Siemens's Kleinfeld to `Kick-Start' Cash-Losing Units (Update1)
Jan. 18 (Bloomberg) -- When Klaus Kleinfeld became chief operating officer at Siemens AG's U.S. unit in 2001, he assigned traffic-light colors to each of the company's 100 divisions and told the 24 red underperformers to turn around or shut down.
Two years later, only three red lights remained and 10,000 people had left the payroll. Siemens's U.S. unit earned a profit of $561 million in 2003, after a loss of $553 million in 2001.
Kleinfeld, 47, has a chance to repeat that U.S. success when he takes over as chief executive officer of Munich-based Siemens on Jan. 27. In 2004, seven of Siemens's 13 divisions missed earnings targets set by CEO Heinrich von Pierer; its mobile-phone unit posted an operating loss of 141 million euros ($184 million) in the three months through September.
``Siemens needs a kick-start and a clearer focus,'' says Joerg Schaefer, who helps manage 5 billion euros at AMB Generali Asset Management in Cologne, Germany and holds Siemens stock. ``Von Pierer was one of the last German executives to build on the consensus model, and Kleinfeld will be more tough-minded.''
As Europe's largest engineering company, 157-year-old Siemens makes products ranging from mobile phones and medical equipment to airport baggage-delivery systems and the circuitry that controls car air bags.
First Challenge
Kleinfeld's first challenge will be Siemens's unprofitable mobile-phone unit, the world's fourth-largest handset producer. The company sold 51 million phones last year, losing market share after production delays led fashion-conscious consumers to buy newer models from Nokia Oyj and Samsung Electronics Co.
Earlier this month, von Pierer, 63, said Siemens's mobile division was under review. ``Either the situation has to be fixed or we have to find a partner for cooperation,'' he said in a Jan. 6 interview. ``We have to fix, close or sell.''
Siemens shares have fallen 9.7 percent in the last 12 months, compared with the 6.9 percent gain in the Bloomberg European 500 Index over the same period. They closed at 61.58 euros on Jan. 17. The stock has risen 8.4 percent since the announcement on July 7 that Kleinfeld would succeed von Pierer.
The company reports earnings on the day Kleinfeld takes control. Siemens will probably say that net income in the first quarter of its fiscal year rose 15 percent to 815 million euros, according to the median forecast of 16 analysts polled by Bloomberg News.
Sales in the three months ended Dec. 31 probably rose 4.9 percent to 19.2 billion euros as new orders gained 3 percent, the analyst survey said. Net income was partly boosted by the sale of 13 million shares in Juniper Networks last month, which Merrill Lynch & Co. analyst Bram Cornelisse estimates led to a 200 million-euro gain.
Fearful Workforce
Credit Suisse First Boston estimated on Jan. 11 that the mobile-phone unit will have a loss of 423 million euros this year. Overhauling the company's telecommunications units may result in 3,000 job cuts, London-based analyst Patrick Marshall wrote in a research note. CSFB rates the company ``neutral.''
``The best idea for mobile phones would be a sale, but a joint venture seems more likely,'' says Christoph Niesel, who manages 2 billion euros at Frankfurt-based Union Investment, Siemens's largest institutional shareholder. ``Siemens should focus its resources on areas where they make money.''
Kleinfeld, through Siemens spokesman Peter Gottal, declined to be interviewed.
Last June, Siemens reached a two-year agreement with the IG Metall union to cut costs by 30 percent at its Kamp-Lintfort, Germany mobile-phone plant. The company withdrew a threat to move production to Hungary after 4,000 employees agreed to work longer hours without extra pay.
``There's a lot of fear among the workforce,'' says Michael Leucker, a union representative at the plant. ``It's the 11th hour for us, and we'd like to stay alive.''
Handsets are Siemens's last wholly owned consumer product. The company phased out production of stereos and televisions in the 1990s and produces personal computers and home appliances under the Siemens name through joint ventures.
Changing Culture
In the U.S., Kleinfeld regularly visited project sites and established a monthly e-mail report to all employees to report on the company's progress.
``When he started, people were nervous,'' says Klaus Stegemann, 48, chief financial officer of Siemens in the U.S. ``Some people probably thought that they had a nice life and were wondering why this guy from New York was bothering them.''
Beyond selling some underperforming U.S. telecommunications and industrial units, Kleinfeld required that managers combine the company's various products and services through a program called Siemens One.
Siemens One
Before Kleinfeld arrived, Siemens's U.S. managers met three times a year to discuss divisional cooperation. He scheduled meetings every two weeks to review Siemens One projects.
``Kleinfeld put some horsepower behind the plan and made it a focused approach,'' says Ken Cornelius, 50, head of Atlanta- based U.S. Siemens One. ``When there was an issue with a project, he just got on the phone to the customer. It started snowballing.''
In the first year of Siemens One, the plan generated $380 million in extra sales, and the program is expected to add $1.3 billion in additional revenue this year, Cornelius says.
Scott & White Healthcare Systems, a Texas-based hospital operator, ordered $250 million worth of medical equipment, safety systems and telecommunication devices from Siemens for its new 381-bed Center for Advanced Medicine in Temple, Texas.
``Of course, we're always looking at other vendors,'' says Mark Clardy, purchasing project manager at Scott & White. ``But if all solutions are equal, we will go for Siemens. They seem to have a leg up all the time.''
Reorganization
Married, with two teenage daughters, Kleinfeld was born in Bremen, Germany. He joined Siemens in Munich as an advertising and design manager in 1987, and moved to the strategy unit the following year, spending a decade there.
In 1998, he became head of the x-ray unit at the medical- engineering division, which had a loss of 84 million euros the previous year. The company cut 1,400 jobs and reorganized the workforce, leading to a profit of 332 million euros in 1999.
The turnaround at the medical unit was part of a companywide effort to revamp unprofitable divisions. By the middle of 2000, Siemens had disposed of units accounting for 15 percent of sales, including Munich-based Infineon Technologies AG, now Europe's second-largest semiconductor company.
Kleinfeld moved to New York as U.S. chief operating officer in 2001 and was promoted to CEO a year later. ``They put Kleinfeld in a few positions to check him out,'' says Heinz Hawreliuk, 57, a Frankfurt-based union representative on the Siemens supervisory board. ``It was almost like doing an internship.''
`He Was Ambitious'
While in the U.S., Kleinfeld helped raise the company's profile with a listing on the New York Stock Exchange. He also joined the board of the Metropolitan Opera and sponsored the city's bid for the 2012 Olympics against several other contenders, including Leipzig, Germany. Kleinfeld's boss, von Pierer, was on the board advising the Leipzig Olympic effort before the city was eliminated from consideration in May 2004.
``He was ambitious and wanted to get to the top. There was a sense that he had a destiny,'' says Jack Bergen, 62, a former Reagan administration defense strategist hired in 2001 by Kleinfeld as senior vice president for marketing in the U.S. ``We've gone from a region that was struggling and losing money to a region that's a benchmark for the rest of the operation.''
Return to Munich
Following Kleinfeld's return to Munich in January 2004 as head of corporate strategy, the company combined its wireless and fixed-telecommunications divisions to offer an integrated service for corporate customers. Siemens has also stepped up investment in water-treatment projects and wind power energy, and signed agreements for joint ventures in Russia and China.
The company's three most profitable units last year produced medical equipment, power-generation hardware and automated machinery. Siemens VDO, a maker of automobile electronic components, including sensors used in sports cars made by Porsche AG, exceeded its earnings target, as did the medical division.
In July, Kleinfeld traveled to Russia to complete an agreement with Interros Group for a controlling stake in ZAO Siloviye Mashiny, a power equipment maker. Siemens plans to invest $200 million in Siloviye in the next three years.
``Kleinfeld was clearly in charge and not afraid to make decisions himself,'' Sergei Aleksashenko, the former deputy general director of Interros, who now works at the Moscow-based Antanta Capital investment fund. ``With many European companies, you don't know the end of the story, but Kleinfeld was different, very American-style in his way.''
Salary Disclosure
Siemens has adopted U.S. financial practices by disclosing individual executive salaries for the first time in 2004, a move not currently required by German law. Kleinfeld received 3.3 million euros, including stock options, in 2004, making him the second-highest-paid executive after von Pierer, who took home 4.6 million euros in cash and stock.
Kleinfeld may have to ask unions to accept job losses in Germany, which still accounts for more than one-third of Siemens's total workforce of 430,000. Half of Siemens's twenty- member supervisory board is made up of employee representatives, and the panel has already approved asset sales and the elimination of 35,000 jobs over the past four years.
Kleinfeld, who has told colleagues he will conduct top-level Siemens meetings in English, will bring a more direct, American style to the Munich headquarters, says George Nolen, 48, his successor as U.S. CEO.
``He has little to no patience for people who don't shoot straight from the beginning,'' Nolen says. ``He accepts bad news, but he wants to know how you will fix it. And he'll roll up his sleeves to help.''
To contact the reporter on this story:
Benedikt Kammel in Berlin at bkammel@bloomberg.net.
To contact the editors responsible for this story:
Lars Klemming at lklemming@bloomberg.net or
Zimri Smith at zsmith@bloomberg.net.
Last Updated: January 17, 2005 20:36 EST |
