By William Patalon III
Money Morning/The Money Map Report
General Electric Co. (GE) expects its business in China to double to $10 billion a year by 2010, as the U.S. industrial giant aims to overcome a sputtering U.S. economy by ramping up its emerging-markets focus.
"We've seen great growth in China," GE Chief Executive Officer
Jeffrey R. Immelt told journalists at a recent press conference in Beijing. "The whole focus on water and the environment – well, that's going to offer, we think, big opportunities for us as time goes on."
At a time when the U.S. economy has been hamstrung by a severe credit crisis, a burst housing bubble, and energy and commodity prices that remain high in spite of recent declines, the Fairfield, Conn.-based conglomerate expects China to boost sales of the company's clean-energy technology by 15% to 20% a year, Immelt says. GE should also benefit from heavy spending on other types of infrastructure in China's fast-growing urban centers.
The growth initiatives are needed. Back in April, GE cut its financial forecast for the year ahead after blaming the U.S. credit crisis for disappointing first-quarter results. Immelt said that the company's massive GE Capital financial-services unit – which provides 45% of the firm's overall earnings – would be down as much as 10% this year.
For the entire year, GE has projected overall profit growth of between zero and 5% – hardly the double-digit advance in annual earnings that was once a GE hallmark. Immelt has promised to resurrect that consistency.
"It impacts us, but I think we've kind of managed our way through it pretty well," Immelt told The Associated Press. "We haven't had any big write-offs."
Remember the Titan
General Electric is one of the world's largest diversified technology manufacturers, with revenue of more than $172 billion, and more than 320,000 employees. Its product portfolio includes fuel-sipping jet-aircraft engines, home appliances, security systems and nuclear reactors. The company, with a market value of $290 billion, was the focus of a recent "Buy, Sell or Hold" feature by Money Morning Contributing Editor Horacio Marquez.
GE isn't just America's biggest industrial company; it's also the prototypical "Global Titan," a role that it actually pioneered. Under former GE CEO John F. "Jack" Welch, General Electric made lots of little bets in different industry sectors and in different geographic markets throughout the world. None of the bets were big enough to bankrupt the company – indeed, some of them were as small as $10 million – but some had the potential to pay off big, or at least to help cement relationships that would lead to business deals in related product areas, or in related markets.
At the same time, GE maintained a strict corporate credo: It would be No. 1 or No. 2 in every business it was in. In a case where that wasn't true, the business unit would either be fixed until it was – or the operation would be sold, spun off or shut down.
Under Welch, the formula worked – superbly. During his two decades at the helm, Welch transformed GE from a $13 billion (in market value) producer of light bulbs and home appliances into a corporate heavyweight with a market value of half a trillion dollars. Welch shed billions of dollars worth of businesses, and assembled a new lineup – even guiding the $6.4 billion buyout of RCA, which brought GE the NBC television network.
GE soared to top global positions in aircraft engines, lighting, plastics, power generation, railroad locomotives, consumer electronics, home appliances, consumer and commercial financial services, broadcast TV, water treatment and medical imaging.
And that wasn't just in such developed markets as the United States and Europe. Welch realized early on that China would be a key to GE's long-term health, and made many of those small bets in such areas as medical imaging and water-treatment – not to mention the big bets GE made there in power-generation, where it was already a big player.
Immelt – Welch's handpicked successor – has struggled to find the same magic since his mentor retired in 2001. Under Immelt, unfortunately, growth has slowed as GE wrestled with the credit crisis, the U.S. economy's slowdown, and changes to some of its businesses. The GE capital unit was hit hard, and the home-appliance business has also felt the squeeze. Indeed, despite a century of ownership, GE is now working to divest the appliance unit.
In a particularly embarrassing moment, when GE missed its earnings target back in April – just weeks after Immelt had vowed to "step on the gas" to restore growth – Welch publicly slammed his protégé during an interview on CNBC, a popular cable-TV channel that is actually owned by GE.
"I'd be shocked beyond belief, and I'd get a gun out and shoot him if he doesn't make what he promised now," Welch said. "Just deliver the earnings. Tell them you're going to grow 12% and deliver 12%."
Among the many moves Immelt has made, one particular decision substantially improves GE's potential for long-term success: He opted to create an overall corporate focus on global infrastructure needs.
That's key for several reasons. It enables GE to focus on a market – infrastructure – where there will be trillions of dollars worth of projects undertaken worldwide over the next few decades.
And that focus directly positions the company to capitalize on China's explosive growth.
The GE-China Connection
In a market such as China, where even many basic human needs aren't yet being met, infrastructure improvements figure to be first-focus initiatives for the central government. And that will benefit GE, Immelt has said.
For instance, water and power are two basic societal needs. Once those capabilities are available, basic development can begin. But development can't happen without transportation of products and people. That creates demand for rail service. And once folks start to populate a region, all sorts of new jobs will be created, generating income and savings that consumers can spend on household appliances, on improved healthcare, on consumer electronics – and even on financial services, so that consumers will know how to save and invest the money left over from their newfound ability to spend.
This vibrant new economy will facilitate travel to other areas for the first time ever – but it will also attract new foreign investors and first-time foreign workers. Both the tourists and the financiers will require the same service – airplane travel.
As airline travel in Asia expands, the demand for commercial jets will grow in lockstep. And that will stoke the need for aircraft engines. Indeed, The Boeing Co. (BA) has estimated that China's development will create demand for $340 billion worth of new jetliners during the next two decades.
This infrastructure-centric strategy sounds simple – and it is. But GE has products or services that meet all those needs – and many others, as well.
Immelt said that a corporate reorganization announced in July was aimed at simplifying GE's structure and focusing on its finance and infrastructure businesses.
"It's another natural evolution for the company," he told journalists. "It's another way to simplify the company and run it better."
That's why GE has long viewed China as such a key long-term market.
On Aug. 25, GE announced it was starting to move into its new China headquarters, a massive office campus situated in the East Coast city of Shanghai. Located in that city's, GE's China Technology Park complex of offices is an expansion of its former China research center. It covers more than 650,000 square feet and – when completed – will house more than 3,000 employees from GE's China business groups.
Immelt said the new facility – one of four global R&D centers that GE operates – would help the company conduct actual research-and-development programs inside China. The three other R&D centers are located in the United States, Germany and India.
The Shanghai complex also will serve as GE's China headquarters, helping the company with its efforts to "localize" its product lines for the China market. Overall, GE has 12,100 employees in China.
Late last month, GE also said that it would soon be delivering the first of 300 advanced locomotives to China, with the remainder arriving by mid 2010. The first two locomotives – from a contract signed in 2005 – will be shipped fully assembled from the United States. But the remaining 298 will be shipped as "kits," with the local content gradually rising – until it reaches as much as 80%, said Lorenzo Simonelli, the global president of GE Transportation. The first locomotive will be assembled in China next month.
"They will have up to 80% local content," Simonelli told Reuters on the sidelines of a press conference to announce the delivery of the trains, which are valued at $450 million. "It really is a localization effort."
By boosting the local content, GE increases the contract's profit potential, said Tim Schweikert, the president for GE Transportation's China unit.
GE was also a major sponsor for the just-concluded Summer Olympic Games in Beijing, and said it generated $1.7 billion in revenue from that event – including $700 million in sales of power-equipment and other products for sports venues, and another $700 million from advertising for NBC, the U.S. broadcaster for the games.
Overall, companies such as GE and The Coca-Cola Co. (KO) spent as much as $400 million each on Olympics sponsorship and marketing programs, estimates IEG LLC, a firm that tracks corporate sponsorships. About $70 million to $80 million of that total consisted of a one-time payment for the right to sponsor the games, and the rest included advertising and marketing, as well as product promotion,
The Wall Street Journal reported.
GE used the Olympics as a venue to host 2,000 customers and guests from around the world, wining and dining them, taking them to top tourist spots and providing tickets to Olympic events. Immelt himself played host at some of these events, the company said.
Zig When Rivals Zag
Although it's been badly stung by the U.S. downturn, Immelt recently told journalists that he's looking to benefit from the malaise, as well. With prices now depressed for entire companies, unwanted divisions, and even some product lines, GE expects to find some "great deals" on possible buyout targets.
"Some of the best opportunities we've seen in the last 10 years we're seeing right now – assets are cheap," Immelt said. "In financial services, sometimes bad news is good news. You'll see some great deals done in this cycle, and we'll do some of them."
But it will be a seller, as well as a buyer.
GE plans to shed its lighting business, as well as its home-appliance unit. While current plans call for both units to be spun-off as standalone units, Immelt said GE is still open to offers from prospective purchasers. Two companies mentioned as possible bidders on the home-appliance unit include:
- LG Electronics Inc., a South Korean electronics and telecommunications giant that's positioning itself as a global heavyweight.
- And the Haier Group Co., a China-based appliance-maker that's one of that country's real corporate success stories.
"There's a lot of interest in it," Immelt said of the home-appliance unit. "This is a great way to expand into the United States. Our base case is to do a spin to investors, but I think the appliance business makes sense to a lot of people out there."
GE has no plans sell its NBC Universal media unit, even though investors have repeatedly pressured GE to sell or spin-off a business they say has no real connection to the chief business activities of an industrial and financial conglomerate.
"I always say: 'Look, it's a good business. We run it well'," Immelt said. "We've never contemplated it [a sale]. We don't think about it. We like the business."
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.