Siemens’ Case Study
The time is now. Fossil fuels are quickly becoming an outdated energy source, because they are rapidly depleting. For energy companies like Siemens, it is now the crucial moment where there needs to be adjustments in strategy to reflect a changing world. However, the company must be in a good financial position to do so. Clearly, there needs to be enough free cash to reinvest into alternative energy sources as a way to ensure the company continues to exist long after the fossil fuels wells have run dry. Thus, this analysis aims to explore Siemens’ financial position to determine whether or not there is enough of a balance to go forward with massive investing into new technologies.
Pro-Forma Cash Flow Statement
Pro-Forma Cash Flow Statement (In Millions)
2012
2013
Sales
30,305
29,913
Change in Receivables
2,087
2,175
Cash From Sales
10,891
9,190
Cost of Sales
21,607
22,106
Change in Payables
27,236
25,771
Change in Cash
2,060
2,365
Cash Margin
35.93%
30.72%
Research and Development
2,904
2,878
Selling & Administrative
3,991
4,173
Other
Assets Reduction Due to Spin-Off
1,800
Total Cash Expenses
124730
130319
Net Cash From Operations
2,509
3,084
Income Taxes
Interest Expense
2,278
1,087
Investment and Financing Transactions
Interest Income
2,946
1,306
Other Financial Income
7
Total Nonoperating Cash Changes
6,639
6,664
Net Cash Increase (Dec)
-1274
BCG Matrix
2012
LOW
HIGH
HIGH
Strategy: Maintain current operations, while cutting back on R&D spending slightly. The company must first get itself a stronger cash flow to rethink more investment in R&D of alternative energy products in bulk.
Strategy: Investments in R&D are still worthwhile, but in very limited amounts. It is clear there is a need to stay competitive, but spending must be cautious because of the poor performance in 2011.
LOW
Strategy: With a weak ability to turn a profit increasing cash flow is difficult. The company would need to scale down the cost of operations first before future investing.
Strategy: Look to acquire smaller successful companies in the market.
2013
LOW
High
HIGH
Strategy: Explore smaller, successful companies that already have their presence made in the market share. There is a potential for relatively high ROE without all the initial start up investments.
Strategy: Heavy investments into wind energy resources. Possible expansion into Southern California for large scale wind turbine plant construction.
LOW
Strategy: Scale down development of alternative energy spending and focus on the combustion of coal, which the company is already a proven leader in. This is ultimately the return to something the company does well to increase profits.
Strategy: Begin the steady decrease in investments related to fossil fuels. There is no growth here and even though the market is still lucrative today, it will begin to end soon. The company needs to begin the transition into alternative energy designs.
Strategic Recommendations
By examining Siemens’ cash flow, it is clear that the company had more cash flow in 2013 than in 2012. Although the profit margin was down in 2013 to 6.3%, rather than the 6.3% seen in 2012, the cash the company has is an indication it has the potential to invest back into the corporation during this crucial decision moment (Siemens, 2013). This free cash can open up funding for more research and development spending, but such spending must be done cautiously in order to keep free cash available for the purpose of balancing liabilities and other losses in the next few years to keep the company in a stable financial position as the market changes so rapidly.
Should Siemens invest in a number of alternative energy technologies to ensure it has its hand in which ever one proves itself as most successful? This may seem like the best strategy because the market environment is so uncertain. However, this is not the case for Siemens. The company just underwent a major restructuring in 2008, “consolidating the number of sectors from more than one dozen down to just three — Industry, Energy, and Healthcare” (Rothaermel & Hoepfer, 2010, p 283). It would be a step backwards to just undo all the work that was so recently done in order to restructure again with a model that obviously was not working for the company previously.
Instead, Siemens should focus on a more narrow net and invest into one particular field. This would allow the company to maximize the ROE on its investments made. Currently, the largest market share of alternative energy is biomass, which made up about 6% of the global energy sold in 2008 (Rothaermel & Hoepfer, 2010). However, there are more lucrative potential markets for Siemens, which has already begun the process of investing in wind energy technologies.
Wind turbine power is a source of energy that has been undergoing some major changes recently. According to the research, “modern windmills are high-tech devices capable of producing several megawatts of energy each, enough for one turbine to supply electricity to an entire small village” (Rothaermel & Hoepfer, 2010, p 288). They are extremely efficient at producing renewable power when used in the correct environment or circumstances. There have been major wind plant construction projects recently, showing proof of the energy source’s success. As such, “wind power is deemed to have immense upward potential for at least the nest two decades” (Rothaermel & Hoepfer, 2010, p 288). It is thus a sound investment because of its high potential in the years to come. Therefore, “it is the fastest growing energy alternative sector, a trend that is predicted to continue” (Rothaermel & Hoepfer, 2010, p 289). Yet, wind power is extremely expensive to get started in, with high barrier entries (Rothaermel & Hoepfer, 2010). This would also justify the concept of Siemens investing heavily into only one technology, as it could not feasibly try to enter the wind power industry only partially.
Another reason why wind power would be the best choice for investments is because the company is already in a strong position in the market. Siemens has experience already, and so it can maximize its early start in the field to become one of the dominant players in the market environment. Here, “Siemens Energy builds wind turbines, claiming to have globally 1,800 megawatts of offshore wind capacity installed or on order as of late 2008. One major project off of Denmark’s seacoast was its 2008 Rodsand II wind farm contract with E.ON to manufacture 90 wind turbines” (Stanat, 2010). Today, there are very few competitors in place already in the market, making Siemens’ poised for market entry in a big way (Rothaermel & Hoepfer, 2010). Siemens can create an empire built on a renewable source early on and then carry that success far into the future. This also makes it unnecessary to acquire companies already in the market to capitalize on another’s experience, which will ultimately keep more cash flow in the company’s reported financials as well.
References
Rothaermel, Frank T. & Hoepfer, Matt. (2010). Siemens Energy: How to Engineer a Green Future?
Siemens. (2013). Annual Report. Web. http://www.siemens.com/investor/en/publications_calendar.php
Stanat, Michael. (2010). Corporate sustainability strategies: A Siemens case study. SIS International Research. Web. http://thoughtleadership.sismarketresearch.com/energy-climate-change-research/2010/2/9/corporate-sustainability-strategies-a-siemens-case-study.html
Stock Analysis on Net. (2014). Siemens AG. Research & Analysis. Web. http://www.stock-analysis-on.net/NYSE/Company/Siemens-AG/Financial-Statement/Statement-of-Cash-Flows
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