Company Analysis Siemens Ag

Company Analysis: Siemens AG


India Kee BUSA 4995: Strategic Management

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Executive Summary

Siemens AG is a large and diverse company with a 160-year history. It competes mainly in industrial products, energy production, and medical solutions. It has facilities in over 140 countries in 15 divisions, providing it with an impressive market presence an d plenty of resources to support its commitment to innovation – its main core competency. Despite this, its financial position, as measured by common ratios, is only average. To improve its position, it needs to focus on reducing costs and increasing net income. Siemens also has some problems it needs to overcome in its corporate environment. One change that needs to be made is in its attitude towards ethics. Several of its key executives are being investigated in conjunction with a bribery scandal. The new CEO, Peter Löscher, has made progress toward changing corporate attitudes in this regard. Another change that needs to be made is in the composition of the pool of key executives. Currently, they are almost all white German males. Perspectives from different cultures would greatly benefit Siemens in its quest to help define the future of its industries. All things considered, Siemens is in a relatively good place in the market, with few exceptions.

Company Analysis: Siemens AG Contents

1.0 Company Description.............................................................................................................4 1.1 Company History..............................................................................................................4 1.2 Company Ownership........................................................................................................5 1.3 Key Executives.................................................................................................................5 1.4 In the News.......................................................................................................................5 2.0 Markets & Subsidiaries...........................................................................................................5 2.1 Geographical Segments....................................................................................................6 2.2 Business Segments............................................................................................................6 2.3 Strategic Equity Investments............................................................................................7 3.0 SWOT Analysis......................................................................................................................8 3.1 Strengths...........................................................................................................................8 3.2 Weaknesses.......................................................................................................................8 3.3 Opportunities.....................................................................................................................9 3.4 Threats...............................................................................................................................9 4.0 Financial Analysis.................................................................................................................10 4.1 Income Statement Analysis.............................................................................................10 4.2 Balance Sheet Analysis...................................................................................................11 4.3 Sector Financial Analysis...............................................................................................11 4.4 Financial Ratio Analysis.................................................................................................12 5.0 Conclusions...........................................................................................................................13 References...................................................................................................................................14 Appendix A: Siemens’ Locations Worldwide........................................................... ................16

Figures & Tables

Figure 1. Siemens’ Stock Price from September 15-October 13, 2008.....................................10 Figure A-1. Locations of Siemens Facilities............................................................... ...............16 Table A-1. Siemens Locations by Continent.......................................................... ...................17

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Company Analysis: Siemens AG 1.0 Company Description

Siemens AG is a global enterprise that was founded in Germany in 1847. It is comprised of 15 divisions, from production automation to real estate. Five are in the Industry Sector. Two are in the Energy Sector. One is in the Healthcare Sector. There are also seven other divisions and strategic equity investments, described more fully under section 3.2 (Business Segments). 1.1 Company History. Telegraphen-Bauanstalt von Siemens & Halske was founded in

1847 by scientist Werner von Siemens and mechanical engineer Johann Georg Halske to manufacture a new pointer telegraph. Its first expansion outside of Germany came in 1853, when it began work on a telegraph network in Russia. This led to Siemens’ presence in St. Petersburg, Russia, in 1855, under Carl von Siemens. Operations were also established in Britain under Wilhelm von Siemens. By 1914, one quarter of Siemens & Halske’s total workforce was located outside of Germany (Siemens AG, 2008). Siemens’ expansion was halted and largely reversed as a result of World War II. During the war, Siemens lost its foreign assets and saw many of its German facilities destroyed by Allied air raids. In total, the damage resulted in a loss of four-fifths of its total assets. Siemens did not fully recover until the 1950s, when it regained its foreign assets and began to rebuild its international sales. In 1966, to help strengthen Siemens’ market position, the three companies under its umbrella – Siemens & Halske AG, Siemens-Schuckertwerke AG, and SiemensReiniger-Werke AG – merged to form Siemens AG. The seven business units that resulted were in a centralized corporate structure with combined annual sales of DM 10 billion (Siemens AG, 2008), or approximately USD 2.5 billion (Marcuse, 2005). In 1990, Siemens decentralized its operations into 15 largely autonomous units. The company maintains this structure today.


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1.2 Company Ownership. Siemens is a publicly-held company with 876.9 million

shares outstanding (E*Trade, 2008). All shares are no par value common stock with a notional value of €3.00, which was approximately $3.75 per share on October 28, 2008 (XE.com, 2008). Of this, 79,133 shares were held by members of the Managing Board (Siemens, 2007, p. 97). No figures were available for the number of shares held by members of the Supervisory Board. 1.3 Key Executives. The operations of Siemens are overseen by the Managing Board

and the Supervisory Board, in accordance with German corporate law. The Managing Board is comprised of 11 members, while the Supervisory Board has 20 members. Shareholders elect half of each Board. Peter Löscher, President and CEO of Siemens AG, chairs the Managing Board, while Dr. Gerhard Cromme chairs the Supervisory Board. Each Sector has its own CEO. Heinrich Hiesinger, Dr.-Ing., is the Industry CEO; Wolfgang Dehen, Dipl.-Kfm., is the Energy CEO; and Jim Reid-Anderson is the Healthcare CEO (Siemens AG, 2 008). 1.4 In the News. Siemens has been in the news frequently over the past year for ethical

issues: some of its key executives, including former CEO Dr. Klaus Kleinfeld, have been forced to resign because they were involved in bribery schemes. However, its endeavors into organic light-emitting diodes have also made the news; Siemens and two major competitors, Philips and General Electric, have invested into this new light source (Svensson, 2008). Siemens is also involved in repairing and restoring Iraq’s electricity grid (Associated Press, 2008).

2.0 Markets & Subsidiaries

Siemens has many divisions located throughout the globe. As mentioned earlier, it competes in several different markets, which gives it flexibility in strategic planning and the ability to spread its risk. This section gives a brief overview of Siemens’ worldwide operations.


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2.1 Geographical Segments. Siemens has facilities in over 140 countries. They operate

in nearly all of Europe, all 50 states in the United States, and many countries in the Americas, Africa, the Middle East, and the Asia-Pacific region. A map and a complete list of countries in which Siemens operates is located in Appendix A. Different locations have different focuses: for example, Siemens in Iraq is reconstructing the energy infrastructure there, while Siemens’ African operations focus on medical and communication technologies (Siemens AG, 2008). 2.2 Business Segments. Excluding strategic equity investments, Siemens has 12

business divisions. Eight of these divisions are categorized into the Industry, Energy, and Healthcare Sectors. The remaining four are standalone units under the Siemens umbrella. In the Industry Sector, there are five divisions. Automation and Drives offers “solutions for the manufacturing and process industries, and electrical installation technology” (Siemens, 2007, p. 53). Industrial Solutions and Services uses other Siemens products to “operate and maintain plants and facilities for customers” (ibid, p. 54). Transportation Systems provides “comprehensive transportation solutions” (ibid, p. 55). Siemens Building Technologies “is a service provider, systems integrator and product manufacturer” for automation and safety products (ibid, p. 56). OSRAM “creates lighting solutions…[including] lamps and optoelectronic semiconductor light sources” (ibid, p. 57). Together, these five divisions provide five different focuses. It is likely that any adverse risk incurred in one division is offset by positive returns in one or more of the other divisions. Also, since the Industry Sector provides roughly 50% of Siemens’ total revenue and profit and the majority of new orders (ibid, p. 208209), it can absorb adverse effects from other Sectors, at least to some degree. In the Energy Sector, there are two divisions. Power Generation “builds…power plants…and control technologies for…air pollution control” (Siemens, 2007, p. 62). Power


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Transmission and Distribution provides “innovative, efficient solutions for power transmission and distribution” (ibid, p. 63). These two divisions provide over 25% of Siemens’ total revenue and profit. Power Generation also had the highest number of new orders by division in fiscal 2007, meaning that it is growing in size and potential productivity gains (ibid, p. 208). In the Healthcare Sector, there is only one division. Medical Solutions has “a broad and innovative portfolio of diagnostic and therapeutic solutions, clinical IT and audiology technologies” (Siemens, 2007, p. 69). It accounts for approximately 13% of Siemens’ total revenues and profits and almost 12% of new orders (ibid, p. 208-209). The other four divisions are not categorized. Siemens IT Solutions and Services offers “consulting, systems integration and IT infrastructure management” (Siemens, 2007, p. 70). Siemens Home and Office Communication Devices “develops and produces high-quality products for home communications” (ibid, p. 71). Siemens Financial Services provides “business-to-business financial solutions” (ibid, p. 72). Siemens Real Estate “plans, builds, finances, develops and operates Siemens facilities” (ibid, p. 73). These divisions make up almost 11% of revenue, but less than 1% of profit (ibid, p. 208-209). The results from these divisions are likely negligible within the scale of Siemens’ total financials, but the fact that Siemens still invests in them illustrates that they have a large enough pool of resources to be able to sustain operations with less than optimal profits. 2.3 Strategic Equity Investments. Siemens has entered into three joint ventures with

other companies. All of these joint ventures are classified as non-consolidated subsidiaries under IAS 27, and as such are not included in Siemens’ financial statements. Bosch und Siemens Hausgeräte GmbH (BSH) is a 50/50 joint venture with Bosch that is “the world’s third-largest manufacturer of household appliances” (Siemens, 2007, p. 74). Fujitsu Siemens Computers is


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“Europe’s leading IT manufacturer” (ibid, p. 75). Nokia Siemens Networks is “one of the top three players in today’s telecommunications industry” (ibid, p. 76). 3.0 SWOT Analysis

Siemens is a very large and complex company; therefore, a comprehensive SWOT analysis is beyond the scope of this report. A brief snapshot of the company’s strategic position is presented in this section. 3.1 Strengths. Siemens is a large company with a formidable market presence. It has

operations in 147 different countries throughout Europe, Asia, Africa, Oceania, North America, Central America, and South America (Siemens AG, 2008). This extensive worldwide presence, coupled with its three separate Sectors, ensures that it has many diverse markets throughout which to spread its risks. Additionally, one of its core competencies is innovation. Creating new products requires a large amount of resources, including capital, human workers, facilities, and managerial willingness to take on risk. Because of Siemens’ size, both physically and financially, it can commit the time and resources necessary to provide new products to the market and ensure future growth. To illustrate this point, during fiscal year 2007, Siemens spent €3,399 million on research and development – its largest expense after selling, general, and administrative expenses, and 21.5% of total expenses before income tax (Siemens, 2007, p. 201). 3.2 Weaknesses. The most obvious weakness that Siemens has to overcome is a

corporate environment that does not discourage bribery. As of July 31, 2008, “prosecutors are investigating almost 300 former and current Siemens executives” co nnected with alleged corrupt practices (Schafer & Williamson, 2008, p. 17). Among those targeted are former CEOs Dr. Klaus Kleinfeld, who served from early 2005 until his resignation on June 30, 2007, and his immediate predecessor, Dr. Heinrich von Pierer, who served from 1992 until 2005 (Siemens AG,


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2008). Siemens is taking steps to remedy its ethical problems, including increasing its transparency and prosecuting the managers involved, so within a relatively short period of time, this should no longer be an issue. Another weakness of Siemens, however, is lack of diversity in management. After Peter Löscher took over from Dr. Kleinfeld, he stated in an interview that “the management board are all white males. Our top 600 managers are predominantly white German males. We are too one-dimensional” (Milne, 2008, p. 18). To remedy this, Löscher has instituted a mentor program, allowing young minority managers the opportunity to be mentored by senior managers in an effort to increase diversity (ibid). 3.3 Opportunities. Thanks to its commitment to innovation, Siemens is in an excellent

position to compete in its chosen fields as technology evolves. Its OSRAM division, for example, has recently developed “extremely efficient, long-life light emitting diodes,” for which it won the German Future Prize (Siemens, 2008). As Siemens continues to create innovative new products, it will enter into new markets that have not even been thought of today, providing growth opportunities for the company. Siemens has many goals that it believes it can achieve during the next decade. For example, by 2020, Siemens hopes to provide electricity to the world’s current emerging markets, such as China, and is committed to reducing CO2 emissions to the lowest level possible. It also strives to produce complex, yet individualized, products for clients while minimizing costs (ibid). 3.4 Threats. Because Siemens is mostly in high-tech industries, it is somewhat more

susceptible to adverse economic conditions than a company that provides products that are considered more necessary to customers. Its Medical Solutions division is especially vulnerable, and company CEO Peter Löscher has “predicted market conditions will continue to be ‘difficult’ for the next six to 12 months” (Esterl, 2008, p. B.2). The recent economic crisis has also had a


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negative effect on Siemens’ stock price over the past month, as shown in Figure 1. Siemens stock dropped to a low point of $59.35 on October 10. This was about 63% lower than its 52-week high of $160.37 on December 28, 2007

Figure 1. Siemens’ Stock Price from September 15-October 13, 2008 (NYSE, 2008).

(NYSE, 2008). Though Siemens’ large size is an advantage in many ways, it is also a potential liability. It is not economically feasible for it to be completely focused in one or more particular areas. Therefore, that opens the door for a competitor with a focused strategy to come into the market in a specific area and undercut Siemens’ market share, either by charging a lower price or by offering a differentiated product. To mitigate this threat, Siemens must constantly monitor the activities of its competitors and maintain its core competency of innovation. 4.0 Financial Analysis

Much information can be gleaned from looking at Siemens’ financial statements. For the sake of comparability, this discussion will rely on statements that have been common-sized per the procedures outlined by Stice, Stice, and Skousen (2007, p. 1272-1274). 4.1 Income Statement Analysis. Horizontal analysis of the comparative income

statement for fiscal years 2007 and 2006 shows first and foremost that net income increased from 5.0% of revenue to 5.6%. This resulted from a decrease in cost of goods sold (from 73.9% in 2006 to 71.2% in 2007) along with selling and general administrative expenses (from 17.9% in 2006 to 16.7% in 2007). Research and development expenses, the cornerstone of Siemens’ main core competency, stayed constant at 4.6% of revenue (Siemens, 2007, p. 200).


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At this point, it is instructive to draw comparisons with General Electric (GE), one of Siemens’ top competitors. While GE has a gross profit margin of 57.7%, Siemens’ margin is only 28.8%. GE also has a higher percentage of net income, at 12.9% of revenues for fiscal 2007 (GE, 2007, p. 64); Siemens’ net income is only 5.6% of revenues. While this is not a completely fair comparison, it shows that Siemens might consider implementing cost-cutting measures to decrease its expenses and therefore increase its net income. 4.2 Balance Sheet Analysis. Siemens’ consolidated balance sheets for fiscal years 2007

and 2006 show first a drastic decrease in cash, from 15.4% of revenue to just 5.5%, meaning that Siemens reduced its excess cash reserves. Trade receivables decreased slightly as well, from 22.8% to 20.2%, indicating that customers are paying more quickly this year. Inventories also decreased from 19.2% to 17.8%, which would also reduce inventory carrying costs. Property, plant, and equipment (PPE) decreased from 18.2% to 14.6%, meaning that it took only 14.6 cents of PPE to generate one dollar of sales this year. Total assets were 126.4% of sales, meaning that each dollar of sales requires about $1.26 in assets (Siemens, 2007, p. 202). Again drawing comparisons to GE, one can see that Siemens holds less cash than GE, which has cash of 9.1% of revenue. GE holds less in inventory at 7.5%, which indicates that it spends less on carrying costs. GE uses PPE at 45.1 cents per dollar of sales. Most striking, though, is GE’s total assets, expressed as a percentage of revenue. GE requires $4.60 to generate $1.00 in sales (GE, 2007, p. 66). Siemens is using its assets much more efficiently. 4.3 Sector Financial Analysis. Siemens competes in multiple markets and industries.

This analysis will consider only the three core industries: Industry, Energy, and Healthcare. The main Industry products are customized motors, Sinteso fire safety systems, wastewater treatment products, and high-speed trains (Siemens AG, 2008). Total Industry


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revenues amounted to €38,487 million – 50.3% of total revenue (Siemens, 2007, p. 208). Total Industry profits amounted to €3,542 million – 54% of total profit (ibid, p. 209). The main Energy products are industrial gas turbines, wind turbines, HVDC longdistance transmission systems, and power measurement devices (Siemens AG, 2008). Total Energy revenues amounted to €19,883 million – 26% of total revenue (Siemens, 2007, p. 208). Total Energy profits amounted to €1,797 million – 27.4% of total profit (ibid, p. 209). The main Healthcare products are single-source CT scanners, laboratory automation products, syngo® workflow optimization suite, and hearing aids (Siemens AG, 2008). Total Healthcare revenues amounted to €9,851 million – 12.9% of total revenues (Siemens, 2007, p. 208). Total Healthcare profits amounted to €1,323 million – 20.2% of total profit (ibid, p. 209). 4.4 Financial Ratio Analysis. Analyzing a firm’s financial ratios help “identify

deficiencies and…evaluate [its] financial position” (Brigham & Houston, 2007, p. 102). Accordingly, this section will show analyses of four of the most common financial ratios. All ratios come from E*Trade’s analysis (2008). The most important ratio is return on equity (ROE), which is net income divided by common equity. This tells stockholders “the rate they are earning” on their invested capital (Brigham & Houston, 2007, p. 102). Siemens’ ROE is 13.06%. This is average for its industry and below competitor GE’s ROE of 18.69%. This reinforces the point in section 4.1 that Siemens should attempt to increase its net income. The current ratio shows the ability of a company to cover its current liabilities (CL) with current assets (CA). Siemens could pay its current liabilities 1.17 times, which is significantly below average. If Siemens were forced to pay all of its CL, it could do so, but it would have to liquidate CA at close to their book value. A similar measure is the quick ratio, which shows the


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ability to pay CL with CA less inventories (the least liquid of CA). Siemens’ quick ratio is 0.78x, which means it could not pay its CL without liquidating part of its inventory. The price/earnings (P/E) ratio “shows how much investors are willing to pay per dollar of reported profits” (Brigham & Houston, 2007, p. 102). Siemens’ P/E ratio is 11.91x, average for its industry. That means that investors view Siemens as no riskier than its competitors, with average growth prospects. 5.0 Conclusions

Siemens is a strong competitor with a large market presence in Industry, Energy, and Healthcare. Its earnings are solid and it is managing its risk well. Its main financial issue is controlling costs and increasing net income. In its business planning, it needs to maintain a focus on research and development to maintain competitiveness. Its personnel in top management would benefit from increased diversity and points of view from natives of countries besides Germany, along with a corporate culture that emphasizes ethical behavior. Siemens is on the path to continued success, and if it persists in this direction, it will remain an excellent company and a good investment for shareholders.


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References

Associated Press (2008, September 28). Iraqi Christians protest new election law. Retrieved on October 14, 2008, from http://www.msnbc.msn.com/id/26929108/. Brigham, E. F., & Houston, J. F. (2007). Fundamentals of Financial Management . Mason, OH: Thomson Higher Education. E*Trade (2008). Siemens AG Sponsored ADR. Retrieved on October 12, 2008, from https://www.etrade.wallst.com/v1/stocks/snapshot/snapshot.asp. Esterl, M. (2008, July 31). International Business: Siemens Posts Sharp Drop in Net; Orders Increase, But CEO Projects ‘Flattening Growth’ [Electronic version]. Retrieved on

October 5, 2008, from ProQuest. GE (2007). GE Annual Report 2007 . Menlo Park, NY: GE. Marcuse, H. (2005). Historical Dollar-to-Marks Currency Conversion Page. Retrieved on October 12, 2008, from http://www.history.ucsb.edu/faculty/marcuse/projects/ currency.htm. Milne, R. (2008, June 25). Siemens too white, German and male, says chief [Electronic version]. Retrieved on October 5, 2008, from ProQuest. NYSE (2008). Siemens AG. Retrieved on October 14, 2008, from http://www.nyse.com/about/ listed/lcddata.html?ticker=SI&fq=D&ezd=1M&index=3. Schafer, D., & Williamson, H. Executives feel fallout from Siemens bribery case [Electronic version]. Retrieved on October 5, 2008, from ProQuest. Siemens (2007). Annual Report 2007 . Berlin, Germany: Siemens AG. Siemens (2008). Pictures of the Future: Spring 2008. Berlin, Germany: Siemens AG.

Company Analysis: Siemens AG Siemens AG (2008). Siemens AG – Global Web Site. Retrieved on October 12, 2008, from http://www.siemens.com. Stice, J. D., Stice, E. K., & Skousen, K. F. (2007). Intermediate Accounting . Mason, OH: Thomson Higher Education. Svensson, P. (2008, October 10). Plastic film could make house lights obsolete. Retrieved on October 14, 2008, from http://www.msnbc.msn.com/id/27116343/. XE.com (2008). Universal Currency Converter . Retrieved on October 28, 2008, from http://www.xe.com/ucc/.

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Company Analysis: Siemens AG Appendix A: Siemens Locations Worldwide

Figure A-1. Locations of Siemens Facilities.

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Europe: Albania Austria Belarus Belgium Bosnia/Herzegovina Bulgaria Croatia Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Italy Latvia Lithuania Luxembourg Macedonia Moldova Netherlands Norway Poland Portugal Romania Russia Serbia & Montenegro Slovakia Slovenia Spain Sweden Switzerland Ukraine United Kingdom

Table A-1. Siemens Locations by Continent. Asia: North America: Afghanistan Canada Armenia Mexico Azerbaijan United States Bahrain Bangladesh Central America: Brunei Costa Rica Cambodia El Salvador China Guatemala Cyprus Honduras Georgia Nicaragua Hong Kong Panama India Indonesia Caribbean: Israel Curaçao Japan Dominican Republic Jordan Jamaica Kazakhstan Martinique Korea Mauritius Kuwait Trinidad and Tobago Kyrgyzstan Lebanon South America: Macao Argentina Malaysia Bolivia Myanmar Brazil Nepal Chile Oman Colombia Pakistan Ecuador Philippines Paraguay Qatar Peru Russia Uruguay Saudi Arabia Venezuela Singapore Sri Lanka Oceania: Syria Australia Taiwan New Zealand Thailand Turkey Turkmenistan United Arab Emirates Uzbekistan Vietnam Yemen

Africa: Algeria Angola Benin Botswana Burkina Faso Cameroon Central African Republic Chad DR of the Congo Egypt Equatorial Guinea Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Ivory Coast Kenya Lesotho Liberia Libya Malawi Mali Morocco Mozambique Namibia Niger Nigeria Rwanda Senegal Sierra Leone South Africa Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

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Company Analysis Siemens Ag

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