GE CEO Jeff Immelt on the Future of GE-and of American Manufacturing
Not long ago, materials were cheap and labor was expensive. Today, the reverse is true, which is why it makes sense to re-shore production in many sectors. But more importantly, the product is increasingly part of the process, driving more companies to embed their know-how and innovativeness with the product itself, says GE CEO Jeff Immelt. That and the prospect of cheaper energy due to the fracking revolution will boost manufacturing in America.
March 10 2014 by JP Donlon
Jeff Immelt has led GE for 12 years, becoming CEO four days before the September 11 attacks, weathering that and other so-called “black-swan” events, including two recessions, during his tenure thus far. Coming from the company’s healthcare division, he reshaped GE by focusing on energy, healthcare and transportation while selling several divisions he inherited from Jack Welch—including plastics, insurance and NBC Universal Media—that once represented 40 percent of sales. He pushed an expansion that now brings 65 percent of sales from outside the U.S., up from 30 percent when he started. After Boeing, GE is the country’s largest, single exporter. Immelt tripled GE’s R&D spending to six percent of non-financial revenue. In the process, he acquired about $115 billion in assets and received $7 billion from those he sold.
In the following conversation with Chief Executive editor-in-chief J.P. Donlon at the 2013 CEO2CEO Leadership Summit at the NYSE, Immelt discusses some of the strategic changes he has initiated, including bringing some of GE’s manufacturing back to the U.S. in line with the changing economics of production and innovation.
A number of experts have been saying for years that such moves are overdue. In their 2009 article, “Restoring American Competitiveness,” in the Harvard Business Review, Gary Pisano and Will Shih argue that “offshoring has been devastating whole U.S. industries, stunting innovation and crippling capacity to compete long-term.” Harry Moser, an MIT-trained engineer and founder of the Reshoring Initiative recently told Forbes, “Many companies that offshored manufacturing didn’t really do the math. As many as 60 percent of the decisions were based on miscalculations.”
At a 2013 conference on the future of manufacturing, Immelt presented GE as a company with manufacturing in its DNA. “We’re all about additive manufacturing and advance spot welding,” he said. “If you look at a company like ours, at our core, we are a materials company. Gas turbines, jet engines, MRI scanners—that’s who we are.” At last December’s Leadership Summit, he underscored this fact by adding that GE Capital, once 50 percent of the company’s revenue, will shortly represent only 30 percent going forward. At last December’s Summit, Immelt shared his thinking on a wide range of competitive issues facing CEOs everywhere, but he offered a detailed look at manufacturing’s future both at GE and for business in general. Here are some highlights.
In the early years, you were often compared to your predecessor. Now that you’ve significantly changed the company you inherited, do you still get compared, and do you care?
I’ve been asked about following Jack in probably 120 different languages and a thousand different ways. I always answer more or less the same way. Leadership is a one-act play in business and you’re really supposed to do what’s right in the era you live in. What I look for in the people [who] work for me is [individuals] who have their own sense of self and comfort with themselves to take leadership and take the company in their own direction.
It’s easier to replace a really bad CEO than a good one; but sometimes you don’t have that choice. And when you replace a good one, you need to drive change every day but pretend nothing was ever wrong. That’s kind of the way I’ve handled it at GE. I don’t look back, but [I do] drive the things that I think are most important for the company going forward in the era in which we live.
You’ve boosted earnings from manufacturing at GE. Since the country desperately wants the U.S. to revive manufacturing and the jobs that come with it, tell us what GE is doing specifically to revive manufacturing from within and what is needed for the country at large to expand its manufacturing base.
Our best industrial businesses are [those] with a very strong competitive mode—not just from a technology and engineering standpoint but also from a process and manufacturing [position].This isn’t the romantic view of manufacturing that is so in vogue today. This is more about competitiveness and competitive advantage.
I’ve been with the company 31 years and my longtime, good friend Bob Nardelli (former CEO of GE’s Power Systems), who I know is here in the room, can back me up on this. In the 1980s, U.S. labor was expensive and materials were cheap for probably the first 20 years of my career. This did not generally help good labor-management relations. As a result, most of us saw it our task to outsource manufacturing, to move it to low-cost countries. This continued through the 1990s and into the very early 2000s.
Today, materials are expensive and labor is relatively inexpensive. Today, the product is the process, more or less. And labor is a lot more flexible. If you look at an aircraft engine, the content of labor is probably less than 5 percent. We have two hours of labor in a refrigerator. So it really doesn’t matter if you make it in Mexico, the U.S. or China. Today it’s really about globalization, not about outsourcing; it’s how do I capture markets faster than the competition?
The nature of manufacturing, itself, has changed. That’s why we care more about it. Look at big engines, which are big, technical miracles. We’re inventing the process and the product at the same time. Probably the last generation of, let’s say, G-90, which powers a [Boeing] 777 would have been 50 percent GE content, 50 percent outsourced. The next generation engine, which is called the G9X is probably going to be 70 percent content, 30 percent outsourced. Because we’re inventing the process while we’re inventing the product, we have strong, competitive advantage in manufacturing here, and I think that’s likely going to be the case as time goes on.
Now, as a global traveler like many of the CEOs in this room, when I go to Beijing, Munich, Moscow, South Africa or Brazil, they don’t sit down and say, “Hey, Jeff, tell me about your financial-service business.” They say, “Tell me about your industrial business and tell me how we can move more manufacturing here.” It’s the way countries view competitiveness today. There’s no way to build a country’s wealth without building middle-class manufacturing jobs. And every country recognizes that.
Let me make one other point because most people in this room—and many of your readers—have been impacted by the emergence of China. The second biggest trend that people don’t really talk much about is the evolution of resource-rich countries from natural resource production into industrialized economies. This includes Latin America, Africa, Russia, the Middle East, Canada, Australia and Asia. Twenty years ago, when oil prices were high, Saudis bought apartments in Paris. Now, they’re re-investing back in their country. We see this going on everyplace. Industrial capability has become the calling card in almost any country that we go to today. This will be true for all of our businesses in the room.
You’ve spent a lot of time in Washington on the president’s council. Tell us, what does the country have to do to provide a sufficient platform for manufacturers to succeed?
I always start the answer to this question with, I’m a Republican. I was then and I am today. I say this so people don’t assume that this is all part of fat-cat Washington insider stuff. When you’re asked by the government to do something, you’re supposed to say yes. At least that’s what I told my mother. What I learned on the council was that there are four things that drive a country’s competitiveness. It’s true for the U.S. and every country that I ever went to.
It starts with education. We need more engineers and we need more welders. Engineers create jobs and engineers create companies. In advanced manufacturing, welders create productivity and we need both of those. In Vietnam, the government provides 5,000 people with welding degrees every year. You can go to Vietnam and build a plant that’s very competitive from day one because of what the government’s done.
The second thing is infrastructure. This is where I disagree with many Republicans; we need to improve infrastructure. [The New York Times’] Tom Freedman came to one of the GE meetings last week and he said that flying from Beijing to JFK is like going from the Jetsons to the Flintstones. There’s some truth to that.
The third thing is the focus on small and medium business, which is an amazing engine of growth. I’d say they’ve gotten hammered in this downturn. For every job in GE, there are eight in the supply chain. We need to worry about these eight in the supply chain and how they’re doing.