GE Power Falters on Underperformance of Alstom Investment
Weak earnings associated with General Electric’s (GE’s) underperforming $10.1 billion investment in Alstom have prompted the giant conglomerate to rejigger its power business and lean more heavily on other segments.
GE Power, the company’s long-standing and lucrative business unit that has installed 1.6 GW of the world’s installed capacity over its 125-year history, has also suffered costly operational misses owing to softer markets for new capacity and an energy transition unfolding worldwide, company executives said in a November 13 investor call.
While the GE Power franchise remained “good,” even in the face of a “tough market,” GE had “exacerbated the market situation with some really poor execution,” GE CEO John Flannery said.
GE, a company renowned for technology breakthroughs will now seek to reinvent itself with a number of broad changes, including shrinking its board from 18 to 12, shaking up leadership, and shifting its focus to cultivate more earnings for shareholders.
At GE Power, specifically, the changes relate to costs, capital allocation, working capital and operations, governance, and culture. It will involve “right-sizing” for market structure, simplifying its portfolio, revamping its supply chain, and resetting its supply base by 2020, Flannery said.
A Swirl in the Waters of a Deep History
GE Power’s announced changes came just days before Siemens said it would cut 6,900 jobs over the next several years and consolidate three power-related divisions owing to a number of factors, including flagging orders of large gas turbines.
At GE, however, changes have long been expected. The company signaled it would firm up weak revenue after John Flannery replaced Jeff Immelt, who served as GE’s CEO for 16 years. In June, Russell Stokes replaced Steve Bolze as president and CEO of GE Power. Flannery noted on November 13 that more leadership changes had since occurred, and about 40% of its executive team is “new.”
Also in June, GE Power combined with GE Energy Connections, the company’s electrification and automation solutions arm. More recently, the company has also moved to divest some businesses. This fall, GE Power completed the $3.4 billion sale of its lucrative water and process technologies division to multinational water management firm SUEZ less than a week after GE struck a $2.6 billion deal with ABB for GE’s electrification business.
The changes are notable in the context of GE’s long history. GE has been a flagship name in the power generating business since 1896, when it became one of the first companies listed on the newly formed Dow Jones Industrial Average. By 1901, GE had successfully developed a 500-kW Curtis turbine generator, and in 1948, it installed a pioneering heavy-duty gas turbine for power generation at the Belle Isle Station in Oklahoma. Then in 1957, the company connected the first nuclear reactor to a commercial electricity grid. GE’s contributions to power generation technology have continued in a steady stream over the decades.
In 2015, the company marked another major milestone as it took over competitor Alstom in a $10.6 billion deal, and integrated the giant global equipment firm’s products into its portfolio. Just a year before, meanwhile, it launched the HA heavy-duty gas turbine, a new gas turbine technology that was last year leveraged to achieve a 62.22% combined cycle net efficiency (Figure 1). In the backdrop, to boost revenues and cement the company’s future, former CEO Immelt invested $4 billion over half a decade to transform the firm into a “digital industrial” company.
Last week, however, Flannery reset the company’s course toward an “industrial company.” The decision to revamp was drawn from an existential consideration of GE’s purpose during his first 100 days, he said.
During the company’s 125 years, GE has tackled the world’s biggest challenges, including power, flight, and health, all “absolute underpinnings of the modern world,” he said. “Even with all of these incredibly positive impacts on the world—strong franchises … lots of strengths—we have not performed well for our owners,” he said.
Going forward, “we really just have to focus on how we can create the most value—and the portfolio of assets that we have for our owners—and we’re going to do that with a very dispassionate eye, very critical, analytical, dispassionate eye,” he said. “At the end of the day, we really exist to deliver outcomes for the customers, performance for the owners, and have an environment where our employees are motivated by, excited by, rewarded for delivering on those two things,” he said.
Dim Expectations
While the transformation will be companywide, a strong revamp effort will be focused on the overall power business, which Flannery said was “challenged.”
GE’s focus on the renewables business, which offered a “strong growth curve” amid “a lot of disruption,” will shift to pushing down production costs and ensuring GE’s April 2017 $1.7 billion acquisition of LM Wind Power pays off. At GE Power, meanwhile, “It’s a heavy lift to turn around, but its fundamental assets, strong franchise in an essential infrastructure business, [those] we can improve a lot in the next one year or two years,” Flannery said.
GE Power is made up of several lucrative business segments, which brought in a combined $26.8 billion in revenue for GE in 2016 (Figure 1). The sizable earnings are about 22% of the total $123.7 billion GE drew in last year from all its business units, but GE Power was GE’s highest-earning unit (followed closely by the Aviation business at $26.2 billion). At GE Power, meanwhile, the segments that bring in the most revenue are those dedicated to power services and gas power systems.
