March 07, 2009

General Electric Models the Past and Future

After the American Century

Back in 1980s I was something of an expert on the history of General Electric, having written a book about it. Since then I have casually followed the company, as part of my interest in the history of technology, but I have not done any research directly on GE itself. Nevertheless, from a historical viewpoint, GE is a fascinating study in what has happened to the American economy during the last century.

GE began as a merger in the 1890s between a number of electrical manufacturing companies, including those of Thomas Edison. It held a large clutch of valuable patents in electrical lighting, transmission, and so forth, and it was also wise enough to establish the first corporate research and development center in the United States, in 1900. It gave inventors and scientists security in return for patent rights, and managed to parlay its early dominance in the industry into a long-term dominance in most things electrical, including radio, television, and much else.

GE also bought promising small companies that made consumer goods, such as irons or toasters and developed these products. At first each kept its own brand identity, but around 1920 the company was convinced by the legendary advertising man, Bruce Barton, to consolidate all its consumer goods and sell them under the single logo of GE. For generations afterwards the GE label was an assurance of quality, and many consumers bought their refrigerators, stoves, televisions, and other large electrical purchases from GE, which remained one of the largest corporations in the United States for all of the twentieth century.

Of course GE made some mistakes, like missing the emerging computer revolution, and it was unlucky in taking a leading role in nuclear power, which became unacceptable to the American public after the Three Mile Island Accident. Still, until the last quarter of the twentieth century it remained a powerhouse, and a corporation loved by investors, because from the 1930s it just never missed a dividend, and usually paid a little more than expected. GE was the definition of a blue-chip stock.

But last week GE was on the ropes, as it announced a big cut in its dividends. Its stock price fell to little more than $6 a share, a two-thirds drop over just a few months, and even since 2007 when it was selling for $37.

What happened? GE changed its winning strategy. Instead of focusing exclusively on being the best in the world at its core businesses, electrical power generation and electrical consumer goods, its management decided to branch out. It bought coal mines, for example, and got into medical services. This seemed to make sense, as Asian companies were making the appliances at prices so low there was little profit in it, compared to the 1950s. Most tellingly, GE made a lot of money by lending other people money. GE competed with banks, through a financial division.

For years that finance division was the most profitable part of the company. No more. In the late Bush marketplace, GE's lending was apparently no more profitable than the banks' mortgages. Depending on what rumor you believe, the debt ranges from a paltry billion (which I can easily handle) or two to maybe 40 billion. No one outside the company seems to know. And so the stock falls.

Is this not, in miniature, the history of the American economy since 1900? From blue collar jobs and heavy industry to white collar jobs in finance? From patent control and market dominance to loss of control over markets? From blue chip stocks, rock solid in value, to a faltering stock price amid uncertainties about the company?

If GE was the model company for the 20th century, can it revive to be a model for the new century? I submit that GE should get back to its roots. It still has terrific research labs, excellent consumer products, and exciting new alternative energy technologies. It could help to develop a national smart transmission grid, new mass transit, and much else. But to do so, it might need to split itself into two companies, letting the financial arm go it alone, and if necessary, fall into bankruptcy.

[Update: On June 26, 2009, GE was selling for just under $12.00 a share, and had been trading at higher prices since this piece was written, briefly even getting over $16.]