Siemens' Information and Communications business area takes measures to ensure profitability in difficult environment
Jung: "We are holding to our medium-term margin targets"
The three Groups comprising Siemens' Information and Communications business area are outlining their goals and business strategy at an analysts conference in London. Discussions are centered on measures for concentrating on growth businesses, cutting costs and adjusting resources and capacities. Volker Jung, member of Siemens' Corporate Executive Committee with special responsibility for the company's I&C area: "Despite current market weaknesses, we are holding to our medium-term margin targets. The measures we are implementing will substantially strengthen profitability." Information and Communication Mobile (ICM) and Information and Communication Networks (ICN) are the Groups primarily affected by the measures. Savings at ICM are expected to total EUR 600 million. As previously announced, some 2,600 temporary employment contracts are not being extended. Anticipated savings at ICN will total EUR 800 million. ICN will cut 5,500 jobs and transfer a further 2,000 employees to ICM along with its microwave radio business.
In fiscal 2000 (ended September 30), Siemens' Information and Communications area - with sales of over EUR 26 billion - accounted for more than a third of the company's total sales (including Infineon). EBITA (earnings before interest, taxes and amortization) totaled EUR 1.5 billion. In the first six months of fiscal 2001, parts of the I&C area - in particular the mobile phone and enterprise networks businesses - were hit by increasing difficulties in the industry. The impact of the general economic slowdown in the U.S. and Europe was also felt. Despite these factors, I&C sales for the first half of fiscal 2001 still grew 20% to EUR 14.7 billion. However, EBITA declined 50% to slightly under EUR 0.5 billion, due primarily to difficulties in the enterprise business and pressure on mobile phone margins. Jung noted that Siemens - by rigorously focusing its activities on mobile business - is now in a favorable position in this sector despite current weaknesses in the market. The three I&C Groups are concentrating on those strategic growth sectors where potential demand is highest: broadband access technology, IP convergence, mobile networks and devices, and solutions and services for e-business. To improve their earnings, the three Groups are initiating a series of detailed measures to ensure a return to profitable growth.
In the last few years, ICM has successfully leveraged its product portfolio to sharply improve its market position and is currently a world-leading supplier of mobile phones and mobile network infrastructures. ICM is also in the forefront in the new business of 3G (UMTS) mobile networks. ICM head Rudi Lamprecht: "In the last two years we have grown faster than the market in all sectors." The Group was impacted, however, by the increasingly weak market - especially in mobile phones - in the second quarter of fiscal 2001. EBITA totaled only EUR 6 million on sales of EUR 2.8 billion. These more difficult market conditions for both mobile phones and the expansion of UMTS networks are expected to continue for some time. The market is currently in a phase of consolidation.
Due to the reduced estimates for worldwide demand for mobile phones, ICM has initiated a program to adjust production capacities and cost structures. The production of mobile phones for the European market will be restricted to Kamp-Lintfort, Germany, and for the Asian market to Shanghai. The plant in Bocholt, Germany, will concentrate on the production of cordless phones and the Leipzig facility on wireline phones. As a result of this change, some 2,600 temporary contracts for employees in mobile phone production will not be extended. Including further measures in components procurement, marketing and central services, total savings should come to EUR 600 million. Over the next few quarters, restructuring costs at ICM will add up to between EUR 100 million and EUR 200 million.
ICN's market is currently moving from separate voice and data transmission to IP-based convergence systems. The Group's portfolio focus on growth sectors has given it a solid starting position in this changing market. However, increasing market weaknesses are starting to be felt here as well. Telecom operators are reducing their investment budgets, and the slowing economy - especially in the U.S. - is hurting business with enterprise customers. In the second quarter, ICN sales climbed 11% to EUR 3.1 billion while its EBITA fell to EUR 50 million.
In response to more difficult market conditions, moves to increase profitability are also being intensified at ICN. ICN head Roland Koch: "With our 4P program, we have defined the right tools. Their application will quickly push us back to the forefront." Measures entail both the restructuring of the Enterprise Networks Division and the optimization of procurement, logistics, project controlling and production processes throughout the Group. These moves should yield savings of EUR 800 million in the coming quarters. In addition, ICN's microwave radio business - employing nearly 2,000 people - will be transferred to ICM, due to the increased importance of microwave technology for the UMTS infrastructure. To reduce costs, ICN also plans to cut 5,500 jobs. This figure includes the 3,500 previously announced in the first step. This move will primarily affect sales and maintenance personnel in the U.S., Germany and other Western European countries. Over the next few quarters, ICN will incur some EUR 250 million in costs for the restructuring of Enterprise Networks.
In addition, plans call for rapidly cutting back start-up losses in the strategic core businesses of IP convergence (Surpass and HiPath), broadband access (including Efficient Networks), optical networks (Optisphere) and Internet routers (Unisphere), and thus achieving a targeted increase in growth-based earnings of roughly EUR 300 million. The entire package of measures should enable the ICN Group to achieve an EBITA margin of 5% to 6% and sales of some EUR 14 billion to EUR 15 billion in the coming fiscal year.
Siemens Business Services (SBS) has established itself in Germany and in some other European countries as a leading supplier of I&C services. As in the year-earlier period, the Group posted second-quarter EBITA of EUR 24 million and sales of EUR 1.5 billion. SBS head Friedrich Fröschl aims to considerably grow the Group's international business. In this connection, SBS's will focus on expanding its consulting business and e-business activities. Today, electronic and mobile business already accounts for nearly 30% of SBS sales. This figure is expected to climb to 75% within three years. |
