How Siemens Lost Its Way; Every success already contains the seed of failure

08/07/2013 07:06 PM

Peter and the Wolves

How Siemens Lost Its Way

By Dinah Deckstein, Martin Hesse and Thomas Tuma

Siemens is a massive global conglomerate, building everything from trains to power plants. In-fighting and last week’s ouster of CEO Peter Löscher are just a few indications of a German giant’s decline. The company must find new markets to regain success.

A few days before all hell breaks loose around him, Joe Kaeser is sitting in his Munich office, relating anecdotes about the big, wide world of Siemens. At the time, he’s still the company’s chief financial officer. A large, black-and-white photo of the striking cliffs of Big Sur, on the California coast, one of the 56-year-old executive’s dream destinations, is hanging on the wall behind his desk. Kaeser, with surprising openness, describes how almost everyone in the company “has recently come a little unhinged.” At some point, he says, even he began to feel like a rock in the surf.He argues so clearly and precisely that the question seems inevitable: How can Siemens, the German multinational conglomorate, emerge from its crisis? From this point on, Kaeser puts on a disarming smile. You’d have to ask the CEO, Peter Löscher, he says, noting that it’s his job to know.

Siemens has always had confident CFOs. But Kaeser has been so openly critical that some at the company have already eyed him with suspicion in the past. Others call him authentic. Kaeser himself says: “It’s time for the CEO to tell us where we’re going. The CFO’s job is to ask how we’re going to get there.”

Exactly two weeks after this conversation, everything has changed. Löscher was ousted and Kaeser was chosen as his successor. Last Wednesday, he was still commenting on the company’s meager quarterly results, and by Thursday he was giving his first interviews.

Now that he has premiered as the new Siemens CEO, Kaeser no longer seems quite as cool. A power struggle of the sort rarely seen in German industry is raging behind the scenes. Two of Germany’s most powerful business leaders are clashing with each other in the Siemens supervisory board: Supervisory Board Chairman Gerhard Cromme and former Deutsche Bank CEO Josef Ackermann, one of his deputy chairmen.

The two senior executives have had plenty of experiences of their own, and they probably believe themselves to be more important than they actually are. But they, of all people, are now providing Siemens with an unprecedented “farce,” as the financial daily Börsen-Zeitung notes.

Open Wounds

Companies, like people, also protect themselves and normally hide behind masks of clichés, politeness and discretion. For a few days last week, however, Siemens seemed like an open wound. The dispute between the two old executives — who can be as vicious as wolves — quickly became so loud that even Chancellor Angela Merkel made it clear that she wanted to see calm return to Munich.

But calm isn’t exactly the forte of Germany’s most traditional industrial group, where everything is always a little bigger than among the rest: the orders, the goals, the battles and the disasters. And there have been many of the latter recently, including a fiasco in the solar business, billions in poorly conceived acquisitions, €600 million ($796.8 million) in write-offs for offshore wind turbines in the North Sea and repeated delays in the delivery of 16 high-speed ICE trains to Deutsche Bahn, Germany’s national railway.

The Siemens workforce, about 370,000 employees, is active in more than 200 countries in the world — everywhere except North Korea. Siemens employees are responsible for about 8,900 inventions a year. The company employs about 18,000 software engineers (not even Microsoft has more than that), and it earns €78 billion in annual revenues with products that normal consumers usually notice only when they break.

Perhaps one of Siemens’ problems is that it only has large customers these days. It sold off the mobile phone business. Refrigerators and dishwashers sold under the company logo are actually made in a joint venture with Bosch, which Siemens does not manage.

The multinational corporation has lost some of its connection to the German people, and yet it has always remained uniquely German nonetheless. Both the country and the company are large, respected, humorless and ambitious. Both are searching for a new role — Germany in Europe and Siemens in the entire world.

‘Children in a Sandbox’

This can certainly provide for some entertainment value, especially when even a senior Siemens official says: “Sometimes people in companies like ours behave like children in a sandbox, where the kids are envious of each others’ sand castles.”

To truly understand how last week’s showdown came about, it’s worth looking back at 2005, when then-CEO Heinrich von Pierer passed the baton to Klaus Kleinfeld. Everything was still in order at the time, and each executive had his designated seat at the boardroom table in Munich. The executives only spoke in turn, and no one was blamed when something went wrong, because the governing collective did not believe in assigning individual responsibility.

Then came Nov. 15, 2006. On that Wednesday, prosecutors and investigators searched about 30 Siemens offices, as well as the homes of top executives. The company had developed a perfectly functioning bribery system over the decades, and until the passage of an anti-corruption law for corporations in 1998, such “useful expenditures” were even considered tax deductions in Germany. But even after the law went into effect, Siemens continued with its old practices. Either the company didn’t — or couldn’t — cease to bribe potential customers.

Siegfried Russwurm, now CEO of the company’s powerful industry division, remembers driving home one evening a few months later and seeing the SPIEGEL cover story about Siemens at a gas station. He usually kept his magnetic card with the company logo attached to his belt, but this time he turned it inside out so that no one could see where he worked. “I was ashamed,” he says today. And he isn’t the only one.

The bribery scandal came as a heavy blow to employees. But worst thing about it was not the loss of image and self-confidence. The American Securities and Exchange Commission (SEC) threatened to blacklist the company, and executives in Munich were worried that this could translate into a substantial loss of contracts worldwide. In those months in early 2007, Siemens’ very existence was at stake.

The Doer and the Supervisor

First, Supervisory Board Chairman Heinrich von Pierer had to be disposed of, which Cromme handled. A week later, a successor also had to be found for Kleinfeld. It was a largely informal search, in which Cromme heard about Löscher through acquaintances. On that Friday, Löscher boarded the last flight from the United States to Frankfurt, where he met with Cromme the next day. Soon Löscher, who was still with US pharmaceutical company Merck at the time, was the new chief executive at Siemens.

The upshot is that both men came to their jobs more or less accidentally, one as a doer and the other as his supervisor.

Löscher was given the credit for the fact that the entire scandal “only” ended up costing the company €2.5 billion ($3.3 billion). As the first Siemens CEO who had been brought in from the outside, he was able to clean up unapologetically.

But while the Germans were concerned with their own interests, business was booming — and, along with it, the competition. “Everyone was relaxing and saving their strength,” Joe Kaeser recalls. “Everyone except Siemens.”

Löscher cleaned up the mess, recruited new people, restructured the company, emphasized dialogue and left day-to-day operations up to the division heads. It’s something he does well — textbook-style management. It worked, even if the employees tended to be motivated by fear rather than enthusiasm.

But how does one prescribe a necessary change of course to a global workforce, a shift away from the culture of fear and toward a form of growth that is still based on values? And what exactly are those values?

“You feel like you’re in one of those fairy tales in which the knight has just killed the dragon. And now he has to capture the princess’s heart,” says Kaeser. “But we were standing, breathless, on the bridge to the tower, while the dragon behind us was starting to spit fire again.”

Seeing Black and White in a Sea of Gray

In this phase, Löscher began making his first mistakes. In the spring of 2011, he announced a sales target of €100 billion — a quarter more than the company had earned by that point. He also said that the return on sales would increase to 12 percent. But he didn’t say how and with what means these goals were to be reached. Instead, he presented a cost-cutting program that angered employee representatives.

Löscher’s second term began in the summer of 2012, and it didn’t begin on a good note. The ICE trains for Deutsche Bahn weren’t finished yet. The offshore business in the North Sea had turned into a nightmare. Löscher couldn’t hear the dragons yet, but they were already hissing.

Löscher’s closest associates say that he operated in binary fashion, like a computer: One. Zero. Question. Answer. Problem? Solution! Black. White. He couldn’t see the many shades of gray around him. But Siemens is in fact a gigantic palette of a wide range of gray tones.

The head of a major German corporation is always in a cocoon. As diverse as the external influences are, he remains protected from them. But even after five years at Siemens, Löscher still had almost no confidants to explain the subtleties to him.

“In the first two years, a new boss has the employees he inherits,” says a member of the Siemens board. “After that, he has the ones he deserves.”

A CEO Loses Ground

At 8:15 in the morning, on April 8, Löscher took a walk around his company’s gigantic 2,500-square-meter booth at the Hanover Trade Fair, where several hundred Siemens employees were working. He slapped people on the back and shook their hands, but he did so mechanically, like one of the industrial robots he was about to show Chancellor Angela Merkel and Russian President Vladimir Putin.

It’s a problem his press staff often faces. Photos of Löscher are always welcome, because on good days he looks a little like George Clooney. But moving images are almost unusable, because he is about as supple as a yardstick.

Then he gave what some might call a speech.

After Löscher spoke, Russwurm, the stocky head of the industry division, welcomed his staff. “It’s going to be incredibly exhausting, but make sure you have some fun, too!” he said. “And don’t let the start-ups get to you! Not every gadget you see on a folding table here is going to take the fight out of us!” His remarks were greeted with laughter and applause. Later, Russwurm would explain the technology to the chancellor while Löscher stood next to him. Löscher isn’t fond of photo ops, but they’re important nonetheless.

Troubles Mount

At this point, CFO Kaeser was already warning people inside the company that the 12-percent return-on-sales target could be discarded. The write-offs in the offshore sector were growing. Even the terrestrial wind turbines weren’t safe. In the United States, massive rotor blades became detached from two turbines in Iowa and California. Fortunately there were no injuries, but now all the turbines had to be inspected. The ICE train delivery was delayed even further. The dragons were approaching.

The supervisory board chairman of a company like Siemens is the CEO’s best friend — at the beginning, and as long as things go well. But he becomes his most dangerous adversary when things start going downhill. Cromme hadproblems of his own. He had to step down from his equally prestigious job as chairman of the supervisory board of ThyssenKrupp at the end of March. The steelmaker was plagued with billions in write-offs, as well as minor and major scandals. Since then, the grand old man of Germany Inc. — a reference to the former German practice of the country’s top banks and companies owning shares in each other’s businesses to promote growth in the postwar era — has only held the top post at Siemens.

There, at least, it was important that nothing else could go wrong. But in a company that makes such a wide range of products, from gas turbines to the equipment necessary for entire steel mills to intelligent power grids, something is always bound to go wrong.

On April 10, Löscher met with Russian Prime Minister Dmitry Medvedev in a godforsaken wasteland on the outskirts of Moscow. The event was called “Future Dialogue” and took place in a cube made of glass, steel and concrete, which could easily double as the headquarters of any James Bond villain. The blonde hostesses looked like they had been produced in a cloning laboratory and were wearing skirts in Siemens turquoise. The cube, in the small town of Skolkovo, is supposed to become the nucleus of a Russian Silicon Valley.

The promoters of the project are Medvedev and oligarch Viktor Vekselberg, who remained impassive when Moscow journalists confronted him about allegations of corruption surrounding the expansion of Skolkovo. Löscher praised Russia and talked about “partnership,” which, when he pronounces it, sounds like “boardnaship.”

Siemens plans to invest €40 million in the new high-tech center. In the past, the company probably would have bribed local officials to secure orders. Today the one-hand-washes-the-other principle is known internally as “localization of value creation.” Siemens helps in the industrialization process, which then becomes profitable for Siemens. Everything is legal and clean.

Growing Resentment

This was still Löscher’s mantra, and he embodied it, too — with Putin, with Merkel and with US President Barack Obama. At home, however, there was growing resentment, because he was paying too little attention to Germany and spending much of his time jetting around the world. To address the problem, Löscher had meetings scheduled in Germany.

The native of Austria’s Carinthia region sees himself as a global citizen and has confronted many other challenges before. He studied in Vienna and Hong Kong, and he has worked in Japan, Spain, England and the United States. He is married to a Spanish doctor, and his father-in-law was once the president of FC Barcelona. He only becomes somewhat emotional when the subject is football, his native Austria or his family, and his three children. He doesn’t like to talk about them. Who or what is this Peter Löscher?

“A diplomat — calm, steadying and precise,” says Jürgen Grossmann, a multimillionaire, former head of the electric utility RWE and one of Germany’s most entertaining business executives. He took Löscher along to the Mille Miglia Storica classic car rally twice, an adrenaline-charged spectacle. “Peter navigated with incredible precision and calm.”

The first time, they crashed a 1928 Lancia Lambda when the engine failed. “I’m the kind of person who, when something like that happens, stomps his foot three times and shouts ‘shit!’ Peter was so composed that you just had to respect him.”

The two men are friends, but they couldn’t be more different. “That’s exactly what makes friendships interesting,” says Grossmann. One is the stiff contemplative type, while the other is a folksy businessman and bon vivant.

Grossmann is always consistently loud and direct. The cosmopolitan Löscher, on the other hand, is adaptable. He is noticeably relaxed during business meetings in the United States, he is structured when in Asia and in Germany he comes across as especially rigid. Is he a chameleon?

But he remains a stranger at one of the most quintessentially German of Siemens events, the Erlangen Bergkirchweih, an annual beer festival in the Bavarian city of Erlangen. It’s important to know that although Germany accounts for only 14 percent of Siemens group revenues, Germans still make up a third of the company’s global workforce. The Nuremberg-Erlangen metropolitan area is also home to 40,000 Siemens employees, the largest number of Siemens employees in one place. Bergkirchweih is the biggest festival in Erlangen, a 12-day event around the Pentecost holiday. Real Siemens employees used to take the entire 12 days off.

These days, they sit in the beer gardens on the city’s Burgberg hill, drink beer and talk about old times. Executives make an appearance at the event, as do prominent city and state officials. When the mood gets more relaxed, someone like Pierer sits down with the revelers. Erlangen and the Bergkirchweih embody the old Siemens spirit. An outsider like Löscher is always viewed with suspicion in Erlangen.

Yet another dragon was fuming. There were many dragons by now.

The IG Metall metalworkers’ union and the members of the shop council still supported Löscher, but they were already vocally opposed to his cost-cutting program. Analysts and large institutional investors alike were getting nervous. Cromme needed some good news, but there was none to be had.

Stiff Competition

It’s a straightforward calculation: General Electric, the Munich-based company’s eternal rival, has 65,000 fewer employees than Siemens, its revenues are €35 billion higher and market capitalization is three times greater.

When Kaeser and Löscher spoke to truly major investors and shareholders like Blackrock or Fidelity, they were told: “Now we’re talking.” The conversations didn’t revolve around perpetual German corporate and political debates on issues like a quota on female managers, executive’ salaries or a shift green energy, but around everything. The papers never report on these kinds of meetings, but they are the most important of all meetings.

The media was beginning to dissect Löscher and Siemens. This is often an indication that so-called communications consultants from all sides are trying to stir things up in editorial offices. In this case, the targets were Cromme, Löscher and Siemens in general.

The company has about 2,000 people working in its communications department. When a Chinese blogger gets upset about his Bosch-Siemens refrigerator, it can turn into such a media conflagration that Munich has to react. When actress Angelina Jolie philosophizes about her fear of breast cancer, people at Siemens Medical Technology know that they have a small window within which to explain to the world the benefits of their CT machines.

Communication is important in the real-time era of Facebook and Twitter. But it can only reinforce or slow down trends. It can’t turn stories around. Smoke was beginning to rise at Siemens headquarters.

Who needed whom more: Cromme Löscher or Löscher Cromme, who was also being circled by vultures by now? His deputy, Ackermann, repeatedly denied that he wanted to become chairman of the supervisory board in Munich.

Löscher tried a bold move in the first week of June, in an effort to show strength and self-assertiveness. In press conferences and interviews, he was suddenly critical of the government’s shift away from nuclear power and toward green energy, also known as the Energiewende, which he had consistently supported. The diplomat was reaching for a crowbar, which didn’t suit him at all.

On June 5, he met with Berlin journalists in the mud-colored Marlene Dietrich conference room at the Wyndham Grand Hotel. He had brought along experts to deal with technical details, and he had a cheat sheet with numbers on it in his jacket pocket. The journalists, skeptical by profession, took notes.

Löscher said things like: “Our costs are getting out of hand” and “we require more market.” He isn’t a born dragon-slayer.

At that point, he had already decided to hire a new communications chief, Michael Inacker, deputy editor-in-chief of the business newspaper Handelsblatt. Löscher was suspicious of his existing head of communications, Stephan Heimbach, who was married to Merkel’s deputy government spokeswoman, was a speechwriter for former Chancellor Helmut Kohl and was a loyal Siemens employee. Löscher sensed that Heimbach was too close to Cromme, who, in turn, could interpret his replacement as a showdown.

But now Inacker would probably not be starting his new job in Munich, after all. Suddenly things were moving very quickly. The dragons were on the move.

The Markets Like What They See

In mid-July, it was becoming increasingly clear that Löscher’s target of a 12 percent return on sales by 2014 could not be met. Siemens was on the verge on budget negotiations. What would happen if the most important target were missed by such a large margin once again? The so-called disclosure committee met to assess whether the “markets” needed to be informed with an ad-hoc report. The lawyers took over. The machine was now on autopilot, heading for the abyss.

A terse, six-line report was issued on July 25. At one point that afternoon, €5.4 billion in value was temporarily wiped off of Siemens stock.

There is an indicator for how seriously a company’s crisis should be taken: The more “communications consultants” try to explain away the crisis by pointing fingers, the greater the crisis.

By now at Siemens, many were closing in, representing all factions in the debate over what had gone wrong at the company. In the end, Löscher was sacrificed so that Cromme could save his job. As for his part, former Deutsche Bank CEO Ackermann simply wants to land Cromme’s top job — that’s his reason for poisoning the well.

At this point, the sandbox was much bigger than the construction in Munich where the new corporate headquarters are being built.

On Saturday, July 27, some of the investors’ representatives met at the Munich airport, with the remainder participating in the meeting by conference call. Cromme wanted to replace Löscher. Ackermann resisted the idea. He is no friend of Kaeser, but he felt taken by surprise and had no interest in running after Cromme.

The ex-banker had businesswoman Nicola Leibinger-Kammüller and Allianz CEO Michael Diekmann on his side. The trio argued that the manner in which Löscher was to be driven out was dishonorable. The flap was hardly over before it was publicized. The employees’ side, under IG Metall Chairman Bertolt Huber, was more straightforward and unanimously favored replacing Löscher.

Ackermann is 65 and Cromme is 70. Both men joined the Siemens supervisory board in 2003, when corruption was still rampant.

Both men would never admit it, but they need highly prestigious jobs in the Siemens category in the same way that others need air to breathe. Cromme is beleaguered, but he isn’t about to part with this last job so quickly.

Last Wednesday, they all pulled themselves together to present a united front. Kaeser was unanimously appointed the new Siemens CEO, as if nothing had happened.

When he gave his first press conference at 2:30 p.m., he looked like a funeral director. His nonchalance had suffered, and so had his humor. But at least the dragons have disappeared for now.

Kaeser has spent his entire 33-year career at Siemens. He still lives in the town where he was born, Arnbruck, and his real name is Josef Käser. After spending a few years in the United States, he reinvented himself as Joe Kaeser. Employees like him, and so do the markets. The stock price is on its way up again, even though Siemens was never doing poorly in the first place, with revenues of €78 billion and profits in excess of €4 billion in the last fiscal year.

Siemens Must Find New Markets

Nevertheless, Kaeser will have to find some princesses to capture in the next few months. Siemens has to attack. The company earns two-thirds of its revenues in saturated markets, where no more significant new business is to be expected, say company officials. In other words, growth can only come from emerging and developing countries, or from the discovery of new technologies.

“We will electrify the world — forward and backward,” thunders Michael Süss, who tends to represent the wrought-iron faction on the board. “Energy will remain a very important business for the next 100 years.” Only growth fuels the stock price. And in the long term, only a high stock price can prevent Siemens from eventually being broken to pieces.

A new game is beginning, even though the old one hasn’t ended yet. More clashes are expected within the supervisory board, even though no one is willing to comment publicly anymore. “Incredulous amazement” has taken hold, say board members, noting that this isn’t the way to work together.

Some major shareholders feel that Cromme, too, should go by the time Siemens holds its shareholders’ meeting next January. Cromme, for this part, could certainly try to force Ackermann out of the board, especially as there is no chance he will ever take his place. Employee representatives on the board would never accept Ackermann, with his financial background. For them, he will always be the grinning caricature of the profit-driven executive who flashed the V-for-victory sign during a 2006 trial over bonus payments to former executives of Mannesmann, the telecommunications giant that was taken over by Vodafone. Ackermann had been a co-defendant in the trial in his capacity as a member of Mannesmann’s supervisory board. Everyone has lost, and yet everyone is trying to feel like a winner — if only from a moral standpoint.

Last Thursday evening, Löscher spent a long time drinking white wine with IG Metal Chairman Huber on the patio of the Freisinger Hof Hotel in Munich. Huber did most of the talking, while Löscher listened. He can console himself with more than €20 million in settlements and pension reserves from Siemens.

Perhaps Munich was the pinnacle of his career. The air was thin up there. Like his predecessors, those six years will continue to haunt him for a while, but the upshot is simple: On Löscher’s first day on the job, Siemens was worth €103 billion on the market. On his last day, its market value was only about €83 billion.

In a 2011 interview, Löscher said: “One should never be the one being driven.” It turned out to be the best year in the 166 years of Siemens history. Every success already contains the seed of failure.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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