How the future of the German giant's business is complicated
Faced with a problem, familiar to many German company heads, is Roland Busch. The Siemens chief executive runs a sprawling, undervalued $110 billion conglomerate whose future is complicated by Europe's increasingly difficult relationship with Germany's biggest trading partner, China. Siemens trades at about three-quarters of the value of its assets, while shares of Germany's second-largest company by market value have consistently underperformed the MSCI World Industrials Index over the past few decades. To stop the decline, it needs to pick up its core business and offload a low-margin rail business. Rising geopolitical tensions with China complicate both.
China has been Germany's largest trading partner for seven consecutive years: in 2022 exports and imports between the two states were worth 299 billion euros, while China is the biggest customer of the port of Hamburg, with the Chinese shipping group Cosco be a shareholder in one of its terminals. About 1/3 of German companies import critical materials such as lithium and rare earths from China. Rising tensions between Brussels and Beijing are upsetting this relationship. In July Germany encouraged its companies to ease ties with China, warning that the government would not bail out companies hit by trade shocks. The sales split suggests nothing less than Siemens' reliance on the world's second-largest economy, with the giant recently refocusing on electronics, energy and transport equipment into a modern technology powerhouse. Last year, 27% of its revenue came from its digital industries (DI) division, which sells software and automation tools for industrial facilities. More than 1/5 of the unit's sales come from China.
Bush's first headache is that the Chinese economy is slowing. Siemens missed profit forecasts last quarter due to a 37% contraction in digital industry orders due to issues with China. Industrial production slowed from a 4.4% year-on-year increase in June to 3.7% in July. Siemens could not leave China even if it wanted to, as it is, among other things, its largest research hub outside of Germany. The second headache is that loosening relations with China complicates the easiest solution to Siemens' undervaluation, its mobility division.
Bush's predecessor, Joe Kesher, sealed a rail merger with France's Alstom in 2017 that was shot down by European antitrust regulators. An obvious buyer is China. Alstom's takeover of Bombardier's rail business in 2020 has increased concentration in the European rail market. And Siemens needs a buyer with a global reach, without a direct European presence. China's state-backed CRRC Corporation, the world's biggest rolling stock maker by revenue, would be a logical buyer for a business valued by Barclays analysts at €9.5 billion. But this conflicts with the EU's agenda. to remove the risk. Siemens missed its third-quarter profit forecast due to weaker demand in several markets, including China. Its digital industries business, which provides software and tools to automate factories, saw a 37% drop in orders and is expected to grow revenue by 13% to 15% this year, compared with 17% to 20% last year. In this context China remains a vital market for innovation and growth in the industrial conglomerate. At the same time, however, it is looking to invest in Southeast Asia to differentiate itself from China and reduce supply chain risks, according to Human Resources and Sustainability director Judith Visse. The German group is hiring and considering adding factories in fast-growing economies including Indonesia, Vietnam and Thailand, he said.