Chop Shop Case in Point: General Electric
From Thomas Edison to Jack Welch
The history of General Electric is akin to a corporate archeological dig. The bones of the human drive to create are all there, moldering in the 120 year history of GE. Requiring nothing more than as much scholastic honesty as we can afford (while still making the point we hope to make), it’s a matter of dusting off the skull of the ancestor and trying to follow its Darwinian trajectory to the existing modern-day entity by tracking DNA.
Jack Welch became an international business icon for taking GE from its manufacturing base into a multinational technology and services conglomerate. That’s a long way to come from Thomas Edison’s forerunner to the modern GE, but then Henry Ford would hardly recognize what has been done to his company either. Edison and Ford were old camping buddies (Aquarius and Leo) and one can only speculate over what they might have to say, while toasting a marshmallow today over the coals that remain of their descendent empires.
Edison was GE’s founder and initial source of intellectual capital, a man complicated by his amazing insights, endless sense of inquiry and commanding ego. Why does it not follow that, after the great man died, the company itself took on his almost paranoid need for recognition? Yet that largely failed to happen during the first hundred years of GE history and began almost exactly at the close of that milestone, with the 1981 elevation of Jack Welch to control.
Edison's financial success, like that of Ford, lay outside their inventions, notably the electric light and the moving assembly line. Both maximized profit by the application of mass-production and intellectual property rights. Edison put rivals out of the game by buyout, legal intimidation and the occasional borderline fraudulent statement. What possible better godfather to the world’s most venerable and profitable corporation?
Edison’s major contribution to the world of pure research was Menlo Park (a substantially unknown concept in those times), his brain-factory in New Jersey. Edison cashed in his Quadruplex Telegraph for the money he needed to build Menlo. The telegraph was Edison's first big financial success and it says much about the man that he immediately rolled that windfall into Menlo Park, history’s first private institution whose sole product was a constant flow of technological innovation and improvement.
Essentially a patent production-line, Edison personally held the patent to most of its inventions, much of it from the research and development work undertaken at his direction. He drove employees hard to produce results, but set an uncompromising pace by his own output. Menlo Park was precursor to the great industrial research institutions to come, like Western Electric-AT&T’s Bell Laboratories, also in New Jersey and named for an Edison peer, Alexander Graham Bell.
There isn’t a single thing in today’s world that would surprise Thomas Edison. “Uh huh, got around to that, did you?” would be his likely comment. He would deeply understand Microsoft’s monopolistic fights, including the statement from their 2008 annual report;
“We may have to choose between withdrawing products from certain geographies to avoid fines or designing and developing alternative versions of those products to comply with government rulings, which may entail removing functionality that customers want or on which developers rely.”
The implied threat in that statement is vintage Edison. The fight to control, the urge to eliminate, the battle for dominance was forged from traits historically relied upon for human survival.
To understand General Electric, dust off the bones of the ancients. But, setting that long history aside, the year 1890 will suffice, the year the man formed Edison General Electric, bringing together several of his business interests under a single umbrella.
The General Electric Early Successes
To give 1890 context, Henry Ford was 27 years old, doggedly farming and running a sawmill in Dearborn, Michigan and not enjoying a moment of it. He was a year away from taking a job as an engineer with the Edison Illuminating Company, but still six years from actually meeting Edison. It would be another thirteen years before he established today’s Ford Motor Company.
1890 also saw the founding of the United Mine Workers of America, Chicago’s selection as host of the Columbian Exposition (displaying the grandeur of electric lighting some three years later), Wyoming and Idaho were admitted as states, the Wounded Knee massacre occurred in South Dakota, punch-cards were invented to tabulate that year’s census by a company that later became IBM. Dwight Eisenhower was born in 1890, along with Paul Whiteman, Ho Chi Minh, Stan Laurel, Agatha Christie, Groucho Marx and Charles de Gaulle. But perhaps most relevant to this particular subject, it was also the year the Sherman Antitrust Act became law. The corporate giant and its legislative David were born in the same year. How prescient is that?
1Edison is considered one of the most prolific inventors in history, holding 1,093 U.S. patents in his name, as well as many patents in the United Kingdom, France and Germany. He is credited with numerous inventions that contributed to mass communication and, in particular, telecommunications. His advanced work in these fields was an outgrowth of his early career as a telegraph operator. Edison originated the concept and implementation of electric-power generation and distribution to homes, businesses, and factories - a crucial development in the modern industrialized world. His first power plant was on Manhattan Island, New York.
Of those 1,093, Edison’s first patent (U. S. Patent 90,646) was for an electric vote recorder, granted two decades earlier in 1869 and come back to haunt us today in the Diebold version. A brilliant illustration of what goes ‘round, comes ‘round.
Edison was 43 at the time of the company founding. Two years later (as was his lifetime template) he merged his company with the Thomson-Houston Company, a holder of patents of interest to Edison. Dropping the Edison name, the surviving company became General Electric.
Lights dimmed, lightning flashed, switches were thrown and the great body on the table breathed life. In that founding year, the company formed by the merger employed 10,000 people and had $20 million in sales, a stunning number at a time when the nation was still primarily engaged in agriculture. Edison was perhaps the original mergers and acquisitions guy. He would have loved Jack Welch.
Leaving Edison’s personal history behind (it shines with too much wattage for comparison to mere business), GE went on to merge the National Electric Lamp Association into its lighting division. NELA was a holding company composed of small lamp manufacturers who had banded together to compete against the General Electric Company. Formed in 1901, gradually nibbled at and then swallowed ten years later by the fish it had been created to avoid, the acquisition was iconically Edisonian and set the stage for later growth. The Sherman Antitrust Act was not asleep, noting that by 1911 GE already held 75% of NELA.
Adding to the odor of monopoly, the Navy Department had three years earlier taken bids for 340,000 lights. Of the fourteen bids presented, thirteen of them were for exactly $50,631.23, a not-so-smart concept for avoiding the appearance of collusion. It came as no great surprise then, when Attorney-General George Wickersham sued General Electric, Westinghouse Lamp Company, Westinghouse Electric & Manufacturing Company, National Electric Lamp Company and a bunch of other lighting companies in on the deal (or purported to be) for restraint of trade. The suit was brought through the United States Circuit Court for the Northern District of Ohio at Cleveland. In October of 1911 Toledo, Ohio Judge John Killits, found the manufacturers guilty as charged.
Because General Electric Company essentially owned National Electric Lamp Company and had acted as a hidden partner, Killits ruled the lamps made by National had to wear the GE brand. In those simpler (but every bit as competitive) times, having the U.S. Attorney General find against you was a shaming event. Today, it’s business as usual, as chip-maker Intel illustrates, having just been assessed a whopping $1.5 billion dollar fine from the European Union for monopolistic control over the computer chip market. The 2009 market shrugged off Intel’s problem, the stock losing 12 cents on a share price above $15. Then as now, we see what we care to see;
2"General Electric through this lamp pool held control of 95% of the lamp business of the country. It sounds like an oppressive monopoly and yet it has been one that has made possible the wonderful development of electric lighting, while prices have come down from 85 cents 15 years ago for an ordinary carbon lamp to 16 cents or 14 cents in quantity. There was chaos in the lamp business 20 years ago. The lamp pool restored the industry to a commercial basis and this led to wonderful inventions, so that for 16 cents the consumer gets a lamp 50% more powerful and efficient than the lamp for which he paid 85 cents in 1896."
Ah yes, a benevolent dictatorship is always the most efficient for of business or government. Draw your own comparison between GE’s more powerful and efficient lamps (at declining cost) and Intel’s contribution to what has become known as Moore’s Law. Based on a paper that Intel co-founder Gordon E. Moore wrote in 1965, essentially Moore predicted that computer capacity would double every six months, while the cost of that increased capacity would halve. GE then and Intel today, represent the two faces of technological triumph; a lowering of prices and increased usability at the (perceived) cost of limited competition.
An interesting side note to the NELA portion of GE history, is the development of Nela Park in suburban Cleveland. As a result of the antitrust litigation, it was proposed to GE that its lamp operations be physically separated from the parent and relocated from Cleveland to the countryside. GE purchased an abandoned vineyard seven miles outside Cleveland and construction began for Nela Park, the very first Industrial Park in the world!3 In 1975, the 92 acre Nela Park was listed as an Historic Place in the US Department of the Interior's National Register.
One of Nela's best known buildings is the Lighting & Electrical Institute, which receives thousands of customers and lighting professionals each year (to this day) at its many conferences and training programs. Nela Park remains the home of GE’s Lighting Division Headquarters. The ‘industrial’ or ‘business park’ has since become an ubiquitous part of the suburban American landscape. We move on to 1919, a hugely significant year for GE.
The year 1919 saw Edsel Ford succeed his father, Henry, as head of the Ford Motor Company. Teddy Roosevelt died in his sleep, Prohibition came on the arms of the 18th Amendment, Grand Canyon became a national park, the Bauhaus architectural movement was founded, Einstein’s Theory of Relativity was confirmed and the Treaty of Versailles ended World War One. Jack Palance was born, along with Robert Stack, Andy Rooney (is it possible? What’s in the air over there at 60 Minutes?), Ernie Kovacs, Jackie Robinson, Red Buttons, Eva Gabor, Forrest Tucker, Tennessee Ernie Ford, George Gobel, Nat King Cole and Liberace.
The Radio Corporation of America (RCA) was founded in 1919 by GE, ostensibly to further international radio, utilizing 1891 Edison patents for “transmission of signals electrically” by radio. A year later (1892) he received a patent for a two-way radio, but it’s the RCA story that has intriguing military sub-plots.
4On April 8, 1919, U.S. Navy Captain Stanford C. Hooper and Admiral W. H. G. Bullard met with GE company executives to ask that they not sell their Alexanderson alternators to the Marconi companies. The premise of the Navy's proposal was that if GE created an American owned radio company, then the Navy would secure a commercial monopoly of long-distance radio communication. This marked the beginning of negotiations by which GE would buy American Marconi, a foreign owned company, and organize what would become the Radio Corporation of America.
The incorporation of the assets of British-owned Marconi Wireless Telegraph Company of America, the Pan-American Telegraph Company and those controlled by the United States Navy, led to a new firm begun by General Electric in 1919. The subsequent cooperation among RCA, General Electric, United Fruit, Westinghouse Electric Corporation, and AT&T laid the groundwork for significant developments in point-to-point and broadcast radio, including the new National Broadcasting Company, NBC.
The U.S. Navy turned over to RCA the former American Marconi radio stations seized during the war. Admiral Bullard received a seat on the RCA Board of Directors for his efforts in establishing RCA. The end result was government-created monopolies in radio for GE and Westinghouse and in telephone for AT&T.
United Fruit? Government creating monopolies? A seat on the board for the enabling Admiral? No matter, we’re off to the races.
By 1926, RCA had grasped, wrestled and thrown to the ground the market for commercial radio. Pulling together individually owned stations, it formed the National Broadcasting Company NBC. Three years later (the fateful 1929) RCA bought out Victor Talking Machine, the leading American producer of phonographs and phonograph records and one of the leading phonograph companies in the world at the time, the merger becoming RCA-Victor. They promptly created new techniques for adding sound to film.
1930 sees GE and Westinghouse divest themselves of RCA as a result of antitrust charges. What government gives, government taketh away.
1930 also sees GE develop research into plastics
1931 and in October of that year Thomas Alva Edison dies
1932 and GE Credit Corporation is founded, allowing depression stressed families to purchase General Electric appliances on credit
1935 the first electric kitchen garbage disposal is GE produced
1942 and the first American jet engine is developed. Where? Where else, GE
All of the above (with the exception of the founder’s death) were innovations, inventions and the result of essential research under the GE umbrella, where it seemingly never rained. Anything was possible as the war finally ended and America became the sole industrial power left standing.
GE and America at the Close of World War II
It’s impossible to understand the rise and fall of American industrial power without taking into consideration the circumstances at the close of World War Two.
1945 was the final Roosevelt year, as the man who had been for many citizens (including me) the only president in memory was inaugurated to an unprecedented fourth term. As president, he finally witnessed the close of fighting in Europe, attended a very controversial post-war meeting with Churchill and Stalin at Yalta and died two months later of cerebral hemorrhage at Warm Springs, Georgia. No president, save perhaps Lincoln, had so many admirers and detractors holding such fiercely held positions of love and hatred. But from coast to coast the nation wept.
Six months later, war was over in the Pacific with Japan’s surrender. The United Nations was founded, the ball point pen first went on sale and the World Bank was established. America was euphoric, as a historic war finally came to an end. To the survivor go the spoils and it was an allied survival, but only America had avoided massive infrastructure destruction, protected by its vast oceans and the nation was essentially intact and powerful beyond measure. Britain lost its empire, the Soviets suffered 27 million dead and America stood poised to inherit what politically and industrially remained of the planet.
A strategic error was in the making, but that error was not yet evident and would reveal itself only in succeeding decades.
As the war effort wound down and American industry turned to supplying a world in need, it misunderstood having the only game in town for business and industrial acumen.
Thus began fifteen to twenty years of U.S. industrial dominance across world markets that should have provided breathing space for the innovation, retooling and modernization that never happened. The long race is not and has never been capitalism’s strong suit. As long as profits flow and markets survive, invention, research and development are likely to lag in the comfortable confines of profit.
There’s a difference between capitalists and entrepreneurs. Edison, Ford, Rockefeller, Carnegie and Steve Jobs were all entrepreneurs---on fire with the innovation and invention that builds empires. Jack Welch, much as Edison would have understood the concept, was a capitalist, reaching beyond electronics, taking the company into healthcare, financial services and insurance, including an enormous portfolio of cable TV channels and into the resort business. Those are financial decisions that made GE the largest corporation in the world as they build and innovate less and essentially became brand managers. Capital needs make companies more and more captive to quarterly earnings and, one can argue, vulnerable to a grow or perish mentality.
One can also argue that this is the new American paradigm and that argument has held through six decades of American job loss, along with the slimming down of the middle class and a surge in poverty. Capitalism goes where capital is required. The need for investor earnings is no longer national, but international. Capital no longer knows boundaries and we have maintained ourselves as a nation of innovation, foremost in the world, but without the lasting benefits of production. Capital is king, but the United States is (or at least was) a republic and not a monarchy.
That’s really what this book is all about.
No doubt Marshall Plan financing to Europe accelerated industrial competition, as newly reconstructed factories there took advantage of the most modern and up to date technologies. America produced the technology, but took little (or certainly not enough) notice, lulled by the profit of easy markets while its industry became rusty and outdated. The political genius of the Marshall Plan, more than any other factor, brought lasting peace to Europe. It need not have been a penalty to an enlightened American business community, but it was.
Economic aid to Japan amounted to about half of what the Marshall Plan provided to Europe, but the aid to Japan was spread over a much smaller geographic area. As the world stood in awe of the first instance of a conqueror rebuilding defeated nations, the payoff was peace. It may also have included the seeds of American industrial decline.
I hope to make the case that the ultimate eclipse of American industrial superiority was more our making than theirs.
Post World War II Mergers and Acquisitions, the Days of Wine and Roses at General Electric
The General Electric Aircraft Engine Division was hardly a Johnny-come-lately, even though they didn’t produce an operative military jet in time for WWII battle. The division traces its origins to 1901 (the Edison days), when development of steam turbine systems was underway. These turbines maximized energy from steam pressure, using fan blades in series to drive power generators. That (essentially) is what happens within a modern jet engine.
Power was the big problem to be solved, as industrial America emerged and GE quickly adapted the turbine concept to the need for a more efficient fuel than coal. Gasoline, once an annoying byproduct from refining crude oil into kerosene (itself developed as a substitute for the more expensive whale-oil used for residential lighting), was about to team up with diesel and heating oil to power a national industrial adventure.
In 1903, GE scientist Dr. Sanford Moss developed America's first gas-powered turbine, regarded by some as the ancestor of the jet engine.5 Today, the GE Aircraft Engines unit of the General Electric Company is the world's leading manufacturer of aircraft propulsion systems for military and civilian use. The company attributes its success in the industry to heavy investment in research and development, stringent quality control and excellent customer relations. GE Aircraft Engines is also one of the nation's top exporters, supplying engines for a wide range of commercial and military aircraft, boats, hydrofoils, and industrial power generators.
In an illustrative example of more fun and games with the military, at the end of the war the Army sought out new options for future military aircraft guns. The U.S. Air Force was still a couple years from its founding and the subsequent takeover of military airpower, but the development of jet fighter aircraft meant that shooting down a much faster plane from a much faster plane would be near to impossible without a greatly increased volume of fire. The Army wanted fast and reliable and they wanted it quickly.
So GE’s Armament Division, leading the way in what would become Eisenhower’s dreaded military-industrial complex, reached back eighty or ninety years to resurrect the Civil War Gatling gun, a six-barrel rotating weapon. The original had to be hand-cranked, but the developing generation of turbojet fighters had power to burn, certainly enough to turn a rotating barrel mechanism. Faster and more reliable than a gas-operated cannon, with six spinning barrels, the per-barrel firing rate was lower, preventing overheating while still blazing away at 120 rounds per second.
Americans are arguably at their inventive best when figuring out slick, elegant and more efficient ways to kill people. The Army contracted GE in 1946 for "Project Vulcan," a six-barrel cannon capable of firing 7,200 rounds per minute without melting or misfiring. The wonder was that aircraft of the day could carry the weight of sufficient ammunition for such a sustained rate of cannon-fire.
Fast-forward to the year 1953.
Dwight Eisenhower is inaugurated,
Sir Edmund Hillary conquers Mt. Everest,
Jack Welch is but an eighteen year-old graduate of Salem High School and
GE chemist Daniel Fox accidentally discovers Lexan while looking for something entirely different.
In 1955 the GE Research Lab figured out how to make artificial diamonds, mostly for industrial use. A few years later they invented the laser and then sort of quieted down for a few years until 1981, when "Neutron Jack" Welch became CEO and the focus changed from invention, innovation, research and development to the maximization of shareholder value.
If American business and industrial dominance has a tipping-point, 1981 is the likely fulcrum and Jack Welch the lever.
The Twenty Jack Welch Years and General Electric’s Long Slide (Upward) to Profit in Place of Product
Jack took over in 1981, the year
Ronald Reagan became president,
the 52 American hostages held by Iran (and largely responsible for his election) were released,
the first gull-wing De Lorean DMC-12 coupe rolled off an Irish assembly line,
Walter Cronkite retired,
Reagan and Pope Paul II are shot (both survive),
Diana married Charles,
Anwar Sadat was assassinated and
Joe Louis died.
It was a tough, chaotic, violent year.
Welch didn’t drop in to GE on the wings of an executive search firm, as is (too) often the case in recent years. Jack joined General Electric in 1960, his first and only job after graduating from university. A junior engineer in Pittsfield, Massachusetts, he came on board at $10,500 a year. Welch was named a vice president of GE in 1972, moved up to senior vice president in 1977 and vice chairman in 1979. Welch was GE's youngest chairman and CEO ever, when he took over in 1981. But, like Arnold Palmer and Michael Jordan, Tiger Woods and A-Rod, he quickly became the metaphor for rock-star recognition in his game and set the stage for those who were to come.
His game was business. At the time of his 2001 retirement, Welch was being paid $4 million a year, while negotiating a nifty retirement income of twice that. You got it right, $8 million a year to retire. Even so, 2007 compensation for the top five executives made Jack look underpaid by comparison, as (according to Forbes Magazine) money rolled out of the Brinks trucks as follows:
Steve Jobs (Apple), $647 million
Ray Irani (Occidental Petroleum), $322 million
Barry Diller (IAC/Interactive Corp), $295 million
William P. Foley (Fidelity National Financial ), $180 million
Terry Semel (Yahoo), $174 million
The curve flattens at $150 million or so and there are a frightening (and depressing) number of people running our major corporate enterprises who are almost entirely compensated for performance. Welch performed brilliantly, if you define that as maximizing shareholder value.
The quick-and-dirty way to maximize that value is to
let go service personnel,
cut research and development,
sell off marginally profitable (but supportive) divisions,
cut infrastructure investment,
slash benefits such as healthcare and retirement contributions,
fire any full time employees that can be replaced by temps,
close or consolidate facilities,
raid the retirement-fund cookie jar,
mandate however many weeks of unpaid ‘vacation’ you can get away with and
get rid of all mid-level perks.
Result? When maximizing shareholder value, quick-and-dirty pays off. Particularly for the performance compensated CEO. Quarterly profit leaps, stock prices take off running and CEO compensation leaves the ground for a successful blast into orbit. WARNING: This method is best carried out by the hired gun. It’s tough (except for Jack) to sell people you’ve worked with for decades down the river.
It’s also best done with an executive search firm at your side, looking down the road for the next underperforming corporation needing a quick fix. This is not a game for the long haul. It’s raider’s work, best accomplished with a pirate philosophy and a willingness to relocate.
Maximizing shareholder value, according to Jack, is the dumbest idea in the world, but only in retrospect.6 Welch deconstructed GE throughout the eighties and nineties, for the dual purpose of quarterly return and growing GE to the largest corporation in the world. The first step in realizing that vision was dismantling the bureaucracy. A 100 year legacy from Edison and his heirs was delivered to Welch, who promptly bought and sold the parts like a busted up Buick in a chop-shop.
7At the start of Welch's tenure GE administration was built around three hundred separate businesses, a recipe for inefficiency. Welch tore into the ossified corporate structure with a vengeance and by the mid-1980s had overseen nearly 120,000 layoffs and earned the nickname "Neutron Jack." The name was derived from the neutron bomb, a weapon designed to minimize heat and blast effect but maximize dispersal of lethal neutron radiation—in effect, eliminating people but leaving buildings and equipment intact. Welch was never fond of the moniker.
Entire lines of business were dismantled or sold off under Welch's doctrine of exclusively maintaining operations that were ranked first or second in their given field. By 1985 billions of dollars had been made or saved through sales and layoffs. Welch sought opportunities for growth by reinvesting those billions and considered possible takeover targets. He eventually settled on RCA, originally a GE startup but at the time of the merger a top competitor in the high-tech and defense industries. The merger made sense as an effort to consolidate American manufacturing in those fields against Japanese competition.
The deal was the largest merger of its kind in the history of American business, with RCA selling for nearly $6.3 billion. Within three years half of RCA's premerger workforce was gone, as well as most of its businesses, including the radio network, which had been in operation virtually since radio was born. By the late 1980s only the National Broadcasting Corporation (NBC) television network and RCA's defense businesses remained.
Welch called that streamlining GE to make it a more competitive company. In 1981 he made a speech in New York City called "Growing fast in a slow-growth economy," that’s often pointed out as the beginning of corporate obsession with shareholder value.8 Twenty-five years later, discussing the recent financial collapse with the Financial Times, Welch reversed himself, saying
“On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy... your main constituencies are your employees, your customers and your products.”
Sure, Jack. Now you tell us.
During his years at the helm (regarding the employee portion of that valued constituency), each year he fired the bottom 10% of GE managers, no doubt feeling that constantly looking over one’s shoulder in fear is useful to the bottom line. He was reportedly brutal with executives. Constantly pushing performance and backing it with bonuses, stock options (and the threat of being let go), nearly a third of all employees were rewarded primarily by this means, thereby guaranteeing that an atmosphere of growth at any cost would drive corporate decision-making. The nine-layer management hierarchy was gone (and well gone, no doubt of that), but in its place hovered the specter of insecurity. Welch told his management,
"We're going to demand from you earnings growth every year. Those are the rules of the road. You take charge of your destiny. If you don't, we will."
Earnings growth every year is as unreasonable a demand as better growing seasons, rain only when needed and guaranteed markets to a farmer.
Welch would bristle at those charges, but the fact is that GE became a twenty year Roman candle arcing across the corporate sky to explode in a dizzying display of make-believe stars, guttering to the ground. The man celebrated as the greatest executive that ever lived, made that title hollow by his reckless driving.
A timeline of GE spin-offs and acquisitions since Jack Welch settled into the CEO-Chairman position illustrates the changing character of the company;
(Wikipedia, parentheticals mine)
1984, GE spins off its commercial computer graphics products and services Genigraphics Operation. (Cut loose from sufficient R&D interest, the division died on the vine as an independent entity. Even so, it pioneered computer presentation graphics and opened opportunities for Microsoft, Adobe Photoshop and Corel. Score a loss for pure research and a win for earnings growth)
1986, RCA is re-acquired, primarily for the television network, all other operating divisions sold off to Bertelsmann and Thomson. (R&D loses and the bottom line is unclear as major network TV struggles)
1989, The Consumer News and Business Channel, or CNBC, is formed to provide business news to cable television subscribers. (A further move to information rather than product, unless you consider Jim Cramer’s Mad Money rants a product.
1993, GE Aerospace Division sold to Martin Marietta. (Net loss for R&D)
1996, MSNBC is formed with partner Microsoft, to compete with the Cable News Network. (Entertainment once again fluffs the bottom-line pillow)
1999, Montgomery Ward exits Chapter 11 bankruptcy protection, and becomes a subsidiary of GE Capital, a major creditor. (What is this, a net ball? GE Capital was once headed by a single person. The unit, now split into four divisions, makes up a large portion of GE revenue)
2000, Montgomery Ward folded by GE Capital due to declining sales (No doubt for some profitable purpose such as a tax write-off)
2001, Jeffrey Immelt becomes CEO, replacing Jack Welch.
Jack Welch’s aggressive move toward financial services and away from production reflected the fact that financial services was where the action was. GE Credit, originated as a support for depression-stressed families who needed a toaster or radio, was poised to become the tail that wagged the dog. Financial services (the profit raked off exorbitant interest and the enormous money made from Americans selling each other stuff) made up an astounding seventy-five cents from every dollar in the U.S. economy.
Service industries, including financial, were the big hitters and Welch quickly wanted in, ridding GE of any division that didn’t hit home runs over the left-field wall of earnings growth. It’s hard to do that with product. Product is messy and competitive, often greasy and costly to build, cumbersome to warehouse and ship. Money travels light, wears clean suits and eats in the finest restaurants. Money is the place to be and shareholder value was the mantra. It had yet to fall victim to worldwide economic collapse and become the dumbest idea in the world. NBC and GE Capital gained 12 percent in yearly profits from $14 to $25 billion over six years.
Euphoric, Welsh flogged GE's merger and acquisition activity, as sales of services jumped from 30 percent to 45 percent of revenue in 1994, and neared 60 percent by 1996. Thus, in twenty years at the helm, Jack changed General Electric from a mostly industrial, research and intellectual property company earning $1.6 billion on sales of $27.2 billion, to a financial services and media driven behemoth earning nearly $11 billion on a four-time sales growth to $112 billion. Jack’s was quite a beanstalk.
Welsh was then the most celebrated American businessman ever, his grinning face ubiquitous on business magazine covers spanning the globe. His successor, James Immelt was heir apparent, presumably perched atop an odds-on favorite and set to gallop the GE entry down the homestretch to history’s wire.
Immelt, General Electric and the Country All Melt Down Together
A graduate of Harvard Business School, you couldn’t find a nicer guy to take home $14 million as corporate CEO than Jeff Immelt. The corporate trajectory had been cast in bronze by Welch and Immelt took over the top job from his desk at Healthcare Services, where the success of the division coincided with GE excellence in imaging equipment and a corresponding boom in health spending nationally.
After taking over from Welch, GE stock plummeted by nearly 80% and Immelt is currently one of President Obama's financial advisors, trying (one would hope) to make sure that the nation doesn’t follow the same path. Does it seem strange to you that so many of the experts selected to stench the flow of American economic blood are the very surgeons responsible for the operation?
But Immelt stayed the course, flogging acquisition at the expense of actually producing anything. His tenure included; (Wikipedia, parentheticals mine)
2001, NBC acquires Telemundo, a leading Spanish language TV network. (More media, less product)
2003, GE Capital acquires Transamerica Finance. (Bigger hunk of loan-sharking, but not much product)
2004, NBC acquires Vivendi Universal, thereby forming NBC Universal. (More media)
2004, GE Capital acquires Dillard's credit card unit for US$1.25 billion. (More juice in the highly profitable juice game)
2004, GE sells 60% stake in GE Capital International Services (GECIS) to private equity companies. (They retain 40%)
2004, Genworth Financial formed from General Electric's life and mortgage insurance assets. (No loss, no gain)
2004, GE Security acquires InVision Technologies, a leading manufacturer of airport security equipment. (Net gain for product)
2005, GE Commercial Finance acquires the financial assets of Bombardier, a Canadian aircraft manufacturer for US$1.4 billion. (More product, particularly military)
2006, GE Healthcare acquires IDX Systems, a medical software firm, for US$1.2 billion. (Net product gain)
2006, GE Advanced Materials division is sold to Apollo Management for US$3.8 billion. (Loss of product)
2006, GE Water & Process Technologies acquires Zenon Environmental Systems for $758 million. (Moving to green technology)
2007, GE-Aviation acquires Smiths Aerospace for £2.4 billion. (Big win for military industrial product)
2007, GE Oil & Gas acquires Vetco Gray for US$1.9 billion. (Who knows?)
2007, GE Plastics is sold to SABIC for US$11.7 billion. (Sounds like building the bank account at the expense of product)
2008, GE Co. to acquire Vital Signs Inc. for US$860 million. (The name just begs for metaphor in a horrendous stock decline from $80 to $5)
You can make a pretty good case that GE today is really more of a financial services company than a manufacturer, arguably a financial company with a manufacturing arm. It was announced on May 4th that General Electric would auction off its appliances business, hoping to raise something in the $5–8 billion range.
In mid-April of 2008, Jack Welch, the man who said shareholder value was the dumbest idea on the face of the earth, commented on a possible miss of earnings forecast by his successor, Immelt;
“I’d be shocked beyond belief, and I’d get a gun out and shoot him if he doesn’t make what he promised now,” Welch said on CNBC, a cable station owned by GE. “Just deliver the earnings. Tell them you’re going to grow 12 percent and deliver 12 percent.”
A year later, a stung James Immelt fired back; 9that in the 1990s,
“anyone could have run GE and done well.” Warming to his theme, he added, “Not only could anyone have run GE in the 1990s, [a] dog could have run GE. A German shepherd could have run GE.”
Welch, to his credit, more or less agreed with this assessment. “It was an easier time to be a CEO in the 1990s,” he told the Financial Times. “The wind was at our backs.” As they say on Wall Street, never confuse brains with a bull market.
And thus, as the sun sets slowly in the West, we say goodbye to an American icon in the manufacturing, research and development sector. Sorry Mr. Edison. You and Henry Ford have both been ill-served by the past fifty years of American business policy and leadership.
Those who carved those birds got phenomenally rich at the corporate dinner tables, but somewhere along the line we lost our industrial heritage and parked it in a Wall Street chop-shop.
Agricultural to Industrial to Financial
The amazing history of GE makes it uniquely suitable for a comparison from what America once was and what it has become. We built our ‘empire’ (for want of a better word) by opening up a major and largely untapped land mass, originally in agriculture and then through the decades of ‘industrial revolution’ and now into what may be characterized as a financial consumer society.
It’s been a quick trip. By comparison, the British Empire lasted 400 years, almost twice the length of America’s existence as a republic. The history of American Empire (if that’s a definition we’re comfortable with) is barely a hundred years old and arguably in steep decline as I write this.
Agriculturally, we are still the world’s largest producer after China and India, but that productive capacity has been subsumed by agri-businesses---large corporate entities that operate (as corporations are designed to do) on profit rather than care for the resource. Thus we have a vast but perilous food supply, marked by industrial methods and subject to brutal methodology and massive intermittent recalls over health issues. Industrial style meat production transfers the antibiotics and steroids needed to keep the animals on their feet until slaughter, directly through to consumer consumption. The result has been an increasing obesity rate among the population and a stunning and frightening increase in drug-resistant disease.
Industrially, we have lost our lead in the world to China and Germany and their rates of increase are far steeper than ours. But there is no doubt we are up there yet, among world leaders.
If that’s true, then where have all the jobs gone?
It’s not complicated. The difficulty is that, in world ratings, countries are rated by what they make, rather than where they make it. Where is a vital statistic for an American worker and, although the numbers are very hard to accurately determine, some sources estimate that as many as 40 million American based (and therefore counted) jobs may have moved overseas. It may help General Motors, but doesn’t much save Detroit if their brands and parts supply chain are manufactured elsewhere.
Financial Services are now our major strength, but there are no nuts, no bolts, no chickens, toasters or TVs in the highly profitable business of moving money around. Yet the world still functions more on product than money and product is where we are losing our edge. Further, as recent meltdowns of entire nations have proven, finance is a wary mistress, frequently here today and gone tomorrow to a less adventurous suitor. Finance is not only a precarious venture, but it accumulates money unevenly across the population, creating a social wedge between those who seem to have it all and accelerating a race to the bottom for an ever-growing percentage of Americans.
Witness the average wage of a Goldman Sachs employee10 at $367,057 compared to an average service-industry wage of $33,000.11 The latter certainly implies the need for both parents working to sustain a family of four and a college education for the kids is but a dream.
That’s not a future that suggests a continuation of the American Dream, that of doing better than one’s parents and enjoying a slice of the pie through job, wage and health security while moving up the ladder of financial security.
2 News Bureau in Boston, October 14, 1911
3 GE Lighting, History of Nela Park (www.gelighting.com)
8 WIKIPEDIA-In 1981, Jack Welch made a speech in Hotel Pierre, New York City called ‘Growing fast in a slow-growth economy’ (8.12.1981). This is often acknowledged as the "dawn" of the obsession with shareholder value. Welch's stated aim was to be the biggest or second biggest market player, and to return maximum value to stockholders.
9 The Atlantic, June, 2009, Do CEOs Really Matter
10 Wall Street Journal, Jan 18, 2012, Average Pay at Goldman Sachs
11 Service Economy Taking Over U.S., July 14, 2010, Dustin Ensinger
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