WSJ summary of Siemens' AGM:
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February 18, 1999
Business and Finance - Europe
Siemens CEO Von Pierer Continues Fight
To Recharge Company and Keep His Job
By WILLIAM BOSTON
Staff Reporter of THE WALL STREET JOURNAL
MUNICH, Germany -- As snow falls on the tarmac at the Franz Josef Strauss International Airport in Munich, investors are shuffling in for the annual shareholders meeting of Siemens AG, and Chief Executive Heinrich von Pierer is once again promising that spring is just around the corner.
This time he had better be right, because a new guard of investors is tired of unfulfilled promises of a turnaround. If Mr. von Pierer's latest 10-point plan to revamp the sprawling electronics giant doesn't produce results soon, he might not be around at next year's gathering.
Heinz Hawreliuk, the IG Metall union representative to the Siemens supervisory board, says no discussion has started yet about removing Mr. von Pierer and that the board still has some time to carry out its plans.
"But von Pierer and the others know exactly that if they don't follow their announcements with deeds then a debate about personnel will begin," Mr. Hawreliuk says.
Feeling the Heat
How much longer does Mr. von Pierer have to get the recovery formula right? Speculation has appeared in the German media and been bandied about among analysts that time is running out for the 58-year-old lawyer, who has run Siemens since 1992. The company's results were hammered last year by the Asian crisis. Signs of mismanagement at some divisions caused heads to roll, in a rare shake-up.
"Presumably, months ago the controllers gave the Siemens chief a period of probation during which he must show that his 10-point program, which went over well in the media, also bears the promised fruits," writes German investment newsletter Platow Brief. "Some observers even believe that this year's annual shareholders meeting could be the last which von Pierer experiences as Siemens captain."
In an interview at Siemens's baroque headquarters in Munich, Mr. von Pierer acknowledges that he is under increasing pressure to produce results, but he dismisses the notion that he has lost the confidence of the supervisory board and the company's investors.
"We have achieved some success," he says. "The fact is that among management there isn't the trace of disagreement."
Mr. von Pierer speaks of the "other Siemens," a faster-to-market, more-profitable company that is driving innovation in key areas. "We want to be either No. 1 or No. 2 in 80% of the businesses we're involved in as compared to 60% today," he says, adding that the company now registers more than 6,000 inventions a year, twice as many as it did in the early 1990s.
Changing Attitudes
When he addresses shareholders Thursday, Mr. von Pierer will go on the offensive, pointing to a 12% rise in net income for the fiscal first quarter ended Dec. 31 and the fact that investors have shown their approval, as evidenced by Siemens's shares. They have outperformed the DAX index of 30 blue chips since July, when he announced that he would present a plan to boost earnings. Siemens shares slipped Wednesday to 59.20 marks ($33.91) from 60.45 marks.
But the winds of change are blowing in Germany. The supervisory board of Bayerische Motoren Werke AG shook up Germany's cozy boardroom culture two weeks ago when it ousted CEO Bernd Pichetsrieder, who was blamed for not taking action to stem losses at the car maker's Rover operations in the U.K. Management watchers predict upheaval in other boardrooms around Germany.
"There is a clear trend in Germany that supervisory board members, perhaps becoming more like the Anglo-Saxon non-executive, are becoming more alert and therefore more decisive," says Wilhelm Friedrich Boyens, director of the German unit of executive recruiting group Egon Zehnder International.
Mr. von Pierer, too, sees a new attitude in Germany. "The pressure is generally greater in Germany than it was in the past," he says. "The focus on profits is greater today than it was for my predecessor. But the goals of these ladies and gentlemen and my own are largely the same. I, too, want to improve the profitability of the company."
In Germany's two-board system, the supervisory board is appointed by shareholders. It, in turn, appoints the members of the management board, which runs the company's day-to-day business. Like a board of directors in the U.S., it supervises the management board.
Labor representatives on the supervisory board wield enormous power under Germany's corporate system. And the biggest thing Mr. von Pierer has going for him is that he is well-liked by the work force. Mr. von Pierer is quick with a warm smile and often takes lunch in the employee cafeteria. "He likes to sit with someone he's never met before. Then he introduces himself as the CEO and asks what should be done to improve the company," says a Siemens employee.
Despite their veiled warning to Mr. von Pierer about producing results, labor representatives fear that a radical reformer like Jack Welch of General Electric Co. in the U.S. -- which competes against Siemens in about 40% of its businesses -- could follow Mr. von Pierer if he is ousted.
"I wouldn't get very far with a nickname like 'Neutron Jack,' " jokes Mr. von Pierer. "We have persuaded our employees to back our initiatives. What counts now is speed. This is a process of transformation that has to be supported by the entire team."
When Mr. von Pierer took the helm at Siemens in 1992, the company was generating global sales of 78.5 billion marks ($44.96 billion) and had net income for fiscal 1992 of 1.96 billion marks. It paid an unchanged dividend of 13 marks. Germany was entering its worst recession since the end of World War II and Siemens, already beginning to feel the raw winds of globalization, was trying to turn around its computer division, Siemens Nixdorf, and the semiconductor group, which had combined losses of over one billion marks.
Mixed Results
Facing falling profits the following year, Mr. von Pierer unveiled his "TOP" program -- which stood for time optimized processes -- that aimed to boost productivity by 30% over the next three years. A year later, he told shareholders that fiscal 1994 "wasn't a good year." However, he noted that the semiconductors group had gotten back in the black and SNI was on track. The dividend remained at 13 marks.
By 1996, the TOP program had boosted productivity 25%, cutting 20 billion marks of costs since the program was introduced, but Siemens's return on equity, at 10.5%, fell short of the company's 15% target. That November, Siemens issued a profit warning and its shares sank.
Mr. von Pierer says that because of his policy of internal restructuring and international expansion, particularly focused on Asia, productivity has improved by nearly 40% to the end of fiscal 1998. Orders have tripled to 120 billion marks over the past five years. Sales in fiscal 1998 totaled 118 billion marks and net income before extraordinary items was 2.7 billion marks.
He acknowledges, however, that the huge savings achieved during the past five years was rarely passed on to investors, who have waited in vain for strong returns. Fierce competition has forced the company to pass on most of the savings to customers by cutting prices.
With the Asian financial crisis spreading to Russia and then to Latin America, by last July Siemens's earnings were again getting hit by losses from its semiconductor business and transport division. Problems bringing new turbines to market hit the energy group, and "incorrect estimates" of market developments sent the mobile-phone businesses into the red.
Chips Are Down
All told, Siemens was forced to take a charge of around four billion marks in fiscal 1998. Mr. von Pierer pledged another program. In November, he unveiled the details of a 10-point plan that envisaged broad restructuring, including a controversial decision to shut down a semiconductor plant in the U.K. that had started operating just 14 months before.
Tired of the huge cyclical losses in the chip business, Siemens announced in November it planned to spin off the division. Along with the sale of other divisions, Siemens shed businesses with sales of 17 billion marks and 60,000 employees. The company plans to put nearly half of executive salaries in the form of bonuses linked directly to share performance. It also upgraded its TOP program.
Recounting the market reaction to the news, Mr. von Pierer cracks a smile and pulls out a chart showing the Siemens shares surging and outperforming the DAX index. "Our course was honored by the capital markets," he says.
Some investors wonder whether they will see real gains from the new program anytime soon.
"We've had enough programs, now we want to see effective success," said Dieter Kaufmann, head of the SdK lobby group for private shareholders.
In addition to constant restructuring at the company, which makes everything from light bulbs to nuclear-power plants, Siemens has faced enormous changes in its markets. Once it supplied all electronics and switching equipment to Deutsche Bundespost, which became Deutsche Telekom in 1995.
"Our public networks division used to do 80% of its business with Deutsche Bundespost," says Mr. von Pierer. "Now Deutsche Telekom accounts for just 4%. That's a big change."
The changes also took Siemens out of Germany. Mr. von Pierer predicts that sales will rise to 133 billion marks in the 1999 fiscal year. Of that, 94.5 billion marks will be generated outside Germany. The company will have around one-third more employees abroad than in Germany.
"In the future, expansion will be in Asia and the United States at the expense of Germany," he says.
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