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General Electric: Back To The Lab

Mon, 09/30/2013 - 10:26am
Tom McNamara and Erika Marsillac

General Electric (GE), in addition to being one of the world’s largest corporations, is also considered to be one of its last true conglomerates. What started out from humble beginnings in Thomas Edison’s work shop in New Jersey has grown into a multinational behemoth. While most famous for its light bulbs that bring “good things to light,” many people don’t realize that for much of the last decade, GE was basically a bank.

By 2002, the company’s financial services division — GE Capital  had grown so big that some Wall Street analysts judged GE’s performance by using Citibank as a benchmark. Banking, insurance operations, commercial loans, leases and middle market finance were just some of GE Capital’s components.

All those financial elements meant that GE was hit hard by the financial crisis of 2008, in part because it was not immune to the market over-optimism that led to the crisis.  By 2008, GE Capital made up roughly $600 billion of the company’s overall assets (in pre-crisis 2007 it was $630 billion), leaving it hugely exposed to global market volatility.

Amid the general financial panic, the company lowered its earnings expectations. It also cut its dividend and cancelled an expected stock buyback program. In spite of this (or perhaps because of it) the stock price went into a free fall, and the company lost its premier AAA credit rating. Some investors called for the breakup of the company. Desperate, GE reached out to Warren Buffet and Berkshire Hathaway to arrange for some much needed liquidity. Mr. Buffet was more than happy to oblige (for a guaranteed 10 percent annual dividend on his investment of $3 billion, of course).

GE has now come full circle, and decided that the interests of its stockholders and customers are best served by it lowering its exposure to finance, getting back to basics and putting a renewed emphasis on manufacturing and industry.

Getting back to manufacturing basics requires GE to strategically realign its operations, a process that has already started. One recent move has been the investment of billions of dollars in energy-related businesses. At the same time, GE is exiting what it calls peripheral or “non-core” businesses. One loss has been its commercial real-estate holdings, and another its remaining stake in NBC.

For GE, this move away from financial exposure and risk can’t come fast enough. Just this July, the Financial Stability Oversight Council (FSOC), a part of the U.S. Treasury, made the determination that GE Capital posed a threat to the financial stability of the United States. As a result, the division will now be subjected to “consolidated supervision and enhanced prudential standards.”

To reduce its risk exposure, GE wants to cut GE Capital to half its 2008 size.  As proof, the company recently announced that it was selling its U.S. consumer lending business. Morningstar (an investment research firm) believes that this can only be a good thing. "[Manufacturing is] what they're really good at," says Morningstar, and it's what will “continue to drive their competitive advantages."

GE’s competitive advantages should be further strengthened by the over $70 Billion in cash holdings it has and the average 2000 patents it files every year. The company’s refocused industrial segments include its energy infrastructure, health care and aviation divisions. These combined units are responsible for almost two-thirds of GE’s current total revenue.

One expected benefit of this refocus on manufacturing should be job creation. In a flurry of activity, GE recently announced it would double its number of engineering interns to more than 5,000 and bring more fabrication and production work back to the U.S. Plans are also in the works for a $580 million investment in manufacturing and research & development. GE Aviation expects to add 400 new manufacturing jobs and open three new plants, while the company also announced it would bring back the production of certain appliances to the U.S. Meanwhile, it plans on hiring 5,000 U.S. veterans over the next five years and partnering with the U.S. Chamber of Commerce to help veterans better adapt and reintegrate into the civilian workforce.

GE’s story appears to be just one more part of a growing trend to “re-shore” manufacturing jobs back to the US. For the sake of the U.S. economy, one can hope that GE will “light the way.”


Dr. Tom McNamara is an Assistant Professor at the ESC Rennes School of Business, France, and a former Visiting Lecturer at the French National Military Academy at Saint-Cyr, Coëtquidan, France.

Dr. Erika Marsillac is an Assistant Professor in Maritime and Supply Chain Management at Old Dominion University, Norfolk, VA, USA and a former lecturer at the ESC Rennes School of Business, France. 


Sources

“Companies awash in cash, when will they spend it?” By John Waggoner, USA Today, May 30th, 2013. Accessed at:

http://www.usatoday.com/story/money/columnist/waggoner/2013/05/30/investing-corporate-cash-levels-soar/2373401/

“Does GE Capital Deserve That AAA?” by Heather Timmons and Diane Brady, Bloomberg Businessweek News, April 7th,2002. Accessed at:

http://www.businessweek.com/stories/2002-04-07/does-ge-capital-deserve-that-aaa

GE website: ge.com

“Financial Stability Oversight Council” US Department of the Treasury, Accessed at:

http://www.treasury.gov/initiatives/fsoc/Pages/home.aspx

“GE at 4-year high on industrial segment outlook” AP News, appearing in Bloomberg Businessweek News, September 27th, 2012. Accessed at:

http://www.businessweek.com/ap/2012-09-27/ge-at-4-year-high-on-industrial-segment-outlook

“GE Highlights What Works in America; Focuses on Manufacturing, Innovation, Jobs and Trade” GE Press Release, February 13th, 2012. Accessed at:

http://www.genewscenter.com/Press-Releases/GE-HIGHLIGHTS-WHAT-WORKS-IN-AMERICA-FOCUSES-ON-MANUFACTURING-INNOVATION-JOBS-AND-TRADE-3662.aspx#downloads

“GE's net income drops 16 percent in second quarter” by Chris Kahn, The Associated Press, appearing in The Denver Post, July 7th, 2012. Accessed at:

http://www.denverpost.com/business/ci_21122882/ges-net-income-drops-16-percent-second-quarter?source=rss

“GE plans more cuts at GECC unit by end-2014” Market Watch, The Wall Street Journal, May 22nd, 2013. Accessed at:

http://www.marketwatch.com/story/ge-plans-more-cuts-at-gecc-unit-by-end-2014-2013-05-22

“G.E. Will Pay Back $3 Billion to Buffett” by Susanne Craig and Ben Protess, The New York Times, September 13th, 2011. Accessed at:

http://dealbook.nytimes.com/2011/09/13/general-electric-to-pay-back-warren-buffett/?_r=0

“Report: GE to spin off consumer finance business” The Associated Press, through Bloomberg Businessweek News, August 30th, 2013. Accessed at:

http://www.businessweek.com/ap/2013-08-30/report-ge-to-spin-off-consumer-finance-business

 

 

 

 

 

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