What's the Secret Behind Siemens's 169 Years of Survival? | QDaily Business History

QDaily Business History looks at companies with long histories that have survived to this day — what they got right, and what they got wrong.

Today we take on a serious question: how does a company live through three industrial revolutions and end up not just alive but still a heavyweight?

This case is about as clear as they come. One piece of evidence: this year marks the 200th anniversary of the founder's birth — and 200 years ago China was still in the Jiaqing reign, not long after the fall of Heshen, and the British had not yet gotten around to selling opium to China. The founder belongs, quite literally, to another age.

The company is Siemens.

Yes, the company you remember for washing machines and refrigerators, and, in earlier years, phones and laptops as well. It used to be everywhere, and its advertising slogan — "broad and profound" — worked hard to prove it. But the appliance and electronics business changes fast. By now, what does Siemens actually have left to boast about?

A few numbers show that this German antique still has some life in it: in 2015, its 168th year, it ranked 63rd on the Fortune Global 500, with annual revenue of 75.6 billion euros and profit of 7.38 billion euros.

Given that the average Chinese small or medium-sized enterprise lives only two and a half years, and a corporate group about seven, it is worth pressing the question: how does a big company stay alive that long, and stay one of the strongest the whole way through?

Siemens caught all three industrial revolutions

Siemens started out in telegraphy.

It owed that first fortune to the first Industrial Revolution. James Watt improved the steam engine in the late 18th century, the steam engine went into locomotives, and Siemens built its commercial network along the railways.

In the 1830s and 1840s, cheap transport let rail networks spread across Europe and the Americas like a spiderweb. The expanding rail network created demand for communication — stations needed to talk to one another instantly to dispatch trains properly — and a huge telegraph market was taking shape.

In 1847, the 31-year-old Werner von Siemens invented a new kind of telegraph and founded Siemens on the strength of it. As the railways expanded, the Siemens telegraph network grew with them across Europe and Asia. In 1848, Siemens laid the first long-distance telegraph line in Europe, 500 kilometers running from the German capital, Berlin, to Frankfurt. In 1870, it laid a line from London to Calcutta, India, 8,000 kilometers long.

The first serious crisis came soon after. The technology was not good enough: telegraph transmissions were disrupted again and again, sometimes cut off entirely, and the furious Prussian government decided to drop Siemens.

Having lost its biggest customer, Werner von Siemens turned to the electrical field instead. "Electrical," put simply, meant anything to do with generating, transmitting and using electricity — the field he knew best as an electrical engineer.

That decision put Siemens in exactly the right place for the second Industrial Revolution. How important is electricity? Today the question barely needs asking. But 150 years ago Siemens already saw it. For a long stretch afterward, as long as it made no big mistakes, making money and expanding came easily. By 1930 Siemens employed 127,000 people, overtaking its main rival of the day, AEG, to become the largest electrical company in Europe. Generators, electric lights, electric trains — you could find Siemens in every corner of the world that had power.

By the end of the 20th century, the third Industrial Revolution had opened the electronic and information age. This time Siemens was slow. It fell into what economists call the technological lock-in trap: a company that built its edge on one technology comes to depend on that technology, ignores the chance that a new one will arrive, and misses its opportunity to extend its own life.

Siemens started making mobile phones and lost to Nokia. Its network equipment lost to Nokia too. It moved into personal computers, but that market was ruled throughout by Compaq, Dell and HP. In short, Siemens produced almost no successful consumer electronics.

After it sold its entire home appliance business to the Bosch Group in 2014, Siemens had almost nothing left that faced consumers directly — and the ads calling Siemens "broad and profound" all but vanished. Its product line, though, is still very wide. Its main products today include the electrical equipment used in railways and transit, power generation and transmission equipment, equipment for industrial production, and electrical equipment for buildings. It became, in short, a company that serves other companies and governments: its technology is in the Shanghai and Beijing subways and in China's high-speed rail.

What let Siemens win back some ground is that the third Industrial Revolution was not only about consumer electronics. New energy was part of it too, and during this period Siemens bought wind- and nuclear-power companies in bulk. In healthcare, it acquired Bayer Diagnostics and an ultrasonic flow meter company.

Siemens's businesses are varied, which makes changing course easy

This big company turns faster than people expect. Its decisive exit from the early telegraph business already showed as much.

Failure happens often, and there is no avoiding it. Take phones: from 2001 to 2004, Nokia's elegant handsets beat Siemens's heavy, ugly ones badly, and Siemens's share of the phone market fell from 8% to 2%.

But such failures did Siemens no real harm — unlike Kodak, which could only file for bankruptcy once its film business failed. Finding its phone business permanently in the red, with no particularly good way to rescue it, Siemens sold the business to BenQ and walked out of the market. The decision was not a hard one. Since 1996, Siemens has reviewed every business internally, and any business that is not among the top three in its industry risks being sold.

For a company as large and sprawling as Siemens, this is like a gecko dropping its tail to escape danger. The tail is gone, but it grows back. When phones failed, Siemens could still sell computers. When computers stopped selling, there were appliances. When appliances ran into trouble, there was the generator business. The approach, interestingly, came from Siemens's biggest rival, General Electric. One of GE chairman Jack Welch's articles of faith was that a business which is not first or second in its field should be dropped entirely.

What gives companies this size the nerve to work that way is that diversification will always carry them through a crisis. Nokia is the obvious case: the world remembers it as the company whose phone business collapsed and that eventually went under, but in fact, after handing the phone business to Microsoft, Nokia leaned on its network equipment sales, which brought in 12.7 billion euros in revenue in fiscal 2014.

You may recall that this was also the principle Werner von Siemens set down not long after founding the company: get into "everything" connected with electricity. After the phone, PC and other consumer electronics businesses failed one after another, Siemens reorganized itself into four divisions — energy, healthcare, industry, and infrastructure and cities. Next to those, the consumer electronics businesses really did not amount to much.

The global market is another way Siemens hedges its risk

The other secret that has kept Siemens out of bankruptcy is globalization, a lesson it learned early, back when its telegraph business ran into trouble.

In its first years Siemens was in a hurry to expand its market, and haste caused problems. It signed contracts with governments before the technology was mature, and in rushing to lay telegraph lines it often left the insulation inadequate. Many of Siemens's early telegraph lines ended up with serious problems in communication quality.

That was when the furious Prussian government gave Siemens its shove, ending its cooperation with the young company.

The Russians saved it. In the 1850s, the Russian government let Siemens spend two years building a telegraph network 10,000 miles long, and Siemens became a long-term partner of the Russian government, responsible for maintaining those lines.

The handsome profits from these long-term contracts rescued a company on the edge and became an important support for its early growth — even though, in truth, what the Russians paid did not match the service Siemens provided.

From then on the international market was always Siemens's most important strategy. In 1872, not many years after the Guangxu Emperor was born, Siemens had already entered China. From telegraphs to generators to electric lights, its business in China kept growing. By 1910 it had gone so far as to set up the Siemens China Electrical Engineering Company — and it stayed until the founding of the People's Republic of China, when Siemens was driven out of the Chinese market.

It came back soon enough. In December 1978, with China only just recovering from years of turmoil and the political situation still unclear, Siemens held an "Electrical and Electronic Technology Exhibition" in Shanghai. You can marvel at Siemens's nerve; you can also see, plainly, how much the international market meant to it.

Today Germany itself accounts for less than 15% of Siemens's revenue, while emerging markets led by China account for 36%. Siemens's generators, electric trains, industrial equipment and building equipment are exactly what fast-growing emerging countries need most. Emerging markets have been not only Siemens's most important source of growth in recent years but also one of its tools against risk.

A few more notes on Siemens

In Siemens's long history there are stories that have no direct bearing on how it runs its business, but that still help us understand the company.

— Germany has plenty of "old antiques" like Siemens

Siemens has been around 169 years. For most Chinese companies that is a number to look up to. In Germany it is nothing to brag about.

According to the records of Teikoku Databank's historical archive, Germany is among the countries with the most century-old companies in the world, with roughly 2,000 of them. Mercedes-Benz was founded in 1870. The chemical giant BASF was founded in 1865. Another chemical company, Bayer, was founded in 1863.

Part of the reason is that Germany came late to the Industrial Revolution. The first Industrial Revolution began in Britain and brought forth a wave of textile, steel and coal-mining companies. Those industries later declined, and the companies moved to developing countries. It was also technological lock-in that kept Britain from catching the second Industrial Revolution, which created no small number of openings for the Germans.

Because the opportunities of the second Industrial Revolution had more to do with infrastructure, this generation of German companies was well placed to thrive for a long time. Germany was destroyed twice, in the First and Second World Wars, and twice rebuilt itself from the rubble, creating enormous opportunities for German companies along the way. Siemens was one of the biggest beneficiaries.

These companies are not the world's oldest, of course. By Wikipedia's list of the oldest companies, the oldest in the world is a Japanese construction firm, Kongo Gumi. Founded in 578 AD, it is the oldest surviving "millennium company" there is, and its main business is building temples.

— Nazism is a bitter chapter in Siemens's history

After Hitler came to power, Germany grew steadily more authoritarian. For companies the choice was to submit to Hitler's rule or to try to make money from his power; either way, most of them became "Nazified" to some degree.

Siemens was no exception. With labor in severe shortage during the war, it took prisoners from the concentration camps to work. Many camp laborers spent the morning making electrical equipment for Siemens and were gassed in the afternoon in gas chambers the company had built. Of Siemens's 200,000 employees in 1944, more than 150,000 were concentration camp prisoners.

After the Second World War, Siemens was called to account for its wartime conduct. Some members of its board killed themselves; others were taken away by the Soviet Red Army. Friedrich Lüschen, the deputy chairman of the Siemens board, killed himself in 1945 after Hitler's suicide. This disgraceful history became a past Siemens will not discuss, and even today the news archive on its website holds only a few scattered records of it.

Not everything was that brutal. During the Nanjing Massacre carried out by Japanese troops in 1937, John Rabe, then head of Siemens's Nanjing office, used his German citizenship and his Nazi Party membership to establish the Nanjing Safety Zone, protecting some 250,000 Chinese civilians.

John Rabe's story was later adapted into the film John Rabe.