Company Analysis Siemens Ag

Company Analysis: Siemens AG 1

Company Analysis: Siemens AG

India Kee

BUSA 4995: Strategic Management


Executive Summary

Siemens AG is a large and diverse company with a 160-year history. It competes mainly

in industrial products, energy production, and medical solutions. It has facilities in over 140

countries in 15 divisions, providing it with an impressive market presence and plenty of

resources to support its commitment to innovation – its main core competency. Despite this, its

financial position, as measured by common ratios, is only average. To improve its position, it

needs to focus on reducing costs and increasing net income.

Siemens also has some problems it needs to overcome in its corporate environment. One

change that needs to be made is in its attitude towards ethics. Several of its key executives are

being investigated in conjunction with a bribery scandal. The new CEO, Peter Löscher, has

made progress toward changing corporate attitudes in this regard. Another change that needs to

be made is in the composition of the pool of key executives. Currently, they are almost all white

German males. Perspectives from different cultures would greatly benefit Siemens in its quest to

help define the future of its industries. All things considered, Siemens is in a relatively good

place in the market, with few exceptions.


Contents

1.0 Company Description.............................................................................................................41.1 Company History..............................................................................................................41.2 Company Ownership........................................................................................................51.3 Key Executives.................................................................................................................51.4 In the News.......................................................................................................................5

2.0 Markets & Subsidiaries...........................................................................................................52.1 Geographical Segments....................................................................................................62.2 Business Segments............................................................................................................62.3 Strategic Equity Investments............................................................................................7

3.0 SWOT Analysis......................................................................................................................83.1 Strengths...........................................................................................................................83.2 Weaknesses.......................................................................................................................83.3 Opportunities.....................................................................................................................93.4 Threats...............................................................................................................................9

4.0 Financial Analysis.................................................................................................................104.1 Income Statement Analysis.............................................................................................104.2 Balance Sheet Analysis...................................................................................................114.3 Sector Financial Analysis...............................................................................................114.4 Financial Ratio Analysis.................................................................................................12

5.0 Conclusions...........................................................................................................................13References...................................................................................................................................14Appendix A: Siemens’ Locations Worldwide...........................................................................16

Figures & Tables

Figure 1. Siemens’ Stock Price from September 15-October 13, 2008.....................................10Figure A-1. Locations of Siemens Facilities..............................................................................16Table A-1. Siemens Locations by Continent.............................................................................17


Company Analysis: Siemens AG

1.0 Company Description

Siemens AG is a global enterprise that was founded in Germany in 1847. It is comprised

of 15 divisions, from production automation to real estate. Five are in the Industry Sector. Two

are in the Energy Sector. One is in the Healthcare Sector. There are also seven other divisions

and strategic equity investments, described more fully under section 3.2 (Business Segments).

1.1 Company History. Telegraphen-Bauanstalt von Siemens & Halske was founded in

1847 by scientist Werner von Siemens and mechanical engineer Johann Georg Halske to

manufacture a new pointer telegraph. Its first expansion outside of Germany came in

1853, when it began work on a telegraph network in Russia. This led to Siemens’ presence in St.

Petersburg, Russia, in 1855, under Carl von Siemens. Operations were also established in

Britain under Wilhelm von Siemens. By 1914, one quarter of Siemens & Halske’s total

workforce was located outside of Germany (Siemens AG, 2008).

Siemens’ expansion was halted and largely reversed as a result of World War II. During

the war, Siemens lost its foreign assets and saw many of its German facilities destroyed by

Allied air raids. In total, the damage resulted in a loss of four-fifths of its total assets. Siemens

did not fully recover until the 1950s, when it regained its foreign assets and began to rebuild its

international sales. In 1966, to help strengthen Siemens’ market position, the three companies

under its umbrella – Siemens & Halske AG, Siemens-Schuckertwerke AG, and Siemens-

Reiniger-Werke AG – merged to form Siemens AG. The seven business units that resulted were

in a centralized corporate structure with combined annual sales of DM 10 billion (Siemens AG,

2008), or approximately USD 2.5 billion (Marcuse, 2005). In 1990, Siemens decentralized its

operations into 15 largely autonomous units. The company maintains this structure today.


1.2 Company Ownership. Siemens is a publicly-held company with 876.9 million

shares outstanding (E*Trade, 2008). All shares are no par value common stock with a notional

value of €3.00, which was approximately $3.75 per share on October 28, 2008 (XE.com, 2008).

Of this, 79,133 shares were held by members of the Managing Board (Siemens, 2007, p. 97). No

figures were available for the number of shares held by members of the Supervisory Board.

1.3 Key Executives. The operations of Siemens are overseen by the Managing Board

and the Supervisory Board, in accordance with German corporate law. The Managing Board is

comprised of 11 members, while the Supervisory Board has 20 members. Shareholders elect

half of each Board. Peter Löscher, President and CEO of Siemens AG, chairs the Managing

Board, while Dr. Gerhard Cromme chairs the Supervisory Board. Each Sector has its own CEO.

Heinrich Hiesinger, Dr.-Ing., is the Industry CEO; Wolfgang Dehen, Dipl.-Kfm., is the Energy

CEO; and Jim Reid-Anderson is the Healthcare CEO (Siemens AG, 2008).

1.4 In the News. Siemens has been in the news frequently over the past year for ethical

issues: some of its key executives, including former CEO Dr. Klaus Kleinfeld, have been forced

to resign because they were involved in bribery schemes. However, its endeavors into organic

light-emitting diodes have also made the news; Siemens and two major competitors, Philips and

General Electric, have invested into this new light source (Svensson, 2008). Siemens is also

involved in repairing and restoring Iraq’s electricity grid (Associated Press, 2008).

2.0 Markets & Subsidiaries

Siemens has many divisions located throughout the globe. As mentioned earlier, it

competes in several different markets, which gives it flexibility in strategic planning and the

ability to spread its risk. This section gives a brief overview of Siemens’ worldwide operations.


2.1 Geographical Segments. Siemens has facilities in over 140 countries. They operate

in nearly all of Europe, all 50 states in the United States, and many countries in the Americas,

Africa, the Middle East, and the Asia-Pacific region. A map and a complete list of countries in

which Siemens operates is located in Appendix A. Different locations have different focuses:

for example, Siemens in Iraq is reconstructing the energy infrastructure there, while Siemens’

African operations focus on medical and communication technologies (Siemens AG, 2008).

2.2 Business Segments. Excluding strategic equity investments, Siemens has 12

business divisions. Eight of these divisions are categorized into the Industry, Energy, and

Healthcare Sectors. The remaining four are standalone units under the Siemens umbrella.

In the Industry Sector, there are five divisions. Automation and Drives offers “solutions

for the manufacturing and process industries, and electrical installation technology” (Siemens,

2007, p. 53). Industrial Solutions and Services uses other Siemens products to “operate and

maintain plants and facilities for customers” (ibid, p. 54). Transportation Systems provides

“comprehensive transportation solutions” (ibid, p. 55). Siemens Building Technologies “is a

service provider, systems integrator and product manufacturer” for automation and safety

products (ibid, p. 56). OSRAM “creates lighting solutions…[including] lamps and

optoelectronic semiconductor light sources” (ibid, p. 57). Together, these five divisions provide

five different focuses. It is likely that any adverse risk incurred in one division is offset by

positive returns in one or more of the other divisions. Also, since the Industry Sector provides

roughly 50% of Siemens’ total revenue and profit and the majority of new orders (ibid, p. 208-

209), it can absorb adverse effects from other Sectors, at least to some degree.

In the Energy Sector, there are two divisions. Power Generation “builds…power

plants…and control technologies for…air pollution control” (Siemens, 2007, p. 62). Power


Transmission and Distribution provides “innovative, efficient solutions for power transmission

and distribution” (ibid, p. 63). These two divisions provide over 25% of Siemens’ total revenue

and profit. Power Generation also had the highest number of new orders by division in fiscal

2007, meaning that it is growing in size and potential productivity gains (ibid, p. 208).

In the Healthcare Sector, there is only one division. Medical Solutions has “a broad and

innovative portfolio of diagnostic and therapeutic solutions, clinical IT and audiology

technologies” (Siemens, 2007, p. 69). It accounts for approximately 13% of Siemens’ total

revenues and profits and almost 12% of new orders (ibid, p. 208-209).

The other four divisions are not categorized. Siemens IT Solutions and Services offers

“consulting, systems integration and IT infrastructure management” (Siemens, 2007, p. 70).

Siemens Home and Office Communication Devices “develops and produces high-quality

products for home communications” (ibid, p. 71). Siemens Financial Services provides

“business-to-business financial solutions” (ibid, p. 72). Siemens Real Estate “plans, builds,

finances, develops and operates Siemens facilities” (ibid, p. 73). These divisions make up almost

11% of revenue, but less than 1% of profit (ibid, p. 208-209). The results from these divisions

are likely negligible within the scale of Siemens’ total financials, but the fact that Siemens still

invests in them illustrates that they have a large enough pool of resources to be able to sustain

operations with less than optimal profits.

2.3 Strategic Equity Investments. Siemens has entered into three joint ventures with

other companies. All of these joint ventures are classified as non-consolidated subsidiaries under

IAS 27, and as such are not included in Siemens’ financial statements. Bosch und Siemens

Hausgeräte GmbH (BSH) is a 50/50 joint venture with Bosch that is “the world’s third-largest

manufacturer of household appliances” (Siemens, 2007, p. 74). Fujitsu Siemens Computers is


“Europe’s leading IT manufacturer” (ibid, p. 75). Nokia Siemens Networks is “one of the top

three players in today’s telecommunications industry” (ibid, p. 76).

3.0 SWOT Analysis

Siemens is a very large and complex company; therefore, a comprehensive SWOT

analysis is beyond the scope of this report. A brief snapshot of the company’s strategic position

is presented in this section.

3.1 Strengths. Siemens is a large company with a formidable market presence. It has

operations in 147 different countries throughout Europe, Asia, Africa, Oceania, North America,

Central America, and South America (Siemens AG, 2008). This extensive worldwide presence,

coupled with its three separate Sectors, ensures that it has many diverse markets throughout

which to spread its risks. Additionally, one of its core competencies is innovation. Creating new

products requires a large amount of resources, including capital, human workers, facilities, and

managerial willingness to take on risk. Because of Siemens’ size, both physically and

financially, it can commit the time and resources necessary to provide new products to the

market and ensure future growth. To illustrate this point, during fiscal year 2007, Siemens spent

€3,399 million on research and development – its largest expense after selling, general, and

administrative expenses, and 21.5% of total expenses before income tax (Siemens, 2007, p. 201).

3.2 Weaknesses. The most obvious weakness that Siemens has to overcome is a

corporate environment that does not discourage bribery. As of July 31, 2008, “prosecutors are

investigating almost 300 former and current Siemens executives” connected with alleged corrupt

practices (Schafer & Williamson, 2008, p. 17). Among those targeted are former CEOs Dr.

Klaus Kleinfeld, who served from early 2005 until his resignation on June 30, 2007, and his

immediate predecessor, Dr. Heinrich von Pierer, who served from 1992 until 2005 (Siemens AG,


2008). Siemens is taking steps to remedy its ethical problems, including increasing its

transparency and prosecuting the managers involved, so within a relatively short period of time,

this should no longer be an issue. Another weakness of Siemens, however, is lack of diversity in

management. After Peter Löscher took over from Dr. Kleinfeld, he stated in an interview that

“the management board are all white males. Our top 600 managers are predominantly white

German males. We are too one-dimensional” (Milne, 2008, p. 18). To remedy this, Löscher has

instituted a mentor program, allowing young minority managers the opportunity to be mentored

by senior managers in an effort to increase diversity (ibid).

3.3 Opportunities. Thanks to its commitment to innovation, Siemens is in an excellent

position to compete in its chosen fields as technology evolves. Its OSRAM division, for

example, has recently developed “extremely efficient, long-life light emitting diodes,” for which

it won the German Future Prize (Siemens, 2008). As Siemens continues to create innovative

new products, it will enter into new markets that have not even been thought of today, providing

growth opportunities for the company. Siemens has many goals that it believes it can achieve

during the next decade. For example, by 2020, Siemens hopes to provide electricity to the

world’s current emerging markets, such as China, and is committed to reducing CO2 emissions to

the lowest level possible. It also strives to produce complex, yet individualized, products for

clients while minimizing costs (ibid).

3.4 Threats. Because Siemens is mostly in high-tech industries, it is somewhat more

susceptible to adverse economic conditions than a company that provides products that are

considered more necessary to customers. Its Medical Solutions division is especially vulnerable,

and company CEO Peter Löscher has “predicted market conditions will continue to be ‘difficult’

for the next six to 12 months” (Esterl, 2008, p. B.2). The recent economic crisis has also had a


negative effect on Siemens’ stock price

over the past month, as shown in Figure

1. Siemens stock dropped to a low

point of $59.35 on October 10. This

was about 63% lower than its 52-week

high of $160.37 on December 28, 2007

(NYSE, 2008).

Though Siemens’ large size is an advantage in many ways, it is also a potential liability.

It is not economically feasible for it to be completely focused in one or more particular areas.

Therefore, that opens the door for a competitor with a focused strategy to come into the market

in a specific area and undercut Siemens’ market share, either by charging a lower price or by

offering a differentiated product. To mitigate this threat, Siemens must constantly monitor the

activities of its competitors and maintain its core competency of innovation.

4.0 Financial Analysis

Much information can be gleaned from looking at Siemens’ financial statements. For the

sake of comparability, this discussion will rely on statements that have been common-sized per

the procedures outlined by Stice, Stice, and Skousen (2007, p. 1272-1274).

4.1 Income Statement Analysis. Horizontal analysis of the comparative income

statement for fiscal years 2007 and 2006 shows first and foremost that net income increased from

5.0% of revenue to 5.6%. This resulted from a decrease in cost of goods sold (from 73.9% in

2006 to 71.2% in 2007) along with selling and general administrative expenses (from 17.9% in

2006 to 16.7% in 2007). Research and development expenses, the cornerstone of Siemens’ main

core competency, stayed constant at 4.6% of revenue (Siemens, 2007, p. 200).

Figure 1. Siemens’ Stock Price from September 15-October 13, 2008

(NYSE, 2008).


At this point, it is instructive to draw comparisons with General Electric (GE), one of

Siemens’ top competitors. While GE has a gross profit margin of 57.7%, Siemens’ margin is

only 28.8%. GE also has a higher percentage of net income, at 12.9% of revenues for fiscal 2007

(GE, 2007, p. 64); Siemens’ net income is only 5.6% of revenues. While this is not a completely

fair comparison, it shows that Siemens might consider implementing cost-cutting measures to

decrease its expenses and therefore increase its net income.

4.2 Balance Sheet Analysis. Siemens’ consolidated balance sheets for fiscal years 2007

and 2006 show first a drastic decrease in cash, from 15.4% of revenue to just 5.5%, meaning that

Siemens reduced its excess cash reserves. Trade receivables decreased slightly as well, from

22.8% to 20.2%, indicating that customers are paying more quickly this year. Inventories also

decreased from 19.2% to 17.8%, which would also reduce inventory carrying costs. Property,

plant, and equipment (PPE) decreased from 18.2% to 14.6%, meaning that it took only 14.6 cents

of PPE to generate one dollar of sales this year. Total assets were 126.4% of sales, meaning that

each dollar of sales requires about $1.26 in assets (Siemens, 2007, p. 202).

Again drawing comparisons to GE, one can see that Siemens holds less cash than GE,

which has cash of 9.1% of revenue. GE holds less in inventory at 7.5%, which indicates that it

spends less on carrying costs. GE uses PPE at 45.1 cents per dollar of sales. Most striking,

though, is GE’s total assets, expressed as a percentage of revenue. GE requires $4.60 to generate

$1.00 in sales (GE, 2007, p. 66). Siemens is using its assets much more efficiently.

4.3 Sector Financial Analysis. Siemens competes in multiple markets and industries.

This analysis will consider only the three core industries: Industry, Energy, and Healthcare.

The main Industry products are customized motors, Sinteso fire safety systems,

wastewater treatment products, and high-speed trains (Siemens AG, 2008). Total Industry


revenues amounted to €38,487 million – 50.3% of total revenue (Siemens, 2007, p. 208). Total

Industry profits amounted to €3,542 million – 54% of total profit (ibid, p. 209).

The main Energy products are industrial gas turbines, wind turbines, HVDC long-

distance transmission systems, and power measurement devices (Siemens AG, 2008). Total

Energy revenues amounted to €19,883 million – 26% of total revenue (Siemens, 2007, p. 208).

Total Energy profits amounted to €1,797 million – 27.4% of total profit (ibid, p. 209).

The main Healthcare products are single-source CT scanners, laboratory automation

products, syngo workflow optimization suite, and hearing aids (Siemens AG, 2008). Total

Healthcare revenues amounted to €9,851 million – 12.9% of total revenues (Siemens, 2007, p.

208). Total Healthcare profits amounted to €1,323 million – 20.2% of total profit (ibid, p. 209).

4.4 Financial Ratio Analysis. Analyzing a firm’s financial ratios help “identify

deficiencies and…evaluate [its] financial position” (Brigham & Houston, 2007, p. 102).

Accordingly, this section will show analyses of four of the most common financial ratios. All

ratios come from E*Trade’s analysis (2008).

The most important ratio is return on equity (ROE), which is net income divided by

common equity. This tells stockholders “the rate they are earning” on their invested capital

(Brigham & Houston, 2007, p. 102). Siemens’ ROE is 13.06%. This is average for its industry

and below competitor GE’s ROE of 18.69%. This reinforces the point in section 4.1 that

Siemens should attempt to increase its net income.

The current ratio shows the ability of a company to cover its current liabilities (CL) with

current assets (CA). Siemens could pay its current liabilities 1.17 times, which is significantly

below average. If Siemens were forced to pay all of its CL, it could do so, but it would have to

liquidate CA at close to their book value. A similar measure is the quick ratio, which shows the


ability to pay CL with CA less inventories (the least liquid of CA). Siemens’ quick ratio is

0.78x, which means it could not pay its CL without liquidating part of its inventory.

The price/earnings (P/E) ratio “shows how much investors are willing to pay per dollar of

reported profits” (Brigham & Houston, 2007, p. 102). Siemens’ P/E ratio is 11.91x, average for

its industry. That means that investors view Siemens as no riskier than its competitors, with

average growth prospects.

5.0 Conclusions

Siemens is a strong competitor with a large market presence in Industry, Energy, and

Healthcare. Its earnings are solid and it is managing its risk well. Its main financial issue is

controlling costs and increasing net income. In its business planning, it needs to maintain a focus

on research and development to maintain competitiveness. Its personnel in top management

would benefit from increased diversity and points of view from natives of countries besides

Germany, along with a corporate culture that emphasizes ethical behavior. Siemens is on the

path to continued success, and if it persists in this direction, it will remain an excellent company

and a good investment for shareholders.


References

Associated Press (2008, September 28). Iraqi Christians protest new election law. Retrieved on

October 14, 2008, from http://www.msnbc.msn.com/id/26929108/.

Brigham, E. F., & Houston, J. F. (2007). Fundamentals of Financial Management. Mason, OH:

Thomson Higher Education.

E*Trade (2008). Siemens AG Sponsored ADR. Retrieved on October 12, 2008, from

https://www.etrade.wallst.com/v1/stocks/snapshot/snapshot.asp.

Esterl, M. (2008, July 31). International Business: Siemens Posts Sharp Drop in Net; Orders

Increase, But CEO Projects ‘Flattening Growth’ [Electronic version]. Retrieved on

October 5, 2008, from ProQuest.

GE (2007). GE Annual Report 2007. Menlo Park, NY: GE.

Marcuse, H. (2005). Historical Dollar-to-Marks Currency Conversion Page. Retrieved on

October 12, 2008, from http://www.history.ucsb.edu/faculty/marcuse/projects/

currency.htm.

Milne, R. (2008, June 25). Siemens too white, German and male, says chief [Electronic version].

Retrieved on October 5, 2008, from ProQuest.

NYSE (2008). Siemens AG. Retrieved on October 14, 2008, from http://www.nyse.com/about/

listed/lcddata.html?ticker=SI&fq=D&ezd=1M&index=3.

Schafer, D., & Williamson, H. Executives feel fallout from Siemens bribery case [Electronic

version]. Retrieved on October 5, 2008, from ProQuest.

Siemens (2007). Annual Report 2007. Berlin, Germany: Siemens AG.

Siemens (2008). Pictures of the Future: Spring 2008. Berlin, Germany: Siemens AG.


Siemens AG (2008). Siemens AG – Global Web Site. Retrieved on October 12, 2008, from

http://www.siemens.com.

Stice, J. D., Stice, E. K., & Skousen, K. F. (2007). Intermediate Accounting. Mason, OH:

Thomson Higher Education.

Svensson, P. (2008, October 10). Plastic film could make house lights obsolete. Retrieved on

October 14, 2008, from http://www.msnbc.msn.com/id/27116343/.

XE.com (2008). Universal Currency Converter. Retrieved on October 28, 2008, from

http://www.xe.com/ucc/.


Appendix A: Siemens Locations Worldwide

Figure A-1. Locations of Siemens Facilities.


Table A-1. Siemens Locations by Continent.Europe:AlbaniaAustriaBelarusBelgiumBosnia/HerzegovinaBulgariaCroatiaCzech RepublicDenmarkEstoniaFinlandFranceGermanyGreeceHungaryIcelandIrelandItalyLatviaLithuaniaLuxembourgMacedoniaMoldovaNetherlandsNorwayPolandPortugalRomaniaRussiaSerbia & MontenegroSlovakiaSloveniaSpainSwedenSwitzerlandUkraineUnited Kingdom

Asia:AfghanistanArmeniaAzerbaijanBahrainBangladeshBruneiCambodiaChinaCyprusGeorgiaHong KongIndiaIndonesiaIsraelJapanJordanKazakhstanKoreaKuwaitKyrgyzstanLebanonMacaoMalaysiaMyanmarNepalOmanPakistanPhilippinesQatarRussiaSaudi ArabiaSingaporeSri LankaSyriaTaiwanThailandTurkeyTurkmenistanUnited Arab EmiratesUzbekistanVietnamYemen

North America:CanadaMexicoUnited States

Central America:Costa RicaEl SalvadorGuatemalaHondurasNicaraguaPanama

Caribbean:CuraçaoDominican RepublicJamaicaMartiniqueMauritiusTrinidad and Tobago

South America:ArgentinaBoliviaBrazilChileColombiaEcuadorParaguayPeruUruguayVenezuela

Oceania:AustraliaNew Zealand

Africa:AlgeriaAngolaBeninBotswanaBurkina FasoCameroonCentral African RepublicChadDR of the CongoEgyptEquatorial GuineaEthiopiaGabonGambiaGhanaGuineaGuinea-BissauIvory CoastKenyaLesothoLiberiaLibyaMalawiMaliMoroccoMozambiqueNamibiaNigerNigeriaRwandaSenegalSierra LeoneSouth AfricaSwazilandTanzaniaTogoTunisiaUgandaZambiaZimbabwe

Company Analysis Siemens Ag

Documents

Transcript of Company Analysis Siemens Ag