Few phrases are duller than “corporate restructuring.” So you can be forgiven if your eyes glazed over when, two weeks ago, Jeff Immelt, G.E.’s C.E.O., announced that the company was going to sell off most of G.E. Capital, its financial-services arm, and concentrate on the company’s industrial businesses (which range from aircraft engines and locomotives to medical devices and power generation). But this is a genuinely momentous move. Not only is G.E. reinventing itself; the move from financial services back to industry could herald the close of an entire chapter of American capitalism.
In the public imagination, G.E. never stopped being an industrial company, but for the past three decades it’s also been, essentially, a huge bank. Its finance division got started during the Great Depression, as a way of helping consumers pay for washing machines and refrigerators. But Jack Welch, who took over in 1981, was obsessed with “growing fast in a slow-growth economy.” G.E.’s traditional businesses, like appliances and lighting, were no longer growing quickly, so Welch needed a new profit engine. Enter G.E. Capital. It became a key source of profits, growing almost twice as fast as the company as a whole and expanding into every conceivable market: consumer lending, credit cards, equipment leasing, commercial real estate, auto loans, leveraged buyouts, even subprime mortgages.
G.E. Capital had a couple of advantages. Because it was not officially a bank, it faced less regulatory supervision. And, because G.E.’s industrial businesses still generated steady profits, the financial arm operated with a pristine triple-A credit rating. (Most big banks are a notch or two lower.) That meant that it could borrow money more cheaply than its competitors, which made its lending highly profitable. Indeed, the sharp ascent of G.E.’s share price during Welch’s tenure arguably owed as much to G.E. Capital as to Welch’s famous management style (Fortune called him “the most widely admired, studied, and imitated CEO of his time”). By 2000, financial services accounted for more than half of G.E.’s revenue. Even after Welch retired, in 2001, finance remained crucial. By the middle of the decade, it was responsible for about half of G.E.’s profits.
But finance entailed problems that weren’t apparent until after Welch left. G.E. Capital sucked up more and more of the company’s resources. In the course of Welch’s tenure, G.E.’s in-house R. & D. spending fell as a percentage of sales by nearly half. Vijay Govindarajan, a management professor at Dartmouth who worked as chief innovation consultant to Immelt from 2008 to 2009, told me that “financial engineering became the big thing, and industrial engineering became secondary.” This was symptomatic of what was happening across corporate America: as Mark Muro, a fellow at the Brookings Institution, put it to me, “The distended shape of G.E. really reflected twenty-five years of financialization and a corporate model that hobbled companies’ ability to make investments in capital equipment and R. & D.”
Finance is also inherently risky. Admirers claimed that cunning risk management enabled G.E. Capital to “eliminate—or at least reduce—all risks that do not carry a big potential payoff.” As if. When the financial crisis hit, G.E. Capital’s earnings plummeted, and the division’s dependence on borrowed money jeopardized the company as a whole. Keeping it afloat required the support of the Federal Reserve and an F.D.I.C. guarantee of more than fifty billion dollars in unsecured debt.
Govindarajan told me that Immelt had wanted to move G.E. back to its industrial roots even before the crash, and, indeed, since 2001 G.E. has more than doubled its R. & D. spending. But dependence on finance was a hard habit to break in the bubble years, with G.E. Capital rolling in cash. The crisis made the decision easier. Shareholders are now wary of finance—G.E.’s stock rose more than ten per cent after Immelt’s announcement—and post-crisis legislation reined in G.E. Capital’s freewheeling ways. The business, which had lost its triple-A rating, was designated a “systemically important financial institution,” and that limits the amount of leverage it can use and subjects it to tougher regulations.
Meanwhile, the outlook for industry is better than it’s been in a long time. American manufacturing was decimated during the first decade of this century, with six million jobs gone, and it was easy to believe that manufacturing was a lost cause. Yet it still accounts for more than two trillion dollars in output, and American factories are still among the most productive in the world. What’s more, energy costs here are falling, and labor costs abroad are rising. Suddenly, the U.S. seems like a reasonably affordable place to make high-end products, like G.E.’s jet engines and gas and wind turbines. There’s a growing market for such products, too. As developing countries get richer, they’re spending more on power, transportation infrastructure, and health care. The energy sector, even with the recent drop in oil prices, has a voracious appetite for exploration and drilling. These are all industries that G.E. specializes in.
This kind of manufacturing, with its automated, high-tech factories, doesn’t create as many jobs as old-fashioned heavy industry, but the gains are still significant. In the past six years, G.E. has opened more than twenty new plants and added more than sixteen thousand new workers in the U.S. “We’re not talking about some nostalgic, morally attractive American folkway,” Muro said. “Advanced manufacturing is a major driver of innovative activity, exports, and economic growth. So it’s good to see a hallmark company refocussing on it.” After twenty-five years of the financial tail wagging the industrial dog, it’s time to try something new. ♦
