Source: Financial Times, January 30, 2009
Siemens low-cost strategy shelter from downturn
The German group says there should be no confusion with 'low-quality' goods.
Siemens aims to accelerate its revenue growth with simpler, low-cost products in the near-term as the global downturn forces customers to turn to cheaper goods.
Like most German industrials, Siemens has traditionally focused on the engineering process rather than marketing its goods.
But the company's focus on low-cost products underlines how Siemens' strategy is slowly shifting thanks to its corps of younger managers.
The move comes as companies around the world reduce their investment budgets, leaving large industrial companies such as Siemens, General Electric or Phillips to worry about growth prospects.
Already, more companies are turning to low-cost products because they are constrained in their capital expenditure, said Roland Busch, chief strategy officer at Siemens, in an interview with the Financial Times.
'Depending on the sector, it is possible that the current crisis will bring a further boost to this market.'
Low-cost products, which are foremost sold in emerging markets, usually have less functionality than their high-tech counterparts but are mostly based on the same technological platforms. A classic example is a mobile phone - although not produced by Siemens any more - that can only be used to make telephone calls but lacks more sophisticated functions such as navigation or emailing.
Siemens defines these products as simple, affordable, reliable and maintenance-friendly goods.
'Low-cost should not be confused with cheap or low-quality goods,' Mr Busch said. Siemens' low-cost strategy is an important pillar in the company's endeavour to weather the downturn.
Which arguments would you give for this strategic choice by Siemens?
Low cost markets grow a lot faster than high-end markets, not least because these markets have a much higher growth potential in infrastructure projects,' Mr Busch said.
In 2008, 30 per cent of Siemens' more-than €77bn ($100bn) in sales came from emerging markets, with China and India forming the most important part of that. More than a quarter of Siemens sales in those two countries came from their low-end products.
Peter Löscher, Siemens' chief executive, repeatedly said the company was well prepared for the crisis, as it had strong reserves, a large order backlog and it could profit from the many government-sponsored infrastructure programmes designed to counter the downturn.
However, Mr Löscher struck a more cautious note this week, after Siemens reported a year-on-year drop in orders for the first quarter of the fiscal year, when he admitted that reaching this year's profit target had become 'even more ambitious'.
Siemens estimates a €100bn market potential for low-end products within emerging countries, half of that in China and India. In addition to sales, low-cost products can be developed and produced in emerging markets.
Mr Busch said the crisis could also push demand for low-end products in the developed world. 'In times of budget constraints, some hospitals might be inclined to buy the more affordable CT scanner (a specialized x-ray machine)'.
Siemens' low-cost CT scanner, called 'Somatom Spirit', is a paragon for this trend. As Siemens entry product for CT scanners, it is developed and produced in China. But about half of the several hundred scanners produced each year were sold abroad.
As production takes place in countries with cheap labour, the margins can match those of high-tech products. 'One cannot equate low-end with low margin. You can achieve the same, double-digit margins as with high-end products,' Mr Busch said.