GE's Industrial Shift to China

By Jason Simpkins

General Electric Co. (GE) Thursday reduced its annual profit forecast for the second time this year and announced plans to reduce dependence on its financial services arm and focus more on the company’s industrial operations, particularly in China.

“GE today revised its earnings guidance for the third quarter, to a range of $0.43 to $0.48 per share from $0.50 to $0.54, reflecting unprecedented weakness and volatility in the financial services markets,” Chief Executive Officer Jeffery Immelt said in a statement.

GE cut its full-year earnings estimate to between $1.95 and $2.10 a share, down from the previous projection of $2.20 to $2.30 a share. The company also made a grim assessment of the U.S. economy in general, saying, “Difficult conditions in the financial-services markets are not likely to improve in the near future.”

The only silver lining GE was able to muster up was that its financial arm, which accounted for more than half the company’s profit last year, “continues to significantly outperform the majority of its peers among large financial institutions.”

GE expects its financial services businesses will earn approximately $2 billion in the third quarter. However, Immelt also announced plans to reduce exposure to financial markets that includes raising capital in GE Capital to reduce leverage ratios by cutting the segment’s dividend payment to its parent company to 10% of earnings from 40% and suspending the current share buyback. GE Capital’s commercial paper cut from 15% to 10% of its total debt going forward.

Immelt’s ultimate aim is to restructure GE in such a way that that its industrial business accounts for 60% of the company’s earnings by the end of 2009.  That would effectively reduce GE Capital’s contribution to GE’s bottom line by 13%, as financial services made up 53% of the company’s 2007 profit.

It is Immelt’s hope that these measures will reduce risk, strengthen GE’s balance sheet, and allow the company to maintain its dividend and AAA-credit rating. They are, however, also a reflection of GE’s renewed focus on its industrial operations, which Immelt believes will lead the way to greater profitability, particularly through emerging markets such as China.

“Our industrial business fundamentals remain very strong, with continued global strength in our core industries,” Immelt said. “Long-cycle industrial and service orders are expected to be up double digits in the third quarter.”

The Industrial Shift to China

GE said earlier this month that it expects its business in China to double to $10 billion a year by 2010.

On Aug. 25, GE announced it was starting to move into its new China headquarters, a massive office campus situated in the East Coast city of Shanghai. Located in that city’s Zhangjiang Hi-Tech Park, GE’s China Technology Park complex of offices is an expansion of its former China research center. It covers more than 650,000 square feet and - when completed - will house more than 3,000 employees from GE’s China business groups.

Immelt said the new facility - one of four global research-and-development centers that GE operates - would help the company conduct actual R&D programs inside China. The three other R&D centers are located in the United States, Germany and India.

The Shanghai complex also will serve as GE’s China headquarters, helping the company with its efforts to “localize” its product lines for the China market. Overall, GE has 12,100 employees in China.

Late last month, GE also said that it would soon be delivering the first of 300 advanced locomotives to China, with the remainder arriving by mid-2010. The first two locomotives - from a contract signed in 2005 - will be shipped fully assembled from the United States. But the remaining 298 will be shipped as “kits,” with the local content gradually rising - until it reaches as much as 80%, said Lorenzo Simonelli, the global president of GE Transportation. The first locomotive will be assembled in China next month.

GE was also a major sponsor for the just-concluded Summer Olympic Games in Beijing, and said it generated $1.7 billion in revenue from that event - including $700 million in sales of power-equipment and other products for sports venues, and another $700 million from advertising on NBC, the U.S. broadcaster for the games.

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Comments

[Norman Lepo...:]

Sounds good.

2008 Sep 26 10:55 AM

[Urbane Gori...:]

IMHO.... Companies in the near future will have to be streamlined and nimble. GE is like a Mom dragging 6 screaming kids around.... Too much baggage.

jegan

2008 Sep 26 01:34 PM

[starboard:]

GE's strength is in wind turbines; combustion turbines; nuclear reactors; power transmission and distribution, locomotives; jet engines; water technology and medical equipment. NBC and Universal Studios are an insult and dead money to boot. GE should sell them immediately. The financial arm is and will be a continuing albatross. It is worth pennies on the dollar. Shame on GE management for shifting the focus of the company from world class engineering and technology to finance and entertainment.

2008 Sep 26 04:04 PM

[Al-USA:]

Another example of American capitalists cutting their own mfn throat.

Slap on the tax incentives/penalties and force them to strengthen America, not China. If that sounds like socialist, maybe you have not heard of the proposed $700,000,000,000 for America's billionaires. Or maybe you agree with socialism for billionaires and capitalism for the rest of us.

2008 Sep 26 04:53 PM

[fran:]

STARBOARD--

GE FINANCE exists to act as banker for buyers/leasors of that other GE "stuff". while acting as GE bank, it does other profit making business..you've undoubtedly heard of GMAC--the only profitable arm GM had prior to their need to sell it to stay out of bankruptcy. GE CAPITAL is good business.

2008 Sep 26 06:28 PM

[Michael D.:]

Agree, GE capital is merely vertical integration of the financing function in an industrial sales stream. NBC/Universal...meh. But who knows, this is a long term, big picture company, re-inventing itself for the new economy.

2008 Sep 26 08:44 PM

[starboard:]

fran,

Thanks for the headsup. To the extent that GE Capital confines it's lending to the "stuff" they make, it makes a whole lot of sense. I didn't think we have to worry too much about power companies not being able to pay their loans off. I have a fear however that GE Capital has involved themselves in some of the same shananigans as the Bear Stearns and Lehman crowd, like derivatives and credit swap defaults. Do you know anything about their exposure in this regard?

2008 Sep 27 04:37 PM