Siemens’ leader seeks better performance
Peter Marsh and Bettina Wassener
Published: July 3 2005 20:29 | Last updated: July 3 2005 20:29
Klaus Kleinfeld, who in January took charge at Siemens, the German industrial group that is one of the world’s biggest manufacturers, is the 11th chief executive in the company’s 158-year history and only the fifth not to be related to Werner von Siemens, its founder. He is also the first to keep in a corner of his office a baseball cap bearing the legend “Top Gun”.
The 48-year-old has an individualistic management style, a reputation for plain speaking and a furious pace of working that he expects others to match. It is an approach at odds with the consensual style often associated with German boardrooms.
With sales last year of €75bn ($90bn, £50bn) and operations in 190 countries, Siemens has products ranging from power stations and telephone equipment to light bulbs and electric motors. While it has managed to avoid some of the problems that have brought other big European industrial groups such as Britain’s Marconi, Alstom of France and the Swiss-Swedish ABB to their knees in recent years, Siemens faces a difficult economic background of expected muted growth in Europe and tougher competition from rivals in low-cost countries such as China.
Its operating profit margins, analysts point out, are only around half of those achieved in the industrial activities of General Electric, the US company that is a long-time rival to Siemens in many business segments. Moreover, Siemens’ share price since the beginning of the year has underperformed the average for Europe’s big industrial companies by about 10 per cent.
In his first interview with a business publication since he took the top job, Mr Kleinfeld emphasises a desire to speed up innovation within the company and cut costs, and hints that businesses that continue to miss earnings targets could be jettisoned. “Only globally competitive businesses have secure jobs,” he says, speaking at the company’s imposing headquarters in Munich.
That building still contains the two people instrumental in appointing him. Heinrich von Pierer, a former lawyer who ran the company from 1992 to 2004, retains an influence as chairman of the company’s strategy-setting supervisory board. Karl-Hermann Baumann, a former Siemens finance director who was Mr von Pierer’s predecessor as supervisory board chairman, continues to have an office there.
The two men took a gamble that Mr Kleinfeld – who has worked at Siemens since 1987 and whose biggest achievement was turning around the company’s poorly performing US unit between 2000 and 2002 – has the mix of qualities needed to improve profits growth and give Siemens a stronger global presence. Mr Kleinfeld’s performance will also be seen as a test of how well his management methods – more direct than often seen in big German companies – will translate to the world’s third biggest economy, especially given the problems that some executives with a similar style have encountered when they have tried to operate in the same vein in Germany (see below right).
In particular, Mr Kleinfeld could run into political difficulties if he decided to reduce the number of Siemens’ jobs in high-cost Germany, which accounts for nearly 40 per cent of its 430,000 global headcount.
“I’d like Mr Kleinfeld to take radical action to improve the company,” says James Stettler, an analyst at Dresdner Kleinwort Wasserstein, the investment bank. “Siemens over-engineers too many of its products and has too much manufacturing in high-cost countries. They are grappling with [underperforming] businesses that GE would have sorted out long ago.”
One person closely associated with Siemens says: “Siemens certainly did not want a Rambo-like figure to be its new CEO. But they did want someone strict and strong and more American-like than the kind of manager you normally find in Germany. Mr Kleinfeld is seen [within Siemens] as someone interested in corporate reforms and can attack some of the normal ways of working in German companies.”
With more than half Siemens’ revenues coming from Europe, Mr Kleinfeld is not afraid of tackling the broad issues of how the European Union deals with problems such as the perception of fading competitiveness compared with the US and eastern Europe. He also plays down the sense of crisis triggered by the recent breakdown of discussions over the EU budget and the rejection of a Europe-wide constitution by France and the Netherlands.
“We must not lose perspective of what Europe is all about, and the great achievements it has brought, and I do not share all this negativism about the EU that’s going on,” he says. He wants the EU to promote higher technological standards in industry by funding big technology projects in areas such as healthcare and transport.
But most of his time will be spent on trying to establish what he calls a “high performance culture” within Siemens, in which the good operating results of such businesses as medical equipment and machinery controls come to be shared by operations that have been relative laggards inside the company. These groups include train manufacturing, telecommunications systems and business services. He has set a tough standard for others in the group, having talked to the company’s top 350 customers during his first few months as chief executive in a schedule that has taken in India, Russia, China, the US and several European countries.
Mr Kleinfeld gained the approval of many investors last month when Siemens jettisoned its lossmaking mobile phone handsets unit. The deal, in which the company virtually gave the unit away to BenQ, a fast-growing Taiwanese electronics business, will cost Siemens €350m and see 7,000 Siemens workers, 3,000 of them in Germany, transfer to the Taiwanese company.
Against expectations that Siemens would follow its established pattern of exiting poorly performing businesses through 50/50 operations with outside companies, Mr Kleinfeld insisted that it should quit mobile phone manufacturing altogether. An internal e-mail authorised by him and sent out at the time of the deal read: “No softy joint venture”.
Roland Pitz, an analyst at HVB, the banking group, says that through the BenQ deal Mr Kleinfeld showed he was “capable not only of talking and making promises, but that he also has the courage to act decisively and rapidly”. Moving on from this, Mr Kleinfeld has also ordered all the 100 individual divisions inside Siemens’ 12 main operating groups to review their business plans with a view to cutting costs and improving their ability to react to new ideas.
He recently convened a meeting of all senior managers in the 100 divisions, using for the first time a management technique dubbed within Siemens as the “traffic light” system. Mr Kleinfeld divided the managers into “red”, “green” and “yellow” depending on the performance of their divisions. All the “reds” – the weakest performers – were instructed to spell out their plans for improvement in front of an audience of other Siemens managers. These people then used electronic voting systems to give the “reds” scores for plausibility.
Mr Kleinfeld admits some of the “reds” found the experience chastening. But he insists that most will learn from the experience and improve. Chillingly for those who do not, Mr Kleinfeld says that, if an executive returns to a similar meeting still marked as a “red”, “it wouldn’t be good” for that person’s career prospects.
Many of the chief executive’s ideas were in evidence during his American spell, when he was given a brief by Mr von Pierer to improve profits in Siemens’ US activities, which are responsible for about a quarter of the group’s sales and employ 70,000 people. He did this through an effort to improve the way in which different groups of workers link up to improve sales – for instance, by getting people from divisions selling control systems and divisions selling lighting to combine in selling to customers such as airports. He also introduced tactics along the lines of the traffic-light system to confront employees with problems and encourage them to change.
One former Siemens employee who worked with Mr Kleinfeld in the US says: “It is fair to say some people disliked being pressured in this way. But Klaus showed himself to be a tremendous leader and initiated a real cultural shift.”
The big question now is whether Mr Kleinfeld can achieve similar results all the way through a company that – in spite of its global reach – continues to have a highly Germanic style. Only one of the 11 members of its central management board, for instance, is neither German nor Austrian. On the question of whether Siemens is too German, Mr Kleinfeld is quick to point out that this adjective has many positive attributes. “We are a global company but we stand for German quality, reliability and high-tech competence,” he says.
On the same tack, he rejects suggestions that his own style is particularly American, and says he developed it well before he took up his Siemens job in the US. Even so, there is an important constituency inside Germany that dislikes the kind of brashness that Mr Kleinfeld sometimes displays – illustrated not only by his baseball cap but by a celebrated incident a few months ago when he dunked a journalist’s mobile phone in a glass of water to denote his displeasure of the fact that the handset was not made by Siemens. “Everyone in Germany whom I know and who heard about this disapproved of this incident,” says a German management consultant. “It showed Kleinfeld to be behaving like a little boy.”
But more recently, Mr Kleinfeld shows signs of having learned from Mr von Pierer’s more restrained approach. He exudes diplomacy when asked about Gerhard Schröder, the German chancellor, whom opinion polls predict will lose office in elections in the autumn and whom some in business criticise for not pushing through enough reforms, for instance, to reduce German employment costs. The chancellor “has done an outstanding job personally, travelling around the world with enthusiasm and passion – to advertise German industry and help win contracts,” Mr Kleinfeld says. “That job could not have been done any better”.
He also refrains from being too outspoken when asked about comments by some in Mr Schröder’s Social Democratic party who compared foreign investors in German companies to “locusts”. Such remarks, says Mr Kleinfeld, “show a lack of understanding of how the [business] world works”.
For the next 18 months or so, Mr Kleinfeld, a former management consultant, says he will be spending much of his time pushing executives in charge of underperforming divisions to turn their businesses around – not just by cutting costs but also by driving the development of new products and finding new markets, particularly outside Europe. “I am confident Siemens has the techniques to do this, using the same skills that have helped us in the past.”
He believes Siemens can push up overall sales in the next few years by double the rate of global growth. That could translate into an overall growth target for Siemens of between 7 and 8 per cent a year.
While most observers reckon that this would be an ambitious goal, it is one that Mr Kleinfeld believes can be met with the help of the company’s recent investments in activities such as wind energy and water treatment – areas in which he expects to see sizeable global growth over the next 10 years.
Many Siemens watchers believe Mr Kleinfeld would be keen to slim down the company over this period through divestments, should the efforts to increase earnings in problem divisions fail. “I get the sense Mr Kleinfeld is very resolute over this and is getting ready to dig his heels in [over the need to improve Siemens’ results], perhaps by taking unpopular measures that could lead to significant job cuts in Germany,” says Ben Uglow, an analyst at Morgan Stanley. Harald von Heynitz, an industry expert at the KPMG consultancy, says he expects Mr Kleinfeld will be “more pushy” than Mr von Pierer, although does not predict “any 180-degree turns” in strategy.
Either way, Siemens’ 11th chief executive will be under continued scrutiny as politicians, investors, employees and fellow-executives wait to see whether he lives up to the legend emblazoned on his baseball cap.
Cautionary tales for a tough-minded manager
The recent record of German executives with a US-style approach to management does not make particularly encouraging reading for Klaus Kleinfeld, the Siemens chief executive who is considered by many – although not by Mr Kleinfeld himself – to fit into this mould.
Wolfgang Bernhard, a former DaimlerChrysler manager and restructuring expert who was once tipped for the top job at the Stuttgart-based carmaker, was forced to leave the company after clashing with both management and unions while helping run its Chrysler brand in the US as chief operating officer. But Mr Bernhard, whose style is frequently characterised as abrasive, has fallen on his feet, landing a top job at the rival Volkswagen.
Thomas Middelhoff and Ulrich Schumacher, who respectively headed Bertelsmann, the media group, and Infineon, the chipmaker that was once part of Siemens, also suffered high-profile downfalls in recent years. Both were associated with what many regard as a US-style brashness characterised by a willingness to go out on a limb without garnering support beforehand among fellow executives. Mr Middelhoff underlined his affinity with North American corporate values by referring to himself even as an “American with a German passport”.
More positive for Mr Kleinfeld – who achieved prominence through running Siemens’ large US unit in the early years of this decade – are the examples of Hubertus von Grünberg and Jürgen Geissinger. Both are Germans who gained experience in top jobs in the US car parts industry. They then returned to Germany to run – with notable success – two German-based automotive groups: respectively, Continental, the tyre maker, and INA, a large family-owned components supplier.
Mr Kleinfeld says his management approach cannot be fitted into any national category. One clue to his way of thinking came when he was asked last year by the Financial Times to name the business book that had most influenced him. He chose Tough-Minded Management by Joe Batten, a book published 40 years ago, which he described as being about “teamwork among excellent individuals working together for excellence – excellence which accepts no mediocrity”.
In the US, Mr Kleinfeld had a chance to put these ideas into practice, achieving higher profits largely as a result of management changes and setting employees tough performance targets.
Kathryn Wylde, president of the Partnership for New York City, an organisation that brings together top executives, observed some of Mr Kleinfeld’s activities in the US. She praises his “force of personality and ability to communicate”, recalling: “He once addressed a group of business executives and [in conveying a message about Siemens and its capabilities] achieved in 20 minutes something that for some people could take months.”
Peter Leibinger, a director of Trumpf, a German machinery maker, and previously head of Trumpf’s US operations, is another admirer. “If he gives a speech on a podium, he is quite capable of being reserved as well as outspoken.” Thorsten Koch, head of Wagner, a mid-sized German maker of paint guns used for home decorating, does most of his business in the US and says Mr Kleinfeld’s “upfront” style came across there as “very refreshing and very non-German”.
Mr Koch believes Mr Kleinfeld could face pitfalls if he tries to transplant to Germany any approach that ignores the need for consensus. But he thinks Mr Kleinfeld will be able to achieve results through a mixture of styles.
“Klaus is a good listener and has good powers of perception [about people]. He’s got guts and he’s also diplomatic and smart. My feeling is that he will do just fine.”
Six months into his job, critics of the Siemens chief are hard to find. The question is whether that will remain the case once he has made more “tough-minded” decisions.
Sources for charts: company; Thomson Datastream |
