With Asia and CNET, GE Again Embraces Change

How should the company you work for or invest in act in today’s deflationary environment? How should it regard collapsing economies in Asia? How should it react to rapidly changing technology?

Of all companies worldwide, General Electric Co. provides the most direct and timely answers to those questions.

In Asia, GE is mounting an ambitious campaign to invest in Japan, Thailand, South Korea and other economies. “The path to greatness in Asia is irreversible, and GE will be there,” Chairman John F. “Jack” Welch Jr. writes in the company’s annual report.

In technology, GE made news last week by investing $26 million in CNET Inc., a small, money-losing Internet company. Its plan is to use CNET’s Internet directory service to expand NBC’s global multimedia activities, which are a revealing story in themselves.

As to the growing phenomenon of flat or falling prices for many goods and services, Welch for years has drilled GE managers to attune their operations to “a whiff of deflation in the air.”

By that he meant they should avoid holding inventories because goods decline in value in a deflation. GE also has avoided borrowing, as every business--and individual--should in a deflation, because it’s harder to earn higher profit to pay back loans when prices are falling.

Whether deflation has come to the U.S. economy remains arguable, but there is no doubt that it has arrived in Asia. Factories and buildings have tumbled in value. Companies with cash, be they local or foreign, will be able to buy such properties cheap in the next year or so.

But it’s a scary world, when values that appeared solid only yesterday seem now to be falling or floating.

And that is why GE is of particular interest in these times. More than any other large company, it has recognized over the last two decades what changing times demand. It has restructured operations over and over, pushing itself to a state of constant change. And it has succeeded in more than doubling profit to $8.2 billion in the last decade while increasing revenue 80% to $91 billion.

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For that effort and investors’ belief in its future, GE has achieved the highest value of any company trading on a U.S. stock exchange--more than $276 billion for the total of its shares on the New York Stock Exchange.

But make no mistake, Welch’s vision of what a company must do to survive in today’s environment is more harsh than sunny. GE today, at 276,000 employees, has 7% fewer people working for it than it had 10 years ago--although it has added 50,000 workers since the recession low of 1993.

GE’s demanding regimen of constant change is one that other companies find difficult to adopt. At present, General Motors Corp. and its United Auto Workers employees are engaged in a bitter strike over demands for change. To Asian companies and societies, now using words like “modernize” and “restructure” for the first time, the GE example will seem like a nightmare.

Yet by adapting to change, venerable 118-year-old GE has survived and thrived while erstwhile competitors such as Westinghouse have disappeared. GE has created value for its employees and pensioners--and for the economy and everybody else’s pensioners--through its productivity increases, the ripple effects of its global success and the sheer 23-fold rise in its stock price since 1981.

Most reassuring, GE is not a high-tech phenomenon but a nuts-and-bolts company that gets more than $50 billion of its sales from aircraft engines, washing machines and refrigerators, power generators, locomotives, factory automation systems, plastics and broadcasting--”ER” and “Seinfeld” among others.

It gets almost $40 billion in revenue from its GE Capital Services division, which would be the largest bank in the U.S. if it were a bank. GE Capital is a financier of airplanes, appliance dealers, store credit cards, railroad cars and a host of other companies and activities.

While most U.S. banks have ignored opportunities overseas to spend their time merging themselves out of existence, GE Capital has spearheaded GE’s expansion overseas, making acquisitions and financing modernization of factories.

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The company has made bold moves. In the early ‘90s, when most of the world wrote off Europe as over-regulated and slow, GE poured investment into the continent. It now has $66 billion in assets in Europe and gets 17% of its income and 19% of its sales from there.

The process will accelerate in Asia, where GE plans to invest at “twice the rate it did in Europe,” says Prudential Securities analyst Nicholas Heymann, who once worked as an auditor at GE Capital.

There will be a lot to invest in. Last week a South Korean delegation led by President Kim Dae Jung visited the U.S. and asked for business investments. “We must make Korea a country that welcomes foreign investment,” said Commerce Minister Tae Young Park at a conference in Los Angeles.

GE is persistent. In 1986, Welch bought RCA, which included the NBC network. For years, analysts speculated that GE would sell NBC because it wasn’t really cut out for the entertainment business.

Instead, it developed the property. NBC has reigned most years as the No. 1 network, and GE has expanded it around the world, challenging CNN. Meanwhile, it has created CNBC, the leading business network on cable.

Now GE has bought into CNET for its Snap news directory, a distant also-ran to Yahoo in Internet services. Professionals in the new technology tend to dismiss GE’s move as that of a rich company making a small bet beyond its competence.

But what they lack in knowledge of the technology, Welch and GE people will make up for it in the intensity they bring to the Snap venture. If money is to be made on the Net, they will probably make it.

There have been numerous books and articles written about how Welch runs GE. Welch, 62, a still feisty chemical engineer, has described GE’s mission and his own goading and lecturing of its managers as human development.

“Every person counts,” he says. Although clearly, GE’s many layoffs mean that some people count more than others.

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Fact is, for all its breadth of businesses, GE owes a lot of its earnings growth in recent years to the finance company, GE Capital. That only underlines how difficult it is to achieve growth these days in traditional manufacturing businesses such as aircraft engines or factory equipment.

Also, there remains unfinished business. Though GE awards bonuses and merit raises throughout its employee force, it gives stock options to only 10% of its people--a much lower percentage than many successful U.S. and international companies include these days.

Welch has two and a half years before his retirement to keep GE going and to see that more employees get ownership of one of the most successful stocks of the last 20 years.

Meanwhile, for business trends and economic direction in a bewildering world, GE is a beacon to watch.