What is Siemens?
Siemens AG (FWB: SIE), founded in 1847 by inventor Werner von Siemens, is a multinational conglomerate company which is headquartered in Munich, Germany. It is the largest manufacturing company in Europe, employing around 385,000 in over 200 countries worldwide. Its primary business sectors consist of Industry, Energy, Healthcare, and Infrastructure & Cities, with Electrification, automation and digitalisation representing the long-term growth fields of Siemens.
Siemens is by no means a company that will experience rapid growth as seen by current tech companies. However, at the same time, it is by no means staying motionless in an ever changing world as it has demonstrated its adaptiveness through countless joint ventures and acquisitions into upcoming and developing companies. For example, notable joint ventures initiated by Siemens include Traction Equipment Ltd. (STEZ), Zhuzhou China, which is a joint venture between Siemens, Zhuzhou CSR Times Electric Co., Ltd. (TEC) and CSR Zhuzhou Electric Locomotive Co., Ltd. (ZELC), which produces AC drive electric locomotives and AC locomotive traction components. Primetals Technologies is a joint venture between Siemens VAI Metals Technologies and Mitsubishi Hitachi Metals Machinery which was formed in 2015. From these ventures, one can clearly see Siemens’ desire to expand into the industries and sectors of the future, in this case, electric vehicle manufacturing.
How strong is Siemens financially?
Siemens has historically been a financially strong company as a result of its prudent and effective management. For the nine months ending 30 June 2020, Siemens AG revenues decreased only 1% to €41.83 billion, which, given the havoc that has been caused by the global pandemic, is very impressive. To put this into perspective, in comparison to one of Siemens’ competitors General Electric Company (NYSE: GE), revenues for the six months ending 30 June 2020, decreased 16% to $38.27B. Moreover, net income applicable to common stockholders excluding extraordinary items decreased 8% to €3.17 Billion. The revenues reflect Digital Industries segment decrease of 6% to €11.12 billion, Smart Infrastructure segment decrease of 1% to €10.42 billion. Even though the decrease in earnings has affected its current cash flows, to a large extent it has been effectively contained and will be insignificant to Siemens balance sheet in the long term. Lastly, Siemens has consistently demonstrated its ability to grow its earnings and strengthen its balance sheet every year, with revenues increasing from €75.64 billion in 2015 to €86.85 billion as of 2019 and assets increasing by nearly €50 billion since 2013.
However, the United States segment took a more substantial hit, decreasing by a significant 18% to €9.58 billion, and the Asia (excluding China), Australia segment decreased by 28% to €4.66 billion. Currently, the U.S segment of revenues account for a considerable 21% of Siemens’s total revenue, therefore the huge decrease which has also been felt by similar competitors will limit spending on further growth. At the same time, however, Siemens Healthineers accounts for 16% of overall revenue and is the second largest segment of Siemens’s overall revenues and with growth in the healthcare industry in the United States alone projected to witness a CAGR of 6.6% all the way through until 2024 combined with spending to reach $10 trillion by 2022, this temporary decrease in revenue does not raise a large concern. As a result of the fast growing demand for healthcare consumption in the U.S. Siemens Healthineers’ earnings and growth are forecasted to grow exponentially which will offset any current downturn in revenue in this sector in particular.
The reputation of Siemens should also be taken into account when scrutinizing Siemens. Siemens’ reputation was called into question in 2008 when it was accused of bribing Greek Government officials to secure contracts during the 2004 Olympic games in Athens which tainted its reputation and called into question the ethics of its previous business transactions especially with international entities. In spite of this, key shareholders of Siemens act as a testament of the faith they have in the conglomerate’s future. For instance, notable shareholders include the State of Qatar (DIC Company Ltd.) with 3.04% and the Government Pension Fund of Norway with 2.5%.
What does the future hold for Siemens?
At first glance, it is apparent that the power and gas segment of Siemens AG, accounting for 18% of total revenues, is a concern for its future potential growth. It is no surprise that the future growth prospects for companies with large exposure to oil and gas are limited, especially with an ever-growing increase in regulations and a greater focus on renewable energy. It is estimated that by the year 2030 the electric power requirement will be 10 times the present capacity. Thus the question of how Siemens will respond to this upcoming threat arises, to ensure that their exposure to a declining industry is limited.
Over the past several years, Siemens has proven itself to be actively aware and decisive in shaping its image and reputation as an environmentally friendly company. Currently holding a high ESG score of 8, Siemens has grown and continues to grow its sustainable energy segment which currently accounts for 9% of the total revenue.
Furthermore, as part of CEO Joe Kaeser’s Siemens’ Vision 2020+ strategy, he aims to make the conglomerate more efficient, more flexible and more environmentally conscious . Henceforth why Siemens has recently transferred its majority stake in renewable energies company Siemens Gamesa Renewable Energy (SGRE) to its new unit, which comprises the company’s oil and gas, conventional power generation, power transmission and related services businesses. This new entity has created a “major player” in the energy market, and is expected to have a business volume of €30bn and comprise more than 80,000 employees, the firm noted. Kaeser said earlier this year that “This move will create a powerful pure-play in the energy and electricity sector with a unique, integrated set up – an enterprise that encompasses the entire scope of the energy market like no other company.”
Siemens’ desire to grow and improve upon their current operations can be clearly seen through its unusually high commitment and spending into research and development. For instance, in fiscal 2017, Siemens invested €5.2 billion in research & development, compared to €4.7 billion in the reporting period 2016. More recently, in 2019, Siemens increased its research & development investments to about €5.7 billion. Even though research and development does not guarantee absolute success, it clearly highlights the company’s commitment to remain a key player in the future of tomorrow and with such consistency, Siemens has built up a reputation as one of the world largest investors in research and development. This unwavering commitment to R&D was also demonstrated this year when Siemens announced that research and development spending would not be reduced due to the effects of the pandemic despite a decrease in overall earnings.
Overall, Siemens is a highly diversified company that has demonstrated its ability to adapt and restructure its segments of businesses to fit in with the ever-changing world we live in. Moreover, with its huge market capitalization and effective managements it has consistently shown its ability to limit its financial losses and reduce its risk during economic downturns, proving its ability to remain a key player both in the good times and bad for the long term. Both these factors have been an effective strategy for Siemens remaining and thriving as one of Europe’s largest companies for over a century and a half.
The Sweeney Club 