US industrial titan loses its lustre
After nearly 40 years at the top, General Electric has lost its position as the largest US manufacturer by market capitalisation, following a dramatic slide in its share price this week. Ursula Milton discusses the future of this American industrial titan with the FT's Ed Crooks.
Presented by Ursula Milton and produced by Fiona Symon
From the Financial Times in London, I'm Ursula Milton. And this is FT News.
After nearly 40 years at the top, General Electric has lost his position as the largest US manufacturer by market capitalisation, following a 13% slide in its share price over two days. The falling GE shares follows its announcement on Monday of a 50% cut in its dividend and a warning that earnings in 2018 were on course to be only about half the level the company had previously forecast. Some investors also reacted with disappointment to the plans for turning the company round set out on Monday by John Flannery who took over as chief executive in August. Here with me to discuss the future of this American titan is Ed Crooks, our US industry and energy editor.
First of all, could you put this dramatic fall in context for us? Just give us a bit of a history of the company and why it's such a famous name.
Yeah, I think you used the expression industrial titan, which is exactly right. GE has been a huge figure in the US and indeed the global industrial landscape for many decades. Of course, it has a very famous history-- founded by Thomas Edison back in the 1880s-- that was kind of the ancestor's company to GE found in the 1880s-- and then, subsequently, formed as GE in the 1890s, this great, long history, operations all over the world.
And it's also been for 37 years the largest US manufacturing company by market capitalisation. In fact, for a while in the late 1990s, it was the largest company by market capitalisation of any on the entire US stock market. And so it's had this extremely eminent position from which there has been a long period of decline really since the 1990s then really followed by quite an abrupt slump just recently over the course of this year and then even, particularly, as you've been saying, in the past few days, with investors worried about the outlook, worried about the chief executive's plans to turn the company around, and also very disappointed, I think, with the sharp cut in the dividend.
So briefly, what's gone wrong? When did the problems start? What sort of form do they take?
This is a company in a lot of industries that move quite slowly. And so I think it's very fair to think of the problems as having developed over a large number of years. One of the important things to think about with GE was that it was not just a manufacturer. It was a very big conglomerate really with a huge financial services arm. The financial services division, built up during the 1980s, 1990s, that accounted for more than half its profits at one time.
And in 2015, the previous chief executive Jeff Immelt took the decision to sell off the vast majority of those businesses to focus on industrial activities on the expectation that cash flows would pick up from the industrial operations, and that would allow the company to keep paying its dividend and give it a bright future. And that didn't happen. The industrial businesses have been very disappointing, hit by various problems, in particular to do with the weakness of fossil fuel industries.
They've had problems with gas-fired power generation. They've had problems in their operations serving the oil and gas industry. And so it's turned out that relying on those industrial businesses has been much less of a good bet than Jeff Immelt hoped it would be.
So John Flannery took over in August. What's he been doing since then? And what's the strategy that he set out on Monday for turning things around?
So there's been a lot of sort of symbolic stuff since then. He's grounded the company's fleet of executive jets. He's saying that senior managers all used to be given a car by the company. And that's not going to happen any more.
There have been various job losses announced here and there. For instance, he's been pruning back some of the software operation that GE had been investing very heavily in its digital operations. And John Flannery says that's still a very important part of the company's future, but he's not going to try and spread it as widely as Jeff Immelt had planned to do. And so he's been cutting back on that.
He has not talked about huge headcount reductions. There's no big job loss figure that's been published by GE. Although, it seems likely the head count will come down a lot.
But what he has talked about is focusing the company really and focusing really in just three key areas, such as aviation, parts for aircraft, and aero engines. Of course, GE famously makes power generation and equipment for the electricity industry and health care, medical equipment, scanners and so on. And what he's saying is he's going to focus on just those three business lines and sell off everything else. And so a lot of other things that GE has been doing, for instance, making locomotives, which is a business they've had for a century, and indeed the original lighting business. All of that is going to be sold.
Wow, so some serious changes. What's been the response from investors?
Well, yeah, I mean you say serious changes. I think investors often have been disappointed because they'd expected more. I think maybe they expected a more emphatic commitment to cost reductions. People have said, well, they've been talking about cost reductions for a very long time. And it doesn't seem to really help their performance very much.
And also people have been talking about a more radical break up and maybe thinking that, for instance, the health division, again, which doesn't have very obvious synergies with power equipment or with aircraft components, people have said why not spin that off and make it into a separate business, which actually is what GE's great German rival Siemens is planning to do. It's planning to float its equivalent health care business.
And so I think that explains a lot of the poor share price reaction we've seen over the past few days. It's people thinking that, really, there's a bit too much continuity in GE's management. There's not enough of a sense of urgency of really trying to turn the company around.
So if you had to make a forecast, difficult thing to do, I know, do you think GE can recover? Do you think it can avoid a break up? Do you think Mr. Flannery can do it?
I certainly think it can recover. I mean if you look at the industries it's in, aviation is an industry with a fantastic long-term prospects, I mean, depending on what happens to world prices and so on and to the world economy and to security around the world. Providing things go on as they have been, more people will be flying in the future. And aviation aerospace is going to have a great future.
Health is certainly going to have a great future. People are going to want more medical treatment, more sophisticated equipment, and so on. So that's also business, which looks really good long-term prospects. Power generation maybe has some more question marks over it.
The rise of renewable energy has been very bad for GE's traditional coal business in gas-fired power generation. But GE also has a good renewable business in its wind turbines. It's the second largest manufacturer of wind turbines in the world. So that should have a good future ahead of it.
And so, certainly, if the businesses can be run right, if they can be made more efficient, if they can be streamlined to generate the cash and generate the profits that John Flannery wants, then yeah, I certainly think it's doable. But these things are not quick and easy. These are businesses that operate on long lead times. And they're quite slow moving industries. And so, certainly, I think the process of turning around is going to be a slow business as well.
So investors will want to be patient?
I'm afraid investors will have to be patient, certainly, yes.
Thanks very much for shedding light, Ed. And thanks also to our producer Fiona Simon. And don't forget you can follow more developments in this story on ft.com/companies.