GE: The longest wind-down in history

[TraderTate + 186]

Well, that was a long and painful process. I think the "has it hit the bottom" story on GE has been going on longer than any I've ever heard. Now it's been finally kicked out of the Dow. I guess Wall Street just couldn't let go of one of it's oldest babies, but it's been getting harder and harder to figure out exactly what GE in the realm of energy. Loved the WSJ opinion piece that noted "the company turned out to be a hedge fund masquerading as an industrial giant". 

[Jan van Eck + 7,558]

Yet, the Wall Street Journal writer is not correct.  GE is a classic conglomerate, and to suggest that a conglomerate acts as a gigantic hedge fund is both unfair and unrealistic.  What GE had was the ability to take an industrial segment, such as its locomotive building operations, and inject large amounts of capital into it - capital that would not have been available had the division been a stand-alone corporation.  

Lots of heavy manufacturing is capital intensive.  The locomotive industry was going through a dynamic change, pushed by an implacable EPA and emissions Orders, and by rising fuel costs that were hurting RR income statements. The last time that the locomotive builders had this upheaval was when the diesel-electric driveline replaced steam.  Before then you have the upheaval from coal to oil. That worked well as long as #4 fuel oil was cheap, to use to make steam.  But steam machines had a high labor cost and a high out-of-service rate, due to bearing maintenance and firebox cleaning requirements.  Then along comes the Diesel and you see the steam guys get pushed out.  Now the RRs have to contend with the EPA. 

The GE solution was to mount four smaller diesels on the frame space of the one giant motor of the older machines.  The four diesels each had their own generators, and they could be switched on and off as needed.  So the train would pull from a standing start with all four motors on, then as it got rolling up to speed it could shut off motors to save on fuel burn. And since RR locomotive diesels burn light fuel oil  (#2 diesel), that rapidly amounted to big bucks.  Were the traditional builders able to come up with this, where you have the expensive R&D to figure out how the electrical controllers would be built?  Nope.  But GE had the capital to do the R&D and to build the production line to manufacture that locomotive.  And that, in a nutshell, was the strength of GE. 

So, if GE had that great strength, why is it failing?  In short, terrible, just awful, managers, especially at the top management level.  You have the colossal egotists that show up and actually get hired, who go play "super-star" by bringing their Board of Directors a dizzying array of "deals" where they buy unrelated companies with the fuzzy ideas of reaping huge profits, and a totally stupid Board that actually indulges those ideas, and  pays their super-star vast amounts of money.  Think of it as organized looting of the corporation's assets by a TV reality star.  Sound familiar?

Edited July 4, 2018 by Jan van Eck
wrote "frame space"; typing errors