Immelt Stakes GE's Growth on Higher R&D Spending
Jeffrey Immelt says General Electric Co.’s growth depends on bringing the right technology products to market, from gearless wind turbines to cancer-treatment tests and engines that turn cow manure into energy.
“I believe that more investment is going to be required to drive growth,” the 54-year-old chief executive officer said in an interview. “It’s the way you build big service revenues and good margin rates.”
GE will spend $20 billion on technology development in the two years through 2012, and the Fairfield, Connecticut-based company is increasing research expenditures 18 percent this year alone.
Even if the products debut as planned, Immelt needs them to become hits quickly. They will make up a larger share of earnings because the percentage contributed by other businesses is decreasing as GE sells a majority stake in its NBC Universal unit to Comcast Corp. and shrinks GE Capital to less than a third of profit from about half in 2007.
GE made a step toward the latter goal with an agreement, announced today, to sell its BAC-Credomatic unit to Grupo Aval Acciones y Valores SA, Colombia’s largest bank holding group, for $1.9 billion.
GE divisions excluding media and finance provided 57 percent of the parent company’s $156.8 billion in sales last year, up from 51 percent in 2007. Immelt and other executives are scheduled to host a webcast tomorrow to discuss the company’s performance in the second quarter as investors look for indications R&D investment is paying off.
New Product Risks
Whenever a company introduces or overhauls a major product such as a planemaker’s jet engines or a country’s electrical grid, there are risks: the wrong decision may mean being cut out of a market by competitors for decades. GE will add 30 percent more products this year than last with a similar number in 2011, Immelt said.
“It’s a lot more complex for a GE because you have state- overseen type products -- you get the government involved because it’s the grid for baseload power, or rail initiatives, or transport,” said Nick Heymann, an analyst at Sterne Agee & Leach Inc. in New York.
Immelt’s push into markets tied to the company’s main jet- engine, power-generation equipment, locomotive and health-care businesses was on display this week.
Trimming Development Time
GE Aviation Systems, via a venture with China’s Aviation Industry Corp., was chosen as the lead integrator for electric systems on the country’s C919 jet. On July 13, GE announced new electric-car charging stations and a home electricity-usage monitor tied to the so-called smart grid.
Other new products on tap include digital pathology programs to replace traditional microscopes and slides and software to help railroads and utilities become more efficient.
Immelt’s focus on R&D has reduced the time needed to bring to market some products, such as those developed by the Jenbacher division, from four years to two, GE said. Jenbacher, which makes engines that turn waste gases into electricity, announced this week it had completed nine months of powering the Ukrainian Milk Co. near Kiev using waste from 4,000 cows.
Investors want to see R&D efforts translate into orders, then sales, in the next two years as profit growth fueled by a rebound in financial services wanes. In May, Immelt predicted an “upside” to 2010 results, previously forecast to be little changed. The company is projected to post adjusted profit of 27 cents a share tomorrow on sales of $38.3 billion, the average of analysts’ estimates compiled by Bloomberg.
While a 4.7 percent decline by GE shares during 2010’s first half was better than the Standard & Poor’s 500 Index or the Dow Jones Industrial Average, the stock’s five-year performance through June 30 trailed both benchmarks. GE tumbled 58 percent in that period, while the S&P 500 dropped 13 percent and the Dow declined 4.9 percent.
Analysts including Terry Darling of Goldman Sachs Group Inc. expect sales at the energy unit dropped in the second quarter. Orders, a measure of future growth, should rise by at least 10 percent, the first year-over-year gain since 2008, Darling wrote in a note to clients this week.
Research and development this year on new products will rise to about 5 percent from 3 percent in 2000 for the industrial divisions, putting GE in line with most rivals when calculated excluding the finance unit. Siemens AG, a competitor in energy, health care and lighting, spent about 5 percent of sales last year and United Technologies Corp., which competes in jet engines, spent about 3 percent, according to Bloomberg data.
‘Winning or Losing’
GE’s four global labs in Niskayuna, New York; Shanghai, Munich and Bangalore, India, as well as a fifth under development in Brazil, account for about $600 million in spending on ideas that take longer to bring to market than those under study in the company’s divisions.
“There is only one measure of success for me, and that’s how the businesses are doing,” Mark Little, who oversees global research, said in an interview. “Our people care deeply about what’s going on in the marketplace, are we winning or losing, and when we see our market share going in the right direction.”
Developments that lower prices of products in areas such as ultrasound, while increasing their speed, have helped open up overseas markets such as India and China, John Dineen, CEO of GE Healthcare, said in an interview. Dineen and Little said they’re concerned with new product sales and picking the right markets.
‘Courage and Endurance’
“When you’re going to be successful in these high-tech types of longer-term businesses, with longer development cycles, you need courage and endurance to manage programs like that,” Dineen said.
Immelt kept spending steady in areas where products take longer to come to market than traditional large equipment even as GE’s shares hit an 18-year low in March 2009 and the financial crisis loomed.
“Last year and the year before, the way Jeff invested here is absolutely stunning,” said Christoph Hergersberg, who runs the biosciences labs at the research center in Niskayuna.
GE is spending about $100 million to build a large-vehicle battery factory near the research center in upstate New York, and the company announced software in June developed with railroad Norfolk Southern Co. that would shave time from freight-car deliveries by letting trains travel faster.
Six years after Immelt purchased Amersham PLC in what remains GE’s biggest acquisition at about $10 billion, the bioscience digital-imaging technologies he envisioned are finding their way to market. The life-science division will account for about 10 percent of the health-care unit’s revenue this year, Dineen told investors in June.
Now, GE is teaming with Eli Lilly & Co. to develop tests that help match cancer patients with the treatments that would work best for them.
GE has “expertise in certain areas that we don’t,” Dr. Richard Gaynor, Lilly’s vice president of cancer research, said in an interview. “They are strong in engineering, strong in mathematics, strong in things like pattern recognition that other parts of their businesses bring and apply to biology.”
Immelt’s philosophy of buying new technology and applying GE’s marketing resources and know-how hasn’t always worked. He sold the company’s security business to United Technologies after cobbling it together via acquisitions on a bet the technology would benefit from GE’s manufacturing base.
Last year, he folded the water unit, another roll-up of acquisitions, into the energy division to tie it more closely to utilities after profit and sales stayed stagnant over years.
In energy, GE’s biggest industrial business, investment has climbed in power and water, Steve Bolze, who oversees that part of GE Energy Infrastructure, said in an interview. Since the water division was added to his business, the company has “doubled down” on investment there, he said.
The number of scientists and engineers at GE as a whole has risen to 37,300 this year from 31,602 in 2006. GE’s total employment last year was about 304,000 worldwide.
“Between this year and next we’ll be up to between 5 and 6 percent of our industrial revenues in R&D,” Immelt said. “That’s pretty world class, so I think from a quality and quantity standpoint, I think we’ve made a lot of progress.”