Europe's Top Industrial Firms Diverge in AI Strategy Amid Expansion

Europe's three biggest industrial companies are pursuing different strategies as they invest gains from the AI boom, with Schneider Electric joining Siemens in expanding software while ABB focuses on equipment. All three companies have recently raised earnings guidance. The companies have used higher share prices and strong balance sheets to make acquisitions, with each agreeing the company's biggest deal in the past two years.

France's Schneider announced the near-$24 billion acquisition of US engineering software group PTC last week. Dealroom identified the deal as the largest Europe-to-North America transaction since 2021. Schneider chief Olivier Blum said the deal created a complete software and AI business by combining Schneider's power meters, cooling systems and control devices with PTC's software for designing, building and servicing products. Schneider said significant opportunities are emerging as intelligence becomes embedded in products, machines, processes and energy systems.

However, Schneider shares fell 10% on the day the deal was announced. Jefferies analysts worried that the transaction would dilute Schneider's energy management and data centre business. Jefferies analysts questioned such a large software and AI investment amid growing anxiety about the sector.

ABB has taken a different approach with the $5.5 billion purchase of UK industrial components maker Rotork. The Switzerland-based group has 2,000 in-house software engineers, but the acquisition highlights ABB's focus on physical equipment for electrification and automation. ABB chair Peter Voser said last month that ABB would not buy software or AI companies outside ABB's expertise and would instead develop technology internally. AlphaValue analyst Kulwinder Singh Rajpal said ABB's equipment focus shows that market leaders do not necessarily need expensive software to improve profitability.

Bankers say ABB can finance more deals, citing past reports of interest in Legrand, the €36 billion maker of switches and plugs. Company figures show that ABB spent almost $13 billion on acquisitions in the past decade, compared with $38 billion for Schneider and $28 billion for Siemens AG operations. Siemens, Europe's largest engineering company, moved into software by buying UGS for $3.5 billion nearly two decades ago. Siemens completed the $10 billion acquisition of Altair Engineering last year. Altair makes software for the automotive, aerospace and energy industries. Siemens said recent market developments and competitors following Siemens into software confirmed Siemens' decade-long strategy of combining physical and digital technology.

The three companies make products ranging from circuit breakers to computers for factories and high-speed trains. The companies have also expanded products that power, manage and cool AI data centres. Europe has largely missed opportunities in consumer AI models, leaving Europe's industrial companies to invest in the infrastructure supporting AI. Rajpal said the companies' acquisitions fit their respective strategies, supported by strong balance sheets, sufficient free cash flow and clear visibility on data centre demand.

Schneider had the largest data centre exposure of the three last year, generating about €10 billion, or a quarter of total revenues. Schneider raised the company's outlook again on Friday because of surging demand from technology companies. ABB says ABB's technology supplies one in four data centres. ABB's data centre revenues are about $3 billion, or about 10% of total revenues. Siemens' data centre revenues exceeded €3 billion in the first nine months of the fiscal year, about 50% above a year earlier and about 7.5% of total core business sales.

Investors hope the companies will benefit from continued demand for technology that operates data centres, although that demand depends heavily on the AI boom continuing. Investors also hope the companies will benefit from industrial AI, a nascent field that uses factory and production-line data to improve operations. Success will depend on harnessing advanced machine learning using manufacturing, engineering and energy data collected from thousands of sites worldwide. The data could generate measurable investment returns in car and jet assembly, chemical production and oil production through better design, simulation, error correction, lower costs and reduced carbon dioxide emissions. Celonis co-founder Bastian Nominacher said Europe's engineering giants have decades of industrial data and an enormous opportunity to turn that data into competitive advantage through AI.

However, industrial AI implementation remains in its infancy. Rising valuations of leading technology companies have also prompted fears of a potentially ruinous AI bubble. Voser expressed confidence in sustained equipment demand but voiced concerns that financing the boom could lead to a challenging period. Siemens and Schneider are betting that combining equipment and data can deliver success in the next generation of industrial manufacturing. Jefferies analyst Lucas Ferhani said the belief is that hardware and software can no longer be separated in operating future factories.