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Thu 30 Jul 2009 04:00 PM

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Powering ahead

Siemens global CEO Peter Löscher tells us why the future is bright for the once troubled German conglomerate.

Powering ahead
Powering ahead
By building solar thermal power plants in the Sahara desert, the Desertec project aims to meet part of Europe’s energy needs by 2050.

Siemens global CEO Peter Löscher tells Arabian Business why the future is bright for the once troubled German conglomerate, and how the Sahara desert can benefit Europe.

When Peter Löscher took the helm of Siemens in July 2007, it was because the industrial giant needed an outsider to clean up the company following a bribery scandal that would land it with a $1.6bn fine.

Two years later, the 51-year old Austrian says he has been successful in his quest to reinvent the 162-year old company.

“The Siemens of today can no longer be compared with the company it was before. We are a fundamentally reformed company — in terms of personnel, organisation and leadership culture,” he says.

“Independent observers now consider Siemens to be a model in compliance. We stand for ethical business, since only ethical business is sustainable.”

Changes to the company’s corporate culture have also resulted in chief executives now having clearly defined responsibilities, resulting in faster decision making.

Restructuring and cost cutting to the tune of €1.2bn ($1.7bn) has paid off in the stock market too: over the last 12 months, Siemens shares have lost 36 percent of their value, compared with a 58 percent decline for rival General Electric.

Of course, it helps to have strong operations in alternative energy and healthcare, both sectors that stand to benefit from government stimulus packages. The company is banking that out of an estimated €2 trillion ($2.8 trillion) in global stimulus packages, it will be able to snap up orders worth €15bn ($21bn) over the next three years. Around 40 percent of that would go to green infrastructure investment projects.

However, Löscher argues that all three business divisions — industry, energy and healthcare — will gain from two major factors impacting the global economy: global warming and urbanisation.

“Green, energy-efficient solutions are already generating a quarter of our total revenue, and this is increasing every day. We have the largest portfolio of green technologies in the world,” he says.

In spite of the current economic crisis, Siemens aims to increase its annual revenue from €19bn in 2008 to €25bn in 2011.

“All three sectors will benefit from the green orders, but mainly energy and industry. In addition to climate change, we see two other trends that Siemens began addressing quite some time ago: shifting demographics and increasing urbanisation. Already today, more people live in cities than in rural areas; life expectancy is continually increasing. That’s why intelligent traffic concepts and healthcare solutions are needed, for example.”

First half revenue rose six percent compared with the corresponding period last year, but a 10 percent drop in new orders during the same period shows that the company has not been immune to the international recession.

In the Middle East, Siemens has been a key player in building the region’s infrastructure, but Löscher declines to comment on whether it has any plans to help the UAE, or any other state, with their nuclear power ambitions.

The company is currently embroiled in a bitter dispute with France’s Areva to exit the two companies’ €2bn joint venture in nuclear reactors. In March it announced a deal with Rosatom, the Russian state owned nuclear group, to create another joint venture.

“The talks with both companies are ongoing, so…I cannot comment on any questions related to those business activities. But one thing is clear: In the future there is a huge potential for such kind of business,” he says.

The French economy minister said in June that Areva was to hold talks with Kuwaiti authorities over its nuclear power plans, and the US government last year signed civil nuclear power deals with Saudi Arabia and the UAE.Emirates Nuclear Energy Corporation (ENEC), the body responsible for implementing the UAE’s $41bn nuclear programme, wants to build three nuclear reactors, the first of which would come on stream by 2017.

Qatar has said its interest in nuclear power has waned amid lower oil prices since signing a memorandum with EDF, France’s largest electricity provider, in January 2008.

Earlier this month, Siemens was one of 12 major European companies to sign a declaration of intent to build a series of solar thermal power plants in the Sahara desert that would supply Europe with up to 20 percent of its energy needs by 2050. The project, called Desertec, would require an investment of around €400bn ($570bn).

With its strong track record in offshore wind farms and steam turbines for solar-thermal power plants, Siemens is hoping to supply the key components for the project, including high-voltage direct-current transmission systems, steam turbines, solar receivers, the instrumentation and control equipment for solar thermal power plants, and offshore components.

“Generating power in the desert and bringing this power to Europe over an ultra-efficient transmission system…that’s a job made for Siemens,” he beams.

Still, some big names are casting doubt on the project’s viability. The CEO of Vattenfall, the Swedish power giant that is also Germany’s fourth largest utility, has said technology and transmission costs would be too high, and that building the plants in politically unstable countries would make them vulnerable to terrorist attacks.

“Europe needs to generate electricity in Europe,” Lars Josefsson, who is also an advisor to the UN and German chancellor Angela Merkel on climate change, told Financial Times Deutschland.

Löscher says switching to an energy mix with a higher share of renewables can allow GCC states to retain their oil reserves for a longer time period than currently projected.

“Projects with renewable energies have a huge potential in Saudi Arabia. The country has very large areas which would be suitable for wind or solar power due to its geographical position — investments which would pay off very quickly.”

Couldn’t rapid expansion in those sectors also pose a threat to the region’s energy producers? “Desertec will not solve all of Europe’s energy problems at one shot: in the next few decades, we’ll still need a reasonable energy mix. The Desertec Initiative aims to supply from 15 to 20 percent of Europe’s energy needs by 2050,” he says.

Siemens said in its first half earnings report that “the current microeconomic and financing environment was showing no evidence of near term improvement”. Today. Löscher sounds a bit more optimistic.

“The global decline appears to be slowing down. Therefore, we can realistically hope that worldwide, we’re now approaching the low point. However, it is still very difficult to predict how long the worldwide economy will remain at this depressed level, and when and at what rate of incline it will once again rebound,” he says.

Asia and the Middle East remain key growth drivers for the company. In 2008, the two regions contributed around ten percent to order and revenue growth.

“Despite the crises the economic growth is still very high in these markets compared to other countries.”

To rid the firm of the sort of short term planning that helped create the current downturn, Siemens has recently introduced a new compensation system for its managers.

The new system offers all employees to convert their variable income into shares. If the shares are held for more than three years, they will get an additional one free for every three shares already held. The top 500 managers are contractually obliged to hold a certain percentage of their fixed salary in shares.

“This turns managers into owners, and owners develop their company sustainably,” Löscher says.

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