Those who fear total domination by all-powerful conglomerates should examine the sorry fate of General Electric (NYSE: GE). This historic titan of American industry is slowly dying before our eyes.
GE’s stock was trading at $14.12 a share on July 10, 2018. The pathetic share price came as the company was desperately selling off assets to raise funds and avoid collapse.
General Electric is planning to spin off its healthcare division, sell its oil and gas services assets to Baker Hughes, and fold its locomotive division into Wabtec. Those are simply the latest in a serious of panicked moves.
Other drastic downsizing at GE in recent years included moving the HQ to Boson, and selling off its appliance division. The company is desperate to cut costs, and obsessed with austerity a sure sign of a dying corporation.
GE shows why we should not Fear Big Tech
This should be a lesson for those who are paranoid about all-powerful technology companies dominating our lives. General Electric was once the subject of the same type of hysterical fears now directed at Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG).
Kurt Vonnegut Jr.’s disturbing dystopian novel Player Piano was inspired by General Electric. Vonnegut reportedly wrote the story of machines replacing all human labor while working in public relations at GE headquarters.
Today all GE is inspiring is pity and contempt. The company is a pale shadow of the corporate behemoth and technological powerhouse critics like Vonnegut feared.
General Electric and the Death of the Old American Economy
General Electric’s problems stem from its roots in the Old American economy. That economy is slowly dying and taking companies like GE with it.
The Old American Economy was centralized, driven by industry, focused on natural resources, and rooted in physical assets. The New American Economy is decentralized, driven by information, focused on data, and rooted in digital assets.
This does not mean industry has disappeared. Instead, industry will become automated, digitalized, and information driven. Information technology will become interconnected with physical assets, and more focused on real-world results.
The current management at GE seems to realize this. Their new focus is going to be on energy production and aviation. Those fields are technology-driven and heavily reliant on data.
Is GE Making Money?
General Electric’s real problem is that it has become very hard to make money in the old economy.
GE reported a loss of -$1.84 billion for 1st Quarter 2018, despite revenues of $28.66 billion. The loss occurred even though the revenues grew by 6.62% on a year-to-year basis and generated an operating income of $2.179 billion.
Some things are improving at General Electric; the loss was down from 4th Quarter 2017 when GE lost $9.462 billion. The operating income was far improved -$11.279 billion reported in December 2017.
General Electric is apparently on the verge of making money again. It reported a gross profit of $6.504 billion on March 31, 2018. There are still problems at GE such as a free cash flow of just $97 million despite an operating cash flow of $1.39 billion.
There’s a serious lack of cash and a mountain of debt at GE. The company reported $125.836 billion in debt and no cash and equivalents on March 31, 2018. That’s disturbing because GE had $39.854 billion in cash and equivalents as recently ad September 2017.
Will Amazon and Apple End up like GE?
The situation at General Electric should give tech investors pause because GE was America’s original technology company. It was founded by no less than Thomas Edison back in 1892.
Disturbingly, tech companies like Apple (NASDAQ: AAPL), Alphabet (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN) are emulating GE. Those titans are trying to create bureaucratic centralized infrastructures and dominate the whole production process as GE did.
Amazon in particular is trying to follow General Electric’s model of being both a technology and entertainment company. In its heyday, GE owned NBC, manufactured appliances, and helped build nuclear weapons.
Like General Electric, Amazon is trying to offer a wide variety of consumer products. General Electric once produced everything from TV sets to record players to washing machines. Amazon is trying to offer everything from clothing to home entertainment systems.
Is General Electric Silicon Valley’s Future?
Another intriguing similarity is Amazon’s forays into heavy industry, research, and government contracting. General Electric was once a major government contractor building everything from jet engines to nuclear weapons.
It also spent vast amounts on research. The company far-sightedly, pioneered automation and radio, and helped bring television to America.
The Everything Store is a major government contractor through Amazon Web Services (AWS). Amazon is also spending heavily on cutting-edge research into robotics, artificial intelligence, and automation.
Investors will wonder if today’s tech titans like Jeff Bezos and Elon Musk are building bureaucratic empires that are doomed to failure. General Electric started on the cutting-edge of innovation and ended up as mess of red tape, bureaucracy and micromanagement.
The General Electric story teaches that long-term investors might be better off with specialist tech companies like NVDIA (NASDAQ: NVDIA). NVDIA concentrates on chip making and leaves research to everybody else. Or with more decentralized organizations like Berkshire Hathaway (NYSE: BRK.B) or Alphabet (NASDAQ: GOOGL).
Alphabet and Berkshire Hathaway operate more like investment banks than conglomerates. Berkshire simply owns companies, and ignores management. Alphabet puts up the money for R&D and leaves the management to others.
Such models might be as profitable as centralization but they do a better job of mitigating risks. The financial model is more decentralized which can be more resilient.
Stay away from General Electric
The moral of the story is to stay away from GE for the foreseeable future. This company has not demonstrated it can turn around or fix its problems.
Everything at GE including the cash dividend of 12¢ scheduled for payout on July 25, 2018, is in doubt. There is only risk for investors at General Electric right now so stay away.
Historical Highlights of General Electric
America’s original technology company has a storied history. Some highlights of the GE story include:
- General Electric was founded as an effort to commercialize Thomas Edison’s inventions.
- Back in 1889 J.P. Morgan, and his partner Anthony Drexel merged two companies dedicated to marketing Edison’s technology into General Electric.
- General Electric was part of the original Dow Jones Industrial Average back in 1896. It has remained part of the Dow ever since.
- General Electric brought radio to America by forming the Radio Corporation of America (RCA).
- RCA and GE founded NBC as two radio networks in the 1920s.
- General Electric divested itself of RCA and NBC in 1930 to avoid antitrust laws.
- General Electric built America’s first jet engine during World War II.
General Electric pioneered Computers
- General Electric made one of the first television broadcasts in Schenectady, New York, in 1928.
- General Electric reacquired NBC and RCA in 1986. NBC was later sold to Comcast in 2013.
- General Electric was once a leader in computer technology. During the 1950s it was the largest American user of computers beside the federal government.
- GE was the first private company to own a computer at its Appliance Park industrial campus in Kentucky.
- General Electric got out of computer manufacturing in 1970 when it sold its computer division to Honeywell.
- General Electric is a major manufacturer of wind turbines.
- General Electric (NYSE: GE) is the only company on today’s Dow Industrial Average that was included on the 1896 original Dow.
- GE was the worst performing stock on the Dow in 2018.
General Electric’s Controversial Past
- General Electric helped transform Ronald Reagan from a second-tier Hollywood star into an influential figure.
- Reagan first achieved national prominence as a GE spokesman and TV host in the 1950s.
- General Electric designed the nuclear reactors used at Japan’s Fukushima Daischi Nuclear Power Plant. The meltdown of those reactors following a tsunami helped discredit nuclear fission in 2011.
- General Electric announced plans to sell its industrial solutions business to robot maker ABB (NYSE: ABB) in 2nd Quarter 2018.
- General Electric’s finance arm; GE Capital once owned the famed retailer Montgomery Ward.
- It was GE Capital’s decision to stop financing Montgomery Ward that caused that brand’s demise in 2001.
Not even General Electric’s rich history can protect the company from the America’s transition to a new economy. That is an important lesson every value investor needs to take to heart.