The Top Three Challenges Facing Incoming Siemens CEO Roland Busch

(Bloomberg) -- Siemens AG’s soon-to-be solo chief executive officer is taking over a dramatically different company from long-time boss Joe Kaeser, though the serial dealmaker is leaving plenty of challenges to contend with.

Roland Busch has big shoes to fill following a more than seven-year run under Kaeser during which Siemens shares advanced 75%. Investors applauded his breakup of the German conglomerate’s sprawling structure through the spinoffs of Siemens Healthineers AG and Siemens Energy AG, plus the sale of its remaining stake in Osram Licht AG.

The moves also allowed the former units to respond faster to market changes, with Siemens Energy announcing Tuesday it will cut 7,800 staff as it contends with the decline of coal and gas-fired power production.

The combined market value of Siemens and the three spun-off companies has climbed to about 190 billion euros ($229 billion), almost double what the parent was worth when Kaeser started. But while Europe’s largest industrial company has slimmed down since 2013, profitability at some of its core divisions still lag peers, according to Phil Buller, an analyst at Berenberg.

“Mr. Busch needs to execute on margin improvement,” Buller said in an email. “Nothing matters more right now and should be seen as a priority over and above any potential further portfolio simplification.”

Siemens rose 1.6% in Frankfurt as of 12:20 p.m. local time. The shares have gained 13% this year.

Busch, 56, is a Siemens lifer much like Kaeser, 63, who relinquishes the co-CEO role on Wednesday, when the company also will report earnings. Siemens already has reported better-than-expected preliminary results for two of its main units.

Here’s a look at some of the tasks Busch faces:

Boost Margins

Siemens’s digital industries unit, which produces factory-automation and process-management systems, already has enviable margins, according to Berenberg’s Buller, who rates the company’s shares a buy. But it has an opportunity to keep improving profitability by growing the software portion of its business faster than hardware. Dassault Systemes SE is the rival to measure up against in that space.

On the other hand, the smart infrastructure division that makes systems for controlling power grids, traffic and buildings trails behind rivals including Legrand SA, Eaton Corp. and Schneider Electric SE.

Economic fallout from the coronavirus pandemic and decisions by customers to hold back on investment limited demand for Siemens-built products and weighed on profits last year. The company should get a boost as economies recover. Demand from China helped lift results last quarter.

More Divestments

While Kaeser downsized Siemens to better focus on core businesses, the company is still a bit unwieldy, with almost 300,000 employees and businesses ranging from traffic-light systems to skyscraper-heating products. Analysts think Siemens’s market value still includes a considerable conglomerate discount compared to the combined value of its individual business.

The smart infrastructure segment, in particular, needs pruning, according to Ingo Schachel, an analyst at Commerzbank. That division broadly splits into electricity-grid management, systems for managing large commercial and industrial buildings, and controls for industrial processes.

Riding Rail

Siemens Mobility, a manufacturer of trains and their equipment, stands to gain from the world’s push to make transport environmentally sustainable. Busch could do more to put the unit in the spotlight, especially in the U.S., where the new Biden administration is looking to spend billions on infrastructure.

Europe also is expected to be a bright spot after nations including France and Germany said they’d increase rail-related spending to wean travelers off flying and driving.

“All European countries have train networks that often have been neglected,” Siemens Mobility boss Michael Peter said in a December interview. “That’s a huge opportunity.”

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