By Sarah Knight
FRANKFURT, Sept 23 (Reuters) - Germany's largest manufacturer needs to convince investors it can turn a tidy profit if it wants to become the General Electric of Europe.
Siemens AG is regarded as a safe bet in the volatile technology industry thanks to its profit-spinning lighting and medical units, cash flow power and modest debts.
Its shares are up about 20 percent on levels four years ago against telecom network gear peers such as Alcatel , Lucent and Nortel . It also has the highest Standard & Poor credit rating among them with AA-.
But investors need convincing that Siemens' diverse structure creates value, rather than just insurance against weakness in one part of the business or another.
"If Siemens wants to become a world-class company, not only from a technological perspective, and command a higher rating it needs to prove it can react more quickly and cut costs more aggressively," said Dan Manor, an analyst at CSFB in London.
Valued against conglomerates exposed in part to similar sectors, Siemens' operating margin in the last quarter was 4.4 percent, compared with 20 for GE, 2.1 for Philips -- a rival in medical and lighting -- and 15 for Emerson , which boasts a mix of electronic and telecoms products.
Profitability at the German industry giant, best known among many consumers for its refrigerators and washing machines, is being dragged down by a fallout in the telecom network market and by structural issues at a number of its units.
CEO CONFIDENT
The Munich-based firm founded by Werner von Siemens, which has come up with such useful things as the electric generator, says it is leaving no stone unturned to boost profitability.
"Siemens has never been in such flux as today," 61-year-old Chief Executive Heinrich von Pierer told a German newspaper recently. The Bavarian is also fond of reminding analysts that some of their past advice has proved wide of the mark.
Erstwhile industrial conglomerates like Marconi Plc , now a shadow of its former self, show that the move to pure technology many analysts once favoured for Siemens would have been disastrous.
The acid test for Siemens is whether it can meet margin targets for each unit in the next two business years -- around the time Von Pierer is due to hand over his mandate -- though some doubt if this is possible in the current environment.
"I would be happy if they can just achieve their somewhat modest targets for a firm their size," said Trudbert Merkel, a fund manager at Deka in Frankfurt, who helps manage a five billion euros fund. "But I don't think they can.
That view has been reinforced by reports on Finnish mobile phone maker Nokia and U.S.-based telecommunications equipment maker Lucent , warning of weaker sales markets for their network niches.
Siemens is looking to shed several billions of euros in costs, but has shied away from the kind of massive job cuts that staff representatives on its supervisory board fight off with the help of strong German labour laws.
Since last year the firm, which employs a workforce almost as big as Frankfurt's population, has said it will shed around seven percent of jobs including about 15,000 on hallowed home turf, where it has costly severance packages to deal with.
Apart from trimming jobs, Von Pierer -- a feisty tennis player -- is squeezing managers with 60 percent performance related pay. Unit heads report back to the board every quarter.
"What they have not yet achieved though is really a common management culture throughout the company," said Frank Rothauge, an analyst at Bank Sal. Oppenheim in Frankfurt.
ACTION NEEDED
Analysts appreciate that Siemens is making an effort but say it needs to be more ruthless in shedding small, inefficient businesses in its Industrial Services and Solutions division and ditching poor perfoming bits of the Building Technologies group.
They also want Siemens to slash more than the 17,800 jobs already on the chopping board at its fixed line telecom equipment maker I&C Networks (ICN) as demand for its products goes through a dry spell.
They say Siemens should use its deep pockets to help ICN muscle in on North American markets where competitors are reeling from weaker sales.
I&C Mobiles is likely to fall under the same shadow as mobile phone-making industry benchmark Nokia, which lowered its sales targets for mobile network equipment in the upcoming third quarter and forecasts a weaker market.
In handsets Siemens has gained market share, with a broader focus on high-end and low-end models, taking 8.4 percent of the market behind Nokia, Motorola and Samsung but it is fighting for more to ensure it survives long term.
"I think as the market gets more competitive it needs to step up the pace of new launches," said Christopher Heminway, an analyst at Lehman Brothers in London.
With the dramatic rise and fall of the tech sector grabbing headlines in recent months, other units making up two thirds of Siemens' business have perhaps avoided closer scrutiny.
Some analysts expect the Siemens division with the biggest margins could see its profits halved in the next two years.
The power generation unit, which earned 476 million euros last quarter, is expected to see a U.S. boom for its gas turbines thin out towards 2004 with lesser prospects for new business.