<<(a place) he might find some answers is a plant in Shanghai, the company's second largest unit for making mobile phones.
A visit to the factory suggests responses to the three weighty challenges facing the world's biggest manufacturer outside the car industry: how to boost the competitiveness of Siemens' core production sites in Europe; what to do about its large but problem-ridden activities in telecommunications equipment; and how to beef up the marketing effort across a company that is seen by many as too heavily focused on engineering.>>
Siemens' engineer of change
By Peter Marsh
Published: August 2 2004 16:57 | Last updated: August 2 2004 16:57
Klaus Kleinfeld, the next chief executive of Siemens, is an energetic 46-year-old with a talent for asking awkward questions. Among Siemens' factories around the world, one place where he might find some answers is a plant in Shanghai, the company's second largest unit for making mobile phones.
A visit to the factory suggests responses to the three weighty challenges facing the world's biggest manufacturer outside the car industry: how to boost the competitiveness of Siemens' core production sites in Europe; what to do about its large but problem-ridden activities in telecommunications equipment; and how to beef up the marketing effort across a company that is seen by many as too heavily focused on engineering.
Mr Kleinfeld is due to take the top job in January. Heinrich von Pierer, the current CEO, has been in charge since 1992 but is stepping aside to become chairman of the supervisory board. Siemens has emerged from the difficult economic conditions of the past five years in better shape than many imagined. Yet few doubt that Mr Kleinfeld needs to take some tough decisions to put the sprawling giant which had sales of €74.2bn ($90bn) last year and makes products from factory controls to dishwashers - on a new path.
Mr Kleinfeld has been at Siemens since 1987 and has spent most of his time in corporate strategy. He took on a bigger role in 2001 when asked by Mr von Pierer to turn round the loss-making US operations of the company - a task he accomplished with some style.
In an interview with the FT last year, Mr Kleinfeld described his efforts to reinvigorate Siemens' US business through grilling his American colleagues about their jobs, with the aim of boosting efficiencies and knitting together Siemens' disparate operations. It did not necessarily make him popular, he recalled: “A lot of people said: ‘who the fuck are you to be asking all these questions?'.”
But his interrogation techniques did him little harm in the eyes of his boss. Last November, Mr von Pierer promoted Mr Kleinfeld to another important job: head of information technology and telecommunications operations. These account for nearly a third of the company by sales but last year made a combined operating loss of €173m. The losses have receded this year after several years of cost-cutting, but the operations' relatively weak performance remains a worry for Siemens.
In June the company announced two crucial changes, almost certainly linked to Mr Kleinfeld's ideas. At two German factories - Kamp-Lintfort, which makes mobile phones, and Bocholt, which makes cordless phones employees - will now work 40 hours a week instead of 35, without extra pay. Heralded as a “triumph for reason” by Mr von Pierer, the change is part of a broad thrust by Siemens to re-energise its production activities in high-cost Germany, which accounts for 170,000 of its 420,000 global workforce. Siemens is thought to be keen to use the move to more efficient working in these plants as part of a shift to increase the competitiveness of other European plants.
Second, the company merged its previously separate mobile, or wireless, telecommunications operations (which make both handsets and cellular networks) with its fixed-line telecoms business. The switch allows for further cost cuts in this part of Siemens' business while keeping the focus on the most promising parts of the telecoms equipment field.
“Both these changes appear to have been of his [Mr Kleinfeld's] making, and hopefully these are signs of more to come,” says James Stettler, an analyst at Dresdner Kleinwort Wasserstein. Here Siemens' Shanghai plant enters the story. The style of working in the plant highlights the relative inadequacies of other parts of the company, particularly the unit at Kamp-Lintfort, which makes the same products.
The automated machinery in the two plants is nearly identical. Yet working conditions at the Chinese factory count in its favour. Longer working hours and flexible employment patterns mean 12-hour shifts can be agreed relatively quickly if demand requires. According to Zhijian Fan, head of Siemens' Chinese mobile phone operations, productivity in Shanghai is notably greater than at Kamp-Lintfort.
“We have worked out how to slice orders from customers into small units and turn out the phones in small batches with the minimum delay,” says Peter Perchewski, manager of the Chinese factory. “We've found we can make as few as just six phones in one batch to meet a customer order while the German factory would never be able to do this.”
Such adaptability counts for a lot in the mobile phone business, where models change frequently in response to fickle demand.
Siemens is the world's fourth biggest supplier of handsets, after Finland's Nokia, Motorola of the US and Samsung of South Korea. As well as Kamp-Lintfort and Shanghai, it has a smaller factory in Manaus, Brazil. Last year the Shanghai unit made 13m handsets, behind the German plant's 15m. Each produced around twice as much as Manaus.
The Shanghai plant has performed well in the past few years. But its strengths have done little to help Siemens' position in the fast-expanding Chinese mobile phone business, the biggest in the world after the US. In the past three years, all the leading western suppliers have suffered as China-owned mobile phone suppliers have stepped up their marketing efforts. But while Nokia and Motorola have managed to maintain their positions as the leading two manufacturers in the industry, albeit with diminished shares, Siemens has slipped dramatically. In 2002 it accounted for 7.1 per cent of the Chinese market of 66m phones; last year, its share was 2.6 per cent, according to Strategy Analytics, a US consultancy. Consequently, the overwhelming proportion of the phones made by Siemens in China are being shipped out to other markets, including Europe, rather than meeting expanding local demand.
Siemens has its own phone designers working inside the Shanghai plant to try to ensure model changes are introduced smoothly.
Even so, says Ann Liang, an analyst at Gartner, the research company, Siemens is making phones that Chinese consumers have little interest in. “Siemens has done a lousy job [on design and marketing] in China,” she says.
The company is working to address the marketing issue. In recent months it has arranged a joint venture with Ningbo Bird, a rival Chinese handset manufacturer, to use its 30,000 stores to promote its products. “Anything that gets Siemens closer to its customers in China is a good thing,” says Peter Bernstein, presidentof Infonautics, a NewJersey-based consultancy.
This may help the company's position in China. But some observers think that Siemens should go further, bringing its telecoms operations closer to the customer by quitting the business of making mobile phones and focusing on the network parts of the cellular business. This would also be easier after the merger of the fixed-line and the mobile systems divisions.
Under this scenario Siemens could spin off its handset manufacturing operations to a joint venture. There are several potential partners: Sharp, Sanyo or Matsushita of Japan, or LG of Korea. In joining forces with Siemens, such companies could use their low-cost Asia-based production sites to reduce costs in the hugely competitive field. “Logically I see most of the western-based cellular companies reducing their exposure to the handset side of the business and getting out of manufacturing,” says Ken Landoline, director of telecoms at Robert Frances, a California-based IT advisory group.
Others urge caution, citing an important link between the technical characteristics of handsets and the design and operation of networks. According to this view, telecommunication equipment makers would be wise to keep a toehold in both fields.
Siemens on Monday appeared to be agreeing with this argument, denying that it was ready to change its mobile phone division radically, in spite of its larger than expected €88m loss in the last quarter.
Even so, as Mr Kleinfeld prepares for the top job, thoughts of jettisoning the manufacture of mobile phones are likely to edge upwards in his mind. And the Shanghai plant - for all the food for thought that it provides about Siemens' future direction - might end up being surplus to the German giant's requirements.
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