Pagina 2 de 9 February 5, 2018 Bloomberg Businessweek February 5, 2018 In the century following the Civil And yet, little of this has to do with the stuff GE makes. Its jet engines still War, a handful of technologies dominate the global market. Its tur- revolutionized daily existence. bines, whether in gas, coal, or nuclea power plants, still provide a third of the The lightbulb extended the day, world's electricity. Its CT scanners and electric appliances eased domestic MRI machines are still the state of the art. So what happened? drudgery, and power stations made them all run. The jet engine Unlike General Motors Co., Boeing Co., and other American manufacturing collapsed distance, as, in other icons, GE isn't associated in the pub- ways, did radio and television. lic imagination with just one indus- try or one product, but rather with X-ray machines allowed doctors industrial innovation itself. Famously to peer inside the body, vacuum co-founded by Thomas Edison, GE was actually run in its early years by another tubes became the brains of early co-founder, Charles Coffin. The former STOZ computers, and industrial plastics shoemaker saved the young company from insolvency by negotiating with J.P. found their way into everything. All Morgan, untangled key patent rights with Westinghouse, and established those technologies were either the industrial research laboratory that invented or commercialized by would bring so many good things to life Since Coffin, GE's secret weapon GENERAL General Electric Co. and in a way its dominant product- 43 has been its managers. The company brought organizational rigor to the For most of its 126-year history, during a stock market boom in which process of scientific discovery, and GE has exemplified the fecundity the Dow is up 41 percent, GE has lost scientific rigor to management. In the WITH and might of corporate capitalism. 46 percent of its value, or $120 billion. postwar years, GE hired psychologists t manufactured consumer products A few months after Immelt retired as for a personnel research department and industrial machinery, powered chief executive last summer, the com- It also bought an estate on the Hudson commercial airliners and nuclear sub- pany shocked Wall Street by announce River an hour north of New York City marines, produced radar altimeters ing earnings that were barely half of and turned it into the world's most and romantic comedies. It won Nobel analysts' already lowered estimates. famous management training center. Prizes and helped win world wars. And Soon after, GE said it would halve Crotonville, as it came to be known, it did it all lucratively, rewarding inves- its once-sacrosanct stock dividend was a place where current and future ELECTRIC? tors through recessions, technological because it was short on cash. It also leaders would retreat to be taught disruption, and the late 20th century said it would sell or spin off $20 bil- tested, and imbued with the compa- collapse of American manufacturing. lion in businesses, including its light- ny's values. GE's courtly CEO and chair- That long, proud run may have bulb division. (The appliance business man in the 1970s, Reginald Jones, was come to an end. It happened, as Ernest was sold to the Chinese manufacturer the most admired business executive of Hemingway wrote of going bank- Haier Group in 2016, along with a his era, pushing into international mar rupt, "gradually and then suddenly." license to use the GE brand.) kets and serving as an adviser to four GE hasn't inspired awe for some time Then in January came news of a U.S. presidents. now: The company had to be bailed $6.2 billion charge related to costs Jones's successor was a chemical out in 2008 by the federal govern- incurred more than a decade ago by engineer named John Welch Jr. who'd ment and Warren Buffett, and across GE's financial-services business, an risen through the ranks of GE's plastics the 16-year tenure of recently departed announcement that triggered a U.S. division. You may know him as Jack. The astonishing mess Chief Executive Officer Jeffrey Immelt Securities and Exchange Commission Under Welch, GE came to be seen as a at an iconic American its stock was the worst performer in the investigation. GE's new CEO, John factory for elite corporate talent. The Dow Jones industrial average. Flannery, has grimly promised that "all new boss placed a premium on leader- company The past year, however, has seen options are on the table," including the ship development and the ruthless cull- By Drake Bennett GE enter new territory. Since Donald once-unthinkable option of dismember- ing of underperforming employees. He Trump's election in November 2016, ing the company entirely. became the highest-profile evangelistPagina 4 de 9 February 5, 2018 Bloomberg Businessweek February 5, 2018 and armored against cyclical down- GE Capital could borrow money in . . . . . . . 8:::8: urns in individual industries. And if GE the U.S. to fund offshore businesses in The SEC's Beef With GE is extraordinarily large: .. . . . . also became known for eschewing gen countries where corporate taxes were $28.9 billion in 2017, filings erally accepted accounting principles much lower (or nonexistent), then turn Murky accounting has gotten the company in trouble before , after roughly tripling from 2010 to 2016. About in favor of more exotic and less infor- around and use the interest charges on half that is from the service native measures, investors and ana- those loans to offset the income from General Electric has long interested in GE Capital's contracts. v creative accounting insurance portfolio and in Chief Financial Office ysts could at least take comfort that the GE's onshore manufacturing busi- that wasn't a problem service agreements on GE Jamie Miller said on a company was in capable hands. nesses, making its U.S. tax bills disap equipment, particularly in its onference call with analysts when the company was power business. but she's been reviewing Under Welch, GE's net income pear. And unlike a factory, GE Capital's consistently topping investor Here, GE's accounting the books and isn't "overly swelled from $1.65 billion in 1981 to highly liquid assets could be bought or expectations. These days, it's ractices appear to be concerned" about the issues more of an issue. pretty standard: As many eing investigated. This isn't $12.7 billion in 2000, even as its work- sold at the ends of quarters to ensure ter a year of problems company GE's first time on the w force shrank from 404,000 to 313,000. the smoothly rising earnings that inves- rom cash-flow shortand bases its revenue projections side of the SEC, though. on a number of variables Back in 2009, the agency But over time, less and less of that tors loved. The term accountants use such as the future expense accused GE of breaking rules income came from technological inno- for earnings from these sorts of one-off some long-term insurance Is Securities of maintaining equipment to increase profit or avoid and whether it thinks reporting losses. GE didn't vations or manufacturing prowess or asset sales is "low-quality," but through Exchange Commission customers will be able admit or deny wrongdoing, even the productivity gains Welch had the historic bull market during which opened an investigation into GE's accounting to pay. But the mismatch but it did agree to pay between GE's booked $50 million to settle the wrung out early in his tenure. Instead Welch had the good fortune to run the practices. The regulator is sales and total cash expected claims. -Richard Clough A dial-studded GE computer used t came from GE's financial-services company, investors tended not to get to model a complex electric power system, Columbus, Ohio, 1955 arm. From its humble beginnings hung up on questions of quality. GE's financing family purchases of refriger market capitalization grew from $14 bil- that did billions of dollars in busi- the entertainment assets of Vivendi ators and dishwashers during the Great lion in 1981 to more than $400 billion ness with airlines). As the years went Universal and $9.5 billion for the Depression, GE Capital had ballooned when Welch retired in 2001. on and GE's stock price fell to a third British medical imaging company into a behemoth whose global stable of The risks became clear only under of its Welch-era peak, Immelt came Amersham. There were bargains such for Six Sigma, a management philoso- to a growing skepticism among inves- investments ran from insurance to air- Immelt, who took over the company under pressure from Wall Street as Enron Corp.'s wind-turbine busi- phy based on the systematic pursuit of tors and economists about giant diver- craft leasing to mortgages, giving GE in the wake of the dot-com bubble and to do something. He embarked on ness, picked up in a bankruptcy auc- otherworldly flawlessness. Promising sified companies. During the 1980s, as a share of the action during a period right before the attacks of Sept. 11 (a a series of splashy acquisitions, tion, but for the most part the deals young executives were moved between conglomerates were increasingly writ- when the financial sector was the 45 46 particularly acute shock to a company for example paying $5.5 billion for proved more expensive and less distant poles of the GE empire-from ten off as lumbering and opaque, GE fastest-growing part of a fast-growing medical devices to locomotives to NBC was lauded as what researchers at the U.S. economy. (GE bought the television network in Boston Consulting Group called a "pre- In the hands of GE's financial exec- 1986)-so they could inject fresh ideas mium conglomerate"-focused despite utives and tax lawyers, earnings from GE Power's Schenectady, N.Y., and test themselves. Armed with Six its diversity, nimble despite its scale, this division had special powers. headquarters in the 1980s Sigma, inspired by Jack, honed by the breakout sessions at Crotonville, GE's organizational officer corps could run anything, the thinking went. General Decline The company's mandarin confi- dence was reflected in the tradition of GE has been the worst-performing stock in the Dow Jones GENERAL ELECTRIC dustrial average for more than a year allowing chief executives tenures that measured in the decades, so they could Boeing lift their eyes from the daily fever line of 1009 the stock market to more distant hori- zons. Over time, Welch's management teachings became a best-selling literary subgenre. Fortune magazine named him manager of the century, and other busi- ness periodicals were no less fulsome in their praise (this one gave him a reg ular column). Such was the premium placed on GE managerial talent that when Immelt, with papal pomp, was unveiled as Welch's successor, the other GE two longtime GE executives who'd been -50 finalists for the job were quickly hired as 12/30 / 16 /30/18 BETTMANN/GETTY CEOs by 3M Co. and Home Depot Inc. GE became the great counterexamplePagina 6 de 9 Bloomberg Businessweek February 5, 2018 Bloomberg Businessweek February 5, 2018 synergistic than promised. Scott Davis, a longtime GE analyst and the CEO of A problem in collapse entirely. In October, GE had to raise $15 billion through an emer- The Giants of GE plants just as the market for them was contracting. Part of the decline Melius Research LLC, has calculated one business gency stock sale, $3 billion of it from The men who've made the company what it is- was due to the falling cost of renew- that GE's total return on Immelt's is exactly what a Buffett's Berkshire Hathaway Inc. GE or better or worse able energy, a competitor to natural acquisitions has been half what the only survived the year intact thanks gas, part to a drop in oil and gas prices, ompany would have earned by simply premium o $139 billion in loan guarantees from which hurt demand from the petro investing in stock index mutual funds. conglomerate the federal government. Immelt also publicly pledged to In the decade after that harrowing CHARLES COFFIN states that are some of GE Power's biggest customers. GE was left with a return GE to its industrial roots (with a should be able experience, GE Capital was severely 1892-192 bunch of turbines on its hands. It was new concern for environmental impact) and reversed the deep cuts Welch had to shrug off downsized. But elsewhere, Immelt a costly mistake: The combination of kept on acquiring, spending $10 bil- GE's first president talked his way out of higher inventory and lower earnings made to research and development. lion for the power business of French corporate bankruptcy during the Panic of reduced the company's cash flow by Still, under Immelt GE Capital only Immelt had reassured investors company Alstom, for instance. He also 1893. Without him, there would be no GE. $3 billion. This past August, with the grew. Its profits quadrupled as it gob- that all was well, GE's profits fell poured money into GE Digital, an ambi- stock price burrowing ever down- bled up credit card companies, sub- short of analyst expectations by a tious effort aimed at perfecting a soft ward, Immelt stepped down as chief prime lenders, and commercial real then-unprecedented $700 million. ware language to handle the torrents executive, saying he would stay on as estate. These weren't businesses GE "It seems like something's broken of information created and captured chairman until the end of the year. By had much experience in, but the com- here," Davis, then a Morgan Stanley by next-generation industrial machines. REGINALD JONES October, though, he'd stepped down pany had long taught its young execu- analyst, said on GE's quarterly earn- Immelt talked about making GE a "top from that post, too. 10 software company" whose code ever 1972-1981 tives that they could manage anything. ings call. The company, it turned GE wasn't the only company to out, had been relying heavily on its competitors would have no choice miss the slowdown in the gas-turbine The 2008 financial crisis revealed short-term debt to ensure those ris- but to use . He started in the company's Business These efforts failed to forestall the Training Course in 1939 and never left, market-so did competitors such as this not to be the case. In the first ing earnings, and when that market taking GE global along the way. Siemens AG and Mitsubishi Heavy quarter of that year, a month after froze, GE lost its magical tool. Within next round of troubles-and in the case Industries Ltd. But a problem in one months there were worries that the of Alstom, they helped precipitate it business is exactly the sort of thing company wouldn't be able to pay With that deal, GE had made a mas- that a premium global conglomerate Big Dreams, its debts, then worries that it might sive investment in natural gas power 47 48 should be able to shrug off. Instead, JACK WELCH just as in 2008, the opposite is happen- Small Returns GE's acquisitions under Immelt performed poorly, to say the least 1981-20 01 ing, with robust GE businesses being dragged down by stressed ones. And now as then, investors and analysts AMERSHAM EDWARDS SYSTEMS ALSTOM His favorite saying was "Fix it, close it, or sell it"-basically the who'd been reassured by GE execu- $9.5b, 2003 $146, 2004 $10b, 2014 20th century equivalent of tives that things were fine have found "Move fast and break things." themselves blindsided. GE's decision TELEMUNDO Hope: The diagnostic Hope: Expanding its Hope: GE would be to cut its dividend wouldn't have been pharmaceuticals com- $2.76, 20 01 building-security sys established as the so surprising if it hadn't spent $49 bil- pany would put GE tems business would undisputed global lion on stock buybacks over the previ- in position to lead " position the conglom- leader in power genera- Hope: One of the first new chapter in medi- erate to gain from pop tion from natural gas. JEFFREY IMMELT ous three years-something companies deals of the Immelt era, cine," in the words of ulation growth and a societal focus on safety Reality: The low-margin 2001-2017 typically do when they're flush with it was designed to give Amersham CEO Sir cash and looking to return some of it GE's entertainment divi- William Castell. WMC MORTGAGE in the U.S. OIL AND GAS operation bloated GE's sion (which at the time power unit just as the to shareholders. included NBC, and later Reality: Investors $500m, 2004 Reality: It did not. GE $146, 2007-14 global gas-power mar He had a tough act to follow, not least The dividend cut also brought Universal Pictures) have complained ever sold its entire security slumped. Profit in because he took over at the beginning renewed attention to GE's $31 bil- a foothold in the ce-in interviews, Hope: In a booming division five years later Hope: A series of rapid- the division fell 45 per- of a series of bear markets. fast-growing Spanish- research reports fire acquisitions- lion pension shortfall, which dwarfs housing market, sub- for just $1.8 billion. cent last year; GE language market. and among them Power is now in the that of any other U.S. corporation. NET/GETTY MAGES. IN prime mortgages are Vetco Gray, Dresser, selves-that GE spent a guarant ed money- and Lufkin Industries- process of shedding GE's January announcement that it Reality: Almost immedi too much on the maker, right? was supposed to help 12,000 employees. ately, analysts criticized deal. They argue that was setting aside billior of dallas. GE grow quickly in a -Richard Clough the purchase as an Amersham had Reality: You can guess not market. JOHN FLANNERY for payouts on long-tel overpay. Within a year little-to-no overlap with how that went. GE got 000 icies from an insurer i mundo's share of GE's other industrial out after just three the Spanish-language businesses, there was years-in the middle of 000 Reality: From 2014 to 2017- ago only added to the 2017, with the collapse prime-time audience little-to-no reason to the mortgage crisis- 0OO in oil prices, profit in "It makes you wonder had fallen to 16 percent hang on to it. but the fallout endures. GE's oil unit plummeted The Man Who Could Break Up GE says Nicholas Heymann, from 22 percent. GE As of September 2017 92 percent. GE merged has spent his first six months wo William Blair & Co. and : got out of the entertain- the company was still 000 the business with Baker to streamline the aging behemoth. ment business entirely acing multiple related 10 Hughes and is now porate auditor at GE. a little more than a awsuits. considering getting out What's additionally baffling about decade later. of the industry. GE's difficulties is that there's no COFFIN .Pagina 8 de 9 February 5, 2018 Copyright of Bloomberg Businessweek is the property of Bloomberg, L.P. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for Aviation Is Still individual use. Flying High business towould likely be the last -11% Change in GE's 017 profit Of the three busi- nesses GE is most likely to hang on to- power, aviation, and health-care-aviation s the most valuable . Change in GE de from being GE' Aviation's 2017 profit most profitable divi- sion last year, it's als 45% responsible for the pany's current star product, the Leap engine, a quieter jet Aviation's s turbine used on both GE Aviation technicians work GE's positive operating the Airbus A320 and on an Moot turboprop aircraft engine in Prague in 2016 income the Boeing 737. surrounding global financial crisis, no announced that GE Digital will be so far also point toward making GE chorus of sober-minded people fear- scaled back to pursue "a much more more comprehensible, not only to ing for the future of capitalism itself. focused strategy" selling a few appli- investors but also to its own manag- Rather, the company is flailing while cations to existing GE customers. He ers. The message is that the company, the world's major economies are all has also indicated that the company even if it isn't broken up entirely, will robustly growing. It's the exact sort of will forgo big acquisitions, point- get smaller and simpler. "Complexity moment when GE's global scale should ing out that the Alstom deal "has h hurts us," he said in November. be an advantage. "It's like their sails clearly performed below our expec- "Complexity has hurt us." He's betting are all torn when they've got the per- tations." The blizzard of unorthodox on a future where GE doesn't require fect wind," Heymann says accounting metrics is being replaced management wizardry to run properly, by more-traditional measures. There because wizards turn out not to exist. John Flannery has a reputation at will be fewer businesses, and some of If all goes well, GE will become a GE as a fix-it man. A company lifer, those businesses will do fewer things. more mundane brand. It will be less he made his name by turning around The changes Flannery has promised about spreading the gospel of inno- its health-care division after spend- vation, managerial excellence, or ing most of his career at GE Capital. "It's like their digital disruption and more about Already, Flannery is moving decisively making really good jet engines, gas to address the problems he inherited- sails are all torn turbines, and medical equipment, something his predecessor, in hind- selling as many units as possible, and sight, waited too long to do. He ha when they've upselling clients on software and main- replaced the leadership of GE Power got the enance plans. Perhaps it will be liber- as part of a broader exodus of senior ating. Being an icon isn't worth wha MARTIN executives and board members, and perfect wind" it once was. @ -With Richard Clough