Peter and the Wolves: How Siemens Lost Its Way

By , Martin Hesse and

Photo Gallery: Tumult at Germany's Siemens Photos
Siemens

Siemens is a massive global conglomerate, building everything from trains to power plants. In-fighting and last week's ouster of CEO Peter Löscher are just a few indications of a German giant's decline. The company must find new markets to regain success.

A few days before all hell breaks loose around him, Joe Kaeser is sitting in his Munich office, relating anecdotes about the big, wide world of Siemens. At the time, he's still the company's chief financial officer.

A large, black-and-white photo of the striking cliffs of Big Sur, on the California coast, one of the 56-year-old executive's dream destinations, is hanging on the wall behind his desk. Kaeser, with surprising openness, describes how almost everyone in the company "has recently come a little unhinged." At some point, he says, even he began to feel like a rock in the surf.

He argues so clearly and precisely that the question seems inevitable: How can Siemens, the German multinational conglomorate, emerge from its crisis? From this point on, Kaeser puts on a disarming smile. You'd have to ask the CEO, Peter Löscher, he says, noting that it's his job to know.

Siemens has always had confident CFOs. But Kaeser has been so openly critical that some at the company have already eyed him with suspicion in the past. Others call him authentic. Kaeser himself says: "It's time for the CEO to tell us where we're going. The CFO's job is to ask how we're going to get there."

Exactly two weeks after this conversation, everything has changed. Löscher was ousted and Kaeser was chosen as his successor. Last Wednesday, he was still commenting on the company's meager quarterly results, and by Thursday he was giving his first interviews.

Now that he has premiered as the new Siemens CEO, Kaeser no longer seems quite as cool. A power struggle of the sort rarely seen in German industry is raging behind the scenes. Two of Germany's most powerful business leaders are clashing with each other in the Siemens supervisory board: Supervisory Board Chairman Gerhard Cromme and former Deutsche Bank CEO Josef Ackermann, one of his deputy chairmen.

The two senior executives have had plenty of experiences of their own, and they probably believe themselves to be more important than they actually are. But they, of all people, are now providing Siemens with an unprecedented "farce," as the financial daily Börsen-Zeitung notes.

Open Wounds

Companies, like people, also protect themselves and normally hide behind masks of clichés, politeness and discretion. For a few days last week, however, Siemens seemed like an open wound. The dispute between the two old executives -- who can be as vicious as wolves -- quickly became so loud that even Chancellor Angela Merkel made it clear that she wanted to see calm return to Munich.

But calm isn't exactly the forte of Germany's most traditional industrial group, where everything is always a little bigger than among the rest: the orders, the goals, the battles and the disasters. And there have been many of the latter recently, including a fiasco in the solar business, billions in poorly conceived acquisitions, €600 million ($796.8 million) in write-offs for offshore wind turbines in the North Sea and repeated delays in the delivery of 16 high-speed ICE trains to Deutsche Bahn, Germany's national railway.

The Siemens workforce, about 370,000 employees, is active in more than 200 countries in the world -- everywhere except North Korea. Siemens employees are responsible for about 8,900 inventions a year. The company employs about 18,000 software engineers (not even Microsoft has more than that), and it earns €78 billion in annual revenues with products that normal consumers usually notice only when they break.

Perhaps one of Siemens' problems is that it only has large customers these days. It sold off the mobile phone business. Refrigerators and dishwashers sold under the company logo are actually made in a joint venture with Bosch, which Siemens does not manage.

The multinational corporation has lost some of its connection to the German people, and yet it has always remained uniquely German nonetheless. Both the country and the company are large, respected, humorless and ambitious. Both are searching for a new role -- Germany in Europe and Siemens in the entire world.

'Children in a Sandbox'

This can certainly provide for some entertainment value, especially when even a senior Siemens official says: "Sometimes people in companies like ours behave like children in a sandbox, where the kids are envious of each others' sand castles."

To truly understand how last week's showdown came about, it's worth looking back at 2005, when then-CEO Heinrich von Pierer passed the baton to Klaus Kleinfeld. Everything was still in order at the time, and each executive had his designated seat at the boardroom table in Munich. The executives only spoke in turn, and no one was blamed when something went wrong, because the governing collective did not believe in assigning individual responsibility.

Then came Nov. 15, 2006. On that Wednesday, prosecutors and investigators searched about 30 Siemens offices, as well as the homes of top executives. The company had developed a perfectly functioning bribery system over the decades, and until the passage of an anti-corruption law for corporations in 1998, such "useful expenditures" were even considered tax deductions in Germany. But even after the law went into effect, Siemens continued with its old practices. Either the company didn't -- or couldn't -- cease to bribe potential customers.

Siegfried Russwurm, now CEO of the company's powerful industry division, remembers driving home one evening a few months later and seeing the SPIEGEL cover story about Siemens at a gas station. He usually kept his magnetic card with the company logo attached to his belt, but this time he turned it inside out so that no one could see where he worked. "I was ashamed," he says today. And he isn't the only one.

The bribery scandal came as a heavy blow to employees. But the worst thing about it was not the loss of image and self-confidence. The American Securities and Exchange Commission (SEC) threatened to blacklist the company, and executives in Munich were worried that this could translate into a substantial loss of contracts worldwide. In those months in early 2007, Siemens' very existence was at stake.

The Doer and the Supervisor

First, Supervisory Board Chairman Heinrich von Pierer had to be disposed of, which Cromme handled. A week later, a successor also had to be found for Kleinfeld. It was a largely informal search, in which Cromme heard about Löscher through acquaintances. On that Friday, Löscher boarded the last flight from the United States to Frankfurt, where he met with Cromme the next day. Soon Löscher, who was still with US pharmaceutical company Merck at the time, was the new chief executive at Siemens.

The upshot is that both men came to their jobs more or less accidentally, one as a doer and the other as his supervisor.

Löscher was given the credit for the fact that the entire scandal "only" ended up costing the company €2.5 billion ($3.3 billion). As the first Siemens CEO who had been brought in from the outside, he was able to clean up unapologetically.

But while the Germans were concerned with their own interests, business was booming -- and, along with it, the competition. "Everyone was relaxing and saving their strength," Joe Kaeser recalls. "Everyone except Siemens."

Löscher cleaned up the mess, recruited new people, restructured the company, emphasized dialogue and left day-to-day operations up to the division heads. It's something he does well -- textbook-style management. It worked, even if the employees tended to be motivated by fear rather than enthusiasm.

But how does one prescribe a necessary change of course to a global workforce, a shift away from the culture of fear and toward a form of growth that is still based on values? And what exactly are those values?

"You feel like you're in one of those fairy tales in which the knight has just killed the dragon. And now he has to capture the princess's heart," says Kaeser. "But we were standing, breathless, on the bridge to the tower, while the dragon behind us was starting to spit fire again."

Seeing Black and White in a Sea of Gray

In this phase, Löscher began making his first mistakes. In the spring of 2011, he announced a sales target of €100 billion -- a quarter more than the company had earned by that point. He also said that the return on sales would increase to 12 percent. But he didn't say how and with what means these goals were to be reached. Instead, he presented a cost-cutting program that angered employee representatives.

Löscher's second term began in the summer of 2012, and it didn't begin on a good note. The ICE trains for Deutsche Bahn weren't finished yet. The offshore business in the North Sea had turned into a nightmare. Löscher couldn't hear the dragons yet, but they were already hissing.

Löscher's closest associates say that he operated in binary fashion, like a computer: One. Zero. Question. Answer. Problem? Solution! Black. White. He couldn't see the many shades of gray around him. But Siemens is in fact a gigantic palette of a wide range of gray tones.

The head of a major German corporation is always in a cocoon. As diverse as the external influences are, he remains protected from them. But even after five years at Siemens, Löscher still had almost no confidants to explain the subtleties to him.

"In the first two years, a new boss has the employees he inherits," says a member of the Siemens board. "After that, he has the ones he deserves."

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1. optional
peskyvera 08/08/2013
What the company needs to 'find again' is honesty instead of shady 'under the table' dealings.
2. Siemens builds powerplants?
hman2 08/08/2013
They have sold this long ago. Siemens also doesn't build telephones, networks, computers anymore. All long gone. In the eighties, Siemens boasted on career fairs that they made 80% of their revenue purely with their securities department. Since then, Siemens is merely a bank with some remaining electrical stuff made and sold in the backyard.
3. How to make sure companies stay honest?
Manish Gupte, PhD 08/09/2013
Competition!! One cheats, he looses market to another..
4. Shame in Brazil
george orwell 1984 08/10/2013
Who is the worst, he who who gives bribes or he who receives? Siemens in deep trouble in the middle of a large scheme in Sao Paulo Brazil. Posing as a reliable company to the Germans in Europe, in order no to go to jail in Brazil.
5.
No wonder 08/22/2013
Great and truthful articles. The writers should write a follow up article on the kind of politics played out at ALL levels of the company that is draining energy and resources and profit from the company. People would be surprised if the profits go up actually. Another research to do if there is any struggle or politics between the old timers and new comers of Siemens. Would be interesting to see the attrition rate of new comers at Siemens.
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