Large multinational companies reorganize themselves on a regular basis. A reorg (or its more severe cousin, the restructuring) works like a fitness program that gets a complex organization back into shape, or reshapes it to meet future challenges.
Siemens is no stranger to the reorg. The last one took place in 2014, a year into the tenure of CEO Joe Kaeser. Dubbed “Vision 2020” at the time, Kaeser claimed this week at the company’s Q3 analyst conference that the goals of that initiative largely have been achieved. Discussing the new reorg, dubbed “Vision 2020+”, the CEO views the changes as a course realignment necessary to adapt Siemens’ business to the new challenges of the Digital Age.
In a nutshell, the new Siemens will fold the eight current divisions into three operating companies, to be called Gas and Power, Smart Infrastructure and Digital Industries, plus "strategic companies” in which Siemens holds a majority stake (Siemens Healthineers, Siemens Gamesa and the planned Siemens Alstom). According to the company, the companies will operate with more entrepreneurial freedom, but will still be supported by a corporate framework that includes the company’s centralized research center.
The core of the new Digital Industries company remains automation, but it will now focus more sharply on advanced hardware and software that can benefit most from digitalization. Industrial control products and low voltage switch and control gear will now be combined with products for building control and the digital grid in the new Smart Infrastructure company.
Consolidation usually results in clear and immediate benefits that can cut costs, improve margins, and satisfy demands of the financial community. In this case, administration functions that were duplicated in eight divisions will now be reduced to three larger, but presumably more efficient companies.
Reorgs and Strategy
But what affect can such a reorg have on a company’s product strategy? To understand the answer, it’s interesting to take a look at the company’s automation divisions. At first glance, the remerging of Siemens’ factory and process automation divisions under Digital Industries looks like a hark back to the days of Siemens Automation & Drives and the Industry sector, when all automation products were developed, manufacturing and marketed under one administrative roof. In the late 1990s, when Siemens expanded into process automation, this made sense because the company’s process automation products grew out of the successful “S7” factory automation platform. Later, under Vision 2020, the process automation and instrumentation units were grouped together in the Process Automation and Drives (PD) division, which gave the process people the independence and autonomy they needed to support Siemens’ bold initiative to stake a claim the booming oil & gas business, a move that was underscored by the nearly $8 billion acquisition of Dresser-Rand, a maker of oil field equipment. But just as the company’s oil & gas drive was set to reap the benefits, the price of oil fell precipitously, resulting in deferments or cancelations of investments across the industry, a trend that continues today. The result was years of poor financial performance by Siemens PD, in stark contrast to the glittering numbers of its cousin, Siemens Digital Factory (DF).
By remerging factory and process automation, Siemens can realize the quick benefits of consolidation as a gesture to the demands of the financial community, while using the new operating company to shore up the ailing process automation sector by averaging out financial performance across all automation products. This answer may be enough to satisfy the financial analysts, who focus mostly on numbers and short-term gain. But they might be missing the bigger picture.
The Big Picture
The first part of the big picture is the digitalization “trend”. In fact, digitalization is not a trend any more, but rather a factor that will determine the fates of companies in the future as it picks the winners and losers of tomorrow. At the same time, current automation solutions are modernizing and consolidating. As open platforms and cloud-based solutions emerge, there may not be any automation hardware left to sell in the future. The industry already recognizes that the value of an automation solution lies in the combination of its software and its application know-how. But to get there, hardware has to get smarter and better connected. The consolidation of advanced hardware in the new Digital Industries company is a step in this direction.
The second part of the big picture is that this reorg is not fall back to old structures. Just as the company came out of the closet in 2007 by admitting to being a software company with the acquisition of UGS, Siemens is now taking the next step to becoming a digital company. On top of trimming its hardware, software and service offerings for the Digital Age, Siemens plans to hire 10,000 new employees in the next 8 years to offer strategy consulting services for digitalization. This bold new offering - a great leap beyond the company’s current offering of technology-driven “digital services” - will challenge the technology consulting establishment. The differentiator will be Siemens’ ability to augment these consulting services with its deep industry domain know-how.
Finally, the third part of the big picture is the chance for Siemens to sharpen its focus on the customer. With factory and process automation back together under one roof, the company can better address the hybrid industries that have elements of both process and discrete automation, especially food & beverage and pharmaceuticals.
Is Siemens Now a Holding Company?
An ironic twist to the Siemens announcement is the description in the press of the reorg turning the company into a holding. The financial press has always compared Siemens to its arch-rival General Electric, a company that truly is a holding with a strategy of mercilessly selling off underperforming divisions. Siemens, on the other hand, is viewed as the more humane company with a longer-term strategy and less focus on short-term performance, albeit chronically lower margins than GE. No part of the announcement suggests that Siemens will change this strategy and become a holding. The irony is that the reorg comes just as GE’s digital strategy is foundering and the company is putting its digital assets up for sale.
And the Reaction is…
So how is the financial community reacting to the Siemens reorg? Siemens stock fell the day of the announcement as financial analysts expressed disappointment that Vision 2020+ is simply a reorg, when they had hoped for a full restructuring of the company (read: layoffs). We will know in the short-term what cost savings result and what their effect is on the company’s margins. But the more interesting results will take longer to measure. Will the Vision 2020+ fitness program reshape Siemens to meet the challenges of the digital future? Will Siemens’ foray into digital strategy consulting with its domain know-how be successful? And finally, will the remerging of automation units sustain the lucrative hardware business in the transition to future architectures and new business models?
We’ll know the answers in a few years when Siemens makes its next course correction. Among its peers, Siemens has taken the biggest steps towards digitalization in terms of smart hardware, supporting software, and digital services. By reshuffling the cards, the company has just upped the ante for the industry.