Siemens is case study in China de-risking dilemma

LONDON, Oct 4 (Reuters Breakingviews) - Roland Busch has a problem familiar to many German corporate chieftains. Siemens’ (SIEGn.DE) chief executive presides over a sprawling $110 billion conglomerate with a lowly valuation. But solutions are complicated by Europe’s increasingly tricky relations with Germany’s biggest trading partner – China.
Siemens trades at around three-quarters of what its assets are worth, according to calculations by Barclays analysts. Shares in Germany’s second-largest company by market value have consistently underperformed the MSCI World Industrials Index in recent decades. To stop the rot Busch needs his core business to motor, and to offload a low-margin rail business. Growing geopolitical tensions with the People’s Republic complicate both.
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China has been Germany’s biggest trading partner for seven years in a row: in 2022 exports and imports between the two states were worth 299 billion euros. The Middle Kingdom ranks as the Port of Hamburg’s largest customer and counts Chinese shipping conglomerate Cosco as a shareholder in one of its terminals. Around a third of German companies import critical materials like lithium and rare earths from China.
Rising tensions between Brussels and Beijing are now messing up that relationship. In July Germany encouraged its companies to loosen their ties, warning the government would not rescue corporates hit by trade shocks. That’s unsettling for the likes of Siemens, $62 billion carmaker Volkswagen (VOWG_p.DE) and $39 billion chemicals group BASF (BASFn.DE). While nearly half of Siemens’ revenue comes from EMEA, 13% emanates from China – similar to BASF’s share.
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If anything, the sales split understates Busch’s reliance on the world’s second-largest economy. Siemens has recently refocused from electronics, energy, and transport equipment into a modern technological powerhouse. Last year 27% of revenue came from its digital industries (DI) division, which sells software and automation tools for industrial plants. The unit generates over a fifth of its sales from China. More importantly, DI’s earnings before interest, tax and amortisation (EBITA) margin is 20%, compared with the group’s 15%.
Assume the DI Software arm is worth 18 times the 1.3 billion euros of EBITA Barclays forecasts it to earn in 2024, at a slight discount to the valuation investors attach to France’s Dassault Systemes (DAST.PA). The DI Automation business, which is expected to generate EBITA of 3.4 billion euros, could be valued on a 14 times multiple, similar to Swiss rival ABB (ABBN.S). Meanwhile, Siemens’ Smart Infrastructure (SI) systems for buildings might trade at 13 times its 3 billion euro EBITA, in line with France’s Legrand (LEGD.PA). Factor in the German group’s 32% stake in Siemens Energy (ENR1n.DE) and 75% holding in Siemens Healthineers (SHLG.DE), currently worth 46 billion euros, and it adds up to 156 billion euros. That’s more than Siemens’ overall 140 billion euro enterprise value, implying limited value for Siemens’ Mobility business, home of its legacy rolling stock and signalling systems.
Busch’s first headache is that China is no longer motoring. Siemens missed profit forecasts last quarter due to a 37% contraction in DI orders, led by issues in the Middle Kingdom. Industrial production there slowed from a 4.4% year-on-year increase in June to a 3.7% rise in July. Even before de-risking became a political mantra, German trade with China had been on the wane: exports fell to 6.8% of the country’s total last year.
Busch has vowed to “defend and expand” his company’s market share in China. Yet Siemens would be ill-advised to reverse out of China even if it wanted to. Euro zone industrial output in July, after all, suffered a 2.2% year-on-year fall. The People’s Republic also ranks as Siemens’ largest research hub outside Germany. Indeed, Busch is building a new R&D centre in Shenzhen and expanding the company’s manufacturing network in Sichuan and Chengdu.
The second headache is that cooling relations with China complicate the easiest fix for Siemens’ underpowered valuation. The mobility division can only muster an 8% EBITA margin despite contributing 13% of 2022 annual revenue. As a fix Busch’s predecessor Joe Kaeser sealed a rail merger with France’s Alstom (ALSO.PA) back in 2017, only for Europe’s antitrust regulators to shoot it down. A straightforward solution would therefore see the Siemens boss try again.
Unhappily, however, the obvious buyer is Chinese. Alstom’s takeover of Bombardier’s rail business in 2020 has increased concentration in Europe’s rail market. Siemens needs a buyer with a global reach but which lacks a direct European presence. China’s state-backed CRRC Corporation, the world's largest rolling stock manufacturer by revenue, would be the logical acquirer of a business valued by Barclays analysts at 9.5 billion euros. But that collides with the EU’s de-risking agenda.
In any case, Busch isn’t planning a mobility sale. Instead he’s merely committed to spinning off Siemens’ motors and drives business, renamed Innomotics. That’s unlikely to leave his shareholders jumping for joy. The unit and Siemens’ Airport Logistics unit, which press reports say could be another divestment candidate, may only be worth 4 billion euros combined. Moreover, Kaeser already tried to boost Siemens’ valuation by partially spinning off subsidiaries. That experience has not been an undiluted success.
Shares in Siemens Healthineers have admittedly risen by around 50% since its 2018 IPO. But the mess that is Siemens Energy is a different story. That division’s shares have halved since its own 2020 listing.
As such, investors might not embrace a spinoff of Busch’s offending Mobility unit. Many shareholders want Siemens to be more involved in managing its holdings, especially if they are withering on the vine. Rival groups like General Electric (GE.N) and Toshiba Corp have opted instead to break themselves up completely.
The least-bad way forward for Busch is probably to fully shed Siemens’ stakes in its Healthineers and Energy units, and to keep opening factories in Southeast Asia to diversify the company’s supply chain.
Still, Germany’s Bundesbank recently warned that the country’s industry-driven economy, fuelled by Chinese imports and cheap Russian gas, could shrink further after suffering a brief recession at the start of 2023. Neither Siemens’ existential dilemma nor its valuation discount look likely to get a fix any time soon.
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CONTEXT NEWS
Siemens missed its profit forecast in the third quarter due to weakening demand in several markets including China. Its digital industries business, which provides software and tools to help automate factories, suffered a 37% order contraction and is now expected to grow revenue by just 13% to 15% this year, compared with previous guidance of 17% to 20%.
Siemens is working with BNP Paribas to advise on strategic options for its motors and large drives business, Bloomberg reported in July. Any deal could value the business at 3 billion euros or more, Bloomberg said. Siemens said in March that the spin-out of its motors and drives business would result in a wholly owned subsidiary named Innomotics and would be largely completed by Oct. 1.
Siemens Chief Executive Roland Busch told the Financial Times on May 24 that he would “defend and expand” his company’s market share in China, arguing the market is crucial for innovation and growth at the industrial conglomerate.
Siemens has initiated the sale of its airport logistics division and is working with Goldman Sachs to identify possible bidders, German business daily Handelsblatt reported in May. It said the unit is valued at up to 500 million euros.
Siemens is scouting for investments in Southeast Asia to diversify away from China and reduce supply chain risks, chief people and sustainability officer Judith Wiese told the Financial Times on March 14. The German group is taking on staff and considering adding factories in fast-growing economies including Indonesia, Vietnam and Thailand, she said.
As of September, Siemens had bought back 2.5 billion euros of shares since starting a 3 billion euro share repurchase programme in November 2021.
Editing by George Hay and Oliver Taslic
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