At a Leaner GE, CEO Views Digital Investment as an Existential Need

GE is leading a digital manufacturing transformation because 'we have the scale, the installed base and the industrial expertise,' its new CEO has said.

General Electric Co. (GE - Get Report) hasn't said which $20 billion of businesses John Flannery plans to sell, but the new CEO is emphatic about one he intends to keep: digital.

It's critical to the future of the Boston-based conglomerate, and in fact, to every manufacturer, he said on Wednesday, Oct. 25, at GE's Mind+Machines symposium in San Francisco. 

Global businesses are in the midst of a "new kind of industrial revolution, happening at an unprecedented scale and an unprecedented speed," he said. "It's no longer enough to build incredible machines. The company that just builds machines will not survive."

Instead, factories must produce machines capable of tracking their own performance and sharing the results digitally, enabling analytics software to optimize both maintenance and operation -- a capability GE began emphasizing under former CEO Jeffrey Immelt. 

The company has been styling itself as a digital manufacturer since Immelt fostered development of the Predix software platform to leverage the industrial Internet of Things after selling broadcaster NBC and most of the GE Capital lending arm.

"Just a few short years ago, the idea of a digitized industrial company was just that," Flannery said. "An idea. No precedent. No playbook. No concept. Today, this is a reality. The more we see of it, the more we like it. We're pursuing this with a conviction and a passion like never before."

Following that passion, at present, requires tough choices in other parts of the company, which makes products from medical equipment to jet engines and locomotives. GE posted far lower third-quarter profit than Wall Street was expecting last week and halved its target for industrial cash generation to $7 billion -- well short of the $8 billion yearly cost of its dividend.

That heightened existing speculation by analysts that the payout will be cut, which GE has done only twice in its history, and prompted a spate of stock-rating downgrades. The shares have since fallen 8% to $21.50, compared with a small gain on the broader S&P 500.

Flannery, who has committed to outlining his turnaround plans next month, is planning as much as $2 billion in cost cuts next year and has already grounded GE's fleet of corporate jets while phasing out company cars for top executives.

The company, founded by Thomas Edison in the late 1800s, is under pressure from activist Trian Partners and other investors to buy profits and cash flow, but analysts say a breakup like Trian has supported at companies including DowDuPont (DWDP - Get Report) and Pentair (PNR - Get Report) is unlikely.

Significant technology overlap across GE's divisions supports both keeping them together and maintaining the digital initiative, JPMorgan Chase & Co. analyst Stephen Tusa said in a note to clients, and paring some of the investment in digital should improve cash flow.

Indeed, Flannery said on Wednesday, GE plans to focus its resources heavily on digital enhancement of its core products, such as power plants, oil and gas equipment and locomotives, while relying more heavily on partners for other components of its technology push.

Earlier this week, the company introduced enhancements to a suite of Predix products that will help customers gather and process information farther from their data centers -- and closer to their operations. 

Apps developed for the Predix platform, which does for factories what Apple Inc.'s (AAPL - Get Report) iOS and Google Inc.'s (GOOGL - Get Report) Android did for smartphones, already allow customers to create a "digital twin" of their equipment to analyze performance and flaws and enable machines to alert operators to needed repairs.

Orders for Predix-powered products have doubled since last year, Flannery noted on Wednesday, citing examples such as the FlightPulse app developed with Australia's Qantas Airways that lets pilots track fuel efficiency on their flights.

"The company I joined 30 years ago, in August 1987, that company made machines that made the world better," he added. "We're still that company, but the world has changed unbelievably, and the industrial world has to change with it."

Source: thestreet