Forget Boesky, GE’s Welch Is the <i> Good</i> Story

If you want to understand what is right, instead of wrong, with the U.S. industrial and financial system today, you should forget Ivan F. Boesky and concentrate instead on John F. Welch Jr., the chairman of General Electric, the vast diversified company that will have revenue of more than $40 billion this year thanks to its acquisition in June of RCA Corp.

Boesky, as the Securities and Exchange Commission has revealed, turned out to be just another chiseler--as have so many other Wall Street “geniuses” before him. But his passing from the securities business does nothing to lessen the intensity of global competition for American business, nor to reduce the pressure on U.S. companies to increase earnings to support the stock price.

It is in responding to that challenge that Welch has transformed GE--”restructured” it, to use the currently fashionable word--to prepare it for global competition while being attentive to the demands of the stock market. How successful has he been? So successful that Hitachi Ltd., the Japanese electrical giant (annual sales of $29 billion), recently approached securities analyst Gail Landis--who follows the electrical industry for Sanford C. Bernstein & Co.--to ask how GE was able to restructure.

Facing New Tests

Hitachi was asking because it and other Japanese companies are now suffering a slowing of their profit growth because of the changed yen-dollar relationship and the lagging Japanese domestic economy. Thus, they are facing the same rigorous analysis of the profitability of each of their businesses, the same pruning exercise that American companies have gone through for most of this decade.

That exercise at GE began in 1981 when Welch, then a 46-year-old chemical engineer, became chairman of the 108-year-old Fairfield, Conn.-based company. Welch’s idea was to get GE out of any business in which it couldn’t be a world leader, and so he sold a mining company and a small appliance division for roughly $1.6 billion. That money, plus cash from GE’s older lines such as light bulbs and turbine generators and major appliances--washing machines, dryers and refrigerators--he used to finance research and expansion in GE’s newer businesses, such as aircraft engines and medical electronics, where it makes brain scanners.

But it wasn’t that simple. Others had an eye for the attractions of the old-line businesses, too. Foreign competitors stalk businesses like turbines and appliances because technologies are no longer changing very rapidly and markets can be won by efficient manufacturers who come in with lower prices. And corporate raiders like them because they can use the business’ own cash to pay for its acquisition.

Appliance Sector Threatened

So Welch had to feed and protect his cow before he could milk her. Whirlpool, Maytag and Electrolux, which is Swedish owned, were heating up the competition in the appliance business, in which GE had a 36% market share, and competitors from Japan could be seen clearly on the horizon. If GE stood pat, its appliance business would surely become a case study for some future business school course in industrial decline.

But it didn’t stand pat. It has invested $1 billion over five years in appliances, building the world’s most automated facility in Louisville, Ky., to produce them. Its market share has risen to 41% from 36%, the Japanese competitors who were visible on the horizon have retreated from the market, and appliances have contributed profits and cash flow to help GE’s aircraft engines and brain scanners to take world leadership.

Why is the Welch-GE example so especially pertinent for U.S. industry today? Because in a period when corporate raiders claim that diversified companies should be broken up and their parts sold separately to bring the maximum return to shareholders, Welch has kept GE’s earnings and dividends growing while acting on the old principle that the corporation is a unified whole, with the excess cash of one part able to help the growth of another.

That is the real motive behind GE’s $6.4-billion acquisition of RCA--that the sheltered domestic profits of RCA’s television network, NBC, will help GE compete internationally. And it is a principle revered by the large Japanese companies, who for years have used profits and cash from their protected domestic markets to finance aggressive thrusts throughout the world.

It just might be, in fact, that competitive U.S. business will come back in fashion and that the fashion of listening to raiders will pass. It is reassuring, after all, to hear that Hitachi is seeking to learn the secret of how GE does it. One didn’t hear of them coming to study Boesky.