Full steam ahead
General Electric is forecasting a 10% growth in revenues for 2012
General Electric may operate in many of the world’s trouble spots, but that hasn’t stopped the world’s fifth largest company from forecasting a ten percent growth in revenue for 2012. Vice chairman John Rice explains how. By Massoud A. Derhally
It must be tough being John Rice. When the vice chairman of General Electric looks up, he sees only five companies on the planet bigger than his — Microsoft, Google, Wal-Mart, Exxon Mobil and Apple.
Look down, and the chances of the $239bn conglomerate catching up with its rivals anytime soon look slim: Europe is in meltdown, the US is barely out of recession and large sways of the Middle East are undergoing historical changes.
But then there is good reason why GE paid Rice $20.57m in 2011.“The waters are going to be choppy for a while and there is a certain amount of headwind,” he says. “We can create our own tailwind.”
That he certainly has done. Two weeks ago the US giant told investors to expect a ten percent growth in revenues for 2012, nearly double its previous forecast. Add the healthy growth in China, with expansion in Canada, Australia and South America, and it’s little wonder GE’s shares are threatening to cross the $23 barrier.
And even less wonder that Rice — who has been with GE for 33 years, and from Hong Kong manages all the company’s overseas interests — doesn’t appear fazed by the challenges ahead.
The company expects almost no growth in Europe’s economies and is diverting its attention to other markets as the continent battles a recession and a debt crisis that has raised questions about the future of the euro.
“Sure,” Rice says when asked if he’s concerned about the widening reverberations of the recession in Europe.
“Europe is a big collection of economies, it’s a big part of our business,” he explains. “In our projections we assume next to no growth in Europe for the next five to ten years. It will be modest so we have to look elsewhere for our growth.”
In its most recent World Economic Outlook report, the International Monetary Fund (IMF) lowered its global growth forecast and said the global economy may get worse if the debt crisis in Europe deteriorates further.
“Low growth and uncertainty in advanced economies are affecting emerging market and developing economies, through both trade and financial channels, adding to home-grown weaknesses,” the Washington-based organisation said in its report.
“The main focus continues to be the euro area,” it added. “The lessons of the past few years are now clear. Euro area countries can be hit by strong, country-specific, adverse shocks. Weak banks can considerably amplify the adverse effects of such shocks. And, if it looks like the sovereign itself might be in trouble, sovereign-bank interactions can further worsen the outcome.”
The IMF revised its 2013 growth forecast for advanced economies to 1.5 percent from two percent while it lowered its estimates for emerging market and developing economies to 5.6 percent from six percent.
“We’d love to see a global economy that’s growing at three or four percent and not two percent,” Rice says. “The fact that it might grow at two percent doesn’t change the nature of our strategy. And that’s why I am bullish.
"At the heart of all of this there are still going to have to be investments in infrastructure. I am bullish because under any economic scenario investments will have to be made. Over the long run we’re parked exactly where we need to be.”
The IMF cut its 2012 growth forecast to 3.3 percent, from an earlier estimate of 3.5 percent. US economic growth is estimated at 2.2 percent, while European economies are set to contract 0.4 percent, and Asia expanding 6.7 percent.
“A further escalation of the euro area crisis and failure to address the US fiscal cliff are the main external risks for the region,” the IMF said.
“If these risks were to materialise, Asia’s open, trade-oriented economies would be faced with lower external demand and other spillovers (for example, on confidence), and growth could be substantially lower.”
GE, which employs about 300,000 people is set to restructure parts of its businesses and save about $2bn from its cost cutting over the next two years. However, Rice declines to specify if there would be layoffs and what size.
“Because we do have pockets of cost and efficiency which accumulate in a company over time that we can free up and in some cases we will reallocate that to investors and in other cases we will reallocate that to growth markets so the net impact on jobs is not clear now.
I think we will end up being a company that is simpler, more efficiently run and will free up capital for investment in growth markets,” he says.
The US economy is in better condition today than it was several years ago when Lehman Brothers filed for bankruptcy in 2008, the largest in US history which had reverberations across the world, Rice says.
“No question that if you compare it to 2008 the economy is better,” he says. “There is cause for cautious optimism.”
US economic growth is expected to drop to 2.1 percent next year before it advances to 3.3 percent in 2014, according to the IMF. Official US government statistics showed the unemployment rate falling to 7.8 percent last month.
Still “there are big decisions that have to be made about how to deal with the debt, deficit spending, the fiscal cliff that the US government will face at the end of the year,” Rice says.
“We need to have those decisions made, we can’t kick the can down the road. If that happens I think it will create a much more challenging environment for people. There is a lot of cash that companies have that could be investing that’s sitting on the sidelines because of this uncertainty.”
Rice says while it is inevitable that there would be revenue increases that come from higher taxes, he would like to see structural reform that goes with that.
“I’m prepared to pay more tax but I want to make sure that some of the inefficiencies and structural reform comes with that,” he says. “There needs to be revenue and spending adjustments. It can’t be one or the other. There needs to be both and I think any solution will require both.”
Looking forward, Rice says the demand by governments around the world to modernise infrastructure would help fuel GE’s overall growth with the Middle East being a key market for the company.
The company has ploughed ahead even as the region experienced a wave of upheaval over the past two years that saw the toppling of authoritarian regimes in Tunisia, Libya, Egypt and Yemen. In essence, where calamity exists and challenges of nation-state building emerge, GE finds opportunity.
GE expects double-digit growth in its sales from the Middle East, North Africa, Turkey and Pakistan, as governments invest billions of dollars on their infrastructure, move towards energy efficiency and meet the needs of their growing populations.
“This region is the second largest growth region in the world,” Rice says. “We expect over time to grow at double-digit rates. As we look at close to a ten percent growth rate in total we expect our growth rate here to be in the teens. That makes it important by itself.
"If you look at the developments that occur in the Gulf region, if you look at what’s happening in countries like Iraq and North Africa these are very important. You have to be on the ground working through them to really understand the role you have to play to help.”
Economies of the Middle East and North Africa region are expected to grow 5.3 percent this year, according to the IMF.
Last month the company said it was investing $1bn in Saudi Arabia, the largest economy in the Arab world, as part of the kingdom’s 2020 development plan. That investment, says the company, will help the country diversify its economy and strengthen its manufacturing capabilities.
Fairfield, Connecticut-based GE will also launch the kingdom’s first heavy fuel oil technology programme, which it hopes will improve efficiencies in the conversion of fuel oil for power generation.
With the price of oil projected to average around between $100 and $115 per barrel this year, the economy of Saudi Arabia, which has one fifth of the world’s oil reserves, is forecast to grow about six percent in 2012 after expanding about 7.1 percent in 2011, according to the IMF.
The kingdom’s government has in the past two years earmarked about $500bn as part of a comprehensive effort to address structural issues in the economy, improve education and transportation, tackle unemployment and build hundreds of thousands of homes to meet growing demand in an undersupplied market.
As Saudi Arabia, Jordan and other countries look to build nuclear reactors, GE believes it can compete with companies from South Korea which won a contract to build four plants in the UAE for $20bn and French companies that are also set on entering the market.
“We think we can [compete],” says Rice. “We have a good nuclear business and partnership with Hitachi,” he says, adding, “We have been developing the broadest portfolio of power generation technologies and the ability to access a wide array of fuel choices because what works in one market may not work in another market.”
The wave of protests that toppled leaders in the region present opportunities for GE as governments vie to overhaul parts of their infrastructure and address their people’s grievances, Rice says.
“In reality, part of the reason you have an Arab Spring... is that people don’t see positive developments in their country coming fast enough,” he says.
“For us we interpret that as a need for more infrastructure, better access to healthcare, electricity for everybody, the basic building blocks of an improving standard of living,” Rice adds.
“We are not deterred by the fact that there is the chance for social unrest in some of the countries that we do business because we realise that over the long run, part of the solution, part of the antidote is continued investment in infrastructure and we have a role to play.”
Backing from the US government helps GE generate new business in the Middle East, he says.
“Yeah I think it helps sure,” he says. “It’s certainly helpful to have the support of the US government but we also have to have the support of every government where we operate.”
Powering the Dreamliner
GE is confident GEnx engine issues are now resolved, vice chairman Rice says.
General Electric Co (GE), the biggest maker of power-generation equipment, is confident it has solved the problems related to the engine failure of the GEnx that powers the 787 Dreamliner, the company’s vice chairman John Rice says.
“We think its resolved. We think that the inspection process will keep it from happening again,” Rice says.
In September, GE, the world’s largest maker of jet engines, said it was investigating a second failure of the GEnx jet engine after a Boeing 747-8 freighter aircraft aborted a takeoff in Shanghai, China. That incident followed engine failure in July on a 787 Dreamliner jet being tested before delivery in South Carolina.
The US National Transportation Safety Board said no cracks were found on the 747-8 freighter, while a review of the pre-delivery engines revealed a GEnx engine installed on a 787-8 airplane that had not yet flown had a cracked fan mid-shaft (FMS).
“We think we have exactly the right inspection process which will ensure that if the procedures are followed we won’t see another incident,” Rice says.
“We also made a change in our manufacturing process to go to a treatment that was more environmentally responsible,” he adds.
“The prior treatment had involved a lead based solution and we wanted to eliminate that because from the environmental perspective, lead is something you’d rather not use if you don’t have to.
Removing that created a weakness in the part that is not acceptable, so the fix is relatively straightforward which is to go back to the old process which has been proven for thousands of engines in service.”
The GEnx family of engines which uses new technology and lighter materials, is the fastest-selling engine in GE Aviation history with more than 1,300 engines on order, according to the company’s website.
Compared to GE’s CF6 engine, the GEnx engine offers up to fifteen percent better fuel efficiency, which translates to fifteen percent less CO2 and is about 30 percent quieter.
The GEnx engine’s NOx gases emissions are as much as 55 percent below today’s regulatory limits, and as much as 90 percent below today’s regulatory limits on the emission of other regulated gases.
Qatar Airways has placed orders for 60 Dreamliners — 30 firm and an option for 30 more — and selected General Electric’s new-generation GEnx engine for the aircraft. The Doha-based carrier’s CEO Akbar Al Baker has said the airline won’t accept delivery of its planes until the “material defect in the engine” is fixed.
Etihad Airways, which trails Emirates and Qatar Airways in size, has 41 Dreamliner 787-9 planes on order with GE engines, according to Boeing’s website. Royal Jordanian, the first Middle Eastern carrier to buy the plane has seven 787-8 jets on order and Kuwait’s leasing company ALFACO has eight on order, also with GE engines.
Bahrain’s Gulf Air has sixteen of the jets on order, Iraq ten, Saudi Arabian Airlines eight and Oman Air six. None of those orders have GE engines selected for the jets, according to Boeing’s website.
The 787-8 sells for $206.8m while the 787-9 costs $243.6m, according to list prices, which don't account for discounts that airlines get.