Monday, June 12, 2017

Jeff Immelt: "The decision"

The two articles on G.E. gave useful information regarding the future direction of the company. Jeff Immelt helped the company redefined  its mission as “TO INVENT THE NEXT INDUSTRIAL ERA, TO BUILD, MOVE, POWER AND CURE THE WORLD”. But, the fundamental behind the decision of refocusing the effort G.E. deserves some attention.

Quick flashback:
When Jack Welch took over G.E. leadership in 1981, “growing fast in a slow-growth economy” was the objective. Since G.E. traditional business were slowing down, the CEO allowed G.E. capital to become, at its peak, a source of profit with growth totalizing 2 times of the company as a whole. G.E. capital business serviced to different sectors such as: subprime mortgages, consumer lending, credit cards, equipment leasing…

In 2001, under the leadership of Jeff Immelt, G.E. started to scale down its financial arm to focus on high tech one of the many things the company does best. As per Jeff Immelt, this decision was driven by simple arithmetic rules, where given regulatory environment, the best expected return of G.E. capital was “single digits, high single digits maybe.”, while in the industrial businesses G.E. could have generated return in the order of 17% to 18%. 

Given the facts below, it was hard to capture the arithmetical logic behind the decision: 

  1. Not a officially a bank, G.E. was facing lesser regulatory supervision than it’s bank counterpart
  2. Due to its triple A credit derived from profits generated by G.E.’s industrial businesses, G.E. capital was able to borrow money cheaply.

When questioned on the buying side, Jeff’s answer depart from the above reported facts.  He said the buying side had cost of capital which was presumably better. Although he got a very good point when he referred to capital requirements regarding big institution.

Under  Jeff Immelt leadership, G.E. was able to amortize the financial chock by unwinding a significant portion of its financial assets. There are probably many other fundamentals behind his “decision”, and CEO Jeff Immelt might not have time to go into details. But, the “arithmetical rule” by itself does not really stand. 
The relationship between G.E. capital, G.E. industrial, and the global economic environment is too intricate for a simple decision based  uniquely on potential return. A reasonable fundamental (regarding the refocus) could have been G.E. departure from its initial mission. Because, under Welch, G.E. Capital was said to be sucking up more and more of the company’s resources leaving virtually nothing for G.E.’s in-house R. & D.

Supplemental Reference:
http://www.newyorker.com/magazine/2015/05/04/back-to-basics-why-g-e-ditched-finance


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