GE Returns to its Roots

GE Returns to its Roots

Manufacturing becomes a priority for GE again, but is the company betting too heavily on support from government policies?

The towering windmill slowly churning near Cleveland Browns Stadium on a breezy late-May morning only serves as a way to increase renewable-energy awareness for nearby Great Lakes Science Center visitors. But during that same week in May, General Electric Co. and a nonprofit energy development organization announced a plan to make wind energy in Ohio a reality by building the world's first freshwater wind farm in Lake Erie about six miles north of Cleveland's football stadium.

Fairfield, Conn.-based GE will build direct-drive wind turbines for a planned wind farm headed by the Lake Erie Energy Development Corp. The May 24 announcement is an extension of GE's Ecomagination initiative launched in 2005. The company considers the alternative-energy market a key part of its goal to strengthen its renewed focus on manufacturing-related revenue. Since introducing the campaign, the 130-year-old conglomerate has increased Ecomagination revenue 260% to $18 billion in 2009, noted Chairman and CEO Jeffrey Immelt in a Feb. 19 letter to shareholders.

In the same letter, Immelt said it's time for GE to get back into the manufacturing business. The company plans to accomplish this by stepping up R&D investment in areas such as energy, health care, aviation and transportation. The company also continues to spend heavily on lobbying activities that could accelerate growth in these industries but have come under fire by critics.

A heavy-duty gas turbine rotor is assembled at GE's Greenville, S.C., manufacturing plant. The company has committed to investing more in manufacturing and increasing exports from the U.S.
GE's industrial awakening was spurred by losses within its financial arm, GE Capital. The lending unit contributed to an 18-year-low stock price of $5.87 a share in March 2009. In response, GE shrunk the business, and Immelt pledged the company would become a leader in U.S. exports. "For the last decade, we have run the company with, at times, more than half our earnings coming from financial services," Immelt told shareholders. "As we grew, financial services became too big and added too much volatility. GE must be an industrial company first."

The company also reached an agreement in December to sell a controlling stake in NBC Universal to Comcast Corp. Since making these moves, GE's stock rebounded to a 52-week high of $19.70 on April 30 before falling to the $15 to $16 range by June. In addition, the company's first-quarter earnings beat analysts' estimates, despite falling 31% from the year-earlier period to $1.9 billion.

Health care Sector Booms

But the company's industrial growth strategy is by no means a quick fix, says John Rice, a GE vice chairman who serves as president and CEO of the company's Technology Infrastructure segment. GE is focusing on long-cycle businesses that take several years to mature. As examples, Rice cites the low-emissions Evolution Series locomotive introduced in 2003 and the anticipated launch of its GEnx engine for the Boeing 787 Dreamliner. Both took about a decade to develop. "Companies sometimes get criticized for being too short-term focused," Rice relates. "Most of what we do on the industrial side of our business requires multiyear thinking, multiyear investing and a real focus on the long-term."

Rice estimates the company's investment in R&D was up 7% in 2009 and says it will increase by double digits in 2010. In October 2009, GE opened a $100 million R&D center in Van Buren Township, Mich., that will eventually employ more than 1,100 workers who will work on renewable energy and jet engine technology. In May, Rice visited Michigan to announce the addition of 220 jobs to the region for software development related to jet engine and avionics systems development.

GE has shifted much of its investment focus to businesses in energy and Rice's Technology Infrastructure segment, which accounted for 27% of the company's total revenue in 2009 and is the second-largest behind GE Capital. GE created the business unit in 2008 as part of a companywide restructuring that consolidated six business segments into four. The Technology Infrastructure unit encompasses the company's aviation, health care and transportation businesses. The fastest-growing market within Rice's unit is health care, he says.

In May 2009, the company launched a $6 billion initiative called Healthymagination that calls for GE to invest $3 billion in health care-related R&D and introduce at least 100 new products by 2015. The company began seeking ways to develop medical devices that reduce health care costs for its customers after the Deficit Reduction Act of 2005 went into effect. The bill signed into law in 2006 placed limits on Medicare reimbursement rates to certain diagnostic imaging users.

The company has set improvement targets of 15% for its new products in each of the following areas: procedure and process cost reduction; access to the technologies; and outcome quality, Rice says. In the first year, Healthymagination led to the creation of 24 products. One of the new products is a handheld ultrasound called the Vscan that's not much bigger than a mobile device, such as an iPod or cell phone. The goal is to make ultrasounds more readily available to rural areas throughout the world, Rice says.

The other part of Healthymagination relates to the company's efforts to reduce its own health care costs. GE is developing a "healthy work site" certification program that recognizes facilities that meet high health standards in areas such as fitness, nutrition and preventive health care.

Lobbying for Support

Healthymagination was born from the company's Ecomagination effort to create greener, more energy-efficient products. Through 2008 GE created more than 80 products as part of the Ecomagination program, including renewable energy, rail transportation and water technologies. GE's prospects in the energy sector could benefit further from a national energy policy. The company is a founding member of the United States Climate Action Group that supports proposed federal cap-and-trade energy legislation.

John Curtis, a GE test and assembly technician at the company's Peebles, Ohio, aviation site, works on a GEnx-2B engine for Boeing's new 747-8 Intercontinental airliner.
In fourth-quarter 2009 GE spent $6.8 million lobbying the federal government on everything from energy and health care to rail and aviation, according to documents on file at the Senate's public records office. The company also has been tapping into federal stimulus funds for energy-related projects. "GE is definitely counting a lot on the stimulus money, and a lot of the industries where the government is planning to spend some money in terms of new energy, new technologies and smart infrastructure," says Dilip Sarangan, an analyst with Frost and Sullivan.

The company's lobbying has some pundits saying GE is too cozy with Washington and that its efforts will derail industrial recovery in the United States. One of these critics is Tom Borelli, director for the Free Enterprise Project and senior fellow for conservative think tank the National Center for Public Policy Research. Borelli contends that GE is putting shareholders at the mercy of Congress. "Unfortunately, I don't think a lot of investors are aware of the significant political risk that GE is exposing shareholders to because Immelt at this point has put all his cards on government, especially with respect to the green, renewable energies. That's all dependent on government subsidies," Borelli says.

In August 2009, the Washington Examiner reported that the Free Enterprise Action Fund, where Borelli was a fund manager, obtained an e-mail from Rice encouraging his co-workers to join the General Electric Political Action Committee. The Examiner reported that Rice said in the Aug. 19 e-mail that "the intersection between GE's interests and government action is clearer than ever."

When asked what he meant by that statement, Rice told IW: "GE applies its experience and expertise in governance and the rule of law to help governments all around the world formulate responsible, inventive policies that meet some of their biggest challenges. We work to build relationships that positively serve the pursuits of both business and governments. Because of our global footprint and the interconnected nature of today's business world, it is important that GE participate in public-policy debates globally."

But Borelli says GE's dependence on government poses a risk to shareholders by basing business decisions on what the government wants rather than consumer demand. He points to European countries pulling back on alternative-energy subsidies as a prime example of government-supported green-manufacturing programs gone awry. The reality, though, is that investments in energy technology will follow markets where policies and standards drive demand, John Krenicki, president and CEO of GE Energy, said in an e-mail.

For instance, China's funding for cleaner energy technologies will most likely make it a world leader in wind power installations, he noted. "Countries around the world are vying for leadership in cleaner, smarter energy technologies," Krenicki said. "Frankly, U.S. energy policy is lagging behind in the race for technology leadership."

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