November 30, 2007    Volume 14, No. 21

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General Electric CEO Jeffrey Immelt: The U.S. No Longer Drives Global Economic Growth And Must Decide If It Wants To Be A Competitive Nation



BY RICHARD McCORMACK
richard@manufacturingnews.com

A downturn in the U.S. economy shouldn't hurt General Electric because most of the company's growth is in foreign markets, according to GE chairman and CEO Jeffrey Immelt. The United States is no longer the world's primary economic engine.

"When I look at our businesses outside the United States [they are] very robust and very strong," Immelt said in a Nov. 8 interview with public television talk-show host Charlie Rose. "I really am not worried" about the credit crunch, U.S. housing crisis and high energy costs.

"For our company, I view this as more opportunity than downside. I think you've got to be cautious about the U.S. consumer, but over the last five years we have really positioned ourselves as a global company. What I'm about to say might be good news or it might be bad news: the world has never been more independent from the U.S. economy. If the U.S. economy goes into a recession, the rest of the world is going to feel it, but in my business life, I've never seen as much sense that there are other economies around the world that can absorb the growth."

The U.S. economy is still important, but not like it was five, 10 or 20 years ago, said Immelt. Evidence of this can be found in the $15 trillion that exists in reserves in China, Russia and countries in the Middle East that are running huge trade surpluses with the United States.

"You know, as much as we want to belittle Europe, it's more competitive today -- because of the common currency and things like that -- than it was in the past," Immelt pointed out.

The dollar might be tanking, but it should not hurt GE. "We are almost perfectly hedged as a company," Immelt said.

U.S. exporters should be taking advantage of the dollar situation, but "if we don't turn that into a reduction in our deficit, we have to really worry at that point because that's going to say our competitiveness isn't where it should be." The United States -- thanks to General Electric -- might be good at exporting jet engines, "but if you're talking carpeting or appliances or things like that, then I'm not sure," said Immelt. "That's the conundrum."

More than 50 percent of GE's revenue this year is being generated from markets outside the United States. The company's overseas business is growing twice as fast as its U.S. operations, and overseas sales are projected to account for 55 percent of GE's total revenue of $190 billion in 2008. When Immelt took the reins of GE five years ago, the company had earnings of $11 billion on sales of $110 billion. This year, earnings will top $23 billion on sales of $175 billion. In five years, Immelt predicts that 60 percent of GE's revenues will be generated from overseas.

"Our business outside the U.S. is going to grow 15 percent a year," he said. "Now I always say we're an American company. I'm proud to be an American company. I like being an exporter. I like being a good citizen of the United States. I want Congress to root for GE as a company that can win on a global stage. I don't want people to say, 'Gosh, there's something wrong with GE because they want to be a global company.' I think that's where we have to grow."

Immelt said he worries about whether GE is globalizing fast enough. "Can we be in enough places?" he asked. "Can we have enough talent? And can we avoid the inevitable backlash that's going on in this country and the world about what it means to be a global enterprise?"

This question is important because globalization is "profound," Immelt said. "It's irrefutable and it's irreversible. In other words, when we live in a country where basically our standard of living is being financed by the Chinese, Japanese and everybody that's buying our debt, you know what guys? It's here. If you're running for president or if you're a man on the street, we live in a global network that can't be reversed. Jobs are spread around the world."

From the standpoint of General Electric, it's important for the company to "pick the right places to sell things and the right places to make things." The United States might be able to export products in the high tech, energy and health care sectors, but "certain regions are going to suffer," he said. "Certain regions [of the country] are going to pay. That's easy for me to say because I'm not running for any [political office]. But where businesses have failed, where I have failed is we haven't told the real valuable story about globalization. We haven't said, 'Look, the fact is that without globalization my jet engine business would have layoffs today. My gas turbine business would have layoffs.' We've done a lousy job telling the story."

The U.S. government has a role to play in making sure the United States remains a competitive nation, Immelt commented. If the U.S. government "wants to fix the trade deficit, it's got to be pushed," he said. "GE wants to be an exporter. We want to be a good citizen. Do we want to make a lot of money? Sure we do. But I think at the end of the day we've got to have a tax system or a set of incentives that promote what the government wants to do."

In many areas of the world, GE sells primarily to government customers. "In China, the government is the customer," he said. "When I go to China I go to a combination of the department of energy, transportation, health and human services all rolled into one. The leader sits there and says: 'You know what, Jeff? Your train order -- you know -- you've got to be more competitive. The turbine installation you had in the north is going well.' And he's going down and beating me up like a purchasing manager at GM. I always leave saying, 'God, you know, this is impressive. These guys connect the dots. The level of connection is very impressive."

The fate of the U.S. economy "is going to be decided in the next three to five years," he said. "You've got to have a real game plan for health care and energy and you've got to have a tax and public policy that tries to create the right mechanism for exports," Immelt said, referring later to Washington, D.C., as being "deaf."

The U.S. needs to start figuring out how to control health care costs. Increased costs will be paid by employees and the government, not by companies. There isn't a single company starting in business today that will provide health care for retirees -- "zero retiree health care," said Immelt.

As a result, the government needs to "measure quality, pay for quality, drive process, drive standards and drive transparency around quality," said the GE boss. "Every business guy who's lived in this universe for the last 30 years knows that if you drive metrics and process and quality, costs go down -- in every other industry in the universe."

With the government paying for 55 percent of health care, it needs to adopt metrics and transparency in its dealings with providers. "Government is an important player. I mean, they can change the world in a heartbeat," Immelt said.

"Is America going to lead?" Immelt asked rhetorically. "What's different today is the competitors out there. If I think about the country as a company, the competitors are better today. In 1982, when I joined GE, Japan was going to eat our lunch. Japan was going to crush us. Jack [Welch former GE CEO) sent us all to Japan to study process and we did. I learned a lot. I thank them for making me better. But you know what? Japan was always constrained by demographics, by population size. The Japanese were limited. Japan is an island. Let me tell you, China is not an island. It goes on forever. China's got perfect infrastructure. The government creates the backdrop for success. It is a very well controlled, shrewd, centrally driven economy. I just never cease to be impressed with how well the government of China does.

"Russia has every raw material the world needs. There is wealth in the Middle East unlike ever before. India's guys work seven days a week. They're high tech. They graduate a million and a half engineers a year. We're graduating a couple hundred thousand.

"We've got to compete. We've got to be smart -- use our entrepreneurial ability. We've got to have more kids studying engineering. It's not going to be delivered by a five-minute sound byte in a presidential debate. It is what we have got to do."

Immelt worries that China's stock market could spell trouble. "NASDAQ in 1999 taught us something," he said. "That is, markets are not meant to trade at 70s PEs. I hope the Chinese are mature enough to understand that these [new public] companies aren't going to maintain these market caps. It's just not going to happen. The Chinese stock market can't trade at a 50, 60 or 70 PE into the future. It's just too hard to sustain....There's just a little bit of air in that balloon."

GE's embrace of the green movement is paying off, said Immelt, who decided in 2004 that global warming caused by humans was "a technical fact." In Immelt's global travels, he sensed a "sea change" in the way society viewed environmental issues and that it was important for GE to get out in front. "I'm not an environmentalist at all," he said. "I golf, you know? I didn't come at this with any ideology. I was there to protect my investors and any CEO who doesn't know that when they're on the wrong side of society cannot win. I think that's what I get paid to do."

In 2001, wind turbines were more of a fad -- "kind of a hula hoop" -- than a real business venture, he noted. Wind turbines were generating electricity at 15 cents per kilowatt-hour. But the wind industry commercialized the technology and the cost of power from a turbine is now six cents a kilowatt-hour.

"I would give the Europeans credit," said Immelt. "The Europeans said in 2000-2001 that 10 percent of the energy in Europe was going to be renewable."

That didn't happen in the United States, where there was a belief that if such a mandate were put in place, prices of energy would go up.

The U.S. federal government needs to get its act together with regards to an energy policy that puts in place the incentives needed for U.S. companies to succeed in the global market. There are currently seven states that are debating legislation mandating greenhouse gas reductions. This is unproductive.

"I'd like for there to be a national standard," said Immelt. "I'd like to see a federal process that's intelligent, orderly and lays out real technical options. What we have that nobody else in the world has is we've got the most unbelievable entrepreneurial venture capital community that's the envy of the world. Money that has historically gone to health care or software is now going to energy. The piece we need now is an aspirational energy policy that helps create the right incentives to see it take off. It's a job creator, not a destroyer. In the end, it adds high-tech jobs to this country and doesn't take them away."

Today, GE generates $14 billion from all of its environmental product initiatives, from energy-efficient appliances, compact fluorescent lighting, hybrid locomotives and the GEnx aircraft engine that's 25 percent more fuel efficient than the one it replaced. Of that total, $7 billion is generated through renewable energy technologies.

The company is saving $150 million in its factories by implementing energy conservation techniques. "I thought that was going to be an expense four years ago, but because of high energy costs, that's all become savings," he said.

Immelt said he's not happy with the company's stock price. At about $40 a share, "it's clearly not exactly where I'd like to see it," he said. "If you buy the stock right now, it's a great value. It's going to appreciate and the next 18 months look great. We make $2.20 a share this year; we're trading at a premium on the S&P. If we make $2.50 next year, the stock's going to go up by 15 percent. I totally believe that. If people say the stock trades at about $40 and the break-up value would be $45, $47 or $50, I think the value of this company is going to be a hundred in a couple of years. You know?

"Now that doesn't mean we shouldn't sell [divisions of the company]. We've sold plastics and insurance and we'll sell more things in the future. If somebody can run it better than we can, we should sell it and be very tough-minded about it...I've got to take care of GE investors first."



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