GE Cuts Earnings Forecasts Amid U.S. Credit Turmoil, Shifts Focus to Industrial Businesses in China

By Jason Simpkins
Associate Editor

General Electric Co. (GE), yesterday (Thursday) reduced its annual profit forecast for the second time this year and announced plans to reduce dependence on its financial services arm and focus more on the company’s industrial operations, particularly in China.

“GE today revised its earnings guidance for the third quarter, to a range of $0.43 to $0.48 per share from $0.50 to $0.54, reflecting unprecedented weakness and volatility in the financial services markets,” Chief Executive Officer Jeffery Immelt said in a statement.

GE cut its full-year earnings estimate to between $1.95 and $2.10 a share, down from the previous projection of $2.20 to $2.30 a share. The company also made a grim assessment of the U.S. economy in general, saying, “Difficult conditions in the financial-services markets are not likely to improve in the near future.”

The only silver lining GE was able to muster up was that its financial arm, which accounted for more than half the company’s profit last year, “continues to significantly outperform the majority of its peers among large financial institutions.”

GE expects its financial services businesses will earn approximately $2 billion in the third quarter. However, Immelt also announced plans to reduce exposure to financial markets that includes raising capital in GE Capital to reduce leverage ratios by cutting the segment’s dividend payment to its parent company to 10% of earnings from 40% and suspending the current share buyback. GE Capital’s commercial paper cut from 15% to 10% of its total debt going forward.

Immelt’s ultimate aim is to restructure GE in such a way that that its industrial business accounts for 60% of the company’s earnings by the end of 2009.  That would effectively reduce GE Capital’s contribution to GE’s bottom line by 13%, as financial services made up 53% of the company’s 2007 profit.

It is Immelt’s hope that these measures will reduce risk, strengthen GE’s balance sheet, and allow the company to maintain its dividend and AAA-credit rating.  They are, however, also a reflection of GE’s renewed focus on its industrial operations, which Immelt believes will lead the way to greater profitability, particularly through emerging markets such as China.

“Our industrial business fundamentals remain very strong, with continued global strength in our core industries,” Immelt said. “Long-cycle industrial and service orders are expected to be up double digits in the third quarter.”

The Industrial Shift to China

GE said earlier this month that it expects its business in China to double to $10 billion a year by 2010.

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 Zhangjiang Hi-Tech Park, 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 research-and-development centers that GE operates - would help the company conduct actual R&D 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.

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 on NBC, the U.S. broadcaster for the games.

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