Recently the New York Times reported the strategic sale of GE’s financial business as follows, “Common Sense: Do-it-All Era Ending as GE Returns to Core” and commented, “GE on its way to exorcizing the financial demons of Jack Welch”.
At present, seven years after the global financial crisis, GE is winding up it’s own seventh largest ‘bank’ in the USA, according to plan and assisted by investment banks. This ends the mercurial and unnatural era of GE’s money business. The latter began as an ancillary operation in 1932 as GE Credit providing credit for customers to purchase GE refrigerators and washing machines. This financing unit was boosted in 1984 by the acquisition of Employers Reinsurance Corporation, marking GE’s entry into the insurance business. In 1986, GE made a surprise move into the capital investment sector by taking over Kidder, Peabody & Company. Further acquisitions of all kinds of financial businesses followed: consumer credit businesses, leasing firms and even a mortgage provider, unfortunately just before the subprime crisis.
In this way, General Electric also became the world’s most diversified financial institution with 21 individual financial divisions, 47,000 employees, offices in over 50 countries, and assets of US$ 500 billion. The heights were reached in the late 1990s, when GE Capital gained the accolade "best bank". However by 2008 the financial unit, which in its best years accounted for around half of GE profits, collapsed and was rescued by the US government with US$ 51 billion of public funds under the so-called TLCP (Temporary Liquidity Guarantee Program)(1) — this was more public money than was needed to save Citigroup or Bank of America. In short, the US government was forced to save GE from bankruptcy. (At that time GE was the biggest lender of short-term credit.) Due to such catastrophic mismanagement, GE Capital lost its AAA rating, but luckily for GE was quickly classified as a systemic (too-big-to-fail) financial institution (SIFI).(2) Soon afterwards, commentators called for GE to be split up.
GE (founded 1892) is a company created by the fusion of many other companies. It is the only survivor of the first corporations to be listed in the Dow Jones index. GE was, in the USA, like AEG (Allgemeine Elektricitäts-Gesellschaft, founded 1883) in Germany, the allround electrical engineering company, and made everything from power stations to clothes irons, aircraft jet engines, and numerous other products.(3) Two great inventors laid the foundations of GE: Thomas A. Edison and Charles P. Steinmetz(4) who was the founder of GE Research Lab.
Together with Bethlehem Steel, Dupont, Ford, General Motors, Westinghouse and a few others, GE was for nearly a century an icon for the industrialization of the USA, until Jack Welch launched his GE restructuring program. By then GE had, unfortunately, been a poor innovator for decades, and since then, despite Welch’s schemes, has shown little improvement.(5)
Welch was CEO of GE from 1981-2001. More has been said and written about Welch, whom Fortune magazine called "the CEO of the Century", than about all the CEOs of the other ten largest US corporations combined.(6) While only half-way through his tenure, he was already described as a management hero in various media articles and books. Reason enough for a few biographical facts: Welch began his working life as a chemical engineer and, with noticeable energy and ambition, quickly became an "intrapreneur" as head of GE’s Plastics unit, after which it soon grew rapidly. He demonstrated a relentless urge to compete. According to Welch, life is a struggle and you must fight hard and fight to win: whether in business, in discussions, or playing golf. Very early on, Welch was intent on conquering the role of CEO at GE. Eventually, he succeeded.
During his first ten years as CEO, Welch started a restructuring scheme to make GE leaner: the workforce was cut by 100,000 employees, and a program launched to make GE "boundaryless". The main tool of this company-wide "cultural change" was "work-outs", to encourage employees to actively reshape the business or, in GE-speak, to "empower" employees.
In the early 1980s, faced with fierce competition, above all, from Japanese firms, Welch focused on those businesses that could deliver a steady cashflow and did not have aggressive foreign competitors. The key division targeted for growth was GE’s Networks division: in 1986 it acquired and integrated the television broadcasting network NBC (National Broadcasting Corporation). A little know fact is that Welch also considered buying into the food and pharmaceuticals sectors; it was only high Price/Earnings ratios that put him off.(7) This superficially smart tactical move was actually an act of desperation, not a positive entrepreneurial response to stiff competion. He aimed to sidestep direct comparisons by reinventing GE as a mixture of businesses (conglomerate) and redirected analyst attention toward GE’s maximization of shareholder value, a concept that Welch aggressively propagated (he later regretted this and called it "the dummest idea in the world"). At the time, it was essential for Welch to create the impression that GE’s share price really did deserve a conglomerate bonus, instead of a conglomerate discount.
For the first ten years, supposedly thanks to Welch’s magic formula, GE achieved astounding growth in sales and profits; duly honored by eagle-eyed analysts and the New York Stock Exchange. Huge hikes in the stock price were frequent and GE was the darling of Wall Street, and acclaimed "Number One Company" by Forbes magazine.
In the second half of Welch’s term as CEO, he shifted the focus to continuously increasing returns, as anticipated and expected by finance analysts. In fact, Welch was second to none in playing the numbers game and repeatedly beat analyst expectations of 15 percent annual profit growth with uncanny precision. This was achieved with a number of techniques that GE watchers, fascinated by the headline numbers, for a long time failed to understand.(8)
Here is a list of some of Welch’ s techniques: using industrial divisions and GE Capital as communicating vessels for cashflow, high leveraging of shareholder equity, testing rules on financial accounting to the limit,(9) closing numerous factories and manufacturing sites by applying a simple rule "fix it, sell it or close it", widespread outsourcing, unprecedented offshoring (to Mexico and then China), leaving low-margin divisions (above all Household Appliances and Lighting) high and dry by cutting R&D and capital investment budgets, and expanding Services divisions to stabilize annual cashflow. Further value was extracted from human resources by an aggressive culture of ruthless internal competition: ten percent of the workforce (the lowest performers) was fired every year.(10)
Less glamorous aspects of the Welch style of leadership gradually became public knowledge: when he spent over US$ 100 million to defend GE against accusations of polluting the Hudson River with cancer-producing PCB, while ordering aggressive tactics against environment protesters, and not least, by grabbing the biggest ever corporate employee pension pot — nearly half a billion US dollars.(11)
Welch planned to go out with a bang by taking over Honeywell;(12) that would have made GE the biggest and most powerful corporation in the world. This would have coincided with the end of his term as CEO, but unfortunately for him EU competition authorities blocked the scheme.
Under Welch’s self-styled transformational leadership, GE was reformed from an electricals manufacturing firm into a profit-maximizing conglomerate, the world’s biggest private equity company and most highly capitalized corporation (peaking at US$ 410 billion, but falling to US$ 250 billion by 2015). GE was once a benchmark company for capital markets. And yet, GE was also pacemaker in another sense, the de-industrialization of the USA. This was of little interest to financial markets and related media and neither did GE managers feel any patriotic duty to safeguard homeland workplaces, even though GE earned considerable revenues and good margins from the government (public spending contracts). Welch was idolized by managers as the Imperator among CEOs. Now he is seen by many as someone whose agenda was, above all, about "being Jack". Athough he may not see it, his term as management guru has come to an end.(13) Because there were so many prominent Welch copycats among CEOs, especially at major conglomerates, his behavior has caused enormous collateral damage.(14)
“I have always felt that Jack Welch was one of the most overrated gurus. His strategy of growth by acquisition has now proven to be a disaster and his personnel policies, sack the bottom ten percent of every unit every year, was a recipe for backbiting and lack of cooperation.”
(Blog New York Times vom 11 April 2015)
Immelt, CEO of GE since 2001, is a home-grown GE employee. His father also held a leading position at GE, in the aircraft turbines division. Unlike Welch, his predecessor, Immelt does not aim to be the star of the show. He is said to be a man of moderation, and even accepted earning less than his colleagues on the GE Managing Board. Immelt aspires to be more like a trustee.
Although he still stands in the shadow cast by Welch – who has criticized measures taken by his successor – Immelt has stuck to his course, including the acquisition of over 100 firms, divisions and even a mortgage business (WMC Mortgage), as well as numerous disposals along the way. However, a growth and innovation offensive that Immelt launched in his first few years as CEO has not brought the anticipated leap forward. This is mainly because GE does not have the necessary entrepreneurial and innovative spirit. An image-boosting attempt to jump on the ecology bandwaggon, including the new trendy slogan Ecomagination, also failed to fire up the company.(15) GE’s abandonment of the Welch business model was slow by American standards. In fact, the first real sign occurred only in 2007, when the Plastics business was sold to Saudi Arabian semi-state owned SABIC. Later came the sale, in two stages, of NBCUniversal to cable network operator Comcast.
Immelt, shocked by the global financial crisis and its existential threat to GE, concluded that the banking business was too risky for an industrial manufacturer like GE. He started the first round of major financial divestments with the sale of the US consumer credit business to Synchrony Financial. The final round began as recently as April 2015 with the sale of GE Capital, including its real estate assets, to Blackstone and Wells Fargo for US$ 90 billion.
Immelt is applying diverse tactics to transform GE into an infrastructure business. A first the emphasis was on domain knowledge, which meant that GE management training had to be stood on its head: instead of trying to turn engineers into 'professional̓' managers,(16) the aim now is to equip General Managers with a thorough understanding (deep not wide) of the businesses they run. R&D was expanded with new centers opened in China, India and Germany; the R&D spend was boosted from three to five percent of sales revenue. In 2009, Immelt announced – better late than never – "we need to be in software", so that GE can be a player in the "internet of things". GE also introduced the Fast Works concept to boost its own start-ups. What was also needed was operationally-aware managers who apply proven Japanese methods of lean production. In personnel matters, greater emphasis is placed upon co-operation. With the acquisition of some Alstom units in 2014, Immelt also underlined a new strategy focused on the global infrastructure sector. GE also made a positive public impression by deciding to repatriate some of its profits earned outside the USA.(17) This is a sign of GE committing itself to its homeland, after years in which GE managers did virtually everything to avoid GE paying taxes in the USA. "To keep the company safe and secure" is the new policy, says Immelt.
Nevertheless, after thirty years of managerist control and two years before the Immelt term ends, there is still much to be done. GE still needs to be vigorously restructured and redirected.
GE should be a global infrastructure firm but true to its US roots
Due the huge infrastructure deficit in the USA, GE’s prospects for organic growth are good. As its Medical business is so different from the other operating businesses, it is a natural candidate for spinning off – as Siemens has done – which is a real chance to simplify the company. At the same time, digitization has been identified as the biggest innovative challenge still facing GE.
"It has been a long time coming. I'm a long-time, now retired, GE engineer and was ashamed of the direction my company took. Maybe now GE can make money by getting back to the application of science and engineering as it had done since the days of Edison and Steinmetz rather than by playing with "other people’s money" like just another "Wall Street shark". (Blog New York Times, 11 April 2015)
General Electric is an outstanding case study of a manufacturing business transformed into a managerist corporation with shareholder-value ideology (a dictatorial CEO) and almost ruined.
The fundamental mistakes were:
"US needs an economy that focuses on creating products and adding value to products. We need capital markets to help fund companies that are developing products and providing services".
(Blog New York Times, 11 April 2015)
Early during Heinrich von Pierer’s term as CEO of Siemens (1992 - 2005), management publications and financial media praised GE management strategies as the pattern to be followed. von Pierer wisely ignored this journalistic advice and stuck to his own course and convictions. He refused to transform Siemens, an electrical and electronics manufacturer, into Siemens Capital – he vetoed proposals to form an independent Siemens financial business. His successor, Klaus Kleinfeld, of a management consulting background, was less averse to trendy GE-style management ideas, and his successor, Peter Löscher, a one-time GE board member, took the first steps to turn Siemens into a GE-style conglomerate.(20) This included suitable manager hiring, frequent job hopping and revolving responsibilities (managers always "ready to develop"), exaggerated attention to capital markets and equity analysts, disposals of non-core operating divisions, and neglect of innovation and employee loyalty.
What conclusions should be drawn and positive steps taken?
First: Go your own way
This advice may appear to be common sense, but many managers have neither entrepreneurial insight nor courage enough to act upon it. It is also contradicted by so-called consultants and other interested parties, whose earnings depend on you doing it their way, and buying their templates of advice. Leaving GE for a moment, and taking Siemens as an example, if Siemens needs a unique selling point, as a consultant may expensively argue, it already has one – its own specific qualities and virtues: engineering excellence and experience (above all in electrification, automation, networking, quality, innovation, mastery of complex systems). And yet, believe it or not, ten years ago Siemens sold its core telecommunications business.(21) Financial activities should be ancillary to the core business, nothing more. And yet, the future could be bright: a growing global demand for integrated solutions in industry, in healthcare, and infrastructure makes exactly these traditional capabilities and skills indispensible.
Second: Reinforce your own identity
Ignore your own heritage and strengths (without ignoring weaknesses) and you have no foundation for progress. What worked then, works now. The proven formula for success was innovation, long-term thinking, value creation (not financial value extraction), conservative financing of production, employee loyalty, filling executive posts in-house (with a tried and tested ethos of hard work, integrity, loyalty). This also applies for other leading industrial companies not just GE or, say, Siemens. At Siemens too this spirit should be revived because this attitude and ethos is not outdated or irrelevant, it is a key asset and real competitive advantage.
Third: Avoid managerist practices
A good start to cultural renewal is to throw overboard excess managerist ballast. This means get rid of the multiple complex methods of financial controlling, complicated compliance (rule books on ethical behavior for morally challenged managers), formalistic personnel methods, stop underestimating experience just because you don’t have any, stop frequent reorganizations (centralize/decentralize, insource/outsource, specialize/diversify). Key first steps are to sensibly selection leaders (entrepreneurial, team worker, ethical), a long-term personnel policy, pragmatic technical/specialist strategy not shareholder-value ideology, fair executive pay, believing and trusting your own people’s strengths and capabilities.
German companies need enterpreneurial and courageous business leadership to avoid becoming the divisible/disinvestible conglomerate preferred by capital markets. GE was many things, but never an example to be followed.
Manfred J. Hoefle, June 2015
Links to essays on General Electric in www.managerism.org
(1) The Temporary Liquidity Guarantee Program (TLGP) started on 13 October 2008 by the Federal Deposit Insurance Corporation (FDIC) to ensure sufficient liquidity for interbank trading. It is ironical that the Berkshire Hathaway conglomerate of Warren Buffet had to contribute US$3 billion to help rescue GE, the so-called "best managed company".
(2) SIFI (Systemically Important Financial Institution): bank, insurance or other financial institution whose difficulties can cause a general financial crisis due to leverage, size, network and convertibility issues.
(3) In 1883 the Deutsche Edison-Gesellschaft für angewandte Elektricität was founded and a few years later renamed Allgemeine Elektricitäts-Gesellschaft (AEG). Unlike Siemens, a "family firm" with origins in telecommunications and, later, high-voltage electricity, AEG’s first product was a simple electric lamp.
(4) Karl August Rudolph Steinmetz, born in Breslau (Wroclaw, Poland) mathematician, physicist, research scientist and serial inventor with 200 patents and inventions in alternating current, hysteresis and solid-state physics.
(5) Unlike Siemens, which developed major pathfinding technologies until the 1990s: electron microscope, III-V semiconductors, piezoelectric technology, SF6 switch, Simatic and Sinumerik.
(6) Selected titles: The Autobiography of Jack Welch and Winning – That is Management.
Welch admitted, "I didn't have the guts to do it." (because payback on investment was not achievable within three to four years). No surprize that Welch always emphasizes the "I", a sign of narcissism.
(9) First exposed by The Economist. A settlement was agreed with the Stock Exchange Commission (Litigation Release No. 21166) whereby GE paid US$50 million, but without admitting any guilt.
(10) Welch introduced rule 20-70-10 that the best 20 percent of employees (the Stars) are rewarded with bonuses, the middle 70 percent are, if possible, encouraged and promoted, while the weakest 10 percent (the Lemons) are fired. Many managerist-led major companies copied this loyalty-destroying practice.
(11) Five years after retiring, Welch’s net worth was about US$ 700 million. His many exhorbitant benefits became public knowledge during the divorce of his second wife, Jane Beasley, a M&A lawyer. The grounds for divorce was an affair with chief editor of the Harvard Business Review, Suzy Wetlaufer, who became his second wife and co-autor.
(12) The stock price of both companies diverged: Honeywell had risen 160 percent at time of writing, GE fell up to two-thirds and currently is worth half of its peak share price (a loss of US$ 300 billion since 2008).
(13) see “The Real-Life MBA: Your No-BS Guide to Winning the Game, Building a Team, and Growing Your Career“
(14) In the USA, Tyco-Koslowski , and in Germany, Schrempp at Daimler, and Kleinfeld and Löscher at Siemens. Management journals praised GE managers: Manager Magazin 8/2012 wrote "Turbo Leader GE"; note that subsequent editions featured a large advert placed by GE, entitled "GE in GErmany".
(15) It was above all German media who praised this "green" initiative and urged Siemens to copy GE, even though Immelt himself pointed to the leading role of Europe and Germany in environmental technology.
(16) "I absolutely loathe the notion of professional management." (speech by Immelt at MIT, 2004).
(17) GE was repeatedly critized for being "unpatriotic" due to aggressive tax avoidance. Most recently the tax department of GE had 900 employees.
(18) It is estimated that M&A spending over the past 30 years, even after the sale of GE Capital, is roughly equal to GE’s current stock-exchange value.
(19) In recent years, GE Capital hired around 1,000 Risk and Compliance specialists.
(20) see Lesson No. 11, How Value Extraction Ruins Companies and Society, www.managerismus.com
(21) see Lesson No. 4, The Declining Role of ICT in Germany – Siemens Exits the ICT Industry: Reasons and Lessons, www.managerismus.com
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