Siemens Revamps Its Industrial Business

Apr. 8.11 | About: Siemens AG (SIEGY)

German industrial conglomerate Siemens ADR (SI) has seen its stock price more than double in less than two years. But its CEO, Peter Loscher, still wants more, recently announcing one of the most sweeping revamps in the company's 164-year history.

  • First, he plans to sell shares of Siemens' Osram lighting unit through an IPO this year. That should generate more than $7 billion.
  • Then he intends to create a fourth division to coexist with the company's current healthcare, energy and industrial focuses. The latter, which made $49 billion in sales last year, will be split into two divisions.
  • Everything to do with power distribution and transportation equipment will become a new "Infrastructure and Cities" division. And the same goes for its building technology operations, which produce building automation, fire safety and security equipment.

The new arm will employ 81,000 people and generate approximately $23 billion in revenue. It will focus on tapping into fast-growing infrastructure demand around the world.

Siemens says that the energy efficient-focused market is worth a total $240 billion in developed and emerging nations.

A Much-Needed Change to Speed up Siemens' Growth

Loscher wants such dramatic changes to speed up Siemens' growth. But his plan also addresses criticism of the company's industrial services division. Until now, it has had no solid focus, offering everything from lighting to plant engineering to water treatment and infrastructure services.

Not surprisingly, it keeps falling short of expectations, lagging behind the other divisions. Worse yet, its profit margin fell from 4.8% to 3.5% year on year last quarter.

Many industry analysts applaud his recent decisions. James Stettler, an analyst at UniCredit, said: "The industrial sector has a lot of things stuffed together. It makes sense to regroup that and mirror your customers in your organizational structure."

Yet Loscher's plan involves a lot more than just restructuring. Siemens is positioning itself nicely for the future …

Siemens Future Outlook Sees Boosted Revenues

Last year, Loscher spoke about boosting revenues from green products, services and emerging markets. His recent announcements are a big step in that direction.

For too long, Siemens focused on selling sophisticated industrial products. But it will now move into the high-margin industrial services sectors, like maintenance, which should boost its bottom line…

Rapidly growing mega-cities around the world have become much more important to industrial companies in recent years. This fact is especially true in emerging markets.

Already, the 600 largest cities account for about half of the world's economic output. This figure should rise even higher in the future.

"We view cities as a special focal point for expanding our businesses. That is where demand for our innovations – or expressed in general terms – demand for green infrastructure solutions is concentrated," Loscher said.

Siemens' Major Acquisition

In the midst of cuts and reorganizations, Siemens is also planning a major acquisition.

After it disposes of Osram later this year, its cash reserves will reach above the nearly $22 billion it had at the end of 2010. It plans to put some of that to good use.

Chief Financial Officer Joe Kaser spoke last month about Siemens' acquisition intentions. According to his statements, the company wants to expand its reach in the power networks and plant automation businesses.

Whether that future purchase will be a wise one remains to be seen.

Regardless, a new emphasis on businesses focused on big cities in emerging markets – trains, water treatment and smart energy grids – is a smart move.

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