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Siemens says must drive down costs to succeed

Siemens Chief Executive Officer (CEO) Peter Loescher is pictured during an interview in Munich April 25, 2012. REUTERS/Michaela Rehle
Siemens Chief Executive Officer (CEO) Peter Loescher is pictured during an interview in Munich April 25, 2012. REUTERS/Michaela Rehle

FRANKFURT (Reuters) - German industrial conglomerate Siemens aims to slash production costs and could cut jobs to compete with its rivals, its chief executive said on Thursday, after business this year is proving tougher than it had expected.

"As a leading company, we want to be better than the competitors. We don't want to bob along somewhere in the broad masses of the middle," the firm's Chief Executive Peter Loescher said in a statement.

The comments came after Loescher outlined a new savings program for Siemens, Germany's biggest company by market value and a major employer, in a closed meeting with about 600 of the company's managers in Berlin.

Among the program's goals will be to tackle high production costs, review underperforming businesses and simplify internal processes, Loescher said, without specifying how much money Siemens aims to save .

He said although job reductions were not the company's primary goal, they could occur as the program unfolds.

"This is not enough," a local trader said. "Some people had surely hoped for a more detailed statement on savings."

Loescher said Siemens was still working out what specific measures it would take and would present details when it publishes its financial results on November 8.

Shares of Siemens edged lower on the news, ending the trading session 1.3 percent lower at 77.05 euros, while Germany's blue-chip DAX index was up 1.1 percent.

Analysts have said they expect Siemens to target cost savings of 2-4 billion euros, and have speculated that it could seek to divest or restructure some lagging businesses, such as its Infrastructure & Cities unit or renewable energy.

When Loescher took office in 2007, he aimed to turn Siemens from a lumbering conglomerate dogged in recent years by a complex structure and a headline-grabbing bribery scandal into a growth story, aiming to boost annual revenues to 100 billion euros ($129 billion) in a few years from 76 billion in 2010.

But the economic crisis became worse rather than better over the past few quarters, prompting governments and companies to cut their spending on infrastructure and new equipment and weighing on Siemens' orders and margins.

MARGIN GAP

In the three months through June, Siemens' gross margin - what is left of revenues after the cost of production - was at 28.4 percent, and that figure is expected to slip to 27.6 percent in the quarter just ended, according to estimates by Thomson Reuters StarMine.

That is below the 35.2 percent which Switzerland's ABB, a major competitor to Siemens in power systems and industry automation, posted in the quarter through June. U.S.-based General Electric - which rivals Siemens on gas and steam turbines, wind power and equipment for MRI scans of the human body - was at 37.9 percent.

CEO Loescher said costs for research and development as well as administration and sales were also too high, adding Siemens needed to improve its cash flow again.

"But we also have homemade problems, such as with individual projects like connecting wind farms in the North Sea and with insufficient profitability in some businesses," Loescher said.

Siemens incurred just over half a billion euros of charges related to delayed offshore wind power projects in the nine months through June, and its solar business posted losses.

The profit margin at the Infrastructure & Cities unit, which bundled businesses making products such as security systems and high-speed trains, shrank to 5.5 percent from 6.3 percent in the mint months through June. That is well below Siemens' three other core businesses - Industry, Healthcare and Energy.

But Loescher said on Thursday he had no plans to dismantle the four-pillar structure.

HSBC analyst Michael Hagmann said the new programme's outline suggested that all management needed to do to narrow the gap with its competitors was to improve operational efficiency and make acquisitions to bolster its weaker businesses.

"Similar programs in the past have, however, failed to deliver the desired results," he said.

($1 = 0.7751 euros)

(Reporting by Maria Sheahan; Additional reporting by Hakan Ersen; Editing by Toby Chopra)

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