Analyzing the beginning and end of the splitting of the Siemens motor and large drive business

On July 1, the global industrial giant Siemens spun off its large-scale transmission business (LDA), Sykatec Division, Weiss Spindle Technology Division, and the low-voltage motor and geared motor division of Siemens Digital Industries Group, and became a new company independently "Innomotics", the electric motor and large drive company, integrates the fields of low-voltage to high-voltage electric motors, geared motors, medium-voltage frequency converters and electric spindles, and provides related services and project support. At present, the spin-off of related businesses in Germany has been completed, and the spin-off of global business will be basically completed before October 1, 2023.

In this way, the spin-off, which lasted more than two years, finally came to an end. Siemens divested a business worth 3 billion euros, and the global motor and large transmission and market will usher in a "big mac" with about 15,000 employees. ".

01 From hard to soft?

In fact, since the announcement of the Mindsphere system in 2017, Siemens seems to have gradually shifted the company's positioning from a hardware manufacturer to a software and service provider. For this reason, Siemens is busy splitting non-core businesses while continuously acquiring industrial software companies to strengthen its core digital industrial business.

Siemens' Software M&A Process

In the final analysis, starting with hardware products with low gross profit, combining digitalization and creating a digital twin has really brought an increase in Siemens' profit margin. Since 2017, Siemens has averaged a gross margin of 35.5%, compared to an average of 28.8% over the previous five years. This qualitative change of high added value has gradually given Siemens a mentality of being a "Big Tech". It is precisely because of this that in the past few years, the purpose of Siemens' business split and reorganization is to get rid of products with lower profit margins and fewer digital opportunities in the product portfolios of major business units.

For example, in 2020, Siemens announced that it will separate its energy business into a separate company. Company announcements at the time underscored the strategic focus of the energy business and its group. Compared with other Siemens Group businesses, the energy business is significantly below average in terms of profitability, with a disclosed profit margin of 7.1% lower than the group as a whole.

02Why spin off the motor and large transmission business?

With regard to the spin-off of the electric motor and large-scale transmission business, there was still relatively large internal controversy at Siemens. Some people felt that the geopolitical situation in 2022 has undergone fundamental changes since last year. Mining of raw materials such as rare earths has become more strategically important. The Large Drive Applications division LDA produces electric motors, for example for mines, as well as smaller drives for submarines. Therefore, this spin-off was a mistake. A person on the Siemens supervisory board even said: "Siemens' large transmission business can actually continue to be well integrated with other businesses."

Helplessly, Siemens has limited cards and can only keep the most profitable and digitally integrated businesses with it.

First of all, what is criticized is that although the motor and large transmission business has a revenue volume of 3 billion euros (fiscal year 2022), its profit margin is only about 8.3%, which is lower than the average profit margin of Siemens’ entity business in the same period ( 15.1%). After Siemens spins off these businesses, on the one hand, it can improve the profitability of its main business; on the other hand, the independent company can enhance its own value through a more flexible operating model, more focused market positioning and more innovative product technologies. Siemens CEO Busch said that Siemens' goal is to increase sales by about 10% per year throughout the business cycle until 2025, and maintain double-digit profit margins.

Overall Profit Margin of Siemens Group in Fiscal Year 2018-2022

Secondly, from the perspective of the low-voltage AC motor market, the timing of Siemens' divestiture is very interesting. The European Union has enacted new regulations that will come into effect in 2023, requiring motors with a power between 75kW-200kW to achieve an energy efficiency rating of IE4 or higher. This means that, in the next few years, the commercial and industrial motor market will undergo significant changes - the energy efficiency requirements of electric motors will continue to increase. Moreover, the range of products covered by the new regulations is likely to continue to expand in the next few years, and other regions also show similar trends.

These new regulations will continue to drive the development of electric motor technology. Especially in the fields of new energy vehicles and wind power generation, more efficient, energy-saving and environmentally friendly product technologies such as synchronous reluctance, switched reluctance, axial flux and permanent magnet motors may replace traditional induction motors and AC motors. With Siemens spun off into the electric motor market, and with its motor product line likely to be leaner and more focused than before, we expect competition for the energy-efficient motor market to heat up further.

From the perspective of market competition, Siemens' motor and large transmission business faces fierce competition in the global market from international competitors such as ABB, General Electric, and Hitachi, as well as local competitors from emerging markets such as China and India. These competitors have varying degrees of advantages in terms of price, quality, and service, and they have brought huge challenges to Siemens. Siemens split these businesses into independent new companies, possibly to improve its market competitiveness and enhance its market share and brand influence through more flexible pricing strategies, better product quality, and closer customer service.

Manufacturers' Shares of China's Medium and High Voltage Inverter Market in 2022

Finally, from the perspective of optimizing its own business structure, Siemens' split plan has trade-offs.

For example, in the motor and large transmission business, there are some overlapping and cross-cutting products with its core business areas such as intelligent infrastructure, digital industry and mobile travel, which are resolutely separated. For example, motors and large transmission products in construction, factories, rail transit and other fields.

In contrast, Siemens' powerful low-voltage inverter products are excluded from independent businesses and departments*. It can be seen from the decision to retain the low-voltage inverter business that Siemens clearly sees the product value beyond the inverter hardware itself. That is, frequency converters are often seen as the "smart" device closest to the motor, and as such can become an essential product in all types of digital solutions. For example, low-voltage inverter products are one of the important carriers for Siemens to realize digital transformation and innovation with its MindSphere cloud platform and MindConnect connection solutions. By combining low-voltage inverter products with the MindSphere cloud platform and MindConnect connectivity solutions, Siemens can provide customers with more efficient, reliable and intelligent electrical drive systems and services.

*Because the SIMOTICS low-voltage motor series and large-scale transmission application business are included in the split, we previously thought that Siemens' low-voltage inverter product SINAMICS would also be included in the new independent business. However, judging from the current public information, the low-voltage inverter product line will be retained by Siemens Group.

Not only that, the variable frequency drive VFD has been able to sense the electrical signal changes of the motor it controls for a long time. Based on this, many frequency converter suppliers in the market, including Siemens, have begun to provide condition monitoring and predictive maintenance services. These services use The method of "using the frequency converter as a sensor" is introduced.

03 How to deal with oneself after independence?

After independence, the new company Innomotics has greater flexibility and autonomy. It can formulate more flexible and innovative strategies and decisions based on its own market positioning and customer needs, and at the same time seek more opportunities for it. Partners and market opportunities create conditions. The new company can use the existing low-voltage to high-voltage motors, gear motors, medium-voltage inverters and electric spindles to provide customers with more customized and efficient solutions in the fields of construction, factories, rail transit, new energy vehicles, and wind power generation. solutions to increase its market share and profitability.

At the same time, although Inmonda has separated from its parent company Siemens, it can still continue to use Siemens' advantages and resources in the field of digitalization to realize remote control of its equipment by combining with Siemens' MindSphere cloud platform and MindConnect connection solutions. Monitor, diagnose and optimize to increase the availability and lifespan of its equipment. Inmonda can also learn from Siemens' experience and methods in digital talent system construction to build its own digital team and improve its digital transformation capabilities and value creation capabilities.

Finally, Inmonda may open up more new growth opportunities in areas such as hydrogen production, onshore power system access for offshore platforms and ships, and future-oriented water supply and water treatment, and use its efficient large-scale electric drive system to gradually replace Less sustainable traditional systems, helping customers reduce greenhouse gas emissions, especially in areas where carbon emissions are currently high.