GE CEO Jeff Immelt on the Future of GE and of American Manufacturing

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.

And the last one is regulation. If we want jobs, we have way too much regulation. It’s grown geometrically over the past 20 years. Those are the four things that any government must stay focused on. And this is true globally. If you formed another council today, there are not 17 other ideas besides these four that would be as critical.

Did you ever mention the necessity to roll back regulation to the White House? What reaction did you get?

I’m not here to go down the political path. What we try to do is show projects, not debate policy or philosophy about the EPA or FDA or things like that. But, for example, when you go to do a deep seaport in Charleston and it takes eight years to get permits for it, there’s something wrong. Civilization has been doing deep seaports since the ancient Egyptians. So there ought to be a better way to get things done. Eight years isn’t what success looks like.

The U.S. has one advantage in the fact that states are now the entrepreneurs. If Texas is getting all the jobs and Connecticut isn’t, maybe that should tell us something. GE is so broad that we’re in every state; and let me tell you, there are a lot of differences between Connecticut and Texas. If you’re not willing to hustle and compete every day, you’re going to lose. Government is now the same way. Those of us who are global travelers and see what the world is doing see the opportunity cost of doing nothing. Our job [as CEOs], is to be able to look our employees in the eye and say, ‘you’re going to be able to compete any time, any place, with anybody. We’re going to make that commitment to you.’ That’s the best we can do as business leaders.

You have said it might not be possible to do a whole jet engine using 3D printing but that one can do enough content to shrink development by as much as 50 percent and maybe even take 25 percent of the cost out of the engine. What has been your experience, not just with engines but other parts of your business?

Most of what’s happening with additive manufacturing has been in consumer products. For example, how do you make the iPad casing better or things like that. This is going to take maybe a decade to evolve. But we’ve got 10 parts that are going into the next-generation engine—let’s say the G90 or Leap X engine. The most sophisticated case we have right now is a fuel nozzle that’s going from 28 parts down to 1. The scrap and time savings are huge. A decade from now, you might see as much as 25 percent of an engine made through additive manufacturing. It will likely begin with uniquely shaped parts, like a calumniator and a CT scanner. These are very highly welded that normally involve a lot of scrap. In addition, we acquired a company called Morris Engineering in Cincinnati because it is an entrepreneurial manufacturer. We needed some entrepreneurial manufacturing spirit inside GE, so we had to acquire some of that talent. We may have to acquire more.

The second thing we’ll see is a lot of opportunity for 3D printing in repair shops. We do a lot of locomotive repairs and a lot of healthcare engine repairs. The ability to do a one-off part in a continuous flow will offer great advantage over the next decade.

In addition to additive manufacturing, we’ll be spending a lot of R&D on materials, novel processing, welding and braising. Five years ago, we spent $50 million a year on manufacturing technology—pure technology. I bet now we spend close to a half a billion dollars a year on manufacturing technology. Let me explain. Each time you launch a new engine, you go down a learning curve. If we can take six months out of the learning curve, that’s tens of millions of dollars of profit at GE. So we’re spending a lot of time trying to think of how to better achieve that [opportunity].

A lot of readers tell us that it’s increasingly difficult to find skilled workers. Maybe you don’t feel it as acutely as they do, but describe the worker who we need for the future and what steps GE is taking to try to secure that type of person.

Waves of skilled workers have been retiring, starting at least 30 years ago. It’s particularly acute in industries like the oil and gas business. About two or three years ago, we initiated apprenticeship programs like those in Germany and those we had in GE going back decades. In addition, we embrace the community colleges in a very significant way. For example, in Schenectady, New York, we have Hudson Valley Community College and in Cincinnati we’ve got Cincinnati College. The kids work four hours and then attend school six hours. The community college programs are critical for us.

Thirdly, we’ve made a commitment to hire 1,000 veterans every year. We’re now finishing our second year with three more years to go. We’re trying to provide the bridge between what they’ve been trained to do and what they can do next. About a month ago, I was up in our aviation plant, in Burlington, Vermont. The stations now are a combination of automation and physical work. But without a strong computer background, you’re not going to be able to do what’s required. Tomorrow’s production worker will have to know lean manufacturing, teaming and any number of social skills in addition to physical skills and computer skills.

GE is among the few companies that can handle this [situation] by ourselves, but big businesses and small businesses alike ought to be working together on ways to get these pipelines really working. There are anywhere from 1.5 to 2 million jobs open in the U.S. as we sit here today that are not being filled. For example, GE Capital has a lot of customers who run trucking companies. There isn’t a trucking company in the country that doesn’t have dozens of open jobs that they can’t find people for.

You once said that using big data productively is the Holy Grail for you, particularly since GE has invested $1 billion in creating big data services. Share some of your experience about getting one’s arms around this [opportunity].

This is actually something worth thinking about if you’re an industrial company. I can’t say there was any one day when suddenly something became obvious, but it had been gnawing at me for a while. I became increasingly aware that more and more sensors and computing devices have been integrated into our products. Let’s say you’re flying in a Boeing 737 and you look out at the engine. It has maybe 20 sensors in it. Gas turbines might have 50 sensors, a numeric scanner has continuous data. One turbine blade is probably capable of generating a couple gigabytes of data a day. So you have this incredible data coming together on one site. The physical world and the analytical world are coming together. This is a big theme.

Number two, from a customer standpoint, increasingly our customers talk about their relationship with us in terms of the ability to not have any unplanned downtime. So increasingly in the businesses we’re in, there are these critical infrastructure technologies where the entire customer relationship is defined in terms of availability, productivity and output—with more of our service agreements being aligned with [these issues].

Coming to grips with this is hard. So this is how we’ve thought about it. We went to Silicon Valley and hired 1,000 people who joined GE to help us with this. Our thesis is, “yeah, you could go to work for the next social media site or you could come to work for us and figure out the future of flight or the future of healthcare.” So far, we’ve been able to attract people. We embed it in our service agreements. We don’t look at this as an adjunct business; we look at this as a way to enhance the value of our service business. We’ve launched maybe 30 different applications; we’re at about a $6 million run rate at the end of this year of new value in our service contracts. Everything I’ve seen so far says if you’re an industrial company, this is something you better understand, you’d better own, you better think about.

Who’s going to have the analytical layer around your products? We’ve decided that we need to fight for that and it’s taken a lot of time and effort. Now, we don’t want to be an Oracle or Microsoft. But I want our gas turbines to operate better than anyone else’s because we have all the information about how the analytics work around that asset. And in order to do that, we had to make incremental investments in data science and user interface to make it real.

What role does the “Internet of Things,” or what GE calls the “Industrial Internet,” play in GE’s future?

If you run an industrial company, analytics are going to be a part of your future. So if you’re thinking that you won’t have to become astute on data, software and analytics, you’re in the wrong place. It will permeate all of our industrial businesses.

The second thing I’d say is you will probably have to go outside to get the right talent to allow you to make it as successful as it can possibly be. And the third thing I would say is get on with it now. No matter what you call it, it’s going to have a meaningful impact in your customer interface and the way you treat employees.

Sensors are in all our products, so we get continuous data off of our installed base of gas turbines, jet engines and MR scanners. You have to reach agreements with your customers about how the data gets used and how it gets treated. For example, if we can save one percent on fuel efficiency in our installed base of jet engines, that’s worth $3 billion to airlines around the world. In the industrial world, small changes have a huge impact in terms of the outcomes for customers. And that to me is where the significance lies. For most of my GE career, I thought there were industrial companies and software companies and never the two shall meet. And all of us have software suppliers. Oracle has been a GE supplier for a long time. They’ll say to you, “Don’t worry about any of this stuff, we’ll do it for you.” But if you abdicate to that point, if you leave the analytics to your software supplier, you will lose your customer interface. And maybe [you’ll] lose your customer value proposition. You’re not going to be able to generate the right outcomes for your customers. You do this at your own peril.

In recent speeches, President Obama advances the issue of income inequality. One can barely avoid media reports comparing CEO compensation to the lowest-paid worker. Switzerland, of all places, just had a referendum about capping CEO compensation. Is this something that CEOs should be concerned with? And what, if anything, should they do?

The answer to the first question is yes. If you’re in this room, you know one of the things you never learn until you’re CEO is the importance of context. I knew how to run a business when I became CEO of GE. But I didn’t really know how GE fit within the world until I became CEO. You can’t teach people; you’ve got to kind of learn it on your own. So if you look, broadly speaking, people have been through a lot. They’ve lost their faith in big institutions, big companies and government. So we’re naive in this room if we don’t think that people are pissed and that’s going to last a while and it manifests itself in a lot of different ways.

Then you say, okay, what’s the road out? What is the pathway to a solution? If you reduce CEO compensation and double everyone else’s salary and the growth of the U.S. is zero, there’s not one problem that gets solved. Wealth and equity, healthcare, social security—I could go down the list. Not one of these problems gets solved. If the economy can grow 3.5 percent consistently, then we’ve gone a long way to resolve this.

So from 1982 to 2007, the U.S. economy grew 4 percent a year with no inflation. Give us a few of those years and you’ll see more jobs, better paying jobs, lower deficit and more opportunity. We will all have to do it in our own way in our own companies and be thoughtful about it, and none of us can complain about the way people feel.

But the only way out ultimately is to make the economy grow faster. And that means competitiveness; it means exporting and it means all kinds of things that the people in this room can do more about than the government can do over time.