ESMT–311–0123–1

ES1231

June 27, 2011

ESMT Case Study

Siemens CerberusEco in China:

Introducing low-frills products in
a high-quality company
Introduction
On an unusually cold November day in 2007, Matthias Rebellius, head of the business unit Fire
Safety & Security Products at Siemens Building Technologies Division, was sitting in a hotel room
in Zurich overlooking the lake while reflecting on the meeting he had just attended. Overall, the
meeting had gone as expected: reflecting on past achievements, going through the numbers,
discussing the key performance indicators. But suddenly things became tense during the
discussion of the last point on the agenda: the proper market entry strategy for China. Everybody
agreed that future growth in the market for fire detection products was happening in emerging
markets like Brazil, Russia, India, and China (BRIC) and in the Siemens so-called M3 segments
around the globe – all the numbers clearly pointed in that direction. But it was the way of
addressing these regions and segments that was heavily discussed. Dr. Carsten Liesener, head of
fire detection products and services, proposed turning the solutions business of the business unit
fire safety and security products on its head and developing a new product family under a new
brand name in China and to sell these products with the help of value-adding partners. Others
questioned this approach, mainly due to the danger of cannibalization and issues about
intellectual property protection, but also because they just did not believe that selling products
instead of solutions could be profitable – especially in China.

This case study was written by Martin Kupp and Olaf Plötner of ESMT European School of Management and
Technology, and Carsten Liesener from Siemens. Sole responsibility for the content rests with the authors. It
is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation.
Copyright 2011 by ESMT European School of Management and Technology, Berlin, Germany, www.esmt.org.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording,
or otherwise - without the permission of ESMT.

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 ESMT–311–0123–1 Siemens CerberusEco in China: Introducing low-frills products
in a high-quality company

While the situation was complex and the facts not always as clear as Matthias Rebellius wanted
them to be, he knew that they would have to come to a decision soon. Time was not on the side
of Siemens, as local competition – especially in China with GST or Bolid in Russia – as well as
international competition like Honeywell and UTC were getting stronger and becoming more
aggressive in attacking these promising markets. But could a single company cope with pursuing
two fundamentally different business models: selling complex solutions in the high-end markets
(M1) and plain, functional products in the less demanding but typically fast-growing markets
(M3)? What were the main risks involved and how could these strategies actually be executed?
Matthias Rebellius knew that he would not be able to come up with a solution that evening, but
he was very aware of the fact that he did not have a lot of time on his hands. During the
meeting, they agreed to postpone the decision to the next management meeting in four weeks.
But Matthias Rebellius knew that tomorrow’s newspaper might announce a competitor move that
would force Siemens to act immediately.

Siemens AG
On October 12, 1847, Werner von Siemens and Johann Georg Halske founded the Telegraphen-
Bauanstalt von Siemens & Halske in Berlin, which later became known as Siemens, to produce
pointer telegraphs. The 10-man company began operations in a back building in Berlin. In 1848,
the company built the first long-distance telegraph line in Europe: 500 km from Berlin to
Frankfurt am Main, the then meeting place for the German National Assembly. With the help of
the pointer telegraph, the news that Friedrich Wilhelm IV of Prussia had been elected German
Emperor in March 1849 was transmitted to Berlin in less than an hour. In 1850 the founder's
younger brother, Carl Wilhelm Siemens, started to represent the company in London. In the
1850s, the company was involved in building long-distance telegraph networks in Russia. In 1855,
a company branch headed by another brother, Carl Heinrich von Siemens, opened in St.
Petersburg, Russia. In 1867, Siemens completed the monumental Indo-European (Calcutta to
London) telegraph line.

Throughout the 20th century, Siemens continued its international growth. Siemens dominated in
areas such as telecommunications, medical technology, data-processing systems, manufacturing
of heavy electrical equipment, nuclear power plants, and prided itself on quality and durability.
Siemens expanded its markets usually on the basis of technological competence and close
relations with large customers.

By the end of 2007, annual revenues exceeded €77 billion, providing the company with more than
€6.8 billion free cash flow and €4 billion in net income. More than 425,000 employees were
working for Siemens, scattered across 190 countries. Siemens was organized in three sectors:
industry, energy, and healthcare, as well as cross-sector businesses such as IT solutions and
services and financial services.

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 Siemens CerberusEco in China: Introducing low-frills products ESMT–311–0123–1
in a high-quality company

Siemens Building Technologies

As part of the industry sector, Building Technologies (BT) was an operating division of Siemens AG
and was founded on October 1, 1998, through the acquisition of the industrial activities of
Electrowatt Ltd. (Zurich, Switzerland), thus integrating and combining several decades of
experience in building automation and fire safety.

Electrowatt’s history dated back to its founding in 1895 with a focus on power generation and
distribution and respective engineering services. Its industrial arm was built in the second half of
the 20th century through the acquisition of Cerberus Ltd. (Männdedorf, Switzerland), a world
leader in fire safety founded in 1940, and of Stäfa Control System Ltd. (Stäfa, Switzerland), a
leading European player in building automation founded in 1962. In 1996, Electrowatt acquired
Landis & Gyr Ltd. (Zug, Switzerland), founded in 1896, and merged this company’s building
automation activities with Stäfa Control System under the new name of Landis & Stäfa.

BT consisted of five business units: Building Automation (BAU), Control Products & Systems (CPS),
Fire Safety & Security Products (FS), Low Voltage Distribution (LV), and Security Solutions (SES).
About 50 percent of the BT portfolio (including complex services) was so-called life-cycle
business. This meant that these businesses followed the printer-ink logic in the sense that
customers were given some sort of a hardware or solution (for example, security systems, fire
detection hardware and software, or building automations systems that integrate different
building control disciplines like heating, ventilation, air conditioning applications, lights, and
blinds), which were usually tied to a long-term maintenance contract. The other half of the
portfolio was pure product business that was usually sold via value-added partners (VAP), OEM, or
other distributors.

The Building Technologies division was part of Siemens Switzerland Ltd., Zurich (Switzerland). In
2007 order volume was €6.333 billion, with revenues of slightly less than €6 billion. BT generated
profits of €382 million, giving it a profit margin of 7.8 percent. There was a clear goal for BT to
achieve an annual growth rate of more than five percent with an EBIT margin of seven to ten
percent.

Siemens fire detection products and services

Fire detection products and services were part of the business unit Fire Safety & Security
Products. The main parts of this business were fire detection systems, voice evacuation systems,
danger management, and mass notification systems.

A fire detection system was designed to detect the unwanted presence of fire by monitoring
environmental changes typically associated with combustion. Automatic fire detection systems
can be used to notify people to evacuate in the event of a fire or other emergency, to summon
emergency services, and to prepare the structure and associated systems to control the spread of
fire and smoke.

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 ESMT–311–0123–1 Siemens CerberusEco in China: Introducing low-frills products
in a high-quality company

A typical fire detection system consisted of various components like the control panel, the
primary power supply unit, secondary power supply units, initiating devices, notification
appliances, and the interface to the customer and the supplier or fire departments. Exhibit 1 in
the appendix shows a typical fire detection system.

In 2007 the product portfolio of Siemens fire detection consisted of three main solution
categories: Sinteso for life-cycle business, Synova for product business, and Management
Stations.

The market for fire detection in China

During its quinquennial congress in October 2007, the ruling Chinese Communist Party (CCP)
emphasized its focus on ensuring stable and balanced growth and sought to ensure that this
would remain a policy priority in 2008–2009. In particular, the government would pay greater
attention to the environment, spread the benefits of development to all sections of society, and
narrow income disparities amid rising social unrest, especially in the countryside. Already in 2007
political tensions were high and expected to increase due to the Olympic Games in the capital,
Beijing, which were to start in August 2008. The Games were seen as China’s big opportunity to
showcase itself to the world. Regarding the overall economic situation and outlook at the end of
2007, China’s first fiscal surplus for decades was expected in 2007, with the government balance
forecasted to remain in the black in 2008. Real GDP growth was expected to slow from an
estimated 11.4 percent in 2007 to 10.1 percent in 2008.

At the end of 2007, the Chinese market for fire detection products and solutions could be
segmented in three clear distinctive segments (for an overview, see exhibit 3 in the appendix).
In the premium segment (M1), one would typically find multinational corporations (MNCs) as
suppliers with imported products. These products comply with international certification
standards (EN, UL) and are typically produced in the home country of the respective MNC. Typical
customers were, for example, big hotel chains like the Sheraton. The products are rather
complex and high-tech, with multiple features like immunity to high humidity, compensation for
tough environments, and short-circuit protection. The overall market in this segment was about
1.1 million units with an estimated value of about €28 million. The dominant market players
were Siemens with their CS1140 and DX1151 series, GE with their EST 3 series, and Honeywell
with their Notifier NRS3030 and ND851 series. In this segment, end-users – the general
contractors – were heavily involved in the decision making. Typically, they would specify their
preferred brands. Installers would then offer different products and systems from the list of
preferred brands, but the end-users would make the final decision. The main influencers in this
market segment were design institutes, vendors, and sometimes VAPs. Siemens sold products for
this segment to distributors and VAPs, to installers, and sometimes directly to general
contractors.

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 Siemens CerberusEco in China: Introducing low-frills products ESMT–311–0123–1
in a high-quality company

In the middle segment (M2) were MNCs with locally produced offerings. These products also
comply with international standards (EN, UL) and are often identical in construction to the M1
products but are produced locally in China. The price point for these products was about 30 to 40
percent lower and the market volume was 3.2 million units, with an estimated value of about €48
million. The products had fewer features but nevertheless had fast communication protocol,
adjustable sensitivity, anti-disturbance mechanisms, and were also humidity-proof. These
products were expected to incorporate most of the features of the M1 products within the next
two to three years. The buying process in this segment was slightly different from the premium
segment. End-users would mainly specify budget levels and preferred well-known brands within
this budget. The influence of installers was higher in this market segment.

The low end of the market (M3) was clearly dominated by local suppliers with local products.
These products would only comply to national Chinese standards (CCCF) and were produced
locally in China. And whereas in the M1 and M2 segments part of the market was also the so-
called solutions business with after sales services like maintenance contracts, this did not apply
to the M3 segment. The M3 segment was by far the largest segment, with about 17 million units
with an estimated overall value of about €103 million. Products were rather simple but reliable
with stub line technology, no polarity, and a simple labyrinth (stub line technology does allow for
detecting the fire but not for locating the fire; no polarity meant that installation was slightly
more complicated as installers would have to watch for not crossing cables; for a drawing of a
typical labyrinth see exhibit 5). The biggest player was GST with its GST5000 series and the G3
products. In this market segment, the buying behavior was price-driven. End-users were driven
by price and would often rely on the recommendations of the installers, who themselves looked
for cheap but reliable products. Brand was not a key buying criteria. The leading producers in
this market segment were mainly trying to sell directly to the installers. They would have
branches and sales offices all over the country. Each office had on average 10 sales
representatives, who were commission-based agents and not formal employees of the producers.
About 60 to 70 percent of the market volume for the mid and low markets (M2 and M3) was in
tier 2 and tier 3 cities. And while the local competitors covered about 70 percent of the tier 2
and tier 3 cities with their own branches, Siemens was covering less than 25 percent of these
cities. Exhibit 4 in the appendix shows the different go-to-market possibilities.

The idea
In 2007 it was becoming more and more obvious to Carsten Liesener that BT Fire Safety &
Security Products had to respond to the changing business environment, especially the ever-
stronger growth in the M3 markets, not only in China, but in all BRIC countries as well as in other
emerging markets like Indonesia, Vietnam, and elsewhere.

Carsten was born in Berlin and graduated from Technical University Berlin and University
Mannheim with a degree in Industrial Engineering and a PhD in Business Administration. He had
been working for Siemens for more than 10 years and was in charge of the whole product

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 ESMT–311–0123–1 Siemens CerberusEco in China: Introducing low-frills products
in a high-quality company

portfolio worldwide for Siemens FS. With a small team of dedicated people, he started to analyze
the current trends. Key team members consisted of three two-man teams, internally often called
“couples.” These were the product manager HQ and product manager China; head of R&D HQ and
China; and last but not least, head of sales China and marketing China. These six people not only
collaborated on a daily basis but also tried to build organizational bridges to transcend cultural
differences and potential internal barriers. They got along extremely well both professionally and
personally and were the key driving spirit for the new idea.

By November 2007 they came up with an innovative go-to-market strategy for China. A key
element of their proposal was the development of a new product family called Siemens Cerberus.
It was intended to drive the product business with CerberusPRO for entering the M2 market and
CerberusECO for entering the M3 market in China.

The main reasons for this move were to establish a local footprint in the Chinese M3 fire
detection market and to benefit from the strong growth rates and thus far untapped sales
potential in this market. An additional benefit would be to build up local market expertise and
low-cost capabilities that Siemens could use in other M3 markets around the world. Last but not
least, Carsten wanted to mitigate the risk of M3 competitors by gradually entering the M2 and,
eventually, the M1 markets over time.

The key elements of Carsten’s plan were to develop a differentiated product portfolio under the
Siemens CerberusECO brand. They would start by focusing mainly on tier 2 and 3 cities in China
and address the upper residential developer and commercial buildings. He planned to use the
existing Siemens sales force and to attract new VAPs in these cities. VAPs were mainly local
installers that used Siemens CerberusECO products or the like. At the same time, mainly because
time was pressing and the identification and training of new VAPs would take at least six to nine
months, Carsten was willing to start pushing the product through the existing channels and
already known VAPs who were at that time primarily selling Siemens products in M2 markets. The
key would be to develop a clear and easy to understand differentiation between the existing M2
products (CerberusPro) and the new CerberusECO products for the M3 market. The main
differentiation criteria were product features, price, and sales channels. CerberusECO products,
for example, were planned with stub line, no polarity, and a simple labyrinth at a price point
that was 50 to 60 percent lower than the existing M2 offerings like the SBT BC8001/2.

One of the most debated issues of the plan was the sales approach and especially the steering of
the VAPs. It was agreed upon to give partners volume and growth-based discounts and rebates
and an additional discount for keeping stock according to the order-size levels. Service for end-
customers would be granted only through a hotline or the certified service partners; no Siemens
personnel would be involved in the service. All VAPs would have to take part in a newly
developed training program. They would receive marketing and technical support. The
development of the new product family was supposed to be done in China by a new R&D team
that had yet to be established and was to receive significant support from R&D headquarters.
Production was planned to take part in China as well. Product management should be steered

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 Siemens CerberusEco in China: Introducing low-frills products ESMT–311–0123–1
in a high-quality company

from Switzerland, using the vast knowledge that had been built up in the headquarters over the
years.

Carsten and his team were aiming at launching the product in the third quarter of 2009 and
targeted to sell 26,000 products at a system price point of about 55 Rmb (about €6) in the first
year and then 250,000 units already in 2010. According to the plan, this would calculate to a
small loss in year one and already a black 0 in 2010. For an overview, see exhibit 2 in the
appendix.

While the team was of course convinced of their plan, they recognized some resistance during
discussions with colleagues from other parts of the business. Main concerns were sufficient R&D
capabilities to develop reliable products in time and within cost. Other concerns were related to
IP issues and the high turnover of staff in China. Last but not least, people questioned the sales
approach with VAPs, as building up and training new VAPs would be both timely and costly. But
Carsten was sure that he was doing the right thing and was eager to go ahead and collect real-
time data from the market.

Despite all the information available already at this point, Matthias Rebellius was not sure what
to decide about this plan. Should he give Carsten a go? Stop the project immediately? Or
postpone it to the next management meeting?

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 ESMT–311–0123–1 Siemens CerberusEco in China: Introducing low-frills products
in a high-quality company

Exhibit 1: Set-up of a typical fire detection system

Source: Siemens AG.

Exhibit 2: FS China product sales projection, FY 09-12, mil. RMB

Source: Siemens AG.

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 Siemens CerberusEco in China: Introducing low-frills products ESMT–311–0123–1
in a high-quality company

Exhibit 3: Segmentation of Chinese FS market

1) Price per system point to installer calculate based on 1000 points system
2) Annual unit of data point, and value of the whole system to installer (include detector, panel, controller, etc.)

Source: Siemens AG.

Exhibit 4: Distribution channels for fire detection products in China

Source: Siemens AG.

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 ESMT–311–0123–1 Siemens CerberusEco in China: Introducing low-frills products
in a high-quality company

Exhibit 5: Drawing of a typical fire detection labyrinth

Smoke that enters the labyrinth gets detected by a LED light (the green light going from north to
south). Depending on the kind of smoke that enters the labyrinth the LED light will get distracted and
measured by two photodiodes (on the right side of the labyrinth). Some labyrinths have additional
heat sensors and CO sensors.

Source: Siemens AG.

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