A lot is hanging on the future of General Electric – and not just the survival of one of the most famous business names in America. Last week a Nomura bank analyst warned that fixing GE’s $115bn (£90bn) borrowing burden was “critical” to keeping corporate America’s $9 trillion debt pile on a stable footing. And GE is on the edge.
Jeff Bezos admitted last month that Amazon – the world’s second-largest company – would fail one day. It seemed an outlandish claim. But the sorry tale of GE shows that the impossible could happen.
In 2010 General Electric was still riding high as the largest company in the world. Its products ranged from fridges to jet engines and Hollywood blockbusters. Even now, power stations using GE equipment generate a third of the world’s electricity. But in June GE dropped out of the Dow Jones Industrial Average for the first time in 110 years – the last of the original cohort to leave the famous index.
Since then things have only got worse. In October GE slashed its dividend from 12 cents to one cent per share, allowing it to save $3.9bn amid strained finances.
The proximate cause of the dividend cut was a $22bn accounting hit on power assets bought from the French firm Alstom in 2015. GE’s chief executive, John Flannery, departed at the same time, leaving one of the titans of American industry on its third chief executive in 18 months and uncertain of its future path.
GE’s size in the energy industry was no protection from a series of major missteps. Flannery’s predecessor, Jeff Immelt, made an ill-fated decision to target coal-fired power stations to feed the developing world’s voracious hunger for energy.
GE’s executives were wrong. Global demand for traditional power generation equipment fell, while forecasts for renewable energy proved far too pessimistic a few years later as the cost of solar power plummeted. In December 2017 GE cut 12,000 jobs in its power business, nearly a fifth of the unit’s workforce.
The $22bn writedown was in effect an acknowledgement that Immelt had massively overpaid for the Alstom assets after overestimating their future earnings potential. GE now faces the prospect of multiple regulatory probes over the accounting surrounding the acquisition.
GE’s market capitalisation peaked in 2000, marking the high point for a firm that was a dominant presence on the American business landscape for more than 100 years. It is now worth about $70bn, having reached nearly $600bn in 2000.
The firm was founded in 1890 by Thomas Edison, the holder of 1,093 patents including the incandescent light bulb. But it was Jack Welch who shaped the modern GE. The chief executive expanded GE’s market capitalisation by more than 30 times during his reign throughout the 1980s and the 1990s. Welch became a hero of American business, retiring in 2001 to a shower of hagiographic profiles.
Yet, like the long bull market, Welch’s star waned, and the model of ruthless discipline that he had pioneered became discredited.
Tom O’Boyle, who traced Welch’s corporate tactics in the book At Any Cost, said the chief executive sowed the “seeds of GE’s destruction” as part of his “reckless pursuit of profit”.
“They’ve been a hedge fund masquerading as an industrial titan since the Welch era,” O’Boyle said.
GE bet on its ability to use its financial heft and supposedly unique management style to take on businesses where it had little expertise. Recent years have been a catalogue of retreats. GE will sell its train manufacturing business, spin off its healthcare unit and sell down its majority stake in the oil-field services firm Baker Hughes. GE sold its remaining stake in NBCUniversal – a combined TV and film group – in 2013.
The biggest misstep was GE Capital, a financial services arm set up to help sell the core industrial products. The side business came to dominate, with the staggering success of GE Capital in the decade before the financial crisis coming to represent the bulk of profits for the whole company.
George Eckes, a consultant who worked with executives at the very top of GE before 2000, said that with hindsight GE had “followed this profit centre to the point of excess”.
The company’s finance boss, Jamie Miller, last month acknowledged that the parent company may have to pump as much as $3bn into the once-dominant subsidiary to shore up its balance sheet.
GE has broken with a long-standing tradition in its search for a solution, appointing the first outsider chief executive in its history, Larry Culp. Culp gained the approval of Wall Street as chief executive of the manufacturing conglomerate Danaher Corporation from 2000-14.
He may be forced to go back to the equity markets in 2019 to raise more cash to help cope with its debts, after telling the market the firm would miss profit targets for the year.
The company still has some strengths to fall back on: its jet engine business has been a bright spot throughout the turmoil, playing up to GE’s strengths in high-value-added, precision industry.
“GE has considerable strengths,” said Culp in a call with analysts last month. “The talent here is real, the technology is special and the global reach of the GE brand and our relationships are truly impressive, but GE needs to change.”
