GE Renewable Energy Posts $419 Million Loss

Janice you beat me to it. I was going point out the big ‘tell’ of GE putting the subsidies as a second cause. You more effectively showed it as the only real cause. Inflation for goods that the market actually demands they paid on to the customer.

Yes, Immelt was in over his head. Mainly because he did not countenance the financial shenanigans Welsh relied upon. Plus, Immelt had bad luck/bad strategic insight. His bet on oil field services made sense from a GE ‘core capabilities’ perspective (something Welsh instilled as religion) but not from a global strategy perspective knowing fracking was going to unleash a lot or oil and gas, so drop crude and natgas prices, thereby forcing the frackers to cut way back, thereby ‘ruining’ GE’s newest ‘core capabilities’ business financial prospects.

Just like IBM

Let me just offer a little different take on Welch v Immelt, as someone who was hired by Welch and did work there for several years.

I think the problem with GE Capital was not the shenanigans but just the sheer size it grew to. Under Welch it got to 40% of profits and Immelt continued to grow GE Capital so in 2007 (Immelt took over in 2001) it got to over 50% of profits. So that last growth is on Immelt. GE, the company, became a bank, albeit a hugely diversified bank that did everything any bank does, from equipment finance (the original business) to consumer credit cards to investment banking to reinsurance to owning Lehmann Bros. to you-name-it. When the 2008 financial crisis hit, all banks got hurt. But Wall Street realized, hey, GE, you’re not a manufacturer, you’re a bank. We will stop valuing you and your earnings like a manufacturer, (manufacturer earnings are valued higher than bank earnings), unless you wind down your banking side. This meant forced sales at low values, and some financing like the expensive BH loan, which got negotiated under Immelt, was needed to save the day.

Letting GE Capital grow big started under Welch. But all the other mistakes were on Immelt, he did a comprehensively terrible job. My GE alumni friends from those days still marvel that one terrible CEO could do that much damage to a conservatively managed, rock-solid company like GE.

Immelt followed every fad and every government-pushed boondoggle, like renewables. Immelt got them big into Renewable Energy, and we all know that all renewable energy is only viable when it gets subsidies. It’s just more visible and obvious with GE vs, say, Vesta which gets hidden Danish government and EU subsidies. Immelt bought Alstom and got 30,000 unionized European employees that you can’t fire when sales turn down, and of course sales did turn down. Huge mistake.

Welch never lost sight of the fact that GE is a big bunch of mostly mature, mostly cyclical businesses. “Managing through the (business) cycle” was one of his mottos, and when the business cycle turns down in a huge, mature cyclical business, you gotta lay off workers or you start losing money. I remember a meeting early in my tenure where 5 division managers flew in, each in their own jet, for business reviews, and at the start a finance guy read through that period’s financial results for these businesses. He droned on and at one point said, “… and since the start of the recession your divisions have laid off 41,723 workers to protect earnings…” I just got hired and leaned over to my boss and asked, “we fired 40,000 people the last few months?” “Yup, Tom.” I decided to work late that night, show them they should keep me on.

Immelt sold off Genworth including the reinsurance business but inexplicably kept on GE’s books a lot of the liabilities, which eventually came due as over $21B of losses, which dragged down GE’s earnings for years, strained GE’s balance sheet and took resources away from profitable investments. GE went from being in “every SIC code except food” to a smaller, less profitable company with ageing products because Immelt underinvested in the manufacturing side, which even he admits. Mature cyclical businesses require constant investment in order not fall behind with flow of new products, cutting manufacturing costs, etc.

So overall, much more on Immelt than Welch.

And Rud, here’s a different take on that job you turned down. If it really was corporate head of strategy reporting to Jack, he always generously rewarded senior guys for results. The stock option that job would have included, would have been a lot more valuable than that bonus you didn’t get, a lot more.