Business Irish

Monday 19 March 2018

Dr John Lynch: German engineering giant always bounces back

A friend told me that his daughter once got a student summer job in Germany working in one of the factories of the mighty Siemens engineering giant. When she returned home, he asked her if she had learned much German. The daughter ruefully explained that the word she heard most during her Munich sojourn was 'schnell', meaning fast. It appears she wasn't moving anything like as fast as her German employer thought she should.

That little story could be something of a parable of Siemens – whatever it wants, it wants it fast. Right now, Siemens may be moving fast in the direction of a market re-rating if its present cost curtailment and asset-disposal programme goes to plan.

Siemens is well-known in Ireland because it built the Ardnacrusha power station on the Shannon in the 1920s, a project that cost £5.2m (€6m) plus an extra £600,000 to compensate landowners.

That expenditure was a full 20pc of the then government's revenue budget in 1925. (Imagine spending a fifth of total revenues on a single project? Hold on – did we not spend more than that on bailing out a handful of dodgy banks?)

Siemens also put up the overhead lines for the DART, installed the baggage system in Terminal 2 at Dublin Airport, and its fingerprints are all over the current rash of windfarm technologies. It is a €78bn company, the largest engineering outfit in Europe, operating in almost every country (190) in the world and has 400,000 employees. Today, Siemens is one of the powerhouses of German business together with VW, BASF, BMW and many more.

Since its formation, Siemens has been on the defeated side in two world wars. When not recovering from events like that it was paying fines of €396m by the EU for price fixing (with 11 other companies); it was also fined €1.38bn (a record) for 'questionable payments' and it faced questioning in Greece for alleged payments to the main Greek political parties. In spite of all this the company seems to leap back, a credit to German tenacity.

Up to World War One, Siemens developed an expertise in trains and communications but when the war was over it lost 40pc of its capital, most of its foreign assets, and patents. As with most German firms, Siemens reorganised itself, setting up OSRAM a light-bulb manufacturer, household appliance firms (Siemens, Bosch and Neff), electric heater companies and medical engineering offshoots.

Broken and beaten after the war, Siemens turned out to be a beneficiary of the Marshall Plan due to its expertise in railways, postal services and power generation. By the 1960s, it had regained its standing in the world markets. The collapse of communism in the 1990s was a further boost and Siemens went on to recognise the importance of the Asia Pacific region, before the present emphasis on emerging markets.

The company is massive in scale, in the number of businesses it runs, the number of employees, its research and development, and its world spread. It has four main divisions: energy, industry, healthcare and infrastructure/cities, plus Siemens Financial Services.

Within these divisions are significant business units that are major companies in their own right. An example is the rail business unit, the world's top three suppliers of trains with sales of €6bn; yet one of only 20 business units. The company's global presence is impressive. The Americas have revenues of €23bn, Asia/Australia €15bn, and Europe, Middle East and Africa €40bn.

Siemens is one of the few world-class companies to have developed a formidable research capacity, with 30,000 employees spending €4bn per annum (5pc of total revenue) and having 56,000 patents and 170 R&D facilities worldwide.

Recent announcements from Munich have been a bit downbeat. The CEO admitted that Siemens has 'challenges' relating to revenues and profits except the healthcare division. He stated that the Chinese market was not giving the company "momentum".

But there is a view that the market is underestimating the potential of improved returns with proposed disposals and the 'Siemens 1' strategic plan relating to cost savings. Lighting company OSRAM is due for floatation in July, the solar power division is on its way and the mobile equipment supplier NSN is proposed.

The potential earnings from disposals are estimated at €8bn and cost savings at €6bn. If this is achieved it could be a catalyst for a re-rating of the shares. Maybe the shares will finally break the €100 barrier.

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned.

Irish Independent

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