The Decline of GE

In his column at the Wall Street Journal Holman Jenkins contributes his own explanations for GE’s decline:

Understandably, reporters emphasize the dramatic fall in GE’s market cap, from a company worth $600 billion 18 years ago to barely $100 billion today. But GE shrank partly through sales, having dumped its giant finance arm, its NBC network TV business, and much else.

The really stunning fall is the loss of $175 billion in value in its current set of businesses in 20 months. How did this debacle happen?

In a company that’s nowadays focused on making big machines for other companies, the GE Power business has become the new problem child. The world needs electricity—consumption is expected to grow 30% over the next 22 years. The power unit routinely produced 20% profit margins. But mistakes compound fast in a competitively and technologically demanding industry.

GE made an ill-timed purchase of France’s Alstom in 2015. When the expected upswing in turbine sales turned into a downswing, GE was slow to notice or react, perhaps partly due to promises made to the French government to expand employment.

Orders fell precipitously. Cost-cutting was required, and so were painful choices about whether to slow investment in new technology. All this could only be discouraging to customers making long-lasting, high-risk decisions about whose turbines to buy. By the count of UBS , GE’s share of new turbine sales fell to 11% this year from its historical share of nearly 50%.

Then more bad news arrived in recent weeks, about deteriorating fan blades in GE’s new HA line of power turbines, built and tested out the wazoo to withstand high pressures, temperatures and speeds while promising users lowered operating costs.

He then goes on to defend Jeff Immelt after a fashion:

A conglomerate’s virtue is supposedly the ability of unrelated or partly related businesses to help each other through tough times. The downside is that the stock price of a big and complex company is unlikely to register buried problems until they are far advanced. GE’s stock price long ago decided the conglomerate function wasn’t working. Under legendary CEO Jack Welch, some derided GE as a “faith stock” but his team earned the market’s confidence showing they were on top of problems and reacted quickly to poor performance.

Jeffrey Immelt led the company for 16 years. Despite sweeping changes he made to GE’s business model, Mr. Immelt never regained the market endorsement that Mr. Welch enjoyed. The quest ever since has been for a business mix to which the market will say “yes.”

I think he’s being far too kind. Nearly all of GE’s decline both in stock value and, more importantly, sales volume took place under Immelt’s tenure. Was he GE’s CEO or not? He received an awful lot of compensation for somebody who was simply being buffeted by the winds of fate.

But let’s return to my point of yesterday. It should not have been possible for GE’s management to make so many mistakes over so protracted a period. No major company has adopted the empirical, numbers-based approach to management than GE. Either managers are just pretending to use GE’s Six Sigma or there’s something fundamentally wrong with the methodology itself. I don’t see any other alternative.

Can GE dig itself out of itself on the basis of GE Power alone? I don’t see it. GE Power accounted for about 36% of GE’s revenues in 2017. By divesting itself of Capital, Medical, and Lighting GE is putting a lot of eggs in the Power basket. Power is coping with protectionist measures not only in China and India but in Russia, Brazil, Indonesia, and Kazakhstan by moving production out of the U. S. Will that be enough?