Ge Power Loses Some SteamTim Smart
Two years ago, the head of General Electric Co.'s power-generation equipment business, David Genever-Watling, boasted of rich profits at his $6 billion unit. Today, he's out of a job. His successor, Robert L. Nardelli, took control over the summer and is telling the troops that bad times lie ahead at the Schenectady (N.Y.) operation.
What happened? Blame it on overly optimistic forecasts for power demand in Asia. GE, as well as others in the multibillion-dollar industry, also underestimated the difficulty of cutting deals in places such as India and China. The August collapse of Enron Corp.'s $2.8 billion Indian project, for which GE was to supply $600 million of gas turbines, is only the latest setback for Western companies in their quest for global gold. In China, they are squabbling with authorities over appropriate rates of return. "The euphoria has come down," says Kenneth W. Norwood, market research manager at GE Power Systems.
The troubles in Asia are coming home to roost in the U.S. Power Systems President Nardelli held a teleconference on Sept. 11 to spread the bad news to GE's 20,000-plus power employees. Nardelli declined to talk to BUSINESS WEEK about his plans, but those who have spoken with him have no doubt what will happen next. "The volume has fallen off big time," says Louis Valenti, business agent for the Schenectady local of the International Union of Electronic Workers, who predicts layoffs soon.
Under GE Chief Executive Officer John F. Welch, downsizing has become the norm when sour markets threaten GE's stream of steadily rising earnings. Although Power Systems will see a sharp revenue increase this year of 25%, to $7.5 billion, because of a 1994 purchase of Italian power company Nuovo Pignone, analysts are forecasting a drop in operating profit of between 5% and 10%, to about $1.1 billion (chart). That's not a good enough return for Welch. Power Systems has been one of the heaviest contributors to GE's bottom line: In 1994, its 21% operating margins were among the highest in the company, providing $1.2 billion in operating income--14% of the company's total.
GE is paying for its excessive optimism a few years ago. In 1993, executives told the American Electric Industry Conference that they expected worldwide demand for new power to hit 651 gigawatts between 1993 and 2002. Now, GE's 10-year forecast has been trimmed 7%. Others are even more conservative. "Nothing will go as fast as they think," says Christopher Bergesen, vice-president at McGraw-Hill Companies' Utility Data Institute.
GE competitors Westinghouse and Asea Brown Boveri also foresee slower markets. Westinghouse recently announced a round of 500 layoffs at its power business, while ABB terms the market in Asia as "very, very soft." Says Jerry Vargo, an ABB senior vice-president: "The business that is out there is extremely competitive."
FAMILIAR SCRIPT. The slowdown could hardly have come at a worse time. New orders already have ground to a standstill in the U.S., as the utility industry awaits the inevitable shakeout that will follow impending industry deregulation. That puts even more of a burden on the growing markets of Asia, which are still expected to generate 50% of new orders. With demand flat in the West, GE says the industry has a third more production capacity than it needs in gas turbines. Not surprisingly, this has led to highly aggressive pricing, further damping profit margins. And the deals that are going through involve slow and painful negotiations. On Sept. 12, Siemens signed a deal for a $650 million project in eastern China that took two years to ink.
Nardelli is therefore likely to follow a familiar GE script, one that played out over the past couple of years at GE's aircraft engines group. There, as profits sagged, a new management slashed the workforce in half, the supplier base by two-thirds, and costs on key components by as much as 30%. A manufacturing expert, Nardelli comes to Power Systems from GE Transportation Systems, where he helped lead an overhaul of GE's aging locomotive technology, cutting production cycles by two-thirds. Orders for new locomotives grew 50% last year as GE introduced a new line of high-power, alternating current locomotives. He also won some huge foreign orders, including one in Indonesia.
Those skills will be needed at Power Systems. The markets for new power equipment in Asia remain attractive and over the long term are critical to GE's future. But the brunt of the current weakness is likely to be borne on the backs of workers at home.