Energy & Resources

Prussian blues

Why Siemens could face a fall in its China revenues this year

Kaeser speaks during the IHS CERAWeek 2015 energy conference in Houston, Texas

Kaeser: no growth globally for two years already

During the Nanjing Massacre in December 1937, a German businessman by the name of John Rabe became head of a safety zone that ended up sheltering about 250,000 Chinese citizens from marauding Japanese troops. Rabe became known as the Oskar Schindler of China for his bravery in trying to protect Chinese, among whom were the local staff of his employer Siemens.

Europe’s largest engineering group has a long history in China dating back to 1872. But in recent years it has been on the receiving end of plenty of negative headlines in the country, particularly following a series of articles examining difficulties at its medical devices and gas turbine businesses.

In many ways these problems are an extension of a global struggle Siemens is facing. Since he took over in a boardroom coup in the summer of 2013 CEO Joe Kaeser has been trying to turn the giant turbines-to-trains conglomerate around in what has been dubbed as Siemens’ biggest structural overhaul in 25 years.

But it has proved slow going. Kaeser wants to cut costs by €1 billion ($1.14 billion) by 2016 and hive off underperforming assets, which account for about one fifth of the entire business. He has also announced plans to shed a further 4,500 jobs, prompting protests last month in Germany – where the axe will predominantly fall.

As Deutsche Welle (DW) puts it: “It’s been pretty much downhill for Europe’s largest engineering group. Revenue has all but flat-lined while return on sales, one of the key indicators of a company’s health, appears to have gone into freefall. For every €100 sold, Siemens keeps only nine.”

China is an important part of the equation for Siemens, accounting for 8% of global sales in 2014, at €6.44 billion. However, as we reported in WiC281, the company has been hit by allegations over the relationship between Chinese hospitals and its medical services business. This is not the first time Siemens has been accused of making illegal payments in China. Back in 2007, DW suggested that up to 50% of the company’s business there was generated by bribes. And once again, this was part of a wider problem, described by the newspaper as “the biggest bribery scandal in German history”. Two years after the problem surfaced in 2006, the company ended up sacrificing most of its management board and paying a record $800 million fine to the US authorities, while €395 million was paid in penalties in Germany.

In 2011, Siemens was back in the dock when a former China Mobile executive was sentenced to death with a two-year reprieve for accepting bribes from the company.

This time round Reuters reported that the State Administration for Industry and Commerce (SAIC) has been investigating Siemens for breaches of the country’s competition law. It alleged that Siemens had been offering free medical devices to up to 1,000 hospitals in return for exclusivity agreements over the use of the chemical re-agents needed to operate them.

However, nothing came of this dramatic revelation. Reuters subsequently reported that both SAIC and Siemens had denied that the firm’s healthcare unit and its dealers were being investigated for “commercial bribery”. Siemens stated an SAIC probe into its Shanghai operation was “neither corruption-related nor related to any personal benefits for individuals”, but merely routine and “common worldwide in the industry”.

But local analysts believe the widely publicised episode was not without a point. The Chinese authorities have made plain their determination to raise the sales of local manufacturers in the medical devices sector. Currently, they have a tiny market share. China Business Journal quotes a Forward Industries Institute report that says that foreign companies (mainly GE, Siemens and Philips) dominate sales in China of high-end equipment such as CT scanners (80%), ultrasonic instruments (90%) and ECG machines (also 90%).

Then again, news of a probe isn’t the only difficulty Siemens’ healthcare unit has had. As we also earlier reported disgruntled distributors of Siemens products further accused the giant of various “hidden” practices in an open letter to the media in January. These accusations – which included the alleged forging of sales contracts – were later reprinted by prominent newspapers such as 21CN Business Herald and CBN.

Siemens’ negative PR, however, began late last year when Southern Weekend quoted the former vice minister of health, Wang Qiang, who criticised Siemens for focusing only on selling its products and not on training. This meant, he said, that a lot of hospitals in China had bought Siemens products but couldn’t use them properly.

These criticisms have taken their toll. According to the Economic Observer, Siemens saw a 50% drop in healthcare sales in China during the first quarter. 21CN forecasts sales in this key sector will continue to slump in the second and third quarters – hardly good news for Kaeser or his efforts to turn the group around.

And as Chinese trade magazine Energy reports, Siemens is also experiencing difficulties with its gas turbine business. While Siemens products score highly on reliability, they are expensive and the company is failing to close the pricing gap with GE and Mitsubishi, the magazine says.

Further, Siemens’ difficulties have been compounded by the termination of its cooperation agreement to sell gas turbines via Shanghai Electric, which went its own way after paying €400 million for a 40% stake in Italian company Ansaldo Energia in mid-2014. That deal gives the Chinese firm access to gas turbine technology it previously did not have, posing a possible threat to US and German groups that dominate that business in China, industry sources told Reuters.

Shanghai Electric is one of China’s most powerful energy companies. The fact that Siemens can no longer tender through its network for gas turbine projects, and instead must bid for Chinese government contracts on its own inevitably puts it in a less favourable position. Energy magazine claims that Siemens has failed to sell a single heavy gas turbine in the country since the Ansaldo deal was agreed last year.

The power generation business is one of Siemen’s most significant revenue drivers, but it has been hit by changing trends. In a recent article the Financial Times said that Siemens has been slow to respond to the trend for more decentralised power generation. This requires, for example, smaller turbines that can serve as back-up for renewable power sources.

In 2014, Siemens moved to address the issue by spending €950 million on the aero-derivative gas turbine business of Rolls Royce. It now hopes to bridge the technology gap that opened up thanks to its failure to move sooner.

Of course, a major opportunity for the German firm remains alternative energy, in this case its wind turbine business. Somewhat confusingly, it retains a joint venture with Shanghai Electric in this area. Here the pair rank sixth in China with a 7.48% market share, putting Siemens well ahead of GE. At their Shanghai factory last November they produced what Siemens proudly termed the “first world-leading localised 4MW wind turbine”.But the wind power business has been anything but easy in China over the past few years, and coupled with the general slowdown in the Chinese economy it all adds up to challenging times for Siemens. Indeed, if local media’s predictions about its most profitable business – healthcare – prove correct, then the German conglomerate, which has grown its Chinese revenues from €5.2 billion in 2007, may this year even report a fall in its China sales.

Keeping track: In WiC288 we reported on the Chinese media’s view that Siemens could see a fall in its China sales, owing to difficulties in some of its local business lines. When it revealed its quarterly results in late July that proved to be the case. Siemens said demand for its healthcare equipment in China had been weak in the quarter, as had demand for its industrial hardware, software and services. Overall sales in China – which comprises almost a tenth of the German conglomerate’s worldwide revenues – fell 8% in the quarter. The company’s outlook for the rest of the year did not offer a bullish view on its China business either. Asked whether he expected Chinese demand to stabilise, CEO Jon Kaeser said: “I don’t know. What we know is we need to be as flexible as we can be” adding that in the coming quarters “we are a bit careful about China”.

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