Sunburned

Siemens struggles to make strategy work

Missing earnings targets threaten to turn into a bad habit for Peter Loescher. On Thursday, Siemens' chief executive issued the fifth profit warning since he took the job in 2007. Even more embarrassing, the weak macroeconomic environment explains only part of the latest shortfall. Many of the latest problems at the German industrial giant are homemade.

High-speed train deliveries are behind schedule, off-shore wind parks are not being joined to the electricity grid and buyers cannot be found for the hugely loss-making solar operations. The combined cost of these issues is measured in the hundreds of millions of euros.

The solar mess makes Loescher look especially bad. Siemens bought into the business at an outrageously high price less than four years ago. It bet on the wrong technology and decided to sell out about late last year, but hasn't found a buyer.

As a consequence, the business had to be re-labeled as a continuing operation. The delays will knock about euro 300 million off operating profit this year - about seven percent of the company's earnings. It is now seriously considering a total shutdown.

The humiliating odyssey is fostering serious doubts about Loescher's judgment and his ability to execute. Disenchanted investors criticise a hands-off management style and insufficient attention to detail.

In November 2012, Siemens ditched previously announced growth targets and embarked on yet another efficiency programme. The focus shifted from driving up revenue to cost control. The target of about euro 6 billion of cost cuts in two years was supposed to increase the operating profit margin from 9.5 per cent in 2012 to 12.5 per cent in 2014.

The deadline is approaching, but the target is receding. In the last two quarters, the margin was only eight per cent. Peers like ABB and GE are almost twice as profitable.

Loescher is sticking to the medium-term targets and plans to amplify cost cutting efforts to make up for the solar setback. He has little choice. His credibility would not survive another U-turn.