General Electric Co., that cornerstone of American industrial might, is getting a taste of Detroit’s bitter medicine.
GE’s core businesses of lighting and locomotives, out of favor with tech-besotted investors, are on the chopping block. Its sliding share price has erased $110 billion in shareholder value over the past year — roughly equivalent to the market caps of General Motors Co. and Ford Motor Co. combined.
And CEO John Flannery’s prescription for what ails the mighty GE, detailed Monday in moves that include halving the company’s quarterly dividend, prompted yet more investors to head for the proverbial exits and analysts to yawn. What’s an industrial icon to do?
If the case of Detroit over the past decade is any indication, and it probably is, the answer lies in thinking (and doing) the unthinkable: off-loading longtime units that aren’t delivering sufficient margins, exiting businesses or regions with high capital demands but small returns, and understanding that Silicon Valley’s innovation and earnings power are fundamentally changing investor expectations.
All of that sounds easier than it actually is. Just ask GM and Ford, whose respective leadership teams are straddling the revenue-and-earnings generators of today’s car and truck business and the promise of tomorrow’s mobility, autonomy and electrification future.
Industrial leadership is not enough. Record earnings powered by record car and truck sales and dramatically lower break-even points are not enough. Only tough decisions on chronic underperformers paired with tangible evidence of smart bets for the future are proving enough to reshape the narrative for icons that once defined American business.
They don’t so much anymore. Apple Inc., Facebook Corp., Amazon.com Inc., Microsoft Corp. and Google’s parent, Alphabet Inc., do. Rightly or wrongly, investors prize longtime bulwarks of American capitalism like GE and GM less than high-tech innovators whose software powers an increasing share of American lives.
After years of doubt, investors are starting to credit GM’s strategy because CEO Mary Barra and her team are making the kind of hard, even unprecedented, calls that their predecessors arguably would never consider, much less do. Ford, not so much. And that speaks to GE’s conundrum.
The reckoning is here for GE. A company that loses more than $100 billion in market value over the past year, even as the Dow Jones Industrial Average regularly sets new record highs, is a company in desperate need of a credible way forward.
Selling assets, skinnying the board of directors to a dozen members from 18 and revamping executive comp plans may be necessary. But they are hardly sufficient to slow the decline of a GE far too accustomed to its own ascendancy. Sound familiar?
Detroit may have a better idea, and it starts with scrutinizing the business as coldly as investors and analysts do. It starts with slaying a few sacred cows, with matching the company’s business to the market as it is and will be, not what management wants it to be. And it starts, in several cases, with the ignominy of bankruptcy.
Case in point: GM, which used federally induced Chapter 11 to eliminate four of its eight brands in the United States, to close plants, to reduce head count and to teach its rising executive class the wisdom of hard decisions. Under Barra, it has exited Russia, India, Indonesia and South Africa, ended production in Australia, and sold its money-losing Opel and Vauxhall brands in Europe to France’s PSA Groupe SA.
Case in point: Delphi Corp., the former GM parts unit that filed Chapter 11 in 2005, signaling the Detroit-based industry’s long slide toward collapse. It abandoned U.S. production of commodity auto parts, effectively ending its association with the United Auto Workers, and reoriented the company around a vision it calls “safe, green & connected.”
The result: a share price that has more than quadrupled in value since Delphi Automotive PLC, now legally headquartered in the United Kingdom, hit the market in a 2011 initial public offering at $22 a share. Monday, shares in Delphi closed at $95.57.
It remains a major supplier to the global auto industry. But Delphi is a vastly different company, one retooled for the present and future of transportation — not one clinging to the glory days of the past. Hello, GE?
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.