The General Electric Co. has a storied, 110-year history as one of a handful of companies that were at the center of American capitalism and industrial innovation.
GE created the first incandescent light bulb, introduced the electric fan, toaster and refrigerator, built the first commercial power station, and developed jet engines and industrial plastics.
In 1954, GE hired Ronald Reagan to host a national TV show called “General Electric Theater.” Over the next eight years, Reagan crisscrossed the country and visited more than 130 GE labs and factories. In 1961, Ronald and Nancy Reagan opened up their “all-electric” house to the public.
I still remember Ronald Reagan declaring, “Progress is GE’s most important product.”
But GE, the last remaining original member of the Dow Jones Industrial Average since it was created in 1896, will lose that status today. It will be replaced by drug store chain and pharmaceutical benefits manager Walgreens Boots Alliance.
GE has indeed fallen on hard times. Under its legendary CEO, Jack Welch, GE expanded beyond its familiar territories of manufacturing, engineering and chemicals into a broad array of financial enterprises. GE’s financial unit became a $500 billion Wall Street behemoth, accounting for almost two-thirds of GE’s profits at its peak. But at the height of the 2008 financial crisis, GE Capital toppled. The company was saved only by emergency injections of $12 billion from Warren Buffett and $139 billion from the federal government. Jeffrey Immelt, Jack Welch’s CEO successor, transformed GE over the next decade, jettisoning most of its financial business.
GE, which was the world’s most valuable company until it was overtaken by Microsoft in 1999, has seen its market capitalization shrink from $594 billion in 2000 to $112 billion today. Its stock has dropped 50 percent in the last year. It has cut its dividend twice since 2008, slashed thousands of jobs, replaced CEO Immelt and on multiple occasions reduced its profit forecasts. To pay down an outsized debt, GE is selling long-held businesses such as its century-old railroad division and a unit making large industrial engines. On Monday it announced the $3.25 billion sale of its distributed power division.
GE’s current chairman and CEO, John Flannery, is moving decisively to fix GE’s problems and make its business simpler by selling extraneous divisions. What will be left are three core segments — aviation, power and health care. We must recognize that this will take time. GE’s legacy reinsurance business, which has incurred a $10 billion loss, will be particularly difficult to unload.
The decline of GE represents more than the fate of just one company. David Blitzer, chairman of Standard & Poor’s index committee, emphasized that industrial companies like GE are no longer as prominent in the American economy as they were historically. Blitzer pointed out that banks, health care, tech and consumer companies play a larger role today.
Staying in the Dow for a prolonged period is challenging. Other companies that have been dropped include Sears Roebuck, International Paper, Eastman Kodak, Westinghouse and General Motors.
Michael Farr, president of the Farr, Miller & Washington investment management firm, said: “I think it tells you that GE no longer qualifies as one of the most important companies in our country. In a technology-driven world, it has been challenging for manufacturing companies to remain relevant.”
In his celebrated 1942 book “Capitalism, Socialism and Democracy,” Joseph Schumpeter described the process of industrial mutation. In brief, he wrote that capitalism is an evolutionary process that rewards profitable innovations, punishes less-efficient ways of organizing resources and reduces the demand for outdated products.
GE’s slide from preeminence would not have surprised Schumpeter and has several roots: The emergence of superior manufacturing industrial expertise in countries such as South Korea, Japan, China and Germany; GE’s failure to embrace digital technology, preventing it from sharing the success enjoyed by Apple, Google and Facebook; its conglomerate structure made the company too difficult to manage effectively.
Originally published in the Sarasota Herald-Tribune
