General Electric Breaks Up, Symbolizing Decline of American Manufacturing and the High Price of Financialization

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Even though General Electric will continue in name after yet more downsizing and a breakup of the rump company into three pieces, the image of General Electric as paragon of American management started to unravel after the tenure of Jack Welch, and accelerated after the financial crisis.

As we’ll explain, contrary to fawning media accounts, much of what went wrong with General Electric started on Jack Welch’s watch. But his success in becoming a celebrity CEO helped goose the stock price, making it risky for any sharp-eyed analyst or commentator to even mildly question what Neutron Jack was up to.

First, an overview of the dismemberment, from the Wall Street Journal:

General Electric Co. said it would split into three public companies, breaking apart the more than century-old company that was once a symbol of American manufacturing might and has struggled in recent years.

The plan is being unveiled three years after Larry Culp took over the troubled company and tried to stabilize its operations by selling off business units and paying down the company’s debt load. But GE’s stock price, despite a 1-for-8 reverse split, has lagged behind the S&P 500 and rivals.

GE shares have lagged behind rivals and the​S&P 500 since Larry Culp was named CEO
Cumulative change since Oct. 1, 2018

The move is the culmination of a yearslong process of shrinking the company. GE has already sold off its locomotive and home appliances business. It spun off its oil-and-gas business operations. It has also sold most of its once massive financial services arm, which hobbled the company after the 2008 financial crisis. It also slashed its quarterly dividend to a token penny per share.

What remains today are three businesses—aviation, healthcare and power. The company will now spin them off into separate publicly traded companies.

Aviation, as in jet engines, will keep the GE name. Healthcare consists of making MRIs and other hospital equipment. The power company will inherit a hodge podge of doggy operation in turbines for utilities and wind farms and its “remaining digital division.”

The split-up is widely depicted in the financial press as General Electric capitulating to the new reality of how to run manufacturing firms, that being diversified by product and geography is no longer a good formula.

But perhaps the real question ought to be how General Electric managed to defy the logic of the 1980s, when leveraged buyout artists preyed on overly diversified conglomerates, breaking them up and selling the pieces for more than the value of the former whole, and companies have continued to be under pressure to make themselves look like pure plays, or alternatively, to sell narrowly focused operations when valuations were favorable.

Part of it was that General Electric was impregnable in the 1980s, even if deep financial spadework were able to make a case that its well-valued stock still represented a discount from breakup values. But General Electric, even though its activities extended across a large product range, its industrial operations were run on more integrated basis. And unlike cobbled-together conglomerates, it also had strong positions in particular product/industry categories. It seems hard to remember that GE brand washers and refrigerators were once seen as solid products; if you now encountered them, say in a prospective rental, their presence would be a red flag.

In other words, in the 1980s, it would have been business blasphemy to put General Electric in the same category as the businesses targeted by takeover artists. It had long been one of the very best managed companies in the world; Welch’s predecessor Reginald Jones was toasted as the best CEO of any public company. Even if any financial entrepreneur would have been so deluded as to attempt a run at General Electric, its reputation was an obstacle even more difficult to surmount than its massive size. Recall that the financial establishment recoiled from Saul Steinberg’s late 1960s plan to take over Chemical Bank. Having a go at General Electric would have produced an even more violent slap-down, potentially including Congressional hearings and actions to rein in raiders.

My harsh take on Jack Welch isn’t just due to his destructive expansion into financial services and his cultivation of “CEO as celebrity” which was extremely successful for him and General Electric during his tenure but long-term destructive to management practice in the US. It is also that Welch’s success as a manager has been exaggerated, but it will be well nigh impossible to ascertain to what degree due to the cheerleading and a code of omerta among departing execs. One colleague who worked under Reg Jones and later under Welch, and turned around a manufacturer that remains a top player in its niche, has said that Welch ran on Jones’ brand fumes. And some of his touted practices, such as Six Sigma, were all PR.

Jack Welch and General Electric were lucky enough to ride the great financial markets boom, triggered by a long-term secular trend of declining interest rates. Welch also inherited a superbly run company at a time when America was still a manufacturing powerhouse, despite Japan and Germany making inroads.

Admittedly, General Electric, like many American manufacturers, was in the financing business by virtue of lending to buyers. But it had greatly expanded its role by the late 1980, to the degree that it took big hits from LBO lending (I knew the ex-McKinsey partner who ran its workouts. He had two conference rooms, one that he named “Triage” and the other “Don Quixote”.)

But even as of the early 1990s, GE Capital was celebrated for accounting for 40% of General Electric’s activities, doing everything from venture capital to private label credit cards to credit guarantees. And General Electric got the best of both worlds. It avoided the taint of being seen as a stodgy old economy manufacturer; by the time Jack Welch left, in 2000, it was classified in the Fortune 500 as a diversified financial firm. Yet got to borrow at industrial AAA rates, which were more favorable than any bank or insurer rated AAA.

The enormous GE Capital operations gave Welch more luster than he deserved a second way: they enabled General Electric to play earnings games, so they alway met their quarterly guidance to the penny. Admittedly, GE Capital unwisely continued its expansion after Welch left, in the low interest rate dot-bomb era, including increasing its leverage level and re-entering the subprime mortgage business in 2004.

Then CEO Jeff Immelt kept reassuring investors in 2007 even as the foundation was starting to crack. From Fortune in 2008:

GE is known for seeing changes ahead of time….Home prices peaked in June 2006, yet it wasn’t until a year later, with the subprime crisis on the front page of every newspaper, that GE Capital finally decided to bail out. [Subprime lender] WMC lost almost $1 billion in 2007 before GE dumped it in December. A Japanese consumer-lending company called Lake was another lousy business, but GE Capital again didn’t face the music until it was too late. GE took a $1.2 billion loss on it last year after deciding in September to sell it – but by then consumer credit was deteriorating so fast that unloading it (to Shinsei Bank) took another year….

Despite its stumbles, GE has a long history of strict financial discipline. Immelt told shareholders in February [2008], and repeated to employees recently, that GE had no exposure to collateralized debt obligations (CDOs) or structured investment vehicles (SIVs). It uses derivatives for hedging, which is relatively safe, but prohibits speculating in them, which is dangerous. It subjects its financial positions to shock tests – for example, assuming that interest rates rise a full percentage point across the board and stay there for a year; if that happened in 2008, Immelt said at the beginning of the year, GE’s positions were so well hedged that the effect on profits would be negligible. His upbeat conclusion in February: “Our financial businesses should do well in a year like 2008.”…

Making matters worse, Immelt had assured investors only 18 days before the quarter’s end that everything was on track. GE’s just-released annual report was titled “Invest and Deliver,” significant because inside GE “deliver” is a special word. You deliver on commitments – always. As Welch said on CNBC, “Just deliver the earnings. Tell them you’re going to grow 12% and deliver 12%.”

So Immelt committed the ultimate GE sin and failed to deliver. How come? That’s easy. He reassured investors on March 13, and the quarter ended on March 31. But something unimagined happened in between: Bear Stearns failed, causing credit markets nationwide to freeze up. GE had been counting on GE Capital to do its usual end-of-quarter rescue act, but this time it couldn’t.

This is even more damning than it appears. It effectively says that Immelt didn’t understand that General Electric was a financial services firm, and therefore wasn’t minding that store.

Bear went bust on March 14, a mere day after Immelt gave shareholders another happy talk. Admittedly the run on Bear took only about ten days, but anyone paying attention knew the financial markets were in crisis mode the week before. For instance, our March 6 headline was Credit Markets “Utterly Unhinged”. The post reported that the agency securities market (Fannie and Freddie bonds and mortgage securities with their guarantees) had seized up, a white-knuckle development for a market nearly as big as Treasuries and until recently regarded as just as safe.

And the wheels came off Bear that very March 13 evening. Many of its counterparties stopped trading with it on Monday, March 10. Bear had skimpy cash reserves compared to other investment bankse, as we explained in our March 14 post, Bear Death Watch: Why It Failed. As we wrote:

Bear concluded that it was in trouble as of 4:30 pm on Thursday; it called James Dimon at JP Morgan at 6:00 pm., who immediately called the Fed, which then sent a team of examiners over to Bear that worked through the night.

“In trouble” meant Bear did not have enough cash to open Friday. Bear wanted a $25 billion emergency loan from JP Morgan overnight. JP Morgan (not entirely unreasonably) could not get its arms around the risk assessment overnight and asked the Fed for a guarantee, which it provided in an emergency meeting Friday morning.

How could Immelt think GE Capital and hence General Electric would not get caught in the downdraft? And how could analysts be as deluded? From Fortune, on the first quarter 2008 earnings miss:

Result? Uproar and a further slide in the stock. Investors felt betrayed and disillusioned. Analyst Nicholas Heymann of Sterne Agee spoke for many when he wrote: “Investors now understand that GE uses the last couple weeks in the quarter to ‘fine-tune’ its financial service portfolios to ensure its earnings objectives are achieved. It turns out it really wasn’t miracle management systems or risk-control systems or even innovative brilliance. It was the green curtain that allowed the magic to be consistently performed undetected.”

In September 2008, General Electric had another episode of assuring investors everything was hunky dory and there would be no need to sell stock. As Seeking Alpha recounted later that year:

On September 25, with the stock trading at $25.50, Jeff Immelt lowered GE’s earnings guidance, suspended its $15 billion stock buyback plan and declared they needed no outside capital. He reaffirmed their commitment to maintaining a AAA rating with these actions.

Yet in a week, General Electric’s credit default swaps were priced at junk level just before the company announced a $15 billion stock sale, $3 billion to Warren Buffett on preferred terms and $12 billion to the general public.

General Electric also needed to avail itself of rescue facilities to roll $74 billion of commercial paper and obtained guarantees for $139 billion of debt under an FDIC program.

General Electric lost its AAA rating in 2009, dashing whatever hopes it had had of returning to its former financial services industry bezzle, um, dominance.

Now it’s easy to blame Immelt for much of this sorry performance, and Welch’s successor didn’t cover himself with glory. But a big part of the mystique Welch cultivated was as being a superstar people manager. If you look at The 8 Rules of Leadership by Jack Welch from Inc. Magazine, for instance, it’s all about cheerleading. Nothing about the hard nitty gritty, like making sure your systems (IT, financial) are rock solid, that a CEO should exhibit Andy-Grove-level paranoia in monitoring competitors and looming technology and environmental threats, or even bland but really important basics like listening to customers (and the hard part, figuring out when and how much to act on what they say).

In other words, the lameness of Immelt is the direct result of Welch’s show pony “leadership”. Management succession is one of the most important duties of a CEO and Welch blew that too.

When Welch died in 2020, the business press published encomiums as well as some reputational markdowns. For instance, from The Week:

Upon his retirement, almost 20 years ago, Welch was a legend…

Upon Welch’s death this past weekend, however, GE was a decimated shadow of its former self. And Welch’s own legacy, to put it bluntly, lies in ashes: A warning for others of the dangers in 1980s-style Wall Street financialization, and of an overwhelming focus on shareholder value above all else….

Years after his retirement, in 2009, Welch told the Financial Times that shareholder value — the corporate governance philosophy that a company should focus on maximizing returns to its shareholders to exclusion of all else — was “the dumbest idea in the world.” But while Welch ran GE, you could find few better exemplars of putting “shareholder value” into practice: It wasn’t just that Welch laid off over 100,000 workers; he closed huge swaths of GE’s domestic factory operations — up to and including the company’s famed light bulb manufacturing — and sent them overseas where labor was cheaper. “If I had my way, I’d put every GE plant on a barge,” he once declared.

To further juice General Electric’s stock market value and its returns to the ownership class, Welch took the billions he saved from all those closures and layoffs and embarked on a sweeping quest to buy up companies in sectors and industries far beyond GE’s original core competencies in manufacturing, engineering and electronics. The company became a massive conglomerate, with major stakes in health insurance, pharmaceuticals, finance, entertainment, and more. By the time Welch retired in 2001, GE’s annual revenue flow had increased five times over, and its stock market value had exploded from $14 billion to $410 billion.

Then it all fell apart.

It is sad to see the dismembering of a once great American company. But let’s not forget why.

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  1. Antifaxer

    “So play along while they rave about the stock price
    And pretty soon you’ll be buying into their lies
    Conformity is now rewarded with the guarantee”

    5 Years – Allister

  2. Mikerw0

    What is really sad about what happened to GE was that it played out in plain sight. I was a PM/analyst at one of the five largest asset managers in the US in the 90s. I also covered and had deep knowledge of financial services firms. Turns out that GECC had its on SEC filings, as did the reinsurance operations.

    Any one who took the time to review these would immediately see that Welch was consuming their balance sheets for GAAP EPS purposes. None of the sell side analysts, who were industrial analysts not financial analysts, had a clue what was going on and probably looked the other way. Ask them and they stared at you blankly and touted all of Welch’s buzzwords and happy talk. Same with other PMs (the same ones who wouldn’t listen to warnings on Intel, Enron, worldcomm, Tyco, etc.). PMs don’t bother to read financial statements much less the footnotes.

    It was never a question of whether GE would blow up, but when. My bet was after Welch was gone so others would take the blame.

    1. griffen

      After Welch left, I can recall the musical chairs for the ones not selected to be CEO. Unfortunately I don’t fully recall the other 2-3 candidates; I think one left to run Home Depot. As for the blame falling elsewhere, that appears to be the opinion of business legend Ken Langone*. Langone was a board member when Immelt was the CEO, and pinned it squarely on Jeff Immelt’s tenure. Notably, the WMC subprime mortgage acquisition was a disaster (as cited above).

      *Langone happened to be on tv this morning, to discuss another topic but the interview on Squawk Box went there while they were talking. I need to read his book.

      1. Stephen

        Langone wanted Bob Nardelli, who if I recall correctly was running GE’s medical products division at the time, to succeed Welch. He was out-voted by the rest of the board, Immelt was selected. Langone immediately hired Nardelli to run Home Depot.

        Nardelli ran Home Depot straight into the ground, and Langone never really warmed up to Immelt for some reason. Nardelli was his guy.

    2. ChrisPacific

      I always had my doubts about Jack Welch, although he was mostly before my time. He was supposedly one of the celebrated figures of American capitalism, and yet in my experience any business idea that could be traced directly to him turned out to be horrible (forced ranking being the most egregious example).

  3. Mr. Magoo

    It seems like GE was the only company that came out of the financial crisis hobbled. Did everyone else have their respective runways ‘foamed’?

    1. griffen

      Citigroup was an absolute basket base. And while I could be wrong, it wasn’t Buffett lining up to provide them capital. Citigroup’s management had to make a 2nd inquiry for the FDIC to get a special / additional assist; eventually they split apart the worse assets / exposures into a “bad institution”.

      And what was left without those assets / exposures was still not good. They kept dancing just a bit too much! I hope Rubin burns for eternity, that a**clown.

    2. NotTimothyGeithner

      Many companies failed, but GE’s problems weren’t limited to the sub prime mortgage market. The two cows theory at industrial GE and mismanagement at GE Capital and what they use to call Genworth were where money was tossed down the drain, chasing unicorns. Liquidity wouldn’t have fixed dismantling the parts that worked to chase new markets.

      And cough, long term care, cough. In the obsession, GE shot both cows.

      1. Yves Smith Post author

        GE was a major private label credit card lender. Pretty much all credit card issuers sold their receivables to investors, and those sales were supposed to be non-recourse. But the investors said, You make us whole or we will never buy a dime of this stuff again. There may have been misrepresentations too.

      2. Joe Martin

        The jig was up at GE Capital once GE could not issue prime commercial paper to fund operations. Everything at GE Capital was priced to sell at that point and Wells Fargo bought most of it.

  4. JohnnyGL

    Good post.

    Welch was the poster child of financialization and outsourcing. This quote really speaks volumes:

    “If I had my way, I’d put every GE plant on a barge,” he once declared.

    I think, with hindsight, the 90s and 2000s have become impossible to understand without the wholesale selloff of factories to China. I think that helped underpin a lot of the financialization.

    1. lance ringquist

      carter and reagan did lots of damage, but the immense unreversable damage to americas ability to have any sort of democratic control, and control of our destiny was completely stripped away and turned over to the welchs of america by none other than nafta billy clinton.
      america was heading into the dumpster before the idiot was even out of office.
      we would have had a severe recession, possibly a depression, but bush’s response who saved the day because of 911, and dropped lots of helicopter money.
      but because nafta billy had made the economy so destabilized it did not last long, and down it went again in 2008, obama lied and bailed out nafta billy clintons disastrous polices, and it limped along again.
      today we see the end game to those disastrous polices. more G.E.”s to come.

      1. drumlin woodchuckles

        And more Trumps to come, too. Which won’t solve the problem either.

        The best thing that green/blue people who live in green/blue majority areas can do is try to create separate survival lifeboat economies and societies in their areas so that if/when America delaminates into different countries and no-mans-lands and violent buffer-zone gradients; that the AutarkaBlueZones are able to become viable Green Survival areas.

        And of course lift a finger to vote and feign interest in “national politics and affairs” so as to avoid attracting too much attention to their stealth velvet tiptoe-sneakaway preparations.

  5. sbarrkum

    >it has also sold most of its once massive
    >financial services arm, which hobbled the
    >company after the 2008 financial crisis.

    Did a consultancy gig for GE Asset Management (GEAM) working on their couple of billion dollar Fixed Income and Derivatives portfolio. Anyway they had bought new end to end software. The company had given an offer of USD 2 million for installation. Some smart ass project managers thought they could get do it cheaper. So hired some young Indian coders right out of Uni. It was blind (Project Managers with health care experience) leading the blind (coders who had no clue about bonds and derivatives). The ones who were smart and picked up the jargon and concepts promptly jumped ship for about three times what they were paid at GE. Anyway had to go back to the software company and hire them. Ended with a tab of 6 million and of course all those Project Managers got various awards for a job well done.

    >And some of his touted practices,
    >such as Six Sigma, were all PR.

    I was expected to do six sigma to keep the gig. I refused to do that rubbish. So one of the Indian guys did it for me, because I was teaching all I knew. Two still keep in touch. So I have six sigma qualifications Green Belt I think.

    1. Anthony Stegman

      I worked at Sun Microsystems when Scott McNealy latched onto Welch’s Six Sigma nonsense, along with some other GE management practices. Apparently, McNealy and Welch were golfing buddies. McNealy eventually ran Sun Micro into the ground. just as Welch did with GE.

  6. Louis Fyne

    The GE retail brands, long since parted from GE proper.

    GE Appliances is owned by Haier…but appliances are largely made in Kentucky…for now.
    GE Lighting is owned by a private equity-backed company. If I recall most of the stuff is made outside the US

    1. NotThePilot

      GE-branded adhesives (like silicone caulking) are another one. Not sure if they’re actually imported from Saudi Arabia, but unless the brand has been resold since I last bought a tube, it’s owned by SABIC.

    2. Eric377

      Had a GE model gas oven stove-top bought in about 2008. Still GE at the time. It was really good. Washers and dryers not so good I heard.

    3. Grebo

      I have a GE branded washing machine but the label on the back says it was made by Mabe in Mexico. The main bearing needs replacing.

  7. Michal Palczewski

    The article is written like as we are losing an icon of American something. Mergers usually end badly and spin offs do well. I’m happy to see three smaller companies then one big dinosaur. Hopefully this will happen to GM.

    1. Jeremy Grimm

      General Electric was an icon of “American something”. Thomas Edison was the creative force behind many of the electricity-related companies assembled into General Electric. General Electric and Westinghouse Electric brought electricity to America, electric light bulbs instead of gas lamps. In 1896 General Electric was one of the original 12 companies listed on the newly formed Dow Jones Industrial Average. I believe General Electric was an icon of engineering talent and creativity.

    2. Copeland

      I was starting to wonder of I (and Stoller) was the only one happy to see things that are too big, being broken.

      Now do Amazon

  8. Mikel

    A number of other big companies with.a long history doing spin-offs these days: Merck, IBM, AT&T…
    All of that debt is scaring them now?

  9. Peter Pan

    My father worked for GE from the late 60’s to the early 80’s in a manufacturing management capacity. He interviewed with Jack Welch for a promotion. After the interview he contacted a headhunter to find another job in a different company. He doubled his salary in the new job.

    The primary area of contention revolved around investment in advanced technologies to better meet DOD requirements in manufacturing. My father told me that without those investments it was unlikely that GE would be competitive with other companies of the MIC. The division my father had worked for was eventually sold to Lockheed-Martin.

    1. Jeremy Grimm

      I worked for several months at a GE plant as a job shopper when Neutron Jack was still around. I worked on a Military Industrial Complex project at this plant. It impressed me as highly innovative and extremely promising. I even met one of the chief engineers behind the design. He impressed me as genuinely brilliant. All was going well until GE attempted to invoke a clause in its agreement with the job shops that brought us in. GE tried to take over our contracts and make job shoppers offers to become direct employees in the middle of Winter. As far as I know, most of the job shoppers, including me, immediately posted their resumes and left as quickly as possible. Being a job shopper at that time was a choice most of my co-workers made after becoming very disaffected with direct employment. Most of us had talked with the directs at GE about Neutron Jack’s swashbuckling when his profit directives were not met. Morale was not high. There were indications from an all employees meeting that our project had come under scrutiny and we were all supposed to chip in to pull the oars harder and faster — code for unpaid overtime. That facility became part of Lockheed-Martin roughly half a decade later.

    2. Patrick Morrison

      Right out of college in the mid-80’s, I interviewed with GE for a job in their simulation division in Daytona, FL that was later sold to Lockheed-Martin. I was impressed, though I landed elsewhere. I wonder whether it was the same division your father worked in?

  10. Larry Y

    Would love a younger David Letterman’s reaction to GE’s breakup. Maybe not the most informed take, but his instincts were more right than wrong.

    For those who didn’t grow up on Late Night TV in the US in 1980’s to 2000’s, David Letterman was a late night comedy talk show host on NBC, when GE bought the parent company RCA. He not like his new corporate overlords. The video clips are a bit hard to find, but probably the most dramatic example was when Harvey Pekar is a guest and shows up with a T-shirt supporting a GE strike. It goes off the rails but to Letterman’s credit, the show aired most of it..

    1. drumlin woodchuckles

      Didn’t CEOs first start becoming overpaid as Kennedy and then subsequent Presidents oversaw the cutting of income taxes more and more and more?

      When we were still under the New Deal-Eisenhower tax bracket tables, Boards of Directors would not authorise paying CEOs amounts of money that came under the 90% bracket because that would just be paying 90% of the corporation’s money to taxes. So instead that money staid within the corporation for investment in various aspects of the operation.

      Restoring the Eisenhower era tax laws and rates and schedules might start to bring down the excess salaries of CEOs.

      Or am I wrong?

      1. Richard L Wixom

        Yes, that’s exactly my take. Rather than mere markers for CEO, money is spread around with direct benefits to company, families, and society

  11. NotThePilot

    Count one more person with personal ties to GE; several family members built much or all of their careers at the company. When GE comes up, I sometimes joke with people that “You know how you have medical families, lawyer families, and military families? We’re pretty much a GE family.” I even had some older relatives whose entire retirement savings pretty much consisted of GE shares (people suggested they diversify, but they were too loyal). It’s probably a small mercy they passed on before the dividend dropped to a penny.

    It is really sad to see how it’s come unglued, even if there is perhaps a bit of karma. GE wasn’t immune to stereotypical corporate malice (#1 example I can always think of is all the PCBs they dumped in the Hudson).

    Looking at this from a more hard-nosed, “what now?” perspective though, there’s something I’ve wondered about this break-up. I understand the divisions are by market & that’s how they’re going to split, but is that really the best way? If the whole premise of the plan is to fall back and focus on their manufacturing expertise, isn’t this kind of balkanizing that expertise?

    Does it really make more sense to lump gas turbines with wind turbines and nuclear plants instead of the aviation (jet turbine) division? Even medical might seem like a pretty clean dividing line, until you consider that their diagnostics will rely on a lot of sensor expertise, but so do the controls for all their other products.

    1. Anthony Stegman

      Yes, and Obama should not have an $8 million mansion in Martha’s Vineyard. There is so much injustice in this world.

      1. drumlin woodchuckles

        How do you do that without slaying the non-zombie manufacturing operations they still contain?

        1. BlakeFelix

          It’s a little tricky, but bankruptcy judges can leave profitable businesses running while they sell them off to partially repay bad debts.

  12. Susan the other

    I’ve never thought of Jack Welch as tragic, until now. His comment about how shareholder value was the “dumbest idea in the world” is an eye opener. Letting the shareholders loot the company? Why not, IBG, YBG when the company crashes. Does Warren Buffet have a similar problem? One blurb last week was that he’s got so much money he can’t find enough places to invest it. Clearly Buffet’s money isn’t coming from all those jobs and demand he is creating. Buffet is an apex extractor but he does actually need to reinvest to keep the whole thing rolling along. Maybe with GE it was more direct – an early death by killing demand. How quickly did offshoring kill the consuming economy? A decade maybe? So Welch was doubly ill-fated. He had to contend with shareholder value at the very moment that his race to the bottom killed demand. There otta be a law.

    1. drumlin woodchuckles

      One person owning 10 million shares will think differently about “shareholder value” than ten million people each owning 1 share apiece, probably through retirement plans or whatever.

      And the one person’s thoughts will be cared about, while the ten million other peoples’ thoughts will not even be acknowledged to exist.

  13. Left in Wisconsin

    1. Another disastrous Jack Welch “rule” that gets too little play was that GE should exit any business in which it wasn’t first or second in market share. Obviously, over the long haul this is a divestment strategy, not a growth strategy, or at best means trading businesses that you know a lot about for new acquisitions about which you know much less. Shocking, not, that this did not work out well.

    2. I grew up just outside Schenectady NY, the original GE company town, and the first time union/labor issues cracked my young conscious self was a long strike that took place when I was in 5th grade (1969-70). This was the start of coordinated bargaining by GE’s different (U.S.) unions, and in retrospect was the high point of union power at GE – the end of Boulwarism. Disinvestment in the Schenectady operations began almost immediately afterward and a workforce of 30,000, 45,000 during WW2 (in a city that never had a population of more than 95,000), is down to a couple thousand at best (GE won’t say).

    When a hard-charging young executive named Jack Welch took over as General Electric CEO in 1981, there were 24,000 people working for GE in Schenectady. When he retired in 2001, the company’s stock had exploded, boosting company value from $14 billion to $410 billion, and Welch had gained legendary status as the “Manager of the Century.” And GE’s Schenectady workforce was down to 6,700.

    Some awesome aerial footage of GE’s Schenectady operations from 1940. If one views a current map of the GE “campus,” it now looks like a nature preserve, because almost all the buildings have been torn down, though of course the land is all contaminated, as is a wide swath of upstate NY and western MA where GE employment is mostly gone but the residue of GE will remain forever.

  14. drumlin woodchuckles

    As a mere layman, I do remember once hearing about Jack Welch making ” rank and yank” famous. He then tried to deny that he ever used the phrase or that he ever applied the concept.

    So which one of us is lying to me? My old memory? Or Jack Welch?

    I understand “rank-and-yank” to be “find a way to identify the worst-performing 10% of your employees and fire them or rif them or lay them off. And then do the same thing next year to the remaining employees. And then do the same thing the year after that to the employees remaining after that”. And so on, year by year by year.

    Am I wrong about what ” rank and yank” is?

    Because if I am right, what happens when you get to your last 9 employees? What is 10% of 9 employees?

    1. Tim

      It takes a really clever CEO to be able to anticipate and avoid these hard mathematical problems: by the time the problem could manifest in theory, the business is definitely not first or second anymore in the marketplace, and already divested, so the problem never manifests itself in reality. Clever, no?

      Serious now: I’ve seen “yanked” GE employees set up their own business together with a GE supplier because the supplier lost confidence (in GE, not the yanked employees).

      1. drumlin woodchuckles

        But rank-and-yank was part of what got Welch paid so well, and given such a big retirement sendoff.
        So it worked very well for him. So what does he care if it didn’t work out for GM? Much as he felt he had to pretend otherwise once in retirement.

        There should be an (ironic) Erdogan Award for executives like that. ” I see that GM is like a bus. I get on it and ride it to where I want to go, and then I get off.”

  15. Mickey Hickey

    Around 1990 I was on a Purchasing Management course at the University of Toronto with three managers from GE and others. The picture of the company they painted was frightening. The most concerning was your division has to be number one or a close second in its field or we will get rid of it. The next was the ranking and yanking of groups of employees. They were clearly under enormous pressure and actively looking for a job outside GE. The main models used were Ford and PPG. It was a useful course, but to this day I remember how stressed the GE employees were.

  16. jpr

    Boulwarism gave the world Ronnie Raygun who honed his speaking/sparring skills with visits to industrial plants and “answering” questions from union members after his pep talk (Sarah Palin could have used a similar training regimen, but then she didn’t have his sponge memory either):

    70 years ago, a certain Kurt Vonnegut wrote about those “old boy” days at Schenectady:

  17. Sound of the Suburbs

    What have we missed?
    We have been copying Japan’s mistakes without realising it.
    If you copy Japan’s mistakes, you will end up like Japan.

    In the 1980s, it looked as if Japan would take over the world, but bad financial practices have seen their economy flat-lining ever since.
    Japanese companies found they could make more money from their financial arms (Zai Tech) than they could from their traditional businesses, for a while anyway.
    House prices always go up and their real estate boom would never end, until it did.
    Jusen were nonbank institutions formed in the 1970s by consortia of banks to make household mortgages since banks had mortgage limitations. The shadow banks were just an intermediary put in place to get around regulations.
    Japan has never recovered.

    It’s all there in Japan in the 1980s.

    Japan led the way and everyone followed.
    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
    What Japan does in the 1980s; the US, the UK and Euro-zone do leading up to 2008 and China has done more recently.
    The PBoC saw the financial crisis coming unlike the BoJ, ECB, BoE and the FED.
    It was very late in the day, so the Chinese are still in trouble, as we can see.

    Neoclassical economics is the economics of the Roaring Twenties, the Wall Street Crash and the Great Depression.
    Policymakers sooner or later use the economic growth model of the Roaring Twenties, oblivious to where this is leading.

    What’s wrong with neoclassical economics?
    1) It makes you think you are creating wealth with rising asset prices
    2) Bank credit flows into inflating asset prices.
    3) No one notices the private debt building up in the economy as neoclassical economics doesn’t consider debt.
    4) The banking system and the markets become closely coupled, and as soon as asset prices fall it feeds back into the banking system

    That’s why everyone uses the economic growth model of the Roaring Twenties.
    The money creation of unproductive bank lending makes the economy boom as you head towards a financial crisis and Great Depression.

    The US had done it first in the 1920s, so Japan could study the Great Depression to avoid this fate.
    How did Japan avoid a Great Depression?
    They saved the banks
    How did Japan kill growth and inflation for the next thirty years?
    They left the debt in place and the repayments on that debt killed growth and inflation (Japanification)

    Japan discovered how to avoid a Great Depression and deliver Japanification instead.
    The West copied this solution after 2008 and can’t work out why things haven’t been the same since.

    China’s problems are just beginning.
    They have been using the economic growth model of the Roaring Twenties since 2008.
    They have been pumping up real estate prices with bank credit.
    The money creation of unproductive bank lending made the economy boom.
    No one noticed the private debt building up in the economy as neoclassical economics doesn’t consider debt. Well they did at the last minute
    The banking system and the real estate market have become closely coupled, and if real estate prices fall it will feed back into the banking system

    1. Sound of the Suburbs

      Japanese companies found they could make more money from their financial arms (Zai Tech) than they could from their traditional businesses, for a while anyway.

      What do we find when we look at the data?
      It was actually Japanese corporations that precipitated the Japanese financial crisis in 1991 with all their debt fuelled speculation.
      32 – 34 mins.
      Those that follow MMT will notice the Japanese government was running a surplus as the financial crisis hit.

      This is actually the flow of funds graph central bankers use.
      It is basically the same as the MMT graphs, but the private sector is split into household and corporate sectors.

  18. Cynical Engineer

    I worked for GE for three years starting in 2010. In that time, my division was reorganized three times, going from GE Energy to GE Oil & Gas. The constant organizational changes left everything in an almost permanent state of chaos.

    It was also one of the most toxic places I have ever worked. I started five years after “rank & yank” was officially discontinued, but by that point the the backstabbing and internal conflict was so baked into the corporate culture that it was impossible to avoid.

    Even then, GE’s M.O. was obvious: Use GE stock to buy a company. Cut costs brutally and strip-mine it for money until it started to falter. Sell the desiccated husk off and move on to the next victim. The constant changes made it virtually impossible to compare financial results from year to year and figure out how well GE was really doing. Of course if you looked at the balance sheet, the clue was in the massive debt load that significantly exceeded the assets, leaving nothing for the shareholders.

    And then there was six-sigma. Mandatory four-day training for all engineers. And you had to do a “six-sigma project” to demonstrate that you knew how to apply all the buzzwords to your job. My “instructor” threatened to withhold my certificate after I asked him on the third day to explain to me how I was supposed to apply these vague concepts to writing software, and he couldn’t answer the question.

  19. JimV

    I worked at GE Large Steam Turbine Department Engineering from 1968 to 2003. There were 28,000 employes at the plant (mainly manufacturing workers; the Engineering Department had 2000 engineers). When I left the plant had about 4000 workers, and maybe a hundred engineers.

    My managers when I started had fought in WWII and had a strong identification with the phrase, “loyalty up requires loyalty down.” They knew 10 times as much about turbines as I did. When I left, I knew 10-100 times as much as my managers–which didn’t keep them from cursing me when I burst their bubbles. In the ’70’s I thought I would die at my desk at the age of 70. In 2003 I resigned after completing three last projects. I had to go, for my health.

    Six Sigma and the “Least Effective Person” or “Leper” program were as bad as previous commenters have stated–or worse.

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