and how is that going to happen, please?

Ralf P. Thomas

So let me start with the last one maybe. So getting back to the 2009 levels, we refer of course to the relative figure. If we are outgrowing the 2009 figures in volume, it would be naive to believe that, that level could be held nominally. But what we do, and I tried to explain that in my presentation, the measures we take are of more structural nature. When we tailor our new go-to-market concept to the individual specific needs of the individual markets, smaller countries, more indirect access, bigger countries, efficiency program, we are convinced that these measures have a more sustainable nature and, therefore, can be held through for the next cycle.

Siegfried Russwurm

Well, with respect to the verticals, I know that Joe has mentioned about 20%. There is some fluctuation where there are big projects. Definitely the European or the Southwestern European carmakers are not investing currently. The Japanese haven't done so. So we were in that range, between 15 and 20, more towards the lower end in the last 2 quarters. Let me try to help you out in these verticals. Automotive is the most significant, and I would be surprised if there is any other that is more than 10%. So we have a pretty broad-based vertical distribution of our business. It's sometimes also difficult to find that out because, in many cases, we are selling to intermediates, to solution providers, to distributors, and not all of them give us the feedback of where did it end up. Automotive is something where we are very active in the end market and frankly, our account managers or the big automotive customer, typically know better than the customer itself on how much we sell. Therefore, we believe we have a pretty good grab around the 16 to 20 big automotive players. For the other verticals, it's difficult to say whether a piece of equipment that's sold by Rexel or Sonepar ends up in a Food and Beverage plant or in a processing plant for, let's say, pulp and paper.

Mariel von Drathen

Okay. then, we'll continue with Reed Lonstein [ph] and then Gael de-Bray.

Unknown Analyst

I was a little bit surprised that the growth rate expectation between the U.S. and China is only 1%. Because in China, we're talking about a 7.5% GDP growth expectation, and I don't know what you used in the U.S., maybe 3% or something. Why is the 4 and 5 so close together on your market growth expectations?

Siegfried Russwurm

The reason is the substance of this phrase of manufacturing renaissance. Much more than in other markets, much, much more than in Europe, the phrase "Made in America" does matter and that fuels manufacturing in the U.S. It was by coincidence, I was in the U.S. during the evening of the Super Bowl, and when I saw it in the hotel TV, I was amazed when I saw the Kia advert. And it ended with, "Still be Made in America." So this effect of make it in America or manufacturing renaissance adds, for me, 1% or 2% on the growth expectations. Revitalization of industrial manufacturing, the President is supporting that strongly. That has an effect over and beyond the traditional trajectory that's corresponding with the GDP.

Unknown Analyst

And what's the -- what meaning should we take away, that this industry is expected to grow slower in China, overall, because it seems like the things that this industry provides are a lot of things that China needs to grow?

Siegfried Russwurm

Well, the exports from the U.S. to China will be limited in that respect. The effect that I was mentioning was domestic demands. So yes, it is fueled, but it is lower. The market, the people simply are lower and there are hundreds of millions of Chinese that want to have their first car. So the growth in China from that big population will be bigger than in the U.S., with all due respect. But is U.S. growing faster than Europe? Very much so due to the reasons that I mentioned. So that's the sequencing.

Mariel von Drathen

We'll go to the second row with Gael de-Bray.

Gael de-Bray - Societe Generale Cross Asset Research

Gael de-Bray from Soc Gen. Could you elaborate a bit more on the globalization process of the manufacturing footprint, and maybe you say what's the share of sourcing is in low-cost areas? What's the share of emerging markets you have today also in low-cost countries? And maybe help us understand how it has moved, for example, over the past 5 years or so. And in this respect as well, you haven't said anything about really the SMART strategy that was initiated a few years ago. So what has been the progress there? And I don't know if you could say something about the share of the value product you have now in your portfolio, I don't know, in terms of low-cost CNC or low-cost PLC as a percentage of the total?

Siegfried Russwurm

Well, thank you for that question. Well, the globalization is progressing well. One data point from the top of my head, that about 1/3 of our total purchasing is from what we call global value sourcing countries. We have this SMART initiative now expanded throughout more or less all our product offering. The nice thing is if we would have had more time on the booth tour, I would have shown you the products. The nice thing is customers don't recognize that. The drive from China, from Nanjing, it's on the booth. It's on the exhibit. It doesn't look like a Chinese drive, but you need to be an expert to find out, while there are some small little details, not for the application. We have that for the CNC. We have that for the PLC, I've shown you the high-end flagship, S7-1500, but there was an exhibit of our S7-200 and even the logo that's fully produced, and now the full product management responsibility in China, by the way, product management for the globe. So our Chinese colleagues are responsible for that global business. The same goes for the low-end CNC. So the SINUMERIK 808. It is a product that is defined, developed and produced in China for the world market. And there are excellent applications for these kind of products also in the mature markets. So we are making progress. And a good share of these twin factories that I've shown on one of my slides have their own development. If you take the software development, for example, we have a good distribution. The brain, frankly, still is in the U.S. and partly towards the application in the middle of Europe. The coding, we are all doing in Bangalore. We have a great plant there, and Anton may want then to elaborate on that further on or in the second Q&A round. So we are making good progress. And the trend is going on. As I said, in a standard asynchronous model, we will have -- once we are through with that relocation that Ralf is just now doing, we will have 0 production of this kind of product in any high-end country over the triads, in Mexico, in the Czech Republic and in the western part of China.

Ralf P. Thomas

Maybe with regard to the footprint and making it move, as I said in my presentation, 50% more R&D employees over the last 4 years through 2009 through 2012 in the emerging markets, 25% more sales force in India and China and 14% more CapEx in the emerging markets, while the rest of the world is literally flat. That is a pace we, of course, intend to continue with.

Mariel von Drathen

I think we had questions in the first row. This gentleman, please.

Hans van den Berg

Yes, Hans van den Berg, Echo Point. I have a question about synergies being part of the Siemens organization. What percentage of your revenues come from other parts of Siemens? How do you benefit from being a part of Siemens? And how do you help the others?

Siegfried Russwurm

Well, in a band of brothers, we prefer to talk about the benefits that the other brothers have from us. As a matter of fact, about 7% of our total turnover is from our brothers in arms. In a broad variety, some are the obvious ones. The fact that the gears in our wind turbines are from Ralf's division. That's well known. The fact that, for example, the motion control in an angiographic system from Hermann Requardt is nothing else than a SINUMERIK that's somewhat tweaked towards the medical system. That's less known. It is, in total, about 7%. The transfer price is at market conditions because if you're selling gears also to third parties, then you have something that what we call a market price. And there is a broad variety of that. To some extent, we are the technological base also of our brothers whenever it comes to automation to status [ph] system. And it is in the best interest of both. Let me take the example of our Building Technologies system. I have elaborated on pharma. Our building management system actually is a SIMATIC TIA product with a user interface for the facility management. In a pharma factory, you can switch between those 2 user interfaces. So in day-to-day business, the facility management sees a building management system. At the very same day where the validation, the GMP validation of that process is done and boundary conditions in the factory play a major role, you look at that as a PLC, what it actually is, and you do the same validation task. So that's one of the reasons why, in pharma, we have a very strong position and our colleagues from Building Technology have an excellent base to build up their application. So there is a lot of give and take and technical synergy. It's more a give from our side because we are the product and automation guys. It's not so much components that we get from our colleagues, medium voltage for sure from IC, and if a sugar plant in Turkey wants to do energy harvesting for -- from their waste, we have industrial turbines from our colleagues from the Energy Sector. So there is a good collaboration in that. It would be reported, by the way, then under their numbers. So that's different. If they build in our system, you see that in the external revenue on their side, if we have an industrial turbine, it would not be recognized as our revenue, but we have one account manager of the Siemens one, kicks in [ph] , Michael would then show us the external revenue for him.

Ralf P. Thomas

If you turn in your little booklet, in my presentation, to Page 8, you will see that the intersegmental business during the last couple of years was roughly EUR 1.5 billion, equaling 7% of our revenues, roughly.

Mariel von Drathen

Okay. Then we'll have the next question, Volker Stoll, first row, please.

Volker Stoll - Landesbank Baden-Wurttemberg, Research Division

These are all rather integrated product concepts at the fair. How is the market success in China, for example, for the S7, did you gain market share there? Or this HMI interface, have you been also been able to win some market share there that -- so that your product concepts are accepted more and more?

Siegfried Russwurm

Well, with respect to the detailed products, I would leave that to Anton. He's already smiling. I think he got some relief in the Q&A session. But to give you an example on how that works out, I've been recently with a machine builder customer of ours in Germany that's building powertrain lines for automotive, and he builds that line. The final acceptance test is at the machine builder, so a Chinese line. Power [ph] production step of drilling and milling, that was exactly the same technology with the same automation, whether that line stands in Detroit or in Vossberg [ph] or in Chengdu [ph] . The material handling between one step and the other, where we have a high sophisticated automation here in Germany, so that nobody touches that, on the Chinese, where [ph] it was just a rail where somebody would push that from one end to the other. So you need the high-end automation for the process, for the technology itself. The good news is we have such a broad portfolio that we can cover the steps in between as well. With respect to market share, I would leave that to Anton. I'm not sure whether you have that in your presentation. Definitely, we have the Q&A, where we should answer that from firsthand.

Mariel von Drathen

Okay. So will -- as you were saying, we will have the division CEO presenting and enough time for Q&A afterwards. Let me just -- I think there were 2 more questions over there. Will Mackie, third row, and his neighbor. We'll just take those 2 questions. And then we'll break. And then we'll have, anyway, another Q&A session for the remaining questions also for Ziggy and Ralf Thomas.

William Mackie - Berenberg Bank, Research Division

Will Mackie from Berenberg Bank. Two questions, you've given us background on the growth in your key markets. Perhaps, could you give us a little more of your long-run growth expectations for IA and DT or perhaps some of the subsegments within that? And then within the bridge that you've provided for the Siemens 2014, inflation is the biggest component. Can you break out the main headwinds that you anticipate within inflation over the next 2 years?

Siegfried Russwurm

We don't see that much of difference between IA and DT going forward. It's more on a more granular level. If you take, for example, the wind business, the good news for us is that the question of whether it's geared turbines or gearless turbines, you wouldn't recognize that because we are supplying both. We are supplying wind gears and we are supplying generators for gearless turbines. But that's now a political decision, what does PTC do, and will there be more wind turbines in the U.S. or not. So there are some pockets of our business where we have more question marks due to outside influence. From the core manufacturing industries, there is not much difference between IA and DT. Every now and then, I have to ask the guys on whether this component is on the list of material of Ralf or of Anton. And they are merging. If you have seen on the tour, this motion control, we can do certain motion control with this PLC, certain wheels [ph] in motion. So there is not that much difference from that other than some very specific things, like for renewables or for wind, where -- well, the question mark is a political decision-making. I would not dare to project what that is. In the bridge coming to inflation, one of the key elements, obviously, is wages, wage increase. Every year, I'm cautiously looking on the collective bargaining in major markets. What we see in Germany is a somewhat strange debate that the wage increase has been too low over the last years. On the other hand, I don't expect that the Germans are foolish enough to, well, iron out all their advantages of the last years. Inflation in China, given the huge number of employees that Ralf has shown you, is a matter that we have to address. But the good news is that it's true for our competitors as well. So that is a level playing field. But indeed, when it comes to cost and merit increase, the merit thing is the one that has the biggest interest [ph] .

Mariel von Drathen

Okay. Guenther Hollfelder on the third row, please.

Guenther Hollfelder - Baader Bank AG, Research Division

I had a follow-up on your PLM software unit within IA. Competition is generating margins, I think, between 25% and 30%, or PTC, at least, is targeting this range. So I was wondering, are you within this range? Or are you targeting to get there? I don't know whether I understood you correctly, but you said it's at the other end at your -- of your margin target, which would be around 17%.

Ralf P. Thomas

It's the EBITDA margin range of 11% to 17%. In that range, we're definitely at the upper end and pushing the IA margin over and above that.

Mariel von Drathen

Very good. So I think what we'll do now is have a break -- a short break, short coffee break. We will reconvene here at 10 to 4, and then go into the division presentation. Thank you.

[Break]

Mariel von Drathen

May I ask for your attention, and then we'll continue and dive into the divisions. We'll have 3 presenters in the course of the next hour. And then we'll have a Q&A with the entire leadership team. So whatever question you don't have a chance to ask Ziggy or Ralf early on, obviously, we'll have the time to do so afterwards. With this, I'll ask Anton Huber to join us on stage and tell us all about IA.

Anton Huber

Well, thank you, very much, Mariel. Good afternoon, ladies and gentlemen. It is a pleasure for me to explain the Industry Automation, describe what we are doing. It is a very interesting business, I have to say, very exciting for me. It is a bit technical, I have to warn you. But I'll give you a little hint. All you're about to hear about software and what we do, it serves one purpose. And this is this. This is a CPU. This is the S7-1500 which you have seen on the booth. I can guarantee you, the more we sell this [ph] , the more happier we are. This is really what we want to do. So -- but selling is not that easy. It requires an environment and it requires, of course, infrastructure. And this is through [ph] the customer gets from us. But let me start by taking a look at our business portfolio first.

Industry Automation consists of 5 business units. We do automation systems, product life cycle software, sensors and communication systems, and control components, which are mainly power-switching devices. It has already been mentioned that the business unit, water technology, will be divested, so I will not go into this business today. I will strictly focus on the automation business. In terms of market position and cash generation, our automation system unit is definitely our strongest. The clear second in line when it comes to cash generation is already our PLM software business. The PLM software business is a portfolio of products. The total profit pool of the software business is around the profit pool of our PLC business. So this is why it's really attractive to us and it grows twice as fast. With some of our products, we are already there. Some have on a way to go until they are there. So we are quite well underway with what we want to achieve.

And now a few words to the figures. Despite the still rather weak market conditions, particularly in our most important markets, Europe and China, and we would talk about -- more about China later on, we think that on a comparable basis, our core automation business is performing quite robust. But next to the impact from our M&A activities, there are currently a few operational issues around non-core activities, which impact our numbers negatively. All these issues are being addressed, and I will come back in more detail later on when I talk about the 2014 initiative.

Our biggest automation markets are still the markets of the industrialized countries. Their demand for high-tech products at the highest quality and their continuously increasing regulatory requirements make high-performance automation indispensable when you produce there. Innovations in automation are clearly driven by the industrialized countries. Because of the already mentioned stickiness, Ziggy talked about it, of this business, it is very important for us to capture a significant market share in the emerging markets early. Therefore, we have positioned all necessary resources in those markets we consider important, to secure our global market position. We are very well underway to reach this objective in this regard, and I will show you a very interesting example later on.

Now vertical markets. Where do we get the information, what the market needs today and in the future? Our innovation strategy follows, to a large degree, the requirements of key customers in our signature verticals. We consider the global automotive industry as the leader in productivity, but also the leader in automation. And they are, in a way, normative for the whole manufacturing industry. Of course, we know that this business is very cyclical and we have to be always prepared to deal with the consequences. In process automation, food and beverage industry is the most important vertical market for us, followed by pharmaceuticals. Both industries are heavily regulated by the FDA, and administration and our leading markets for the application of MES systems, which are important into conjunction with our software strategy.

In process automation, we specifically target the so-called hybrid verticals. In addition to the automation equipment for the process part of their production, these customers need also PLCs because they have packaging activities, which are very attractive for us, not just for the PLC business, but also for our colleague from DT with the motion control. For years, we are constantly gaining market share in process automation by selling our DCS system, PCS 7. And in [indiscernible], we have built a very attractive installed base for the PLC business in this process hybrid markets. As it already has been mentioned, we have little business in the Oil & Gas industry, but we will benefit a lot from them a little bit later when this all becomes, let me say, chemical and petrochemical, because this is a strong segment where we are in. In power automation, it's covered by our colleagues from the sector, energy. Due to the high solution content, the process automation business has structurally lower margins than the discrete automation business.

The foundation of the high profitability of our automation business is the huge installed base of PLC systems. This 20 -- more than EUR 20 billion we refer here to are just products. There is no solution content in this, just products in -- we sell in the discrete -- in SIMATIC.

The main thrust of our strategy is, of course, to expand this business on the global basis. A very crucial product to help us push growth and profitability the next 5 to 10 years, you saw today, is our new SIMATIC CPU S7-1500. Right now, we are in the midst of a major market launch. We are very confident that this product will help us to even increase our market share in the industrial market, in the mature markets. Why? Well, first and foremost, we respond with this product to the pressing needs of the market for more protection of IT infrastructure, particularly in plant environment. The SIMATIC S7-1500 has enhanced access protection, which is implemented by sophisticated software and further increased by special hardware means. Another high-value feature is the integrated support for easy connection and controlling of standard drives. It has been already mentioned today. This is also important for our DT sister division. However, the most important feature is its capability to be engineered by our new engineering platform, the TIA Portal. The combined assets of the CPU and the engineering platform allow the use of all advanced engineering capabilities we have, designed into this new generation.

Considering the fact that about 2/3 of the cost of an automation solution is caused by labor hours spent for engineering and commissioning, it is understandable that customer are always looking for reducing this cost. The TIA Portal is exactly addressing this issue. It allows engineers, to a very large degree, to configure hardware and automation components and connect them and connect the terminals by just drag and drop lines between them and not programming it anymore. This substantially reduces coding, testing and most importantly, making coding mistakes and finding bugs afterwards. Their chief time savings in the engineering are very significant and range between 20% and 40%, depending on the particular use case. So the productivity, if we are selling to the customer, can be clearly measured. It's not just a marketing discussion. We describe the use cases, and the customer can compare how long it takes with our engineering tools and how long it takes with other engineering tools. Another very important feature for our customer is that TIA Portal supports over 1,400 legacy products. Why is this important? Well, it is our installed base. We did not want to disconnect our installed base of more than EUR 20 billion from this new technology. So we spent all the money to make the legacy products also to be engineered with the TIA Portal. With this capability, it is very beneficial for our customers to buy the software tool immediately, independent whether they have a new plant to do or not because they can maintain their installed base, the installation and save a lot of money. This was a major interest we pursued when we developed or drafted, let me say, the specification.

It was already mentioned that BMW is one of the first global customers for the TIA Portal, and we are very proud of this. An extensive benchmark was conducted by BMW, exactly comparing use cases and engineering before they made the decision. A commitment over such a long period of time is even, for us, a bit unusual. Our interpretation is that during the benchmark, the customer could not see anything on the horizon which came even close to what we offered. And this is -- was the basis for his decision, which is exactly what we want because we want to stabilize and drive our margin by putting distance between our technology and our competitors'. This is the fact -- let me say, mechanism we're using for quite some time, and we see here, particularly with the TIA Portal, that the distance gets bigger.

Now we have just talked about -- mostly talked about the industrialized countries or the mature markets, but we have also done a lot in the emerging markets. Here you can see it. Particularly for China, we have drafted or developed a very market-fitting portfolio, which we have, let me say, launched or introduced over the years. And you can see here the consequence. In the meantime, the last year, we sold more SIMATIC CPUs in China than in the rest of the world. And this also shows the size and the importance of this market. Well, it's very good when the market this running very fast. Of course, we suffer more when the market is not running that good. So -- but the market will come back. And a very important thing is also, if you look at the picture, let me say, the grayer part -- the lighter gray part, these are the so-called affordable products. But we have introduced now -- some of you which have been 2010 at the Capital Market Day, with the S7-1200. The S7-1200 is an -- let me say, an affordable product for this market, but it is upward compatible with the high-performance CPUs like the S7-1500. So this market, the darker blue market, will grow in China. And you can basically say we have the hooks out already, because if a customer has invested in SIMATIC technology already and can expand its installation by just moving code from one box to the other, I mean, it is a big advantage when you see how much engineering costs. So we have exactly achieved what we wanted. We know and as we told several times, we're a market-leading PLC business. And we have to be a market leader in China. Otherwise, we lose our global market leadership. We have accomplished this. There is no one near -- coming near to Siemens. We are not talking about market shares. It's double-digit. I'll give you a hint. ARC [ph], which you guys probably all know, just look at their figures. They are pretty close to what the reality is.

Before I talk a bit more about our industry software, I would like to explain to you how we see this business positioned within the enterprise software landscape. I better start out by first saying what we do not do. We are not in the desktop arena. We do not do commercial and transactional software like SAP or Oracle do. And we are not in IT infrastructure. We focus exclusively on software, supporting or technical processes for industrial enterprise, understanding our customers value-add in great detail and supporting these processes by software. This is what we do. We live off domain know-how, which is converted into code. We are not an IT service provider. We operate our software business as a product business. We develop software products. We sell licenses and maintenance contracts. So it fits completely into what we do. We are a product company, mainly. Yes, we do a little bit of service business, around 20%, because this is integration service. This is where our engineers learn how the engineering process runs and how to improve and help these engineers. All IT providers, the big ones, are our partners when it comes to customer solutions. So we support with our service, our products. And the big IT companies, as you all know, they do the integration service. They are the customer owners, let me say this way.

Up to now, we have mainly talked about -- no. It becomes increasingly obvious that our customers can see that just optimizing manufacturing alone will not help us to gain the productivity they need for the years to come. Developing a product and its manufacturing simultaneously, in an iterative process, requires extensive simulation. The benefit from such a development are significant. Early adopters show that cost reduction up to 50% are possible. The Siemens strategy is to provide highly compatible but open software, as you have seen also in the TIA Portal, and supporting the whole value-add process of the customer, another customer, not a German customer in this context. We are quite successful with our software business, particularly with the integration of UGS. And as Ziggy Russwurm said, in the meantime, we have won over 20% new customers.

Over the last few years, we have connected design and make process at Rolls-Royce aero engines with our software platforms, on the one side on the product side with our Teamcenter and NX product, on the manufacturing side with our SIMATIC in the [ph] SIMATIC IT. The customer now has a seamless and consistent data support throughout its entire value-add process. This project is not only a reference, but it is a great example to demonstrate the high-value synergies between our software business and our automation business. And there will be -- no competitor will be able to survive on the long run if they do not do -- connect their PLM processes with their manufacturing processes, because this is the area where the most of, let me say, the handwork is still done. There is no automated process to get a product from the lab into the manufacturing. And this is exactly what we are working on.

And I just want to make one comment, because it might seem sometimes, Siemens guys just have fallen in love with software. It goes to the core of the CPU I did show you. Why? Because when we talked about simulation, simulation will, for the next decade, be the lever -- the strongest lever in driving productivity and moving sales and revenue closer to the R&D, because when you simulate, you don't need to spend money for building the plant and buying machines. So the customer is very interested to do simulation. What happens with simulation? When the mechanical engineers does his machine, he wants to run it, he wants to simulate it. Well, this means the automation software, or a big part of the automation software, will be part of the product design software, which is not the case today. These 2 worlds, the automation world in IT and the product -- mechanic product design are completely separate. There is no link between. But the customer will need it for simulation. 15 years ago, we talked about it. We saw it first time. We all said, "Forget it. It's not going to come." 10 years ago, we thought, "This is likely to happen. Look at airline industry. They fly their big planes on simulators." 7 years ago, we bought UGS and I can tell you we are working on this. It's not a question whether it comes or not. It's just a question of when it comes. And no one can escape.

So before I summarize, I want to give you some information about our contribution to the Siemens 2014 initiative. The divestiture of water technology is, for sure, the single biggest project impacting our business. This is clear. Other portfolio activities include the closing of our solar inverter business, the ramp down and closing of our third-party electronics manufacturing services. And with the reorganization in fiscal 2012, Industry Automation received, next to the water treatment business, also significant non-core solution business. Our plan is to reduce the solution capacity a bit over the coming month and redirect the remaining capacity towards building core installed base for us. And in order to lower our breakeven further, increase our flexibility, as Ralf Thomas said, and accelerate growth, we want to further strengthen our indirect sales channel by reducing owned resources and getting more partners on board.

To sum it all up, as in the past, our major focus remains keeping our automation business highly profitable and growing in a leading position. It's number one. The innovations just presented to you, and you will see on the booth, will definitely help us the next 5 to 10 years to stay in this position. With our software initiative, we are well underway to build a very exciting second leg, if you will, for IT -- for IA, with a strong cash flow and good long-term growth perspective. And in addition to all of that, we always have operational fitness programs underway just to ensure that our investments also generate attractive yields.

Thank you very much for your attention. And now, I would like to call my colleague, Ralf Franke, to present to you the DT division.

Ralf-Michael Franke

Yes. Thank you, Anton, and a warm welcome from my side as well. So I'm really happy to have here the opportunity to share my passion for the exciting drive technology business with you.

At Drive Technologies, it is all about efficiency in motion. Customers all over the world, they rely on our dedicated products, like inverters, controls, motors and gearboxes. A collection of them, you can see on this slide: Chevron, being one of the biggest oil and gas companies of the world; Fjellstrand, a Norwegian shipyard; and Vattenfall, one of Europe's biggest power utilities. They are selecting DT as their supplier due to our expertise in their specific verticals. With projects like this LNG plant, Chevron see us as their professional partner, and not only by the delivery of 1,800 motors and drives, but by the successful management of the entire project. So they awarded us with a single-source contract worth EUR 100 million annually. A highly innovative project was the recent development of a full battery-electric-powered ferry. The vessel was designed to achieve an annual saving of 750 tons CO2, providing a fast-charging technology. Substantial cost and energy saving were realized by the implementation for innovative blue drive for marine applications. And this drive system was designed to be applied by every comparable ferry in the world. The next example is a conveyor belt, 13.5-kilometer long, with 6 drive stations, with a total power of 20 megawatt to transport 6,000 tons of coal from the opencast mine to the plant. Again, the intended knowledge of the application and the

translation into a robust and reliable drive system enabled us to realize a reduction in -- of 15% in energy consumption and an improvement of the uptime to 98%. Based on our entire drive system competence, we serve our customers according to their productivity lever. We make them more competitive. We drive productivity in a world becoming electric.

I'm proud to say that we, in Drive Technology, we are the only company in the world that have the whole drive system in their hands. That, we have quite nicely seen on the booths today. Inverters, controls, motors and gearboxes, all these products are benchmarked in their specific markets. Especially, our frequency inverters are not only the core of our portfolio, but they are also key element to reduce energy consumption. Our #1 position for inverters and controls, for motors and generators, as well as for the entire drive system, shows that we meet customer criteria in an excellent way. At any time and at any place in the world, our 100,000 customers can rely on our profound portfolio and our industry-specific competence and know-how. With this competence, we differentiate ourselves from our competitors. And this is a basis to serve manufacturing industries like automotive, process industries like chemical, or infrastructure like wind, with leading-edge drive technology.

But let me explain a little bit more in detail what Integrated Drive System means for us. Customers today are mainly driven by their need for enhanced energy efficiency, reliability and productivity. They want to maximize their plant performance, and they want to streamline their processes. With our Integrated Drive System, we have the right answer not only for 1, but for 3 ways of integration. Our components are designed to work perfectly together, helping to minimize the installation time and maximize the plant productivity. For high-power ranges, you have seen with our vertical [indiscernible], quite a nice example of what drivetrain means in my business. For lower power life cycle ranges, with our new gear drive motor, SIMOGEAR, I can show you an excellent example. The resulting higher powered entity and compact design immediately turns into customer benefit, specifically in the conveyor market. Second, we innovated our engineering tools. And this achievement includes the integration of the drive system into the TIA world as a consistent step. With the recent version of the TIA Portal, we have now the first drive system integrated in that platform. Our customers experience the same ease-of-use in the Integrated Drive System they appreciated already in the engineering of the automation environment. Finally, our life cycle integration provides a digital fingerprint of the drive system, improving the productivity over the life cycle of the customer's application. As an example, our virtual numerical controller allows the machine operator to simulate already the next production step during the running one. That is real productivity.

Well, 2011 was a fantastic year, coming out of the crisis with growth and a favorable business mix and high margin contribution from wind, traction and solar. These external circumstances led to a remarkable profit of 12.6% and most probably will not come back. In fiscal 2012, the market conditions became more difficult. Our high-margin offerings in renewable energy and motion control systems were affected by a weakening demand. For new orders, we experienced a clear decline of minus 8%. On revenue side based on our order books, we could still record a moderate growth of 3%. In Q1 2013, as the market environment became even more challenging, the business continues to decline in short cycle and wind. DT orders follow the same pattern as in the second half of the fiscal 2012, which led to a profit additionally impacted by an unfavorable business mix in high single-digit margin. We expect that we now have reached the bottom. But I also expect that it will last for the next quarters to come on that level. However, despite the changes in our market environment, the underlying business in DT is healthy. And we, as DT management, will manage it back to double-digit profit margin until [ph] 2014.

Looking forward, DT is active in attractive markets with solid growth over the next years to come. With the world becoming electric, especially inverters are key to manage the energy flow. So there are the core element in every drive system. Let me pick energy efficiency as one of the market trends. Energy-efficient production only happens if all the components are perfectly working together. Therefore, the ownership of the entire drive system is a clear competitive advantage. Overall, 70% of all energy in the industry is used by electrical motors, and 97% of the life cycle costs is only defined by the cost of energy. We have an installed base of 40 million drives in our hands. And driven by new regulations, the exchange of these drives alone is a gigantic source for new business for my division. Customers can save up to 70% of energy just by replacing their motors, by an elegant combination of our geared motors and inverters. And this investment turns into profit within only 18 months or even less.

Volatile markets impact our and our customers' business. So flexibility of the footprint is key. We put high effort on our a well-balanced worldwide presence. And as a living backbone of our business, we optimize it continuously according to the changes in global markets. Based on 51 factories in 44 locations worldwide, we can always be where the markets are. Nearshoring for high-cost countries is a core lever to strengthen our competitive solution -- position. And 20 years ago already, we established our manufacturing sites in the Czech Republic for our whole market in Europe. And the same, we did for the United States with our plant in Mexico. We realized early that being local is very decisive to be the selected supplier of choice. In 1996, with the opening of our first manufacturing plant in Nanjing, China became an integral part of our global business. Since then, we expanded and enhanced our local expertise consequently, as changing markets required a high degree of flexibility regarding capacities and reduction of risk. We have established our factories in a way that, for every factory in Germany, we have a twin factory in China. As a result, we benefit from the flexibility to react immediately on changing markets. This improves our cost position and our profitability. With the latest successful product launch, this great localization expertise becomes evident.

Global presence requires not only a balanced footprint, it also means to offer a product portfolio that matches the different expectations of our customers for entry-level, for midrange and for high-end requirements. I'm extremely proud of our latest development, the SINAMICS inverter V20. The task was to develop a product for local customers based on global quality standards and local business responsibility. Designed and built in Nanjing, the result were a highly cost-effective, reliable and easy-to-use inverter for basis applications. This approach paid off. Within the first 3 months after -- of the market launch, we already sold 18,000 unit, earning an attractive profitability. The next step will be to enter the Indian and Brazilian market with entry products out of China.

Achieving the next level of productivity means to apply the Integrated Drive System into the engineering world. Here, I talk cutting-edge technology. In the world of the digital enterprises, the working processes will change dramatically, as Ziggy and Anton has already mentioned in their presentation. And this will have a high impact on the Integrated Drive System as well. Processes will be synchronized, and collaborative engineering will be the standard of tomorrow. Already in the design phase, the knowledge of how to handle a product with a specific machine tool has a high impact on the designer and the production planner. A lot of the engineering efforts are done automatically, and the engineering system itself, due to the intrinsic knowledge about the dynamic behavior of the machine tool defined by the performance of the Integrated Drive System. Who else than us is able to offer such an integrated technology? I just came back from our early adopters, DMG/Mori Seiki, who has awarded us exactly for this innovative technology, which led them to achieve a very, very high improvement in time-to-market. The reason why Mori Seiki decided to apply our drive system was because we outcompeted our Japanese competitors by producing a reference part with a time reduction of 30%. The consumer industry has already identified this new potential and awarded Mori Seiki with hundreds of orders. And for us, it opens, first time ever, Japanese market.

As you heard from Ziggy, Industry is contributing EUR 1.1 billion share to the Siemens 2014 program. Within Industry, DT will have the largest share of these savings. The necessary actions are identified. Implementation has been started and is fully on track. The main levers for the cost reduction are the optimization of our global manufacturing footprint, I will come back on this later, design-to-cost. A good example is the improvement we realized with our medium voltage drive, Perfect Harmony. Here, we successfully turned an engineered system into a standardized platform. With our new design based on 3 engineered modules, we were able to reduce our own engineering effort by 50% and the manufacturing time by 30%. Process optimization within Industry, our -- within our Industry program on the efficiency and effectiveness in the PLM process, we will significantly reduce the key parameter in our innovative business, time to profit, and we will increase productivity in this process by at least 20%. Strengthen our core activities is another lever. We will focus our solution business on attractive verticals with a strong Siemens position. We have seen a successful example on marine, mining and Oil & Gas at the beginning of my presentation. This focus will, of course, be supported by the necessary adoption of the respective resources.

The most important lever for us is the optimization of our global footprint. We are starting from an excellent base, with more than 40% of our manufacturing resources already in Czech Republic or China, low-cost countries. Nevertheless, we continue to consolidate our manufacturing setup. Of more -- of our 51 factories worldwide, we will ramp down 11 in the next years, 9 of them in high-cost countries. In parallel, we will open another factory in Changzhi for large motors this year. An example of this consolidation is our business unit, mechanical drives. They followed the market shift to China by closing 2 of their factories in Germany, moving the production equipment to China, with 500 workers affected in Germany. Additionally, [indiscernible] clear focus on core competencies, we prepared to sell our foundry in Wittgensdorf. And we will further continue to consolidate, closing the mechanical center in Erlangen, closing the factory for linear motors in Munich. They will transfer the value-add to Romania and Bad Neustadt. Additionally, we'll transfer 200 jobs for producing standard motors from Bad Neustadt to [indiscernible] in Czech Republic. And as a last example, the consolidation of our [indiscernible] business and the closure of our production in Krefeld.

Let me go a little more into detail on the example of the mechanical drive unit, where the implementation of these measures helped us to maintain our #1 position in the market for wind gearboxes. As a global leading supplier, we serve 9 out of the top 15 wind turbine OEMs to date. As you know, the market for wind gearboxes has changed significantly in the last years, with a strong shift of end customer and OEM markets to China. In China, we are the most successful nonlocal wind gearbox supplier. And the measures I just showed will help us to be even more successful in the relevant markets. Exploiting the full potential to balance our delivery in high- and low-cost countries' sources is good, but it's not good enough. Being global and local [ph] #1, we are also driving forward the innovation leadership. We have the right solution, whether for geared applications with our hybrid drives or for gearless applications with our direct drive generators. Today, Chinese players are definitely not able to meet the high-quality requirements outside Chinese markets. And being local, as local as possible in China and further enhancing our technological leadership brings us in a very strong position in a very tough marketplace.

Innovation leadership is key to grow our business. Let's have a look at some of our compelling innovative solutions for growing markets. For hybrid buses, we, early, bet on plug-in hybrids, now turning out as being the most efficient buses in the world. With the implementation of our ELFA drive in the new bus for London, our customers benefit from a significant reduction of fuel consumption and having the operating cost reduction of up to 50%. Over and above this order of 600 city buses for London, the long list of OEM waiting to be served includes our Vietnamese customer, Vinamotor. We recently signed a contract, includes a delivery of our ELFA drive system, of 40 to 50 city buses per month in the next years for the cities of Vietnam. Lightweight components provide resource efficiency and flexibility in production. CFRP is a material of the future in aerospace, in mobility and automotive itself. After our acquisition of Vistagy, we are really the only company being able to consult this industry, whether with regard of the behavior of that material or with regard of the optimization of the netting process for an optimum in stiffness or crash reaction. With this unique offering, we get access to the most secured laboratories and help those customers to optimize their products, undisputed technological differentiation in the application of our Integrated Drive System. Unconventional gas is a booming market and a game changer in the world of energy market. Here, we have a triple-digit potential in upstream processes, pipelines, harbor equipment and CNG distribution. For all application, we have proven answers to improve these processes along the efficiency and reliability with our Integrated Drive System. We are well-connected to that market, and our competence center in Houston, Texas is prepared to serve these customers locally.

Let me summarize. We consistently strengthen our #1 market position by our unique Integrated Drive System offering. Our innovation leadership is a key enabler to tap into full potential of compelling new markets and increase profitable growth. Increasing proximity to key markets and optimizing our global cost position, as well as our global footprint, are major levers to contribute to the Industry 2014 target. Based on these defined actions and our good marketing -- market positioning, we accelerate growth and we'll return to double-digit profit in 2014.

Thank you for your attention. And now I want to hand over to Dirk Hoke.

Dirk Hoke

Yes. Ladies and gentlemen, also a warm welcome from my side. And I'm very glad to present to you the new opportunities that we see in the service business. 2 years ago, I was not there because at that time, our division still didn't exist. As Ziggy also already explained, we created the Customer Service division 18 months ago, when we reorganized the sector, combining all the fragmented service pieces into the new division, helping to take care of the synergies, making sure that we have one face to the customer, making sure that we unleash the full potential of services. As you can see, the Customer Service division is responsible for all service activities of the sector. We take care of Industry Automation, Drive Technologies and Metals. We have, in the first year, set up our strategy very successfully. We have rolled out our customer service excellence program to make sure that we collect the quick wins of synergies, making sure to prepare the organization, process-wise and structure-wise, for a faster growth path into the future. We have also made sure that we concentrated on qualification and training for our employees, because our customers expect from us the same level of quality of service worldwide. We cannot explain that we can offer a certain service quality in Europe, but we won't be able to do so in Asia or in Americas.

We have, I think, a fantastic global setup already for Siemens. We are represented in more than -- in almost 200 countries. And this is also equally valid for our service activities, with 17,000 service employees supporting our customers from 380 locations worldwide. And this is a very strong base in order to make sure that we are where our customers are. When -- even more important, we are where they want to go. So when they want to expand their business activities, we will be able to support them. We still have a very strong home base in Europe. Half of our business, half of our revenue, half of our employees are still located in Europe, while we see already strong growth in the other areas of Asia and Americas. In Asia, representing approximately 20% of revenue, we see very strong growth. To give you an example -- for example, last year, we -- our training activities grew by 40% and this was -- we were able to deliver training to some 20,000 participants and approximately 90,000 training days. So it's constantly growing. We see also that our regional setup in Asia is strongly growing. We have added 3 additional service workshop last year, and we're planning still to add another 3 this year. So we're constantly optimizing our regional footprint in order to align it with the expectations of our customers. We also see good growth rates in the Americas. To give you an example, from South America, in the Integral Plant Maintenance, last year, we grew by more than 50%. So strong growth rates also in the other areas outside of our home countries, and we expect further growth in the years to come.

We really focus on long-term partnerships. For us, it's crucially important to convince our customers to be a long-term partner, supporting them in their daily business, enabling them to increase their productivity efficiency by enabling them to have a higher benefit of their invested assets. Of course, a great advantage that we have is, by combining the knowledge that we have from our technology partners, having the leading innovation from Automation and Drive Technologies, we are able to combine that and offer very high sophisticated technology services. And what is even more important now, and we had a learning curve there, we need one face to our customers. We cannot explain that we have different segments, offering different terms and condition or different capabilities to our customers. And this is, of course, also creating benefits on our side. If we are able to live up to our commitments, if we deliver the right performance, we are able to create the stickiness that we want. Once we're in, normally, we have a high degree of recurring business and the customers are very loyal if the performance is up to their requirements. The margins are constantly improving. We see that we have already, in the first year, the focus on high-margin business. We have created additional benefits for the sector, and the first quick wins from our synergies, by combining the fragmented service pieces, are also obvious in the first year already. And of course, in economical unstable times, many of our customers are hesitating to install into vast CapEx investment. And what we see then is that they normally tend to ask us for the support regarding the prolongation of the life cycle of their machines and assets. And therefore, normally, we see higher investment into the OpEx spendings and therefore, of course, an increase in our business.

And as Siegfried already explained, we are not able to give you all the details of our business, but here, you can get an idea in which direction we are developing. We had a very successful first year, as well on the top line, as well on the bottom line. We grew in the first year by more than 2x the market growth rate, by more than 10% on the top line. And we grew more than 15% on the bottom line in the first year. And this is also what we take as a basis for further aspect into our growth perspectives. On the service side, on the revenue side, we see strong growth rates in the future by our large installed base. And of course, also, we add constantly new technology-based services in strong alignment with our colleagues from IA, DT and MT. And another strong effort we are currently perceiving is that we expand our regional footprint not only by our own, but also by combining it with a global service partner concept. On the service profit side, we still can optimize our regional footprint. As I said, we combined all the fragmented service pieces. That means, also, we combined all the regional setups that we had and they were not fully aligned in the past. So we still have optimization potential on that side. But the focus that we started on the high-margin business, phasing out low-margin business, strong portfolio management, we will continue to deliver additional profits from our side. And then global standards, this is really, really important for us. We need to have global processes, global tools in order to drive our service business in a standard way, not only standard portfolio, but also standard processes and tools.

We talked a lot about installed base already and you heard the examples of Siegfried, of Anton and of Ralf, large, huge installed base for Automation and Drive Technologies. And this, of course, is a perfect base for developing our service in a proactive manner. The example here, just the large drives, we have more than 10 million units out in the field. These are large drives, motors and inverters above 250 kW. This gives us the perfect opportunity to proactively approach our customers and consult them on life cycle services, but also on value-add service like, for example, condition monitoring. So we continuously increase the transparency of our installed base and therefore, giving us further growth perspective. We have standardized the processes, how to collect the installed base data, because this is crucial that all our people worldwide understand which data we want to collect. Because we don't want to know every sensor that is installed somewhere in a certain region, we want to know which -- where are the components that create additional use cases for further follow-up services and, therefore, to create the stickiness with our service business.

Talking about increased efficiency of global sales force, in order to give you an idea, I will show you the next slide, because I think it's a perfect example on how to leverage, really, the installed base. This is an example from the U.S. What you see here, the red dots, is our installed base in the New York City area. And when the Hurricane Sandy hit the East Coast, we immediately asked our colleagues to match the data that was available through the Federal Emergency Agency Management (sic) [Federal Emergency Management Agency] with our installed base data. From that, we were able to derive more than 50 customers that could have been affected by the Hurricane Sandy. We then called our customers or connected to them. We also put signs of 0800 numbers in that area out, to provide fast service in case there is the need of recovery. The good thing was the industrial infrastructure was not hit very severely. So it was not a business case in this time, but it shows the potential, what we are able to derive once we know exactly where our installed base is, once we have the creativity to go new -- on new paths and follow our customers.

We have already a vast business portfolio, and we're constantly expanding it. You will see on the standard services, we are mostly combining the services that our customers need in order to create a stable operation, so everything related to online services, technical support, spare parts, field service, everything they need in order to run a stable operation. But once they look into how to improve their productivity and efficiency, they talk with us about other topics. And then we talk about topics we call advanced services. Here, we look at topics like plant and asset management, performance management. We talk about energy efficiency consulting, and some of the other examples I will explain to you with some concrete examples. But then we see also a very strong trend of customers that really want to focus on their core competence, production of things, making things. We see that they are asking us to provide the professional service for the maintenance, taking care that, on one hand side, the cost for maintenance activities go down, on the other hand side, the uptime and the availability of their machines and plants goes up. And here, we see a strong trend towards our services and we see that we have very strong growth rates in many areas of the globe. This all we can support with our strong bases that we have created, for example, regarding professional trainings, because the customers need trainings in order to ramp up their business. We have more than 140 training locations, and last year, we performed more than 290,000 training days for almost 100,000 participants. And what is most important is 85% of that are external customers. So only 15% are internal. One thing is also important to know, when you look at that slide, it doesn't mean that the profit pools from left to right are increasing. So all these businesses that you see here are interesting and profitable businesses.

To give you an example, and I hope all the 5 groups have seen the example at our service booths. You saw Mr. Hagenruda [ph] who was scanning the QR code, the matrix [ph] code, and it showed immediately on the smartphone the manual of the relevant component. It was S7-1500, as Anton has shown you, and it gives us the opportunity to reduce the complexity for our service technicians, for example, to collect all the necessary manuals and when they drive on site. But it also gives the ability to our customers to easily identify and find all the relevant documentation for the components he has installed. We have more than 300,000 documents online in 6 languages. And we see a vast interest -- increasing interest that our customers use more and more online support. We have more than 18,000 users in forums, where they can ask questions and they can exchange topics with other experts globally. This can be either be from other companies or from our side. And we see that we can solve, normally, around 80% of the questions via this online platform. And this, of course, will release [ph] a lot of our scarce resources to other more important questions of our customers.

This is an example of Motor Management Program, one of the advanced services. We've got, a few years ago, our first contract at Tüpras, the biggest industrial enterprise in Turkey, in a refinery at Izmit. We're responsible for the motor management of 1,500 motors. And we are responsible to do the overhaul, the condition monitoring. So we're responsible to take care that the uptime of these motors can be improved. We had such a good performance, by just increasing the scheduled service by 9%, 9.5%, we were able to reduce unplanned downtime by more than 80%. And this was the reason why the customer gave us a second contract at the Izmir refinery, where, also in the first year, we were able to reduce the unplanned downtime by more than 60%. With this, we are able to support a customer to do the necessary maintenance activities in planned downtime instead of in an unplanned downtime case. And of course, this creates the stickiness that we want and the long-term partnership.

Codelco, as Siegfried already mentioned, is a great case. We are now responsible for the maintenance of core components in 3 out of 7 mines of Codelco. Codelco is the biggest copper producer of the world, representing 11% of the copper production globally. And it is quite interesting, because every time we go into such a performance-based contract, we do a very careful analysis of the circumstances, installed base, what material equipment is installed, and then we derive from there the KPIs we are measured against. And in this case, we don't have only production targets and uptime targets, but we also have, based on the requirements of the customer, we have safety and environmental pollution targets. But we, so far, always lived up to our targets. This is why we're constantly expanding the business, also in the Integral Plant Maintenance, with customers like Codelco.

This is a good example to show how we deal with OEM, with customers, because many are -- many people are afraid that we would go into competition with our OEM customers. This is not the case, and this is a clear demonstration here with the Schwäbische Werkzeugmaschinen. It's a medium-size company producing multi-spindle machine centers. They were looking for a new idea how to expand their service business. And of course, they wanted to go into the IT-based services, but they didn't have an owned communication platform and diagnostic platform. So they were analyzing either to develop an owned platform or to buy a platform. As we have a long history on the component side with them, they also asked us. And as we have already an existing diagnostics and network services, condition monitoring services platform, we were able to sell it to Schwäbische Werkzeugmaschinen directly. With this, we enable the customer, our customer to serve his end customer in a much more efficient way. And as you can see, the statement of Ton de Bruine, this is now valid for more than 90% of the customers of Schwäbische Werkzeugmaschinen. They order these network services. There's these diagnostic service. This become -- this became already a standard and driving productivity. This is quite an interesting example.

And during the tour, you also saw the industrial security wall. Many of our customers are still underestimating the risk of industrial security. We have seen here, if you -- an example at a refinery in China, the Sinopec in Qingdao, that the customer bought DCS system from us, a very sophisticated system, more than 60 S7 controllers, more than 30,000 IAOs, and 85 clients to really control the process, but they didn't concentrate on security.

What happened during the ramp-up of the factory, there was a virus, and it was not an attack. The interesting thing, it came from the Windows world, entering into the control system, creating a lot of problems. And they asked us to support them, and they had a planned downtime of 4 weeks, and we were able, within 2 weeks, to really completely newly set up the system, segmented the network, do the necessary firewall installation, system hardening, closing all the unnecessary USB ports and other security holes, creating a very stable framework for their operation. And since we did this, 0 incident happened, and we have really, a clearly, a stable operation. And this links back also to what you saw with the S7-1500, where you have security features integrated. So we are really one of the only ones that can provide security on all levels, down to the last component.

In summary, we have a very strong global setup, giving us the opportunity to serve our customers from more than 380 locations, with over 7,000 employees, creating a strong basis for further growth in the future. And the customer is definitely based in the focus of all our actions. We cannot accept any unnecessary, unsatisfied customer. We need to create satisfaction in all our contracts. We also install more and more standardized customer service surveys in order to really feel the pulse of our customers, react immediately if there is a problem, making sure that service culture and the service mentality of our team, worldwide, is strong enough to create a very solid customer experience.

We have the largest installed base on Automation and Drive Technology components. And of course, this is a fantastic basis for further growth of our service business. We have started with the portfolio optimization. We phased out a lot of low-margin business, and this provides us a very solid basis for further growth. But also, we would -- also consistently in the future, look at our portfolio elements and our regional footprint in order to optimize our service setup.

In the first year, more than 10% growth on the top line, more than 15% on the bottom line, is a very solid start. And of course, we are very ambitious to continue to contribute to the success of the industry sector. And we believe also that, with the resilience that the service business can provide by the recurring business and the long-term contracts, we will be a stable contributor to the success of Industry.

So thanks a lot for your attention. And to be honest, I'm very proud to be leading such a great team in the Industry sector. Thanks a lot.

Mariel von Drathen

Thank you, Dirk. And thank you to your 2 colleagues as well. We will have now a very short break. I would say, we convene here at a quarter to -- quarter past 5. And then we'll go into the Q&A with the entire industry leadership team.

[Break]

Mariel von Drathen

We're running a little bit short of time. I'd like to ask everyone to quickly take a seat. And then we'll start the Q&A. And I look at you, and I don't see anyone having questions. Yes, I do see someone. So Jeff [ph] , fourth row on my right, please?

Unknown Analyst

Two questions, both about kind of the terms of contracts. I was wondering on the BMW deal, how unique it is. Obviously, you'd be happy to sell your service to them on an annual basis. So I'm just wondering with the 15-year deal, kind of what the quid pro quo is? Do they get some first mover advantage, or is there some other element in the terms of the contract, that maybe you could elaborate on? And also, I was just wondering on service, how much of your service business is contractual? And that which, that's contractual, how significant is kind of the performance contracting element of it, where you really have some kind of a performance skin in the game, if you will?

Siegfried Russwurm

Anton, would you comment on BMW?

Anton Huber

For the product part, the service part, I think one of -- Mr. Hoke or someone should answer it. But the car manufacturers are very experienced in doing long-term contracts, because generally, it's sourced for their production demand lifetime. The lifetime of a vehicle, they do a contract because they can't afford to take another supplier on after 3 years, because their R&D is very expensive. They're very, very sophisticated, how they structure a long-term contract. And this is what we basically follow too. So we put in productivity. There are a lot of terms we have to basically follow. And -- but we are quite experienced in this, and we know what this means for us. And as Siegfried said, just looking at the car manufacturer on the OEM is one part. If we look at the car manufacturer, if we looked immediately beyond that -- and this is their supplier base. And this is the real interesting part for us, because I mean, if a customer -- OEM decides that he wants to do this for 15 years with us, I mean, this means for supplier whether he likes it or not, he will have to supply with our components the next 15 years. And this is where we, let me say, really work on and get the money back.

Siegfried Russwurm

Dirk, would you comment on service part?

Dirk Hoke

Yes, of course. The contractual part is approximately 2/3 of our business. And on the performance contracting side, we're just beginning. It is a new form of our contracts. We have established references, but it's still in the area of 10%, so it's not a huge area. Also, we're carefully evaluating each of these contracts, because as we consider us as a low-risk profile business, we want to keep it that way.

Mariel von Drathen

Very good. We'll continue with Andreas Willi and with Timm Schulze-Melander.

Andreas P. Willi - JP Morgan Chase & Co, Research Division

Just 1 question on your profitability in drives. You say you will go -- try to go back up to double digits, but not the 12%, 13% you had at the peak. What do you use as benchmark there in terms of best in class? Because if we look at ABB's discrete automation division, if we take out the robotics business, even though their margins have been falling a bit, they still do 20% margins there. And it's a pretty comparable portfolio. It's basically motors, drives, inverters, generators. Why is ABB making twice, or why are you're not targeting to make the same?

Siegfried Russwurm

So definitely, ABB is the benchmark, which I will use, if I look at the profitability and define [ph] them on market level or not. But the portfolio you compare was ABB and DT is not the comparison of apples and apples. If you take apples and apples on a portfolio, yes, the performance of ABB is better than mine right now. And that is the reason why I tell you that, we as the DT management, will manage it on the level of ABB. It's not all about that we have to be on the level of benchmark in the marketplace.

Timm Schulze-Melander - JP Morgan Chase & Co, Research Division

Just had -- it's Timm Schulze-Melander of JPMorgan. A follow-up question on this BMW contract. So how are the penalties for Siemens calculated if you fail to perform to those thresholds? So what are the sort of contingent liabilities? And then the second question on virus attacks, obviously, is a very high profile case. Just what are the sort of financial consequences of that kind of event for your business?

Dirk Hoke

Well, let me start with this -- over this viral thing. It's almost -- it's, in fact, very [ph] impossible to take over any guarantee on that virus thing. There is no limit to criminal creativity, and that's why we're doing consulting with our customers. We provide services that include response time if things occur, but we cannot guarantee you are safe. And frankly, nobody can do that. So the risk related to this virus aspect for our business is, okay, we need to respond quickly, and we have done so. We have a good track record. And frankly, before we stepped into any liability and guarantees, we compared with our track records, so we feel very confident in that. Anton, can you comment on. . .

Anton Huber

Yes, I did not quite understood your first question.

Timm Schulze-Melander - JP Morgan Chase & Co, Research Division

It was a follow-up to Jeff's [ph] question. Under this 15-year contact with BMW, obviously, you have certain deliverables. And so, what I'm asking is if, for whatever reason, those deliverables aren't met, what kind of penalties, what sort of financial penalties would Siemens run the risk of incurring?

Anton Huber

I would say, and we do not really disclose details on contract. But I can tell you the real penalty would be we would be out of business. And I cannot see -- I mean I have worked for 15 years in the automotive business, supplier business in Siemens. We have never not met our commitments, because you are just simply out of business. It's sometimes painful, I do agree, but this is the rule of the game. And this is true for this, too.

Mariel von Drathen

Okay, then we'll have Gael de-Bray on my right.

Gael de-Bray - Societe Generale Cross Asset Research

You said in both DT and IA, that you're ramping down some of your solutions businesses in noncore markets for you. So could you maybe tell us what share of the business it represents today for the 2 entities, and maybe, actually give us some examples of these kind of solutions you don't want to be into in the future?

Siegfried Russwurm

Well, basically, from the portfolio perspective, it's clear where we would compete on the hour, it doesn't make sense. All our services and solutions must be technology enabled, technology based, that's where our differentiator is. And frankly, looking at the given portfolio, we found some aspects where a midsized local competitor could do technically the same, and that it does not make sense that we compete against their aspirations. For the size of the business, Ralf, do you have that number or...

Ralf-Michael Franke

In DT?

Siegfried Russwurm

Yes.

Ralf-Michael Franke

Would you want to run down?

Siegfried Russwurm

[indiscernible] yes.

Ralf P. Thomas

It is sort of around EUR 600 million.

Siegfried Russwurm

And Anton, on your side?

Anton Huber

Well, I would say it's not that much with us, and probably around EUR 300 million. A part, we will reduce the capacity, I already said, because this is a skill problem then. We cannot retrain certain people. It's just not competitive. And then a part, we will redirect into what we do in the automotive. Because for example, a very simple example is, in the past, we did cabling. When automation was done as a service, then was -- cabling was also done by us. I mean why should we do cabling? We don't need this resource, and we will never do it. This is just for a little example, when we say noncore, this we will not do any more. So I would say over the period of time, we will reduce around 100 -- 150 people here. And the rest, we will redirect.

Siegfried Russwurm

Just to add 1 comment on the overall process, we're talking ramping down. Somebody could ask, "Well, why are you so shy? Why don't you just stop it?" There are a lot of employees in regulated markets, and we don't earn [ph] money with that. So the payback, frankly, to pay a lot of severances for getting out of that business would be pretty miserable. Therefore, it's more a ramping down, finding creative solutions, because severance payment is shareholders' money as well. So we do it in a more intelligent way, it's not just switching it off, stopping that as of day x. We ramp it down in a careful manner. And whoever has the capabilities to be retrained for a different job, we are happy to do so because it saves a lot of severance money as well.

Mariel von Drathen

Okay, I think we have questions here in the second row. Start with Peter Reilly and then Ben Uglow.

Peter Reilly - Deutsche Bank AG, Research Division

It's Peter Reilly from Deutsche Bank. Two questions, please. Firstly, on the portfolio. You've made quite a lot of acquisitions over the last 10 years: UGS and others in the software space, FLENDER in gearboxes. And the obvious gap in the portfolio is robots. Are you now happy with the portfolio broadly, or do you -- and obviously, there will still continue to be smaller bolt-ons, but do you think the big moves are now completed? And then secondly, you've made quite a lot of noise this week about the Totally Integrated Automation Portal. Can you talk about the business model? Is this just a way of selling more motors and drives and components, or is it actually a revenue opportunity in its own right?

Siegfried Russwurm

Well, let me start with the second part, because that meets all of our strategies. As Anton rightfully said, it is a means to sell more components, more controllers. With this portal, we do not expect to do license sales, for example, for that software. This may change as we enrich it to more functionalities that are not directly related to the components. But currently, we enjoy a business model where we sell software capabilities shrink-wrapped in boxes, because it makes the negotiation much easier for that. With respect to the robots, this is a question that pops up every now and then. I have a firm opinion on that. In order to serve our relevant customers, we have to model manufacturing equipment. And if you remember this press example from Volkswagen, where we revamped that press. We have modeled the whole press, including the handling devices without building them. It works and it works with ever handling device, with ever robot and alike, the end customer Volkswagen has. We have the models for almost all of the big robot manufacturers in our database and can deal with that. If we would own robot manufacturing, we would be restricted in that. We would compete with our customers. We enjoy the robot business. We are component suppliers to some of the robot manufacturers, but we don't intend to step into that business. It would break a clear wall, that I'm personally committed to many of our customers on the machine building side, we don't want to be competitors of our customers. Clearly, in our comprehensive offering of that virtual world, we include it, we are partnering with it, as we did with KUKA on the booth, but we will not compete with them.

Mariel von Drathen

Ben?

Ben Uglow - Morgan Stanley, Research Division

Actually, my question is somewhat similar to Peter's. You showed the CNC or the robot. And Siemens provided the code, or enhanced the code on the CNC within that robot. You're similarly supplying machine to a builder's guild license [ph] , et cetera, with CNC. So what -- just so I understand what you're saying, what you're saying is if the -- it does not make sense to have vertical integration down into becoming a machine tool builder? You absolutely are going to remain at an arm's length at all times....

Siegfried Russwurm

Precisely so, precisely so.

Ben Uglow - Morgan Stanley, Research Division

Okay. Because we -- 2 additional questions. One was you emphasized, more than I remember in the past, your strength in process. And PCS 7 seems to have scaled up and all that other kind of stuff. Do you -- can you just -- first of all, could you give us a sense within the division, within EUR 10 billion of revenues, how much now, roughly, comes from process in the hybrid applications? And do you have a target of where you would like to be on a 5-year view? So that was question number 1. And the final question was, could you - and this is for Mr. Huber. On the PLC business in China, could you tell us a little bit about the domestic competition? How is that developing now?

Siegfried Russwurm

So Anton, why don't you take both questions.

Anton Huber

With the Chinese market and the competition, there are a few suppliers there, yes. We see them for quite some time. They have not developed as it was forecasted, by far not. This has, of course, different reasons. One is competitive pressure. I mean when we started selling our product, we have a very attractive brand. We reduced, first, the price, and then moved everything to China. So they did not gain room. We did not hold a price umbrella. So that's one thing. The other thing is that automation also is, of course, used for export. And I mean you have to have a global service if you want to send a machine with a controller on. This is also a major barrier for them. And so far, the competitors have, by far, not developed -- the Chinese competitors, by far not developed as fast as it used to be forecasted. Yes, our competitors from Japan or from the United States, they have run quite fast, too. But as with our jump-start strategy, about, I don't know, 6, 7 years ago, we were on the right track. And now -- I mean even when the business doesn't grow, just look at the annual volumes still flowing out into this market, which basically creates installed base and where we take advantage of. So we don't see that the Chinese competitors are in a position to challenge us at this point in time.

Ben Uglow - Morgan Stanley, Research Division

Will you comment on the process side as well?

Anton Huber

Well, we do not -- generally, we do not talk about market share. I would refer to, in this point, also to ARC because they're collecting, on a legal basis, numbers, and then they say where the different organizations are. As Siegfried Russwurm already said, and there was a discussion about why not in Oil & Gas and why -- what? I mean our strategy is we invest the money where we really have a reasonable return. And if I look -- if my people come to me with approval for projects, I'll look at what is the product content. And I want to see that there is a lot of SIMATIC PLC sold. And when there is a, I don't know, a packaging machine or a packaging, then I vote for the project because then we have limited partners and we have limited own resources. And this is, basically, limiting our total growth. And we pick where the biggest advantage is on the product side. So we do not really have now a market share that target I want organization, because they get the market share, I'm sure. But I want my product to be sold. And SIMATIC is a SIMATIC. And as I had already said this morning, our customer, who buys a SIMATIC CPU for the packaging, pays the same money when he uses it for the brewery. So we do not make a difference in the pricing. SIMATIC is SIMATIC. One time, a software package is on top of it, it's called PCS 7, strictly software, and the other is S7. So this is our business model. It's pretty simple. We want to just sell the common parts everywhere in the world and use it for many applications and not just run after our market share. Because our market share on the SIMATIC is very high. I mean we would never be able to make money on the volume of just the process controllers, if they would be dedicated controllers. We make the good money because we get the same money in process as we get in industry.

Mariel von Drathen

Okay. Well then, we'll continue at the back with Michael Hagmann, please.

Michael Hagmann - Nomura International plc

I was wondering about the -- your sister organization, if you want, so the process for the utilities. I assume a lot of the products that they are offering are pretty much exactly the same that you are offering. So if you could maybe a little bit explain how the relationship is? What are the synergies? Who's in the driving seat for the development of certain products and components?

Anton Huber

Well, you're talking about the automation part now of the Energy sector. Historically, we always had a different software system for the power automation because of their requirement. We want to build an automation system, which does everything. It does create an overhead or a footprint, which you don't want to have. You are not competitive in certain areas. And then you look carefully into the industry, also to our competitors, you'll find them. There are companies with 3 letters. You will find that they also have different application. So what we do with our colleagues, we use the same basis, but they put another software piece on top of it, which serves, really, the fast reaction time they have to have, which I don't need in a chemical plant -- I mean a big chemical container. When you heat it up, it takes a long time. But if you want to shut down a turbine, you don't want to wait. So there are functional requirements which make it not really reasonable, to say, on a common basis. I put a special software piece on it, and this is how we do it. They do their piece on top of it and use our basis.

Michael Hagmann - Nomura International plc

So all the hardware is done by you, and they just do the software?

Anton Huber

Right.

Mariel von Drathen

Then there's a question just next to Michael, please?

Wasi Rizvi - RBC Capital Markets, LLC, Research Division

Wasi Rizvi from RBC. Just in your opening comments, when you're talking about weakness, it seems to suggest it was limited to your shorter-cycle businesses. I think in the past, you may have mentioned that, that tends to indicate that a weakness in your mid-cycle business will follow at some point. Can you talk about what you're seeing in your mid-cycle business at the moment? And because you're suggesting that you might see an improvement in Q4, indicates that you don't think that will happen this time. And then also on the service side, just a question on, could you get the split on what proportion is OEM and what proportion is available [ph] to the end user? And then what drives the decision, whether you support the OEM, provide that service, or whether you're try and do that yourself?

Siegfried Russwurm

Will you start, Dirk, with the latter question?

Dirk Hoke

I don't have the figures available to give you the ratio between OEMs and end customers. OEMs, as I explained in the one example with Schwäbische Werkzeugmaschinen, we're carefully looking how we can support them. So if, for example, an end customer requires a certain service where we would enter into competition with our OEM, we double check first if this is a service area that OEMs wants to cover. We don't want to compete with our OEMs. So ratio is naturally derived from market requirements. And our end customers, if the end customer needs the service and the OEM doesn't provide it, we, of course, have to step in.

Siegfried Russwurm

Well, with respect to the mid-cycle, as you call it, that's something that doesn't worry me that much because I have a certain foresight. If we are selling drive systems for shipyards, for example, we know that month in advance, and that's okay. And it is good and healthy business. Unfortunately for us, our short-cycle business is the one with the biggest profit conversion. So what we see in volatility, especially on the profitability, is much more influenced by the short-cycle business and its current weakness than this mid-cycle business, which is pretty stable, has some upsides, like for example, the Oil & Gas aspects that Ralf referred to out of Houston, has some downsides, strictly some military gray [ph] marine aspects, where navies all around the globe are hesitant to invest for different reasons. So overall, this is a pretty balanced thing, but it is not relevant, frankly, that much for the bottom line as the short-cycle businesses kicks in to the good and to the bad.

Mariel von Drathen

Fredric Stahl had a question, and then we'll move to James Moore.

Fredric Stahl - UBS Investment Bank, Research Division

Fredric Stahl from UBS. Is it fair to say that the LMS acquisition is a part of your push to win further business in the automotive industry? Because I understand there's a number of a BMW-type contracts coming up for grabs in the next few years. That's question number 1. Question number 2, going back to services, maybe if you can give us an idea in terms of percentage of revenues, what is spare parts, training, et cetera, give us an idea of the nature of the business?

Siegfried Russwurm

Look, we'll take up the LMS part first. LMS has a pretty broad base of customers. It's not only to automotive, yes, that's an important segment for them, but it's much broader, and it is gaining importance. The good news is that in the combination of the current LMS portfolio, plus our applications, there are new fields that we are seeing here. For example, in a complete drivetrain, they have a pretty versatile way to model that. And even in the first month that we were interacting, we found interesting areas of synergies for the future. Yes, automotive is important, but aerospace is very important for them as well. Energy markets are very important because they do simulate whole drivetrains in power plants, so they have a pretty broad-based customer base. And the business case of LMS is, for sure, built on synergies and revenue synergies and not on cost synergies, because it was a bolt-on, more or less, to enhance our capabilities.

Dirk Hoke

Regarding spare parts, the total volume of our spare parts is around 30%. This is as well for the direct leasehold spare parts, but also for the spare parts included in maintenance contracts. So the total volume is around 30%.

Fredric Stahl - UBS Investment Bank, Research Division

[indiscernible]?

Dirk Hoke

Yes, we have then the contractual basis. One touch point are the repair centers, for example, where we have another 20% towards the end of the volume, approximately.

Mariel von Drathen

James Moore had a question.

James Moore - Redburn Partners LLP, Research Division

I've got 3 questions, actually. On the PLM, I'm just trying to understand what the opportunity is there. You talked about streamlining the processes. And being at the upper end, so let's say, 17% type EBITDA against DSO [ph] on an EBIT basis, which is somewhere around 30%. Is closing that gap a possibility, or is the scale different in market share the limit there? On service, I know Energy talked about their service being about 1/5 of the business. Can you help us a bit on the revenue size with some sort of rule of thumb? And then thirdly, you were kindly -- helped us with the water tech margin around the time of talking of exiting it, and today with PLM. Of the remaining 3 bits of AS and SC and SE [ph] , could you give us a feel for what the range of margins are and what the ranking is, just so that when we have mix effects in growth, we can have some idea as to how the margin differential looks?

Siegfried Russwurm

On the PLM side, while we don't typically comment on competitors, I see no reason to object to your assumption. I hope that's sufficient answer to that. The reason why we don't publish numbers for our service revenue is that it is difficult to have a like-for-like comparison. How's the value flow over spare part? It's the profit of a spare part and the plant of the original manufacturer or is it the service organization and back-and-forth? There are a lot of peculiarities, which are basically all across Siemens. That's the same for all the 3 sectors that have a dedicated service division. That's the reason why we don't want to publish that. There are so many assumptions, and frankly, so much competitive information on how we do that, that we would like to refrain from that. And as our other 2 sectors, we have picked up the same approach to say, the customer responsibility is with the tech divisions. So they show the wall-to-wall volume and profitability. With respect to the other business units, in IA, that's the level of information where we would give pretty much competitive plans [ph] to [ph] that. You know that we are not talking about business units, and it is an ecosystem that we also have to really look at what we are doing with, for example, our process instruments. That's closely linked to the whole process system that is in AS. So it's -- I think, it's granular enough frankly. And sometimes, I'm regretting that I have to separate between IA and DT because that's complicated enough. We would, frankly, not want to have that discussion even trickle down to a more granular sense.

Mariel von Drathen

Do we have more questions? I think we have 1 remaining question from Andreas Willi. Third row, please.

Andreas P. Willi - JP Morgan Chase & Co, Research Division

It's just 1 question. It's on -- in general [ph] , on the fair, you said one of the words was integration that gets used a lot. The other one is kind of open systems and making things easier to use and reduce complexity. If you look at Siemens' automation business, at least the -- maybe the prejudice is that it's kind of complex, higher end, sophisticated. Is that prejudice right? And if so, how does that impact you, if you try to grow in emerging markets, where customers that have not used automation before, start to think about automation, but they're maybe, almost put off by a scale complexity and investment of a Siemens' system and rather go for something more modest?

Siegfried Russwurm

Well, the prejudice does exist, and we are working on that. Again, due to the lack of time on the booth, I couldn't show you, for example, the broad variety that have -- we have in PLCs, for sure. And S7-1500 is a powerful weapon. A logo, to put it to the other end, one of the strongest sales channels that we have in Germany is the Conrad [ph] retailing because it is easy. Every -- schools are using that for their test, tests [indiscernible], so we have that broad variety. Ralf has talked about the V20 drive. This is a plug-and-play simple drive. Yes, that prejudice is out. And to some extent, our sales efforts is to tell customers, "Well, we are not only for the high end." Distributors help us a lot, so there are exiles [ph] in some [ph] parts, but also midsized distributors help us a lot to fight against that. And the best news is, as Anton said, we have many customers in emerging countries, that started with these entry-level products from Siemens and have grown with that. Deliberately, we don't use it is a different band. Our argument is you can grow with the Siemens PLC from the 200 in China to the 1500. We are better than our reputation is, and we are fighting every day that more and more customers recognize that.

Mariel von Drathen

Okay. I think with this, closes the Q&A. I'd like to thank the Industry leadership team for having spent some time with you and not with the customers. So hopefully, you can go back quickly to the fair. I'd like to thank you for your attendance. Have a safe travel home, and then I'll see you and hear you 2nd of May, when we'll come out with the earnings release for Q2 of Siemens Fiscal Year 2013. Thank you very much.

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