Job No. 1 for GE’s New Chief: Fix Its Ailing Power Business
Posted October 30, 2018 1:23 p.m. EDT
Updated October 30, 2018 1:24 p.m. EDT
In March 2017, Stephen R. Bolze, the president of General Electric’s big power-generation business, led an upbeat presentation to analysts. “We have got an exciting story for you,” he said.
There were challenges, he said, but GE would overcome them. The big power division, which delivered $27 billion in revenue and $5 billion in operating profit the previous year, would grow again in 2017.
But by the end of the year, the power business was in a tailspin — profit fell 88 percent in the fourth quarter. Bolze, once seen as a front-runner to succeed Jeffrey Immelt as chief executive, was out. So, too, was Immelt.
And early this month, Immelt’s replacement, John Flannery, was ousted as well — just 14 months into the job — largely a casualty of the troubled power unit.
The depth of the challenge created by the embattled power business was underlined Tuesday when the company reported its third quarter results.
Recognizing the financial drag, GE announced that it would slash its quarterly dividend to 1 cent a share from 12 cents a share starting next year. The move will save $3.9 billion in cash a year.
GE also said Tuesday that it would cut its power business in two — one division with its gas turbine generators and the other home to the rest of the business, including electric grids and steam generators.
In a morning conference call, Lawrence Culp Jr., the new chief executive, emphasized that the struggling industrial giant still possessed fundamental strengths.
“The talent here is real, the technology is special,” Culp said. “But GE needs to change.”
The biggest changes would have to be made in the power business, said Culp, a former chief executive of Danaher, an industrial company that thrived during his 14-year tenure. Working to turn that business around, he said, would be his priority.
The two power units will report directly to Culp. One message, he said, will be to “wring out some of the undue optimism” that had been part of the mindset there.
At the start of this month, when Culp was named chief executive, he said GE would sharply write down the value of its power business. The write-down of $22 billion, formally announced Tuesday, is virtually all of the goodwill in that business — everything other than hard assets like factories and equipment.
The giant noncash charge is the main reason GE reported a $22.8 billion loss for the quarter. On the conference call, Jamie Miller, the chief financial officer, told analysts that a previously disclosed Securities and Exchange Commission investigation, which included the accounting for service contracts in the power business, was being expanded to include the big write-down. Miller also said the Justice Department had an investigation underway.
In the third quarter, GE reported operating earnings, excluding one-time charges, and revenue that were somewhat below Wall Street’s expectations. At 14 cents a share, the company’s operating profit per share trailed analysts’ consensus forecast of 20 cents a share, compiled by Thomson Reuters.
Revenue of $29.6 billion — a 4 percent decline — was below the $29.9 billion average estimate of analysts.
In the quarter, the ailing power unit’s revenue fell by 33 percent from a year earlier. The business lost $631 million, compared with a profit of $464 million in the year-ago quarter.
The precipitous fall of GE’s power business is particularly remarkable because it does not seem to be a fall-off-a-cliff kind of business. GE has long been the market leader. Its power generators, the company says, supply 30 percent of the world’s electricity.
Gas-fired turbines, equipment that lasts 20 or 30 years, are its core product. There are more than 7,500 GE gas turbines in power plants worldwide, which should be the platform for a large, lucrative service business for maintenance and repairs.
So what happened?
The answer, according to former GE managers and industry analysts, is a combination of a sharp market turn, a wayward acquisition and self-inflicted wounds.
Energy efficiency programs and renewable sources like solar and wind have both expanded and dropped in price faster than anticipated. And further advances in battery technology could make renewables consistently reliable rather than dependent on the weather. Those forces have prompted utility executives to hold off new orders for gas turbines after years of growth.
The demand for gas-turbine power generation this year will be more than 40 percent less than in 2016, analysts estimate.
“The market moved much faster than anyone anticipated,” Lisa Davis, a member of the managing board at the German company Siemens who oversees its gas turbine business.
But while the other major producers of large gas turbines, mainly Siemens and Mitsubishi Hitachi Power Systems, have suffered, they have moved more quickly to adapt than GE, analysts say. At Siemens, Davis said, the market weakness became evident in 2015, and the company began belt-tightening then.
Yet Siemens may have also been a lucky loser. It bid, in competition with GE, for the electricity generation and distribution operations of France’s Alstom. GE prevailed in the long-running negotiations in June 2014, and the acquisition did not close until late 2015.
At first, the deal looked like a good one for GE. A top appeal was Alstom’s base of installed gas turbines — a source of service business — and its combined steam-and-gas generation technology.
But absorbing Alstom proved to be more difficult than expected, and the acquisition increased GE’s stake in the power business on the cusp of the market’s downturn.
The largest part of the $22 billion write-down was related to the Alstom acquisition. It amounts to a declaration by GE’s new management team that it will never generate the earnings the earlier management team had projected.
“Alstom was the biggest bet, but it was symptomatic,” said Deane Dray, an analyst for RBC Capital Markets.
There is a debate among former GE managers over whether the company was slow to respond to the market turn or, as the largest producer in the market, was destined to be hit hardest.
But the GE power unit still has outstanding technology and a long roster of customers, analysts say. The key to a comeback, they say, is quickly addressing the basics of the business. Cutting costs will be part of the formula. But, they say, so will more closely catering to customers, and retaining experienced midlevel managers and skilled engineers.
All of GE’s industrial businesses have been through severe setbacks in the past, including industry cycles and quality issues. But each time, the company has stayed the course and emerged.
In the longer term, natural gas is predicted to be one of the winners in the energy market, plentiful and relatively clean, unlike coal or nuclear.
“Right now, GE is in a real trough, and it looks like the business is collapsing,” said Richard Keck, president of the Keck Group International, a power plant consultant. “But if they don’t panic, it will come back.”
“By 2022,” he added, “whoever is leading the GE power business might well be a hero.”