Services expansion highlights new GE chairman's game plan
Bloomberg News Service
NEW YORK — General Electric Co.'s chairman-elect Jeff Immelt says he will increase profit by taking the largest company by market value into different markets, fueled by new technologies and information services.
"A real priority for the new team is to really accelerate growth," Immelt said in an interview. "And there's four or five levers we've got to pull."
They are: Expand research and development; widen the kinds of services the company offers; get bigger in Japan, China and Europe; push salespeople in the company's 20 main businesses to spend more than twice as much time with customers; and accelerate the pace of acquisitions in the nonfinancial businesses.
Immelt, who replaced retiring Chairman Jack Welch on Friday, will present his plans later this month. How Immelt will maintain a 26-year record of quarterly profit increases in the midst of an economic slowdown and whether General Electric's range of businesses is the right mix will be paramount.
"Investors want no surprises — but they're also eager to see what Jeff does to make his mark," said Michael Holton, an analyst at T. Rowe Price & Associates in Baltimore, which owned about 26 million shares of General Electric at the end of June.
Since being named heir apparent in November, the former head of GE's medical systems unit hasn't sat quietly. While Welch wrestled with the now-failed purchase of Honeywell International Inc., Immelt visited with thousands of customers, employees and investors. He sat in on reviews and began teaching at GE's Crontonville, N.Y., training center.
"In many ways, inside the company, the transition is over," Immelt said from General Electric's redecorated New York offices.
A primary focus will be to expand services, which under Welch grew to 70 percent of revenue last year from 15 percent in 1981.
The next level of services will involve "intellectual content," said Nicholas Heymann, an analyst at Prudential Securities, who owns shares of GE and rates them a "buy."
That means including customers in the design of products and taking internal quality-control programs such as Six Sigma, designed to reduce defects, to customers, Immelt said.
"He's looking for opportunities to help us streamline operations, reduce patient waiting times, reduce customer rates," said Nick Vitale, chief financial officer of the Detroit Medical Center, which operates hospitals and nursing homes. "He's really got a customer focus more so than before."
Immelt also wants General Electric to do more business electronically, including sales transactions and customer consultations. He expects to save twice the projected $1.6 billion this year in 2002 from the company's "digitization" effort.
"Jeff is enthralled with using technology to solve a customer problem," says Scott Donnelly, who heads the company's corporate research and development center.
Last year, for example, GE Medical Systems created a new business through acquisitions Immelt made that stores and manages patient records and digital images. It will account for $1.2 billion of that unit's estimated $8 billion in revenue this year.
Welch has left his 45-year-old successor dozens of businesses with steady profit and revenue growth. General Electric's net income rose 19 percent last year and 15 percent in 1999.
While few question whether profit will keep rising, less certain is if the company can keep that pace in a slow economy, analysts and investors said. Immelt says he doesn't expect the U.S. economy to improve any time soon.
About 25 percent of General Electric's businesses are closely tied to economic swings. Revenue and profit at NBC and the plastics and appliances units fell last quarter, though Immelt said there has been improvement in appliances in recent weeks.
Analysts expect more than 15,000 job cuts this year. General Electric wouldn't specify a number, though some cuts at NBC and the company's locomotive business have been announced.
Investors will be looking for signs that the more than $50 billion backlog at large-equipment businesses such as medical systems, power systems and aircraft engines will keep profit rising. Cost-cutting at the company's financing unit, GE Capital, which accounts for about 40 percent of revenue and profit, has also kept profit growth steady.
"(Immelt) has to give visibility showing that the (other) 75 percent of the company will continue to grow in the mid-teens over three to four years," said Prudential's Heymann.
Immelt said General Electric will meet forecasts for profit this year of $1.47 a share, the average estimate of analysts polled by Thomson Financial/First Call. GE reported profit of $12.7 billion, or $1.27 a share, on sales of $130 billion last year.
The company's shares fell 85 cents to $39.65. They had dropped 17 percent this year.
Immelt said he will appoint a new European executive to oversee operations there, where the company has about 85,000 of its 313,000 employees. In China, General Electric plans to expand its industrial businesses such as plastics and power systems.
Immelt plans to continue making acquisitions, and he has begun reshaping GE Capital. That unit made more than 400 acquisitions in the past decade and is now trying to complete a $5.3 billion purchase of Heller Financial Inc.
