Beatrice Lang
General Electric (GE) is a company with a rich history that traces back to the late 19th century. However, the company has faced challenges and criticism in recent years, leading to questions about its proficiency in certain areas. GE's troubles became particularly evident during and after the financial crisis, with some of its business decisions, such as the $9.5 billion purchase of Alstom's power business, being considered flops. In 2018, GE Power drew attention due to issues with a gas turbine in Texas, and the company has also faced accusations of accounting fraud. These events have raised concerns about GE's management and decision-making abilities, suggesting that the company may need to address certain deficiencies to regain its standing.
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What You'll Learn
- Poor crisis management: GE's response to the turbine blade issue was ineffective
- Financial mismanagement: GE has been accused of accounting fraud and poor investment decisions
- Lack of innovation: GE failed to adapt and innovate, leading to its decline
- Ineffective leadership: Leadership decisions, such as the Alstom acquisition, were questioned
- Strategic missteps: Divestments and spinoffs may not have been well-thought-out
Poor crisis management: GE's response to the turbine blade issue was ineffective
In 2015, a GE 9FB turbine blade broke at an undisclosed power plant. This technology is similar to that of the HA turbine, which broke in Texas in 2018. Initially, GE did not realize that the turbine blade issue would impact the new HA units. After the 2015 incident, GE developed new protective coatings and heat treatment methods to address the issue.
Despite GE's efforts, there have been several subsequent incidents of turbine blade failures involving the Cypress platform, including breakages at wind farms in Germany, Sweden, Lithuania, and the US. These incidents have prompted anger and concern from local communities and developers, who are holding GE accountable for the failures.
In response to the turbine blade issue, GE has advised buyers of its power turbines to switch out faulty blades and has set aside $480 million for repairs and warranty claims. GE has also stated that it is executing a plan to fix the issue and that customer feedback has been positive. However, the need to scale back the use of GE turbines to implement fixes threatens the revenue streams of power plants that rely on them.
While GE has taken steps to address the technical aspects of the turbine blade issue, their crisis management has been ineffective in mitigating the impact on their business and stakeholders. The company's initial lack of realization of the scope of the problem and failure to prevent subsequent incidents have led to negative consequences, including public anger, reduced share price, and potential revenue losses for GE and its customers.
To improve its crisis management, GE could consider implementing more proactive measures to identify and address potential issues with its turbine blades before they lead to failures. Enhancing communication and transparency with customers and the public could also help to better manage expectations and maintain trust during challenging times. By learning from these experiences, GE can strengthen its ability to effectively navigate future crises and maintain its position as a leading provider of turbine technology.
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Financial mismanagement: GE has been accused of accounting fraud and poor investment decisions
General Electric (GE) has faced a number of financial challenges and has been accused of accounting fraud and making poor investment decisions.
In 2019, financial fraud investigator Harry Markopolos, known for exposing Bernie Madoff's Ponzi scheme, accused GE of being "a bigger fraud than Enron," alleging $38 billion in accounting fraud. Markopolos claimed that GE had a "long history" of accounting fraud, dating back to 1995, and that the company was hiding the depths of its financial problems. He alleged that GE was only providing top-line revenue and bottom-line profits for its business units, omitting crucial details such as the cost of goods sold, SG&A, R&D, and corporate overhead allocations. Markopolos' report led to a significant drop in GE's share price, the biggest fall in over a decade.
GE has also faced scrutiny from the Securities and Exchange Commission (SEC) for its financial practices. In 2009, GE paid a $50 million penalty to settle an SEC accounting probe that alleged the company used improper accounting methods to inflate its earnings and avoid reporting negative financial results. The SEC cited four instances of these improper practices occurring in 2002-2003. Additionally, in 2020, GE paid a $200 million penalty to the SEC for disclosure violations in its power and insurance businesses. The SEC found that GE misled investors by not providing a complete picture of its profitability and failing to disclose the impact of its actions on future cash collections.
Poor investment decisions have also contributed to GE's financial troubles. One notable example is the company's $9.5 billion purchase of French transportation company Alstom's power business in 2015, which was considered a flop by many, including former GE CEO John L. Flannery. GE's decision to reduce its stake in Baker Hughes, a GE company, in 2018 and 2019 also drew attention. While GE initially acquired a significant stake in Baker Hughes through a merger in 2017, it reduced its stake to 50.4% in 2018 and further down to 36.8% in 2019, leading to a renaming of the company back to Baker Hughes.
In summary, GE has faced accusations of accounting fraud, with allegations of improper practices and misleading investors, resulting in significant penalties and negative impacts on its share price. The company has also been criticized for poor investment decisions, such as the Alstom acquisition and the handling of its stake in Baker Hughes. These financial missteps have contributed to GE's well-publicized decline and have had repercussions for the company's performance and reputation.
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Lack of innovation: GE failed to adapt and innovate, leading to its decline
General Electric (GE) has been a powerhouse for over a century, but even giants can stumble. GE's decline has been attributed to a variety of factors, one of the most prominent being a lack of innovation. This once-dominant company failed to adapt to changing market demands and consumer needs, causing it to fall behind its competitors.
GE's power business, which began in 1882 with the construction of America's first commercial power plant, has been a significant area of concern. Despite previously dominating the market for electricity generation equipment, accounting for nearly 30% of the market as recently as 2015, GE failed to anticipate and respond to shifts in the energy sector. While the company continued to focus on traditional power sources, the world was moving towards lower-carbon energy solutions. This shift left GE with a product that was becoming less desirable in the market.
GE's reluctance to embrace new technologies and business models is evident in its response to changing consumer preferences. The company was slow to recognize the potential of digital disruption in its core businesses, particularly in the entertainment industry. For instance, GE's decision to stick to traditional in-store movie and video game rentals contributed to the downfall of Blockbuster, as competitors like Netflix capitalized on the growing demand for online streaming services.
Additionally, GE has been criticized for investing heavily in areas that are becoming less relevant to modern consumers. For example, GE's focus on improving gas turbines, which generate a significant portion of its revenue, may not align with the increasing focus on decarbonization and renewable energy sources. While GE has made strides in wind and electrification businesses with GE Vernova, these efforts may have come too late to recapture their lost market dominance.
The decline of GE serves as a cautionary tale for businesses worldwide. In today's rapidly changing business landscape, driven by technological advancements, innovation is crucial. Companies that fail to adapt and innovate risk being left behind, while those that embrace change and explore new possibilities will be better positioned to thrive in a dynamic market environment.
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Ineffective leadership: Leadership decisions, such as the Alstom acquisition, were questioned
In 2014, General Electric (GE) acquired Alstom's power and grid divisions for $17 billion (€12.4 billion). This decision was questioned and scrutinized by French regulators, who considered the business a strategically important domestic industry. GE faced heavy scrutiny and was compelled to make several concessions to secure approval for the deal.
Alstom, a French multinational rolling stock manufacturer, had a history of financial difficulties and incurred significant costs due to design flaws and losses in other sectors. GE's acquisition of Alstom's power and grid divisions was likely questioned due to the challenges Alstom was facing at the time.
Additionally, Alstom had come under investigation by the United States Department of Justice (DOJ) for violating the 1977 Foreign Corrupt Practices Act. This investigation resulted in a $772 million fine for Alstom in 2014, and the company admitted guilt under the Act. Alstom's senior executive, Frédéric Pierucci, was also arrested and imprisoned for 14 months in relation to the investigation. GE's decision to acquire Alstom may have been questioned due to the ongoing investigation and the potential risks associated with Alstom's practices.
Furthermore, the Alstom acquisition was likely questioned due to its potential impact on competition in the rail industry. Alstom and Siemens, Europe's largest suppliers in the rail market, had planned to merge, creating a single 'European champion'. However, this merger was blocked by the European Commission in February 2019 as it would have harmed competition in markets for railway signalling systems and very high-speed trains. The potential anti-competitive effects of the merger may have raised questions about GE's acquisition of Alstom's divisions and its impact on market competition.
Overall, the leadership decisions of GE, particularly regarding the Alstom acquisition, faced scrutiny and criticism due to the financial and legal challenges faced by Alstom, as well as the potential impact on competition and the importance of the industry to France.
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Strategic missteps: Divestments and spinoffs may not have been well-thought-out
General Electric's strategic missteps can be attributed to a series of divestments and spinoffs that may not have been well-thought-out. Over two decades, beginning in 1981 under former chemical engineer Jack Welch, GE acquired RCA and NBC and expanded into the financial services sector. Welch aggressively moved to streamline GE, divesting 117 business units and cutting more than a quarter of the company's jobs. This earned him the nickname "Neutron Jack", suggesting that employees were eliminated while physical assets were spared.
In 2017, GE announced the sale of its Industrial Solutions Business to ABB, and in 2018, it reduced its stake in Baker Hughes, an oil services firm, from 50.4% to 36.8%. This effectively broke up the 126-year-old conglomerate, once a symbol of American business power. In 2019, GE sold its distributed power unit for $3.25 billion and agreed to shed its transportation unit, which manufactures railroad locomotives.
The decision to divest was part of a year-long strategic review, with GE pledging to become a simpler and stronger company that boosts growth, operating profits, and shareholder returns. However, critics argue that Welch's use of aggressive financial targets to assess executive performance led to a focus on short-term results. This, in turn, may have contributed to GE's reputation and stock price damage, as the company became known for "managing" its reported earnings by adjusting its accounting to beat Wall Street's consensus earnings estimates.
In 2024, GE split into three independent entities: GE Healthcare, GE Aerospace, and GE Vernova (energy). This move reflected a strategic shift in the corporate world toward specialization, allowing each company to focus on its core strengths and growth opportunities. While the spinoffs may have been necessary, the process of breaking up the conglomerate may not have been optimally executed, as evidenced by the impact on GE's reputation and stock price.
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Frequently asked questions
One of General Electric's biggest failures was its $9.5 billion purchase of French transportation company Alstom’s power business in 2015, which was considered a flop.
In 2018, GE Power attracted press attention when a model 7HA gas turbine in Texas was shut down for two months due to a broken turbine blade. This impacted several utility companies in the United States, as well as Chubu Electric of Japan and Électricité de France.
Yes, in 2019, financial fraud investigator Harry Markopolos accused General Electric of being a "bigger fraud than Enron," alleging $38 billion in accounting fraud.
