By Jack Denton
Siemens is a 174-year-old industrial giant that, once upon a time, made dishwashers, and maybe that’s the image the brand still summons.
But its new chief executive has a plan to turn the German group into a focused technology company — a blue-chip European stock that investors can buy to play growth in the likes of electric vehicles, lithium-ion batteries, hydrogen power, 5G, cybersecurity, and cloud computing.
In the first capital markets day under Roland Busch’s leadership, Siemens /zigman2/quotes/205905025/delayed XE:SIE +2.55% announced that next year it will change the business model of its fastest growing and most profitable division, digital industries, to focus on software that is sold on a recurring, subscription basis.
The move toward software-as-a-service will be accompanied by a new financial reporting metric that will describe annual recurring revenue — giving investors and analysts new insights into the profitability of the software business.
A change like that has the possibility to cause a massive rerating in the price of Siemens stock by 20% to 25%, according to analyst Philip Buller of investment bank Berenberg. Until now, the software division has been buried within the industrial company, obscuring the higher valuation that software groups typically fetch compared with industrial stocks.
It’s a big shift, but change isn’t new to Siemens. The group built Europe’s first long-distance telegraph line in 1848, just a year after it was founded in a back courtyard in Berlin. By 1900, it had laid more than half of the undersea cables crossing the Atlantic Ocean.
In the next 100 years it grew into a sprawling conglomerate, variously touching everything from household appliances to power generation, telecommunications to trains, and health technology to heavy industry.
Ahead of the capital markets day, Busch told MarketWatch how the industrial giant is pushing toward a new era of growth and acquisitions centered on connecting core technologies such as automation, 5G, and cloud computing across its disparate divisions.
Under the leadership of Busch’s predecessor, Joe Kaeser, Siemens began the process of transitioning from an aging industrial behemoth to a focused technology company, which included spinning off renewable energy group Siemens Energy in 2020.
For Busch, the challenge is now to build synergies across the business divisions that remain, which cover industry, infrastructure, mobility, and health technology — synergies that analysts say don’t quite exist yet.
“Technology is the backbone of our company,” Busch said. “Is 5G the future? Is it automation technology? Is it cybersecurity? Is it digital twins? All of that is playing into all of our businesses.”
The crown jewel in the group’s portfolio is the factory business it calls digital industries. The division builds high-tech factories for the future, supplying automated manufacturing systems and, increasingly, industrial software. It is building next-generation capabilities for automotive brand Mercedes-Benz and scaling up COVID-19 vaccine production for biotech BioNTech /zigman2/quotes/214419716/composite BNTX +5.69% .
“We are a company with a very strong software portfolio, but we are not a software company,” he told MarketWatch. “Unlike any other company in the world, we are able to combine the real and the digital worlds.”
Busch is focused especially on automation, driven by advances in 5G applications in the industrial space. This is where most of the group’s capital allocation will be, he said. A key technological emphasis is on “edge” computing — bringing the processing power available in cloud servers, including artificial intelligence, down to the shop floor.
Cybersecurity is another priority in an age where factories and power grids are targeted by hackers, Busch, said, and Siemens is developing an “unhackable” one-way communication chip.