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FRIDAY NOVEMBER 6 1998 Europe
SIEMENS: Company may still need toning up
By Graham Bowley in Frankfurt
Siemens' decision this week to spin off one-seventh of its vast industrial empire leaves behind a varied portfolio of businesses in mixed states of health. Now that semiconductors are to be floated, the new Siemens will centre on four divisions: information and communications, industry, rail systems and power generation.
While its industrial activities - which have already been restructured and include technologies such as automation - are prospering, the jury is still out on other areas. The principal concern is that they operate in mature markets offering scant potential for explosive growth. "There are a couple of divisions that are in real trouble," said Frank Rothauge, analyst at Sal Oppenheim in Frankfurt.
Rail systems is Siemens' weakest link, and Heinrich von Pierer, group chief executive, would probably like to sell it. His problem is that the present state of the unit means he is unlikely to find a buyer, while any merger with the two other big groups in the field - Adtranz and Alstom - is ruled out because of anti-competition concerns.
The division, which made a loss last year of DM800m ($479m), has been hit hard by over-capacity and falling prices, which have made contracts unprofitable. Siemens has responded by installing a new management team.
"They want to restructure the business and then, possibly one and a half years down the road, look for someone interested in buying it," said Jochen Klusmann, analyst at Julius Baer in Frankfurt.
Information and communications is Siemens' biggest division. It was shaken up earlier this year to combine activities such as mobile phones, telecommunication networks and the former Siemens Nixdorf computer business.
Yet while it has a strong position in the traditional telecoms switching market, it lags behind in state-of-the-art internet-based network technologies.
This is where an acquisition will come soon, Mr von Pierer promised. He named no names, but he gave an indication of where a probable target might be located: "The real music is not playing in Europe. It is in the US, in particular Silicon Valley."
Analysts, however, are not ruling out bigger acquisitions later on, with 3Com of the US or Canada's Newbridge Networks seen as possible candidates.
Mobile telephones and personal computers are other problem areas. Both have been hit by declining prices, and Siemens tried to hive off PC manufacturing by selling it to Taiwan's Acer earlier this year, but the deal collapsed. Siemens says it is seeking a partner in both areas, possibly for a merger - Fujitsu, of Japan, is linked with its PC business.
"Siemens lacks critical mass, so either it gets out or finds a partner. To compete it has to spend a lot of money, and it is unclear whether it is prepared to do this," said Mr Klusmann.
Equally unclear are the prospects for Siemens' power plant business. It ran into quality problems and it is the division most likely to be hit by the slowdown in Asia.
On a brighter note, the division was recently strengthened by the acquisition of Westinghouse, of the US. This acquisition will incur about DM900m of integration costs, but the division is well placed to exploit strong demand in the US. "We are in the middle of a gas turbine boom in the US," Mr von Pierer said.
Yet while the Siemens chief admitted there would be some more minor changes to his portfolio, none would match the large-scale pruning unveiled this week. "That will be it," he insisted.
The poor health of some parts of his remaining empire, however, suggests otherwise. Heinz-Joachim Neubürger, Siemens' new shareholder-friendly financial officer, and increasingly the real power behind the scenes, may also disagree.
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THURSDAY NOVEMBER 5 1998 Telecoms
TELECOMS: Data overtakes voice on BT
By Alan Cane
More data than voice conversations are taking place daily on British Telecommunications' domestic network as use of the internet, electronic mail (e-mail) and electronic commerce (e-commerce) grows at the expense of more traditional means of communication. Bill Cockburn, BT's UK managing director, said a website being was created every two seconds in Britain, with 300,000 web pages were added to the internet each week.
"Telephone calls are being replaced by e-mail transactions," Mr Cockburn said. "Already there are more data transmitted over BT's telephone network than voice calls."
He added that 10m e-mail messages were sent in the UK every day compared with 60m letters.
He predicted that the UK communications market, including conventional and mobile telephony, e-commerce and multimedia, valued at about £30bn a year would double in five years.
The speed at which the UK is adopting internet-based communications suggests it is rapidly catching up with the US, the e-commerce pioneer, where the changeover between data and voice calls took place early last year.
Mr Cockburn, giving his first extended interview since taking over as head of BT's UK domestic operations a year ago, said e-mail and e-commerce represented a "tremendous opportunity" for BT. Investments amounting to £2bn a year in data transmission equipment over the past four years meant that BT was ready to handle a significant increase in internet traffic and e-mail.
Over the course of the next few years, BT's entire UK voice network would be replaced by a system based on internet technology.
The new network would be linked to a global internet system being created by BT and its new US ally, AT&T.
The aim would be to create a low-cost and efficient network capable of providing service at costs comparable with BT's new and agile competitors, such as WorldCom, Colt and Energis.
"We believe that in Europe alone today there is something like $1bn worth of electronic transactions," Mr Cockburn said.
"In five years, that will grow 30-fold as more companies move to an electronic way of doing business."
BT estimates that the volume of data traffic in the UK is growing at 30 per cent a year, while voice traffic is increasing by only five per cent.
It calculates the number of devices capable of receiving multimedia transmissions - personal computers, modified television sets and special telephones - will have risen to 38m by 2010 from 2m today.
Mr Cockburn believes that modified television sets are likely to prove the multimedia system of choice for most homes.
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TUESDAY NOVEMBER 3 1998 Telecoms
REGULATION: Deutsche Telekom chief hits out
By Alan Cane and Ralph Atkins in Bonn
Ron Sommer, chief executive of Deutsche Telekom, the German telecommunications giant which has been hit by fierce competition in its home market, has warned that an escalating price war will make it much harder to produce "the results that our shareholders expect".
Mr Sommer blamed the country's regulatory regime for allowing competitors to snatch market share "in a dangerous way". Deutsche Telekom would respond with "drastic, very aggressive price cuts", but he added the impact "will put even more pressure on our expense base".
That could result in an accelerated programme of job losses, further cost-cutting and reduced spending on networks and services.
Deutsche Telekom last week announced nine-month figures showing net income up 22 per cent but below market expectations. The group has lost at least 14 per cent - some analysts suggest up to 30 per cent - of long-distance business to new competitors in Germany.
Germany last year set average interconnection rates - the price rivals pay to link into Deutsche Telekom's network - at 2.7 pfennigs a minute, which is low by international standards.
The regime, Mr Sommer added, also blurred distinctions between interconnection charges for competitors that invest in infrastructure and those that merely offer services on Deutsche Telekom's network.
"I do not think it is the role of Deutsche Telekom to fire people because we have to subsidise companies that don't invest . . . We are talking big numbers here." Deutsche Telekom has reduced its headcount from 230,000 to 184,000 in three and a half years."
Mr Sommer argued for common regulatory principles across Europe, and eventually world-wide, saying that foreign operators could compete easily with Deutsche Telekom in Germany but the converse was not true in the UK, the US or Japan.
He doubted whether the European Commission was serious about ensuring fair competition in European telecoms. "My question is: What kind of liberalisation policy are you playing? ...I have not seen the proper energy applied by Brussels towards providing level playing fields in Europe, and worse, I have not seen Brussels trying to look to see if European companies are getting the same level playing field in the US and Japan."
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THURSDAY NOVEMBER 5 1998 Telecoms
Call for rethink on German telecoms
By Ralph Atkins in Bonn
Germany's new economics minister has called for a rethink of the country's telecommunications regulatory regime after voicing alarm about the impact of fierce competition on Deutsche Telekom, Europe's largest telecoms group.
Werner Müller said he feared a price war in long-distance telephony could write off "billions of D-Marks of investments". He was not necessarily thinking of replacing Klaus-Dieter Scheurle, the telecoms regulator, but "the regulator should know in what direction the politicians are thinking," Mr Müller said.
Deutsche Telekom has complained that the current regime means competitors that have not invested heavily in infrastructure can undercut its prices unfairly. As a response, Deutsche Telekom is planning "drastic, very aggressive" price cuts to protect market share. In an FT interview earlier this week, Ron Sommer, Deutsche Telekom's chief executive, said the price war would make it harder to produce "the results that our shareholders expect".
Deutsche Telekom was partially privatised in November 1996, although the state still owns 74 per cent of the shares. In an interview with the Süddeutsche Zeitung yesterday, Mr Müller denied his comments reflected worries by the new Social Democratic government over the value of its stake in Deutsche Telekom.
Instead, Mr Müller said he saw himself "in the role of defending the ordinary people and Deutsche Telekom employees who have perhaps bought shares for the first time and who are worried about the impact of excessively stiff regulation on their holdings."
Under the 1996 telecommunications act passed by the previous government headed by former Chancellor Helmut Kohl, the German market was fully liberalised on January 1. It is now considered among the most open in the world, with more than 200 licensed service or network companies.
But Deutsche Telekom has won cross-party support for its argument that the regulatory regime penalises companies with high investment spending. A low "interconnection" rate, averaging 2.7 pfennigs a minute, for linking to Deutsche Telekom's network allows competitors to rely largely on leasing services from the former monopoly carrier and re-sell at favourable prices.
Analysts estimated Deutsche Telekom had seen an unprecedented loss of up to 30 per cent of its long- distance business. Mr Scheurle is due to rule on November 30 on prices Deutsche Telekom can charge for access to the "last mile" connections into customers' houses.
Yesterday, the Bonn-based regulatory authority would not comment on Mr Müller's remarks beyond saying Mr Scheurle looked forward to working "in co-operation" with the economics minister.
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