Ge's Brave New WorldTim Smart and Pete Engardio and Geri Smith
More than 500 million of India's people live in poverty. The government of Prime Minister P.V. Narasimha Rao is teetering as Hindu militants gain ground. Xenophobic politicians have forced U.S. agricultural giant Cargill to abandon a salt-mining venture, and they promise similar action against Coca-Cola, PepsiCo, and McDonald's. Thousands gather at an antiforeigner rally in the southern city of Bangalore.
On the surface, it doesn't seem like the most promising investment opportu- nity. But it is in such developing giants as India that GE Chief Executive John F. Welch Jr. sees the future. For the past few years, teams of General Electric Co. executives have crisscrossed India methodically with the tenacity often associated with a Japanese keiretsu. Today, GE is far and away the biggest U.S. investor in India, with $100 million sunk into factories making medical-imaging equipment, plastics, kitchen appliances, and lamps. Sales in India have gone from almost nothing to $400 million. The goal: $1 billion before the decade's end.
The way Welch sees it, GE's aggressive pushes into India, China, and Mexico are no longer a matter of choice: They could well determine the future of the $57 billion titan, America's third-most-profitable company. Total revenues have climbed a bare 3% in each of the past two years, and the prospects for strong U.S. growth are marginal. Last fall, after looking down from his Guangdong hotel window at a vast sea of construction cranes, Welch set out once and for all a strategy that would shift the company's "center of gravity" from the industrialized world to Asia and Latin America. By 2000, those markets could provide more than $20 billion in revenues, double the current level--and more than 25% of GE's total sales.
Certainly, GE is no stranger to inter- national business. From jet engines to credit cards, its products and services are sold throughout the industrial world. It competes against the likes of Hitachi, Siemens, and ABB Asea Brown Boveri. But GE has never really been a global company, just a U.S. company operating internationally, and most of its activity has been in Europe and Japan.
Now, at the behest of the hard-charging Welch and Vice-Chairman Paolo Fresco, an urbane Italian who lives in London, GE is betting on the three developing giants--China, India, and Mexico--with Southeast Asia close behind. Total population: roughly 2.5 billion, some 10 times the U.S. In all four markets, political and economic risks loom, but GE reckons that placing many small stakes of a few tens of millions of dollars each will cushion it. If the strategy "is wrong, it's a billion dollars, a couple of billion dollars," says Welch, who spends weeks in far-flung capitals pushing the plan. "If it's right, it's the future of the next century for this company."
GE brings a powerful arsenal to the battle, including a team of globe-trotting managers and the technologies most in demand in countries with primitive infrastructures. In some cases, GE relies on exports from the U.S. of high-value goods such as jet engines and turbines. In others, it is becoming a local assembler of low-technology goods or even a full-scale maker of appliances and other products for export. And GE has signed a deal with Rupert Murdoch's Star TV to launch an Asian version of its business and news CNBC channel. General Electric Capital Services helps bind it all together. "They can combine great equipment, the ability to structure deals, and a financing arm that's like having an in-house Wall Street banker," says M. Shawn Cumberland, Hong Kong-based managing director of Wing Merrill International Inc., developer of power plants.
"MONOPOLY PLAYER." Welch chose GE's targets personally after a decade of travel to Asia and around the world. Fresco and other lieutenants were high on Asia and Latin America, where the potential stood in stark contrast to the low growth forecast for the U.S. and Europe. Welch concluded these markets needed just the mix of capital and technology GE offers. "We're a company with great infrastructure strengths and, therefore, a company that ought to go where the growth is," he says. "It's clear to anyone that the growth will be in the Pacific Rim, India, and Mexico."
But such a strategy provokes controversy at home. GE and other U.S. companies have shed hundreds of thousands of jobs in the past decade. While these losses would be even greater without huge exports from the U.S., that's little consolation to some. "I think there should be laws narrowing the kind of work that can go overseas," says William H. Bywater, president of the International Union of Electrical Workers.
For Bywater, shifting GE's focus hits close to home. Twenty years ago, his union had 70,000 members at GE; by the end of this year, that number will likely fall to 30,000. "Jack is the best Monopoly player I've ever seen," says Bywater. "He makes great deals for the shareholders. But I've got to look at what is going to help the economy of the U.S."
To its credit, GE has changed its push since the 1980s when it simply shut down plants at home and bought what it needed abroad. To a much greater extent, the new strategy aims at penetrating fresh markets, rather than hunting for cheap labor. GE argues that this is a net plus to the U.S. Last year, for example, it exported $5 billion more than it imported--twice as much as five years ago. GE points to Mexico, where its operations import some $750 million in U.S. goods, compared with the $500 million GE exports from Mexico. Moreover, GE's total exports of $8 billion help support some 160,000 jobs in the U.S., based on Commerce Dept. assumptions.
For better or worse, GE's new push has an unstoppable momentum. Already, Fresco's efforts have caused a dramatic change in where GE makes money. In 1980, only two of GE's many businesses were true global players: plastics and jet engines. Since 1987, though, revenues from outside the U.S. have risen at an annual rate of 30% and now contribute 40% of the company's total sales. That's up from 29% five years ago. The day is not far off when the company that helped electrify America will earn more money outside its borders than inside. "Being national doesn't pay," says Fresco.
WELCH'S CADRE. To put heft behind its strategy shift, GE is transforming its management ranks, moving Welch confidants to front-line positions in the field and attempting to create what Fresco calls "global brains" to manage operations in distinctly Third World cultures. This summer, Fresco dispatched W. James McNerney Jr., a fast-track young executive, from a Plainville (Conn.) electrical unit to Hong Kong in a senior post overseeing expansion. "We really want to have the same market shares in Asia that we do in the U.S." says McNerney, one of the inner core of executives. That means, according to the GE credo, either No.1 or No.2. McNerney's move is just the latest in a shift of management abroad that has seen the number of officers in Asia double, to 20.
That's in keeping with GE's projections for the region. The Power Systems unit, which makes generators and turbines, expects 50% of its future business to come from Asia. Ditto for Medical Systems, which has seen its overseas revenues soar from 15% in 1985 to 50% now. GE Aircraft Engines, downsizing because of a slump in orders from battered U.S. airlines, won two huge orders, worth $425 million, from Chinese regional airlines this summer. "Ten years from now, Asia will be the biggest market for us," says David Voeller, who runs GE Engines' Beijing office.
It's easy to understand why GE executives drool over China. It plans to add more than $100 billion in power-generating equipment by 2000. It is buying 100 jet engines a year for widebody aircraft. And it has only 1,300 CT scanners for its 62,000 hospitals and 200,000 clinics. So GE has tripled its staff in Beijing and is even planning to send an engineer to Inner Mongolia to service aircraft stopping overnight. "GE has undergone a complete turnabout within the past 9 to 12 months," says a rival.
China is in the midst of creating a financial sector that can fund its growth, and GE Capital sees opportunity there, too. The finance arm, which already has $1.5 billion worth of aircraft on lease to Chinese carriers, is trying to talk Beijing into letting it set up one of the country's first commercial lending operations. The goal: to finance massive capital spending projects, such as a superhighway linking Beijing to Hong Kong, and the inevitable equipment purchases that will arise.
GE is reaching deep into its bag of tricks to win business in these fast-de- veloping countries. In Indonesia, where the company is part of a $2 billion power-plant project, GE has offered an array of technologies to help upgrade the manufacturing base. And it has set up GE Technology Indonesia, which will enter into joint ventures in its tech-transfer schemes. That is a far cry from the days when developing nations looked at big multinationals as exploiters. Indeed, such company-to-country technology deals could become a model for GE as it moves into less developed markets such as Vietnam, where it has set up an office in anticipation of the lifting of the U.S. embargo.
While the majority of GE plants in Asia are aimed at satisfying local demand, it's a slightly different case in Mexico. In effect, GE is fully integrating the country into its emerging North American manufacturing strategy, even while the debate on the North American Free Trade Agreement rages. In 1990, in a joint venture with Mexican appliance company Mabe, GE built a factory in San Lu s Potos . The idea was to take advantage of 30% lower labor costs to produce gas ranges for North America. The plant has been a smashing success, turning out nearly 30% of the gas stoves bought in the U.S. each year. The factory will reach 1 million units in just its third year of operation, and plans call for a 25% increase in output next year.
JUST THE TICKET. But the strategy in Mexico is more than searching for a cheaper work force. GE has been a household name in Mexico for nearly 100 years, producing everything from light bulbs to plastic resin in 20 factories scattered across the country. But in the 1980s, GE made a push into big-ticket businesses, such as appliances and power plants, taking the company, with its 21,000 Mexican employees, to a higher plane. With Mabe, it's tapping into the hungry domestic market for such items as refrigerators and washing machines, where demand is growing 5% to 7% a year. And GE's power business is leading an international consortium to build a $600 million natural-gas-burning power plant near the U.S. border. GE's Mexico sales were $1.5 billion last year--up from $900 million the year before. Says Fresco: "We have a target to double that again over the next couple of years."
Mexico is also a laboratory of sorts for GE's attempts to recruit and develop global brains in its management ranks. This challenge of creating a tier of internationally savvy executives is as big as any the giant faces. Part of the answer is to reach beyond its ranks to tap outsiders. Stanford University business school graduate James T. Polsfut, 34, for example, joined GE 18 months ago, after helping manage the city of Denver's infrastructure projects. A self-described "Spanish junkie" who won a fellowship to study in Costa Rica in the 1980s, Polsfut is one of GE's three business-development managers in Mexico. In contrast, the acting president in Mexico, Paul McBride, is a 15-year-veteran of GE's plastics operation. His preparation for the assignment was a two-month course in Spanish.
To make this management mix work, GE is exporting the training programs and concepts it has made de rigueur in the U.S. GE's focus on lean management, quick response, speeded-up product cycles, and productivity is now moving offshore, along with its capital and technology. In Mexico, for example, GE is starting a program for middle managers, who will be rotated through different assignments for two years. Those chosen will work by day and study by night. While common in the U.S., such programs are new to Mexico. In the U.S., meanwhile, new managerial-level hires are given courses in global issues at GE's Crotonville (N.Y.) training center. The teaching goes both ways. Senior executives are routinely sent on four-week forays to foreign markets, then returned to Crotonville to brief Welch, Fresco, and others.
When all these ideas come together, GE will be what Welch calls a multipolar and multicultural company. It isn't there yet, but if any part of the group is close, it could well be the Medical Systems unit in Milwaukee. One of GE's hottest businesses, with $3.5 billion in sales last year, it is a crucible of management and cultural experimentation--and a Welch favorite. For one thing, Medical is skilled at moving its technology between markets. The low-end gear GE will make in China and India was developed in Japan with GE's 75% joint-venture partner, Yokogawa Medical Systems. In turn, engineers in India and China are developing low-cost products that could serve markets in Latin America and the U.S., where there is a demand for cheaper machines from a cost-conscious medical community.
Medical Systems is also bringing people and ideas from those far-flung lands back to Milwaukee, where it's common to see engineers and managers from Asia working side by side with Americans and Europeans. Designers in Milwaukee also rely on software developed by the joint-venture partner in India. "We're going beyond the manufacturing" in using foreign work, says Claude Benchimol, a French manager who runs worldwide CT engineering out of Milwaukee. "We're doing joint design."
For all GE's businesses, the question is no longer whether they will push into developing markets, but just how big they will become. In the past few years, that new reality has set in, drummed in by Welch and Fresco. It's a strategy that seems likely to pay off for GE, its shareholders, and its cadre of U.S. managers. It's also a win for the thousands of workers whose jobs are more dependent on orders from the emerging new markets. Up against the toughest Japanese and European giants, GE insists its global push is boosting competitiveness, which in turn safeguards U.S. jobs.
In effect, GE is telegraphing the message that for the company to remain competitive and profitable, it has to establish deep manufacturing, technological, and financial roots elsewhere, even if that's at the expense of some factory jobs in the U.S. tied to slower markets. "The modern company has to spread its brains, its centers of excellence," says Fresco. "It really is a citizen of many countries rather than a citizen of one."
This debate over a major company's responsibility to its home market has been raging for decades. It can only intensify as hundreds of other U.S. companies wrestle with the opportunities and challenges that Welch and Fresco see in the developing world. Increasing numbers of U.S. companies, no longer able to rely on the world's largest indigenous market, now are trying to learn to compete globally. GE is one model. It will be up to the likes of Welch, Fresco, and their colleagues to prove that greater global success on the part of one of America's strongest and biggest companies pays off at home, too.
THE BIG GE PUSH A selection of key GE moves in Asia and Mexico APPLIANCES Making low-cost ovens in India through joint venture with Godrej. Builds gas ranges in Mexico with partner Mabe for export to the U.S. Recently opened research center in Mexico GE CAPITAL Setting up a $200 million fund to take equity positions in Asian power plants. Has a stake in $2.5 billion Indonesian plant. Seeking to open China's first commercial lending operation JET ENGINES Sales zoom in China, to $500 million this year. Is opening service centers in 17 Chinese cities by early 1994. Shifted marketing office from Cincinnati to Beijing. Has engine-repair facility in Indonesia PLASTICS Recently bought a commercial resin business in Mexico and has a joint venture. Is completing a compounding facility in India and agreed to one in Singapore MEDICAL SYSTEMS Has a joint venture, GE Hangwei Medical Systems, to develop low-cost imaging equipment in China for local market and export. Has a similar deal in India and a joint venture with Thai Hospitech POWER SYSTEMS Expects to get 50% of new orders from Asia for rest of the century, or half of annual $6 billion-$8 billion in sales. Leader of consortium building a $600 million thermoelectric power plant in Mexico DATA: BW, COMPANY REPORTS