GE Digital: GE's Secret Competency

| About: General Electric (GE)

Summary

On June 23, 2016 GE presented a lengthy manifesto on its digital initiative.

The three hour presentation included 14 executives from every corner of GE and over 100 powerpoint slides.

There was no executive summary identified as such and the presentation was prolix.

This article will set out selected highlights of GE’s ambitions for its newest big thing which may turn out to be very big indeed.

Introduction

GE (NYSE:GE) has been shaking things up over the last several years. Most notably it has sold the bulk of its once highly profitable Financial Services businesses. The sale of its financial services businesses allowed General Electric to free itself from its sifi designation. Moody's Investor Service perceived a financial risk arising out of the sifi release and in response announced that it may downgrade GE's credit rating one notch because:

"The decreased regulatory oversight now allows the company to reduce capital ratios at its finance subsidiary so that more cash can be returned to the parent, which GE plans to do,..."

GE recognized the challenges it would face as a straight-out industrial conglomerate. It has undertaken several important initiatives. It acquired Alstom SA's power businesses in a deal that it completed in November 2015.

More importantly for this article, it has established a digital initiative which it publicized with a three hour presentation on May 23, 2016. This presentation featured 14 executives from every corner of GE and over 100 powerpoint slides which are available here. I reference this presentation for the balance of this article as the "manifesto".

At the outset, Bloomberg characterized GE's digital ambitions in an unflattering light. In this regard, a September 2015 Bloomberg article deadpanned:

"General Electric Co. formed a new division overseeing its software and analytics operations as the industrial manufacturer looks to fashion itself as a tech-savvy company."

The manifesto contains no hint of any such small beer. It hardly merits such dismissive reference. Let's take a look.

GE's Digital Initiative

GE's website incorporates the informative graphic below which sets out a grand vision. The vision involves "Reshaping GE as a Digital Industrial Company."

The slide below is slide 11 from the slide presentation accompanying the manifesto. It presents GE's digital initiative in visual form.

Click to enlarge

The manifesto sets out GE's ambitions for its digital initiative. It shows that GE's executives are extremely enthusiastic about its prospects.

The following excerpt from the manifesto has to get the juices flowing in all but the most cynical observer. Bill Ruh, GE's SVP and Chief Digital Officer describes GE's digital efforts as follows:

"Now we think that if you look in the consumer world, you see the Googles, the Apples, the Alibaba's who've created platforms that others are coming on to. And we see that world as one where they get very good at the home, they get very good at the phone, and they get very good at the auto, potentially. We think that the enterprise is different. These are companies who are taking your traditional ERPs (Enterprise Resource Planning) and providing them in a new way that allows you to get up and running at a much faster rate and at a totally different price point. And of course, we run our operations ourselves on this capability. But we don't think any of these translate over, and we think that there will be this third world, the industrial world, where there will be platform providers and application providers, and that this world, we actually see as bigger and actually much more global in perspective than any of the others, because when you look at infrastructure build-out in the world today, the emerging market build-out is huge. I think this idea of consumer versus industrial is something that everyone has to really begin to think about. And the consumer world move its way over to the industrial world. And we think that there are three major differences that these points point out."

The three major differences to which Mr. Ruh refers are:

"...first, the machine, the second difference is security, and the third difference is in the Cloud.

When he talks about the machine as a differentiator he is almost as dismissive of the consumer world as Bloomberg was of GE's tech bonafides. He is clearly justified when he compares a watch or phone to a gas turbine, a jet engine or a locomotive. Consumer devices are certainly less complex and less critical than many of their industrial counterparts. The security differentiation is obvious. His third differentiator is a bit more subtle to understand. I will let him explain this one himself:

"Then when you look at the Cloud, what makes the [industrial] Cloud different is - look, in the consumer world, we give our information away for free and in exchange for value in a different way. But that is not going to happen in the same way in the industrial world. In the industrial world, the companies will want to own and monetize their data in a different way. They aren't necessarily seeing that all their data goes up into the Cloud like in the consumer world. Our customers want to see a lot of their data living close to the machine, in the plant and in the factory, in the field.

And it's not just the Cloud world. It's the Cloud to edge world, and you're going to hear this over and over for us, that we have to think about compute at all levels, at the sensor, at the machine, at a gateway that incorporates a whole set of assets. And even the ability to move the Cloud closer to the machine and then the Cloud itself. So when you think about the Cloud architecture, it's different by its very nature in these industrial settings."

Mr. Ruh has a vision that gives us a chance to buy a dull old industrial stock that pays us a nice dividend. The secret sauce is that we are simultaneously getting in the industrial internet. Buy GE and get in on the ground floor of a huge opportunity to make up for all the runaway successes that we missed in decades past? Oh happy days. Well, maybe, let's look into it.

Examples of GE's Industrial Internet in Action

The manifesto is replete with an exciting big picture view of life. It also includes examples which are no less exciting. I will set out a few of the most compelling. It is helpful to first consider GE's vision of the digital twin. In the manifesto Harel Kodesh, VP, Predix & Chief Technology Officer, GE Digital, describes this well. He states:

"…our Digital twin strategies somewhat simple we commit every single asset to cyber, so we build a twin of everything that we build, every single physical appliance. so when you think about Jet engine, when it leaves the factory you have a lot of information about what it is, how it looks like, what was the engineer consideration, how far was the freezer (sic) for the composite material from the actual milling machine. all that information goes into the definition of what the engine is when it leaves the factory, but then during operation interesting things starts to happen, we are not talking about just a generic jet engine G19, we are talking about a specific jet engine with a specific serial number that operates on the right wing of 737, with that plane number. That plane flown by different pilot, it goes through different pollutants in the air because it fly different route than another plane, than another engine with another serial number.

So [over time] the functionality of those devices [..] diverges, and as a result the maintenance redeems their recommendation about what to do with that, really depending on all the events that specific device have gone through in its life. And as a result we can pinpoint the specific recommendation with our machine learning algorithm, with the data that we aggregate and it is different from one specific engine to another, and come up with different answers."

The concept of a digital twin is not new. The exciting opportunity for GE Digital is that it has GE's vast resources and industrial know-how to bring to the table. For it, the digital twin is not only a compelling idea, but a tool that it can use to drive its servicing businesses to a new higher level of achievement. Needless to say, if GE is touting something Siemens is right there with it. A recent SA article compares and evaluates the two.

The manifesto also sets out several examples of GE's successful implementation of the industrial internet.

The example below is from Azeez Mohammed, VP, Services Mideast and Africa, GE Power, who describes how the digital twin helps his clients as follows:

"The last example is again at recent when we won this a couple weeks ago. And this [for a] plant in Pakistan, It's called HUBCO. It's a 1.3 Giga power plant. The beauty about this is there is no G.E. equipment in this plant. It is all unsubtle steam turbines. So even a year ago I would be afraid to even touch this plant and to work with it because I need to know how to kind of go work with it, but Digital give whole new capability and I'll explain how. You got the concept of the Digital Twin being talked about a lot, we've been building Digital Twins all kind of assets, turbines, pumps, heat exchangers and so on, at least for I can remember five years, maybe it is more than that, and we have this library that exists, This can be used in our [client's] environment. So if we can pick up plants like this and we can customize it and build out a Digital Twin of this plant, anywhere from one to three months, I don't think a lot of people have this capability and from that standpoint I would say we are three/five years ahead."

Another compelling example comes from GE's use of its predictive technology. It does so to evaluate when an airline engine requires physical inspection by using digital twin concepts that reflect both the particular engine/parts in use and the particular environment in which they have been used.

Kevin McAllister - VP, Services, GE Aviation, uses just such an example when he states:

"Now the ability to understand [predictively] how damage accumulates also matters, because I can tell you, that if you have to pull an engine unscheduled on a Boeing 777, it doesn't make your customer base very happy, it doesn't make the passengers happy, and it's not great for the business. What we've been able to do with analytics is look at those engines flying in nominal environments and have a very different maintenance action. We've eliminated on-wing inspection for this condition out in the fleet, and for those that are in the harsher environment, you can see the dots beginning to converge towards nominal environment, because we can prescriptively take maintenance actions by engine out in a fleet, before it gets to the blue line when you have to take it off-wing."

The slide to which Kevin refers is set out below

Click to enlarge

It is easy to imagine how valuable it must be for GE's clients to benefit from such predictive analytics.

Conclusion

GE Digital has an intuitive appeal to me. It seems like just the sort of situation one seldom encounters. A situation where a great idea exists in the hands of a player who has a unique suite of assets and experiences to fully implement the idea. Even better, GE's stock price is reasonable, albeit a dollar or two higher than I would consider as a fair value.

On the other hand I don't believe that GE's price reflects any potential upside that it might realize from GE Digital. The Bloomberg article quoted above, coupled with GE's own "What's the Matter with Owen" TV ads tell a story. As of yet GE is not instantly recognizable as having chops in the tech world. Further, GE is such a huge company, even after shedding its finance units, that it will be hard slogging for any one initiative to meaningfully impact the bottom line.

The sum and substance of the situation as I see it is that GE Digital will serve as a value multiplier for GE. However, this will take time. In the interim GE's shareholders can continue their ownership, buying on dips when and if they occur.

Disclosure: I am/we are long GE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclosure: I am/we are long GE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.