Jeffrey Immelt, chairman and chief executive of General Electric, discussed the company’s prospects with Peter Marsh of the FT. The following is an edited version of the interview.
FINANCIAL TIMES: Some people think that General Electric, with its mixture of financial services, TV broadcasting and industrial operations, is too complex and should be made simpler, perhaps through splitting off some of the divisions. What do you think about this idea?
JEFFREY IMMELT: The company was designed more than 100 years ago to be a multi-business company. That’s the vision [Thomas] Edison, [who founded the company in 1892] had in the beginning. We’ve evolved since then of course. But we know how to make a multi-business company work. We are good at running a number of businesses in different areas, taking four or five key [management] processes and driving them through the whole of the organisation. At the same time we can leverage the benefits of a triple-A credit rating. We have a superb knowledge of a lot of end-user industries and can join the dots between them. If we want, for instance, to sell or buy real estate in Finland, we are greatly helped by the fact that we’ve probably been selling [aviation] engines in that country for 50 years. The combination of these strengths has led to a prolonged period of superior earnings growth.
FT: But GE’s share price has not been doing too well. Isn’t this a sign that something is not quite right?
MR IMMELT: At its all time high, GE’s stock was trading at a p/e of 50. [The share price was its highest ever in August 2000 when it reached $60 ,compared to about $40 in October 2007]. That’s a performance that is difficult to sustain. Making comparisons [about the stock price] is inevitably to do with the period you select to do this. If you bought the stock in January 2003, you’d be happy. The shares have moved ahead by about 80 per cent since then. There are more advantages than disadvantages [to being a company with a lot of different businesses]. The value of the whole is more than the sum of the parts.
FT: Can we talk about GE’s different industrial divisions, starting with your biggest - infrastructure?
MR IMMELT: Let’s begin with energy. In this field, the next five years are going to be phenomenally exciting. With oil at $90 a barrel, energy is going to be very sexy for some time. We’re going to see an incredible period of growth. We have to consider the multi-dimensional aspects to the technology. GE has got some great strengths in different fields, taking in, for instance, not just the areas where GE has been traditionally strong, such as gas turbines, but in the sectors that look like expanding considerably in the next few years, such as wind and nuclear.
In all these areas, the companies which will win are the ones with superior technology, which can organise their supply chain most effectively ,and can demonstrate they are reliable partners. Taking one example, we’ve had a lot of success in wind energy. We entered this business only in 2002 [through the purchase of Enron’s wind turbine operations]. We paid about $200m for the assets and this year we’ll have sales in this field of about $5bn.
Nuclear is another area where we have a strong business and which is likely to see a lot of growth. Nuclear is going to be somewhere between big and really big. We’re spending a lot of money - $400m-$500m - on new nuclear technologies, such as the Economic Simplified Boiling Water Reactor (a modified form of nuclear reactor). If you look at our nuclear business now it gives us annual sales of about $1bn and this is likely to expand fivefold in the next 5-10 years.
FT: What‘s your view of the solar business, a field in which you are quite small?
MR IMMELT: We have annual sales of about $120m in solar energy [much of this arising from GE’s 2004 purchase of Astropower, a US company that had previously filed for bankruptcy]. It’s an industry with a lot of potential. In September 2007, GE took a minority stake in PrimeStar Solar, another US company exploring ways to build up solar systems through thin-film technology [depositing thin layers of silicon and other materials on a substrate in a technologically complex but potentially low-cost process].
If you look ahead, it does seem as if the thin-film techniques [in contrast to other methods such as making solar cells through a crystalline process] have the greatest promise in bringing down production costs and making solar energy economically viable. We’d be interested either in making other acquisitions [in the solar field] or taking a strategic stake in promising companies, maybe in Germany where there are a lot of interesting businesses in this field with considerable technical strengths. If you look at where the patents are [in solar technology], the leader is Japan, followed by the US and Germany. That means it would be good to be represented in each of these countries [in solar technology]. A problem with acquisitions in solar, of course, is that right now everything is overvalued.
FT: What other parts of the infrastructure business would you like to pick out as an example of a growth field?
MR IMMELT: Water treatment is a big and expanding area for us. We get about $2.5bn a year in sales from this sector now. I’d be very disappointed if it is not $5bn-$10bn in the next 5-10 years. We‘ve made a number of acquisitions in this field and would be interested to look at more, such as in membrane technology [for cleaning up water supplies through filtering or osmosis technologies]. We are setting up a new research centre in Singapore - where there is a lot of expertise in this field - to examine new applications in these disciplines. Water is just the kind of business that suits GE to be in. It’s a global field with a lot of potential in the emerging economies. There’s a great deal of commercial and government focus to improve countries’ capability to provide a safer and more cost-effective water supply.
FT: Please explain your strategy at another of your large industrial divisions healthcare.
MR IMMELT: The healthcare operations have sales of about $17bn a year. Our aim here is to connect up a lot of healthcare processes, built around GE’s core strengths in imaging and diagnostics, to provide a complete service to healthcare customer. The vision in particular is to get the earliest possible view of the likelihood of people suffering from specific diseases or medical conditions, and then arrange for the person to be given the most appropriate treatment.
A lot of this is based around linking up our “in vivo” medical operations [such as X-ray or computer-assisted topography scanning] and clinical diagnostics that are normally carried out on an “in vitro” basis [ie outside the body]. It’s possible to connect up all the pieces to do with patient monitoring and treatment through information technology. In general we’ve been successful in this field in acquisitions.
Particularly important was the £5.7bn purchase of Amersham in 2003 . This took us into the area of imaging agents, improved our links to the pharmaceutical industry and increased our strengths in IT. Through this we were also able to increase our exposure to a lot of new disciplines in biotechnology.
Before this acquisition, GE employed almost no biologists and very few chemists. Now we’ve got a lot more. The deal has led to synergies [combined savings and higher sales] of $400m-$500m a year in our health care operations. [In other planned deals, GE suffered a reverse, however, with a proposal to buy two in vitro testing divisions of Abbott Laboratories in January this year for $8.1bn. The deal was scrapped in July, after the two companies failed to agree terms for the transaction].
FT: Would GE ever want to get even more into the medical business, for instance through buying a pharmaceutical company or a maker of medical implants?
MR IMMELT: It’s always difficult to say to a question like this “never”, but I think in this case I‘d come close to giving this answer. A step like this would take GE too far away from the main focus we have in healthcare which is diagnosis as opposed to treatment.
FT: Let’s turn to another area of your industrial business that seems to be relatively un-loved: the GE Industrial division that combines a lot of sectors including consumer appliances, lighting and automation. Some people have had the impression that, in the context of GE as a whole, you don’t regard these businesses as all that important, on the grounds that earnings and growth opportunities are relatively limited.
MR IMMELT: I don’t think this is a fair view to take. In appliances, for instance, we have operating profits [as a proportion of sales] of 10 per cent and a return on capital of 30 per cent. That’s not bad. We compete very well on these indicators with competitors such as Whirlpool or Electrolux. It’s not really appropriate to consider appliances as a global business. It’s more a multi-regional business, which makes comparisons with some companies such as BSH [the Bosch -Siemens joint venture in appliances] difficult. In lighting, there are huge growth opportunities ahead as the world moves into new types of device such as light-emitting diodes, and away from the old-style light bulb. In general, there is no reason to be in businesses that we are not interested in. So you can take it from this that we are quite happy to be in the sectors that you can see inside GE Industrial.
FT: Which parts of the world offer the biggest growth opportunities for GE as you look ahead?
MR IMMELT: In general our business opportunities outside North America are going to be greater than those inside. [Last year, GE gained slightly more than half its sales of $163bn from outside the US. Of the 319,000 employees in the company at the end of 2006, 164,000 were outside the US.] Of course it would be easier for us if we could get $170bn a year of sales just by selling in Chicago. But of course we cannot. We have to chase the business where it is. That’s why we are much more a global company than we used to be. The fastest growing countries for us are the emerging economies including China, India, Russia and Latin America. In these regions we have annual revenues of about $32bn and the figure is growing at around 20 per cent a year. In Germany, we are also seeing a similar level of growth, but of course it is starting from a lower base. Taking into account the emerging economies and also the more mature markets outside the US, I can see our sales expanding outside North America for the next few years by 10-15 per cent a year. In the US , sales growth will inevitably be lower. This year we’ll probably expand our revenues in the US by 6-7 per cent.
FT: What’s your view of the sales prospects in China and India?
MR IMMELT: China is a centrally planned economy where there’s the prospect of large contracts, sold often through government organisations. We’re getting sales of $5bn-6bn a year in China and this is expanding fast. What we need to do in the next few years in China is go in a direction that you might label “downmarket”. By this I mean that at present we get a lot of sales in China by selling large projects such as big medical scanners. In healthcare, we probably sell $800m-$900m of systems such as these in China, along with related healthcare services. But we could probably double the total sales [in healthcare in China] if we had a bigger range of smaller, cheaper products that we could sell more widely. In India, GE’s sales are about half those in China. The economy here is driven by a buoyant entrepreneurial culture. The government doesn’t really add anything, apart from bureaucracy. So in approaching the business of selling there you have to use a different style to doing the same thing in China.
FT: Emerging economies have helped considerably the financial performance of a lot of companies - GE among them - in the past couple of years. What’s your view of the risks involved?
MR IMMELT: What we have seen is a levelling out of the risk factors . A kind of homogenisation is apparent. The emerging economies are becoming less risky, and the mature economies have become more risky. If you want to see an example of volatility, just look at Wall Street in the past couple of months.
FT: Coming back to the US which is obviously a huge market for you, some people seem to think the US is on the way out as a manufacturing country, even though it is the biggest manufacturer in the world [by value-added output] by a long way. What do you think about this point of view?
MR IMMELT: Manufacturing will continue to have a strong role in the US, as it will just about everywhere. We have a 100-year old railway locomotive factory in Erie, Pennsylvania, that is highly competitive. We’ve changed the factory processes, using Toyota-style manufacturing techniques, so we are much more efficient than we used to be. We can make a locomotive there in 15 days when a few years ago it was 60 days. We make products there and ship them around the world.
FT: What about GE’s track record on innovation and technology? You are putting a lot more resources into this than you used to. Is this a sign that you needed to catch up with rivals such as Siemens of Germany, which some people say has better technology than GE, even though your profitability, and performance in making use of whatever technology you have, might be better?
MR IMMELT: Siemens is a good company and has good products. But to say that their technology is better than GE’s is just an example of German snobbery [about technology]. GE has 40,000-45,000 engineers and spends $5bn-$6bn a year on product development. We have a lot of very good example of innovation and technology. But of course not all the best ideas come from GE. That is one reason we have expanded our research and technology centres around the world to get access to new people, and are also interested in linking up with smaller and entrepreneurial companies.
FT: What’s your opinion of the “credit squeeze” and the view that the US economy may be about to run into difficulties?
MR IMMELT: Housing values in the US appear to be falling. There’s a view that this will make a lot of US consumers feel less wealthy, and lead to a slowing in the US economy generally. It’s clear there has been some bad lending behaviour [by banks] in the US. But in the world as a whole, there is still a lot of liquidity. Companies generally have strong balance sheets, giving them the ability to borrow on reasonable terms. Outside the US, particularly in China and India, economies appear strong. The impact of sovereign wealth funds [state run organisations with large budgets that are investing in infrastructure projects as well as buying foreign companies] is considerable. Even in the US, if we assume there will be some slowing in the economy, the likelihood is that demand for the kinds of infrastructure-related items that we sell, such as medical scanners and power systems, will stay quite high. If you consider the problems in the credit markets, they will not have an impact on the vast majority of GE’s business. In other words, the overall effect on GE will be limited.
FT: Finally, coming back to the share price, does it worry you that GE is no longer the world’s second biggest company by market capitalisation, having lost this slot to Petrochina, the Chinese oil company? [The top three companies by market capitalisation currently are ExxonMobil with a valuation of $507bn; Petrochina, valued at $442bn; and GE, valued at $411bn.]
MR IMMELT: I recall talking to John Chambers, the chief executive of Cisco, a few years ago when Cisco’s market capitalisation was $650bn, and GE was valued at $500bn. Since then, the valuations have changed but I don’t think the details [of valuations] concern neither John nor I too much. It’s better to talk about the fundamentals to a company’s business operations than to focus on the share price.The year before I took over as chief executive of GE [in September 2001] the company’s earnings [in 2000] were about $12bn. Last year they were more than $20bn. These figures provide a better view of the performance of the company. If you look at the Nasdaq index since it hit its peak in 2000, it’s fallen by about 30 per cent. That doesn’t mean that all the technology companies in the index have become bad businesses.