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International Business: Siemens' New Strategy
Siemens Stromberg-Carlson is the U.S. telecommunications equipment division of Siemens AG, the German electronics giant. The Boca Raton-based unit employs roughly 3,300 people in Florida, about 1,500 at manufacturing facilities in Lake Mary and the rest at the Boca headquarters.
The deregulation of U.S. local telephone service and the parallel deregulation of national telephone service in Mexico and other Latin American countries figure to have a profound effect on Siemens, which makes telephone switching equipment.
Telephone switches are the large computer networks that permit phone companies to connect calls back and forth. Siemens Stromberg-Carlson is the number three player in the U.S. market, with about a 13% market share, compared to a 50% market share for AT&T Network Systems and a 34% share for Canadian-based Northern Telecom.
Traditionally, Siemens Stromberg-Carlson has sold equipment to phone companies in the U.S., Canada and the Caribbean from its Florida base. Because Latin America uses a European equipment standard for telephones, Latin customers have been serviced from Germany.
But Siemens is changing the way it does business. The deregulation of Mexico's telephone industry has resulted in the emergence of U.S. players, including MCI, GTE and Bell Atlantic. "It turns out that the real way to deal with those new operators there is to deal with them in North America. We know them here," says Fred Fromm, who took over as chief executive officer at Siemens Stromberg-Carlson last fall.
In fact, Fromm's predecessor as CEO, Anton Hasholzner, is now in charge of development of the Americas. "Basically, what he is working on is to use our capabilities and location in Florida to be more influential there," Fromm says. "Right now, we have not taken on that responsibility officially, but I can tell you we are very actively working on a number of projects in Mexico."
The company's vision, Fromm says, is to turn Boca Raton into the headquarters for the Americas for Siemens.
Great as the opportunities may be in Latin America, Fromm sees even bigger potential in the U.S. market. The deregulation of local telephone service approved by Congress in February figures to trigger a free-for-all between long-distance and local telephone companies and the cable TV industry, all of whom want to deliver voice, video and data transmission services to American homes.
To do that, however, these companies will need new generations of switching equipment. Fromm foresees tremendous demand for powerful new equipment that will enable one company to provide telephone, TV and high-speed data transmission.
Fromm says telephone companies have high quality networks, good switching equipment and physical plant, but can't transmit data very fast because their wire into the home isn't powerful.
The cable TV companies, meanwhile, have a much more powerful wire into the home to deliver video. But most of their networks send signals one way: from the cable company to the customer. "You can only send the signal, you can't send something back. So they have to upgrade their networks in order to be two-way," Fromm says.
Currently, Siemens is part of an alliance with Sun Microsystems and Scientific-Atlanta to develop and sell such equipment. Fromm believes that by 1999, businesses that transfer large amounts of data on a daily basis - such as banks and newspapers - will be using the new switching technology. Sometime after, depending on when the equipment becomes affordable, residential users will begin to benefit.
(Time Warner has a prototype system delivering voice, video and high-speed data transmission to homes in Orlando. But Fromm says Time Warner's hardware is too expensive for mass-scale deployment.)
This may sound like a bonanza for equipment manufacturers, but this brave new world of competition between cable and telephone companies poses risks, too.
"The challenge for the service providers, both the BellSouth's and the cable TV guys, who are on a collision course, is how do you offer service economically?" says Fromm.
The answer, as he sees it, is by demanding cheaper equipment. So while Siemens stands to sell a lot of new switches, it expects intense cost-cutting pressure. "It motivates us to work harder and to reduce the cost of the technology," Fromm says.
Fromm, an affable 46-year-old who grew up in Milwaukee and worked at Bell Labs before joining Siemens in 1979, inherits some other challenges, too. First, Siemens has a reputation as lagging behind AT&T and Northern Telecom in technological prowess, especially in developing wireless telephone switches.
And Siemens has struggled to make inroads against its bigger rivals. "Siemens' share has grown over the last couple of years, but they are still far behind the leaders," says Michael Arellano, an analyst for the market research firm Northern Business Information in New York City. Arellano also isn't sure that deregulation will generate a sales boom for switch makers, saying that the cable and telephone markets won't grow so much as be redivided among different competitors.
Siemens, in fact, laid off 70 people last summer. A company newsletter blamed the job cuts on "an extremely competitive environment where intense price competition is forcing us to become increasingly cost-efficient."
A final problem is that technology is moving so fast that today's bright idea can be tomorrow's white elephant. Arellano notes that just two years ago telephone companies were enthusiastic about building new wire-based systems to deliver voice and video to homes. Then satellite television services emerged, suggesting a cheaper wireless solution to delivering voice, video and data to homes. Earlier this year, AT&T bought a 2.5% interest in General Motors' DirecTV Inc. for $137.5 million.
If Fromm wants an example of what happens to companies that fail to adapt to rapidly changing business environments, he can find it in the demise of IBM's personal computer operation right there in Boca Raton. "All of these pressures [are] changing the business formula. So it's very challenging for us. We have to relook at many of our strategies and many of our processes. We become subject to the same kind of pressures IBM had."
For Fromm, the biggest challenge may be to avoid the results IBM got.
