By Marilen Martin Siemens AG’s Chief Executive Officer Roland Busch is launching a reorganization of the German industrial behemoth to mesh its digital and real-world products, part of a push to lift profitability closer to the elevated returns reaped by tech companies.

Busch, who took charge of the 179-year-old firm in early 2021, wants manufacturing clients like Boeing Co. and Volkswagen AG to bundle different needs through a single touchpoint. These could be as diverse as connecting a plant to the grid to supplying the controls running machines and the software used to design and operate them.

Starting Oct. 1, four units within the top division, Digital Industries, will combine into a single automation business. Connecting sales, technology and data across separate silos is designed to extract more value from software and AI layered onto Siemens hardware.

“If Siemens can scale R&D and at the same time sell hardware, software and services together to customers as an integrated system, that creates both cost and revenue synergies,” said Jasmin Wolfram, a fund manager at Union Investment, which holds a stake of 0.7% in Siemens.

“That was something investors criticized for a long time: the lack of a companywide backbone,” Wolfram added.

While the company’s push into industrial AI has helped make it one of Germany’s most valuable corporations, its margins still trail European competitors including Switzerland’s ABB Ltd. and are dwarfed by rivals like Honeywell International Inc. in the US.

That’s prompting Busch to undertake another effort to revamp one of Germany’s oldest companies, founded in a Berlin backyard with 10 employees in 1847. In recent years, Siemens has shed businesses from semiconductors to energy equipment and medical technology. This time, the focus is not on what Siemens owns but on getting the businesses that remain to work together more efficiently.

It’s a significant shift for a company whose products range from factory controls and power equipment to trains and industrial software. If the revamp is successful, Siemens will be better able to sell its products as an integrated system and it will be easier for customers to navigate the vast conglomerate.

It’s a significant shift for a company whose products range from factory controls and power equipment to trains and industrial software. If the revamp is successful, Siemens will be better able to sell its products as an integrated system and it will be easier for customers to navigate the vast conglomerate.

The approach has broader implications for Europe’s biggest economy and how its manufacturing champions navigate the AI age. Germany’s economic model was built around companies that became global leaders in cars, chemicals and machinery. As these industries increasingly come under pressure from rising costs, sluggish demand and nimble Chinese competitors, Siemens is betting that adding software and AI to its engineering base can sharpen its competitive edge.

That combination is also at the heart of Busch’s case for why it can compete in industrial AI against US technology and software companies and increasingly capable Chinese automation groups. Unlike a pure software provider, the Munich-based firm already supplies equipment inside factories, buildings, power networks and transport systems.

That combination is also at the heart of Busch’s case for why it can compete in industrial AI against US technology and software companies and increasingly capable Chinese automation groups. Unlike a pure software provider, the Munich-based firm already supplies equipment inside factories, buildings, power networks and transport systems.

That gives it access to machines, customers and operating data that software companies lack. It’s betting that the more tightly its controls, software and data are integrated, the harder it becomes for rivals to displace it — including in industrial AI. To expand those capabilities, the German firm spent more than $15 billion on software firms Altair and Dotmatics and is building an AI hub in Seattle led by former Amazon Web Services executive Vasi Philomin.

For investors, the question is whether these investments and the new structure can lift growth and profitability enough to justify valuing Siemens, which has a market capital of about €215 billion ($244 billion), more like a technology company.

The effort to simplify Siemens has already changed how investors view the company. UBS analyst Andre Kukhnin estimates the valuation discount investors once applied because of its tangled structure has shrunk from as much as 50% about three years ago to roughly 10% to 15%.

“They have been successful in reducing it and commanding valuation that is more and more comparable directly to their pure-play peers,” Kukhnin said.

Closing more of that gap will require Siemens to show that the tighter structure can generate faster growth and higher returns.