There could not possibly be any clouds on the horizon with the Dow and the S&P 500 setting all-time highs, while the German DAX is marching relentlessly towards 8,000 and the Japanese Nikkei is soaring. But just then, a deeply connected representative of the world’s real economy spoils the rosy scenario.
“The world is lacking an economic locomotive,” said Peter Löscher, CEO of Siemens, one of Germany’s crown jewels, a self-described “global powerhouse in electronics and electrical engineering” with 370,000 employees spread over 190 countries, and €78.3 billion ($101 billion) in revenues. A gauge of the world economy. So the company had had some issues.
“I came to Siemens when the company was in its greatest crisis,” Löscher told the Handelsblatt in an interview. In 2007, he’d become the first CEO in the 165-year history of the company to be hired from the outside. At the time, Siemens was at the center of the largest corruption and bribery scandal ever in Germany. Its offices had been raided in 2006. In 2007, it was fined by the European Commission for being part of a bid-rigging and price-fixing cartel of international power systems suppliers. Two former executives were convicted in a German court on bribery charges. Other settlements followed. By the end of 2008, the cost of those fines and settlements was approaching €3 billion.
Löscher got the company through it and invested in politically correct green technologies to scrub the smudges off its image. It worked, and he was seen as sort of a hero. But now Siemens is under pressure. It missed its earnings forecast for fiscal 2012 by almost a billion euros. While revenues rose about 7%, expenses jumped, and net profits dropped 26% to €4.5 billion. And those were the good times.
Löscher wants to shave off €6 billion in costs. The company might cut 7,000 jobs in Germany. “Program Siemens 2014,” it’s called ingeniously. Arch-competitor GE also announced a corporate weight-loss program. “In economically difficult times, you have to work on productivity,” Löscher said.
Economically difficult times? You wouldn’t know it from the stock markets in the US, Germany, and Japan that have been soaring in their omniscient manner. And that American locomotive? Isn’t it pulling hard, based on what the Dow and the S&P 500 are doing? Nope. It’s “at best lumbering along,” he said.
At best! He should know. Siemens USA employs about 60,000 people spread over every state. But that American locomotive that the world had become so dependent on is sputtering. Then he moved on the next locomotive.
“During the last crisis, we had China,” Löscher said nostalgically, “and most of the other developing countries also had high growth rates.” But those hopes have dimmed. “Short term, you cannot expect a stimulus from China,” he said. So there’ll be no one to pull the world out of the next slump.
And he worried about the euro crisis. “It remains difficult. The Eurozone is in a recession. With Cyprus it has become clear that the uncertainties in the markets are not over yet. Medium term, progress will be slower in Europe.”
Companies like Siemens, unlike megabanks, have to survive in the real economy, but…. “Business has not become easier,” Löscher said. “The short-cycle businesses are lacking momentum as well. We don’t expect any tailwind from the global economy and markets.” And then he even took away that last glimmer of hope: “Many experts expect an upswing in the second half. We have yet to see any signs of that.”
So how to prepare for this scenario? “Full concentration on what we can influence,” he said, referring to his famous Program Siemens 2014, “thus cost efficiency and productivity,” namely laying off people and shedding troubled subsidiaries. When enough companies cut back, it exacerbates downward pressure. Four investment banks are already hawking all sorts of Siemens units. Including those in solar energy, now that Siemens’ image has been burnished; things have changed, he said, “the markets fell off, Spain cut the subsidies, and the US discovered shale gas.”
Hopefully, revenue would be flat in 2013, and in 2014, maybe there’d be some “moderate growth,” he said. But wait, wasn’t the goal to reach €100 billion in revenues? “That was a secondary goal,” he said. But it’s now out the window. “Currently, the world economy is at a flatter stage.”
That sums up the real economy around the world. The trillions that central banks have printed and handed to their cronies went chasing after assets and have created all kinds of bubbles and immense wealth at the top. They obscured risks, distorted credit markets, and inflated stock markets that have now become drunk with this money and blind to the real economy. It makes sense: central bank manipulations were never designed to, and can’t, cure underlying economic problems—but they do get in the way of resolving them.