News: Analysis & Commentary: RESTRUCTURINGS
JACK WELCH CRACKS THE WHIP AGAIN
He wants a leaner global tiger before he retires. But at what price?
In early November, General Electric Co. Chairman and Chief Executive John F. (Jack) Welch announced a $1.4 billion gain from the sale of GE's Lockheed Martin Corp. preferred stock. The news lifted GE shares by 4%, to 67--and sent a shiver through 6,500 blue-collar workers at GE's Appliance Park in Louisville, Ky.
Why? The money, Welch announced, would help pay for a new round of restructuring aimed at putting GE's industrial businesses in better shape to withstand global competition after the chairman retires in 2000. With operating margins of 12%, vs. 20% in other top-performing divisions, the appliance unit is a juicy target. Unless significant cost savings can be uncovered, as many as 2,600 jobs could be eliminated from the Louisville site.
Appliances is only the beginning of a broadscale restructuring. The final plans are still being worked out, but all of GE's manufacturing units are under review, say GE insiders and analysts. These businesses, which make everything from motors to power systems and locomotives, could face thousands of layoffs. Plants and product lines may be closed or sold, wages cut, and work transferred to nonunion plants and subcontractors both here and abroad. A GE spokesman downplays the overhaul. "When the decision about the investment of these restructuring funds has been made, you'll see a General Electric that looks very much like GE today," the spokesman says. "But it will be better positioned to compete in markets."
Analysts, however, claim GE is up to something big. "Restructuring is likely to involve all GE operations"--except GE Capital Services, says Prudential Securities analyst Nicholas P. Heymann.
The goal: to continue and perhaps even improve upon GE's stellar 25%-plus annual return on equity. With price hikes all but impossible in most GE businesses, that means intense cost-cutting--and maybe even a rethinking of some businesses. Says Heymann: "This is an attempt to enhance GE's cost competitiveness in a deflationary environment."
So, Welch and his execs are looking hard at units where profits, while good by conventional standards, don't match top GE performers. Most vulnerable are industrial businesses such as motors, transformers, and locomotives, as well as power generation equipment, which is in an industry that faces worldwide excess capacity (table).
Welch's moves are likely to reverberate throughout Corporate America. For more than a decade, he has racked up one of the best profit records in business--operating margins hit a record 14.5% in the third quarter, the 17th consecutive quarterly rise. "[GE] is taking action not because it's facing losses but to enhance profitability," says Salomon Brothers analyst Russell L. Leavitt. That puts pressure on other companies to keep up.
Restructuring is nothing new for Welch. He was dubbed Neutron Jack in the early 1980s when he set the pace for corporate cost-cutting. As he kept downsizing to become more competitive, he often was asked: "How much more can be squeezed from the lemon?" His standard reply was that there is "unlimited juice" to be had by gaining greater operating efficiencies.
Workers at Appliance Park are bracing for the biggest squeeze. Giant retailers such as Sears, Roebuck & Co. have so much market clout they can dictate prices for washers, dryers, and refrigerators. The kind of fridge that sold for $509 in 1953 fetches just $399 today--after adjusting for inflation.
JOB CHOP. The major appliance makers have responded by slashing jobs and shifting production to cheaper locales. Stockholm-based Electrolux recently took a $320 million write-off to shed 12,000 workers and close 25 plants. In September, Whirlpool Corp. announced a $361 million charge to pay for a 10% cutback in the company's worldwide workforce of 46,000.
GE has also done its share of chopping jobs and shifting work outside the U.S. It makes all its gas ranges at a joint venture in San Luis Potosi, Mexico, with Mabe, a Mexican company. Overall, GE employs 24,000 people in Mexico making appliances and other products. But GE has also kept ahead in its domestic plants by constantly trimming costs and lifting productivity through teams and other improvements.
But competition is intensifying. Last year Whirlpool opened a $100 million range factory in Tulsa, Okla. The nonunion plant pays about $9 an hour, vs. the $16 that International Union of Electronic Workers members average in Appliance Park, says Charles Smith, president of IUE Local 761 in Louisville. Indeed, most of GE's appliance profits come from parts and services. Its most profitable line is extra-large refrigerators made in Bloomington, Ind. GE actually loses money in Appliance Park, home to 47% of its 19,000 U.S. appliance workers.
Even before the November announcement, folks in Louisville knew cuts were possible. In September, appliance execs told Smith of plans to cut up to 2,600 employees. On Sept. 10, he and IUE President Edward L. Fire met with William J. Conaty, GE's human resources chief, and several aides at a Washington restaurant. Conaty agreed to give the IUE a chance to meet GE's cost-saving goals another way, a condition of the labor pact signed last June.
UNION PLAN. The IUE has come back with an unusual offer. It wants GE to offer older Appliance Park workers early retirement and then replace them with new ones earning a maximum of $12 an hour, instead of $16. And because the new workers would tend to be younger, they also would have lower costs for health care and be entitled to less vacation. The two sides hope to agree on a plan by late December, says the IUE's Smith, which the appliance unit would present to Welch for approval.
The restructuring of other GE units should be less painful. Welch already has been trying to shift GE's focus to higher-margin products and services in businesses such as medical systems, aircraft engines, and power generation equipment. He's likely to demand even greater moves in this direction at GE's annual managers' meeting in Boca Raton, Fla., in early January.
The divisions that make commodity products are possible candidates for plant closings and sales of product lines. For years, GE has been cutting costs in these units, which include electric motors, transformers, and lighting. Now the company will step up those efforts.
The whirlwind Welch is about to stir up is sure to set off clashes with GE's 14 unions. And it may inspire a new bout of corporate downsizings. But with the move, Welch will ensure that GE remains a powerhouse performer well after his retirement.By Aaron Bernstein in Washington, with Susan Jackson in New Haven, and John Byrne in New YorkReturn to top