Working on the Railroad: A Q&A with John Krenicki

Can he put GE's Transportation Systems business on the right track?

One of the quieter units of General Electric Co. (GE ) is GE Transportation Systems. Until this year, its revenues and income were not even broken out in the annual report. Now CEO John Krenicki Jr. has to lead the $2.4 billion business through a tough downturn in its core operations of making freight and passenger locomotives. The unit's other offerings include ship engines, back-up power generation systems, mining equipment, and railway signaling and control systems.

When Krenicki took over in 2000, GE Transportation had come off a year in which it sold 911 locomotives. In 2002, it expects to assemble just 350. The result: widespread layoffs and an even greater push toward higher-margin, less cyclical areas of the business. No wonder the company is on the acquisition trail. Among other plums, it picked up some service assets of Wabtec Corp. that will allow GE Transportation to service the rail equipment of rival manufacturers. Meanwhile, railroad customers are calling on GE to help them deliver higher returns through, among other things, having GE Six Sigma experts on site to help improve companies' productivity and quality control.

Krenicki, a 39-year-old veteran of the GE Plastics division, recently spoke with Associate Editor Diane Brady about how he expects to thrive in what some see as a twilight industry.

Q: The industrial sector is showing signs of life for the first time in 18 months. Are you seeing a turnaround?

A: We see what our customers see. This past winter's warm weather softened coal shipments, which are a major commodity for the railroads. But things have clearly bottomed out, and certain areas of the economy, such as intermodal [container and trailer freight] traffic, are starting to pick up. This year [2002] is going to be better for my customers. And we'll start to see some of the benefits of that in 2003. But it's not going to go back to the boom days of the late '90s.

Q: The '90s also saw a lot of rail-freight woes: consolidation, track conflicts, and big delays. Has the industry recovered?

A: It definitely has. The No. 1 thing that has occurred in the past three years is that railroads have made big strides in service. North American freight railroads have successfully integrated their acquisitions, resulting in higher productivity, lower costs, and improved on-time delivery. That translates to better pricing, which falls through to their bottom lines. They're more profitable now.

Q: How has Transportation Systems helped its customers to increase profits?

A: We've allowed them to outsource significant portions of their maintenance. But they've done the hard work of restructuring the businesses and taking out inefficiencies. All the Class I [major interstate] carriers are profitable. There are cyclical elements, since they serve cyclical businesses such as the automotive and chemical sectors. But inherently, they have a pretty diversified portfolio.

Q: Everyone thinks of the industry as cyclical.

A: The locomotive production piece is definitely cyclical. But we have been investing in services to smooth out the cyclicality. Our objective is to be a noncyclical business.

Q: What kind of services do customers want?

A: They want to focus on running their railroads. They want to benefit from the technology that GE brings to the table by being a locomotive maker but also from know-how we can infuse into their fleets from Power Systems, GE Aircraft Engines, or Medical Systems. It includes technologies such as remote monitoring diagnostics, global positioning systems (GPS), and extended maintenance.

Q: Are you doing more cross-fertilization with the other units of GE?

A: We've been doing it for years. It's one of the reasons for our success. We wouldn't be as successful in transportation if not for the experiences of the Aircraft Engines people, for example. Take remote monitoring diagnostics. A lot of the technology evolved at the corporate R&D center. Medical Systems used it early, as did Aircraft Engines. We were able to leverage their investment and customize the technology for locomotives. Even though we're a $2 billion business, we've benefited from the R&D budget of a $130 billion company. That's a tremendous advantage.

Q: What sort of growth do you see for your services business?

A: This year, we'll have about $2.3 billion in revenue, of which $1.5 billion will come from services. In 1996, it would have been about $500 million, so it has tripled. Looking ahead, I think the locomotive business will come back a bit, but we're constantly on the lookout for acquisitions that add to our service portfolio. We made a big acquisition last year, Wabtec, that gives us the parts and technology to service our competitors' locomotives. I think 70% to 80% coming from services is about right.

Q: You've had a series of layoffs at your U.S. plants in the past year because of declining orders. Does it still make sense to manufacture in relatively high-wage locales such as Erie, Pa.?

A: It's a very competitive site for assembly and systems integration. There's a lot of technology in putting these engines together. Customers' No. 1 need is to have a reliable product, and systems integration is key to that reliability. Significantly less than half the cost of a locomotive is from things we manufacture, so we source components from the lowest-cost places around the world. In some cases, that's the U.S. In others, it's Mexico or China. We're also globalizing the intellect. We have over 100 engineers working on product and software in India. In terms of where we assemble our locomotives, though, we don't see any reason to move that.

Q: In selling abroad, you're often dealing with subsidized and heavily politicized customers and competitors. Is that an obstacle in getting through the door?

A: We've been talking about locomotives, which is one piece of the business. In that area, a lot depends on the economic condition of a country and the willingness to really pay for first-class technology. There's still an element of quasi-government ownership in most of these markets. It becomes a bit of a jobs program. What will globalize us faster is our signaling business, because there you can't afford not to have the best and safest technology. Our European business today is primarily signaling.

Q: So signaling is an easier sell?

A: There's no government ownership of the signaling business. The more important point is that it's not as cyclical a business. If you look at a place like China or Indonesia, where we might get a locomotive order once every 10 or 15 years, it's difficult to maintain the relationships, the service infrastructure, and the spending there. Signaling sales are more even. You constantly have to replace the switches, the gauges, and on-board electronics. Signaling sales position us to support the once-in-every-10-years locomotive transaction.

Q: Passenger rail advocates have pointed out that the U.S. spends more on road salting and roadkill cleanup than on passenger rail. What should Washington do?

A: Rail is a good option for the country--for passengers or freight. In the passenger piece, there should be government support. In the freight piece, I think that's a debate the freight CEOs need to have. It makes sense in certain areas, such as security. In other areas, it would slow them down.

Q: How has the Internet affected your business?

A: The first [effect] is on sourcing with auctions, which started here at Transportation about four years ago. We have to make sure we have the best information at our fingertips from around the world and the most competitive suppliers. We're also digitizing all of our work flows--not just in our own factories but in customers' service shops. We want to run service shops like an Indianapolis pit crew.

Q: The U.S. is considered an also-ran compared with Europe or Japan when it comes to rail technology. Is that changing?

A: In Western Europe, most major cities can be reached within four hours by car, so high-speed rail makes great sense. The same is true in Japan. In the U.S., that makes sense in the Northeast Corridor, but beyond 500 miles, air travel becomes very competitive. Relative to Western Europe or Canada, we have underinvested in passenger rail. On the freight side, we have the most advanced technology in the world. Nobody else moves as much tonnage on rail as the U.S. What we don't have is a price that lets railroads deliver a better return on investment.

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