A Case Of Too Little, Too Late?

It was a long-awaited move. In an emergency press conference in Munich on November 4, Heinrich Von Pierer, CEO of Germany’s Siemens, unveiled a sweeping shakeup of his $71 billion conglomerate. After years of taking a gradual approach to improving the behemoth’s competitiveness in high tech, Von Pierer announced that he would apply radical surgery to Siemens, divesting units with sales totaling $10.2 billion and employing 60,000 people. The company plans to unload its components business and spin off its semiconductor unit. Siemens’ stock soared 12% as investors absorbed the news. “We’re taking shareholder value more seriously than they had thought,” says von Pierer.

Siemens is not alone. Europe’s lagging technology titans are finally responding to their impatient shareholders. They are taking action now because they fear that Europe’s leftist governments will impose tougher regulations and new restrictions on layoffs. In the past several months, shares of France’s Alcatel and Holland’s Royal Philips, as well as Siemens, have taken a beating as investors have worried about their ability to keep up with the speed of innovation, particularly in the hot area of wireless communications. In response, Philips has decided to close a third of its factories worldwide. And France’s Alcatel, after closing 60 plants and spinning off its transport and engineering unit, announced on November 4 that it would undertake a top-to-bottom revamping of its telecom business. Its stock shot up 5%.

Even so, technology watchers worry that Siemens and other European tech conglomerates are changing too little, too late. They are still steeped in a mentality that favors engineering over innovation and marketing, analysts point out. And although their technology is first-rate, they lack the entrepreneurial spark needed to satisfy investors and win in the global information economy. “These companies are dinosaurs in a world now populated by fast-moving mammals,” says Kenn D Walters, Managing Director of the Munich consultancy Globus. “Now they have to change their very nature.”

The European companies are out to defy their critics by plunging aggressively into growth markets even as they cut existing unproductive operations. Siemens, Philips and Alcatel are devising machinery for the internet. They’re plowing investments into explosive phone markets and trawling Silicon Valley for acquisitions. And the European CEOs are turning to a new generation of European managers to help run the shakeup. Many have been educated in the US or have worked in American banks or consulting companies. It will be up to them to build an entrepreneurial fire among their ranks.

Chip shot

One key young manager inside Siemens, for example, is 40-year-old Ulrich Schumacher, the youngest board member in Siemens’ long history. He will be in charge of taking the company’s semiconductor division public. The division lost a stunning $722 million in the fiscal year ended September 30, amid a global slump in semiconductors. But things are looking up. The market is improving, and analysts say Schumacher may be able to refocus the chip unit. “This is potential for a large step forward.” says David Richardson, Texas instruments Inc’s Europe President. “This industry requires autonomy and extremely fast decision-making-which is hard when you’re part of an industrial congloerate.” Success by Schumacher could serve as an example for further spin-offs at Siemens and at other high-tech conglomerates.

In addition to unloading its chips and components business, Siemens plans other deep cuts. It will sell its telecomcable business and a small train locomotive unit. And it will spin off or try again to find a partner to take on its PC manufacturing unit after a deal
with Taiwan’s Acer Inc failed earlier
this year.

Even so, analysts are already calling for more. “The direction is right. But they have to keep on. This cannot be all,” says Frank Rothauge of Sal Openheim in Frankfurt. Siemens limped in with earnings of just $552 million in its latest fiscal year. Von Pierer is hoping to boost margins by expanding Siemens’ efforts in wireless telephony and the internet.

But Europe’s tech giants have languished in this area so far. Philips is a prime example. Only last year, it signed a $.25 billion joint venture with Lucent Technologies and barged into the redhot market for cellular handsets. CEO Cor Boonstra vowed to become a major player in the industry, rivaling Nokia, Ericsson and Motorola. But while Lucent and Philips boasted stellar technology, their team couldn’t ramp up speed for a market that demands new features every several months. In October, Boonstra pulled the plug-at a cost of $540 million.

Surf city
Following a now-familiar script, Boonstra announced new plant closings. From 269 plants worldwide at the beginning of this year, he hopes to be down to 226 by yearend, with an additional 60 to be shuttered over the next four years. At the same time, Boonstra is looking for ways to spend the $6 billion he’s earning from the sale of PolyGram Records Inc. Philips executives say he’s eyeing acquisitions in Silicon Valley.

Boonstra’s goal, much like Alcatel’s, is to build new machines that can link the entire planet to the Web. While Alcatel’s devices would be phones with screens, Philips wants to introduce TVS capable of surfing the web. From a technology point of view, both companies appear well-positioned to build web-surfing tools. The plan is to supplement their European technology arsenal with a handful of Silicon Valley acquisitions.

Pressured by investors, Europe’s tech titans have a newfound willingness to make drastic changes. They’ve overcome political obstacles to slash away marginal units and cut thousands of workers. Now, all they have to do-no small chore-is to take some chances and learn how to innovate on the run. As their friends in Silicon Valley can attest, those are the true secrets to shareholder return.

STEPHEN BAKER

in London, with THANE PETERSON
in Munich
and
KAREN LOWRY MILLER
in Frankfurt.

Copyrighted
BusinessWeekNovember 16, 1998.


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