The beleaguered European manufacturing sector has seen deceleration after two of the largest industrial companies, Siemens and ArcelorMittal, have reported drops in quarterly earnings. However, the changes were both needed and timely and the sector is expected to return to form in the future.
The industrial group, Siemens, missed profit expectations in all their divisions except the one dedicated to transport technology and supplies.
The Munich-based conglomerate attributed the decline of 6 per cent in overall net profit, and similar share price drop, to an unfavourable environment in its key markets. Its digital industries division, supposed to lead the future of the company after the reorganisation, is the main segment responsible for the missed earnings. Soft demand for factory automation and motion control systems in car making and machine tool industry drove its industrial business to a 12 per cent fall in operating profit.
Although the aim of the restructure was to make the company more diversified so it would adapt better to changing conditions, the gloomy climate in the Eurozone for manufacturing has affected the conglomerate as a whole. Thus, given the disappointing results of the quarter, analysts are unclear if the restructuring was worthwhile.
It could be argued that a slimmer structure may have weakened Siemens in the short-term, but may prove successful in the long term.
Siemens has undergone a process of dismantling that has involved mergers, sales and spin-offs. The German conglomerate has also carved out its fossil fuel business, making its digital factory division the most prominent.
This shift to a more technological business model has ended up trimming the company from 16 divisions down to eight. The drastic shake-up was initially well received by investors, and the share price grew by 5 per cent when it was announced.
Even though many of the changes were necessary, their effect on the company’s market value has been negative.
Shares in the firm are trading at over a quarter less than the sum-of-the-parts value, according to Morgan Stanley. However, looking at other giant German manufacturers coping with changing industrial conditions, the decisions of Siemens’ chief executive to make the company more compact is likely to prove correct.