Analysis : Trading in TV Tradition for Profit Margins
In the kind of deal that puzzles most Americans and arouses others to near apoplexy, General Electric is selling its consumer electronics division to the Thomson company of France, and getting out of the business of making television sets in the United States.
That seems, in a sense, to be selling part of America’s technological birthright, because GE’s TV set business includes that of the old RCA company acquired by GE last year. Thus, the technology pioneered by the late David Sarnoff, founder and builder of Radio Corp. of America, developer of radio and of color television, is sold to a foreign company.
In return, GE is getting Thomson’s medical equipment business and cash, estimated by some Wall Streeters at $800 million.
Has GE’s controversial Chairman John F. Welch Jr. sold an American birthright for the proverbial mess of pottage? Is this some kind of stock market play, with Welch doing something to enhance short-term earnings and keep GE’s stock price up while sacrificing American industry?
No, it’s not a stock market play, and Welch does not make decisions about divisions with $3 billion in annual sales to boost stock prices. American business really doesn’t work that way.
But whether the decision to sell consumer electronics is a good one is a tougher question. And the best that can be said is that, right or wrong in this particular decision, Welch made it within a long-term vision of what a U.S. company must do to remain competitive globally.
“You pick your spots,” he said in a recent interview at GE’s Fairfield, Conn., headquarters. And where you choose to compete in the world is “in those businesses, like engineered plastics and aircraft engines and medical electronics, that are in leading-edge technological industries. That’s in contrast to industries where there’s very little technological innovation and the only way to compete is to make it at a lower cost.”
GE, the diversified giant with annual revenue of $36 billion, does lead the world in the “leading edge” industries Welch mentioned--aircraft engines, new high-tech plastics for car bodies and other uses, and medical electronics, where it is No. 1 in brain scanners and other sophisticated equipment. It will get an X-ray business in the deal with Thomson and a boost for its European medical business, where it is challenging giant Siemens of West Germany.
It also is a power in the world in light bulbs and electric motors, railroad locomotives and electrical turbine generators and major appliances such as dishwashers, refrigerators and stoves. All those activities, plus financial services, defense industries and the NBC television network--that it got with RCA--Welch sees as part of what he calls “core” businesses.
But Welch didn’t see consumer electronics as a leading edge business, even though GE leads the U.S. market in TV sales. Only recently, it won praise for expanding RCA’s plant in Bloomington, Ind., to bring home manufacture of 500,000 GE-brand sets, which were formerly made in Japan by Matsushita.
Currency Play
Many people hailed the expansion as an indication of renewed U.S. competitiveness. But Welch saw it for what it was, a currency play in which Matsushita stopped making GE’s sets when the yen rose against the dollar. The TV plant, said Welch, “is not a bet I’d stake my life on.”
What would he bet his life on? On the dishwashers and refrigerators GE turns out from its plant in Louisville, Ky., where it has invested $1 billion over five years to become the world’s low-cost producer. And on locomotives and turbine generators, where GE is keeping production going through a slack time in world markets, counting on a resurgence in orders in the 1990s.
The reason GE likes the NBC network, says Welch, is not because it leads in the Nielsen ratings, but because the business throws off profits that GE can then use for “margin dollars” to support a low-priced bid on a turbine generator contract in some foreign country. “The facts are,” Welch says, “if you create an institution to win in world markets, you have to have a lot of resources.”
Welch, a chemical engineer who took over GE’s top job in 1981, makes his points well. In fact, given his vision for competing in world markets, why should there be any question about his selling out TV? Because he may be mistaken in thinking it’s a technological dead-end.
Television technology is developing in several directions, the most prominent being high-definition TV. As the name implies, high-definition promises clearer pictures and other features that may ultimately marry the TV set to a home computer. Research on it is being done in Japan by Sony and in the United States by--you guessed it--the very company Welch is selling, the RCA consumer electronics division and its scientific laboratory in Princeton, N.J.--the Sarnoff Research Center.
So now that research knowledge, along with RCA Bloomington and its longtime capabilities in the most successful home appliance of the last 40 years--the TV set--will become the property of a French firm. It’s possible to make mistakes in global industry, too, of course. And you have to wonder if maybe GE and Welch have just made one.
