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G.E. Cuts Jobs as It Navigates a Shifting Energy Market G.E. Cuts Jobs as It Navigates a Shifting Energy Market
(about 5 hours later)
General Electric, whose new leadership is moving to eliminate bloat and grapple with the fallout from earlier, ill-timed decisions, is taking drastic steps to keep pace with seismic shifts in the global energy industry. General Electric is racing to keep pace with seismic shifts in the global energy industry, as its new leadership moves to eliminate bloat and grapples with the fallout from earlier, ill-timed decisions.
The company said on Thursday that it would cut 12,000 jobs in its power division, reducing the size of the unit’s work force by 18 percent as part of a push to compete with international rivals in a saturated natural gas market, adjust to “softening” in the oil and gas sectors and stay abreast of the growing demand for renewable energy. In one of the most visible moves, the company said on Thursday that it would cut 12,000 jobs in its power division, reducing the size of the unit’s work force by 18 percent.
Solar and wind energy technology is increasingly being deployed around the world, in large part because of lower production costs. Renewable energy sources are expected to attract two-thirds of global investment in power plants until 2040 and account for as much as 40 percent of total power generation by then, according to the International Energy Agency. The announcement is an acknowledgement that the company has not been properly positioned for where the energy market is headed. Oil and natural gas markets are dealing with a glut of supply and companies like General Electric have been forced to cut prices on their services. The long-term demand for renewable energy is growing globally, even as the American political climate damps its short-term prospects. And G.E. faces a raft of competition from international rivals in all those areas.
In much of the world, more coal is being burned and shipped this year compared with 2016. Still, long-term trends favor renewable sources and natural gas in developed and developing countries. Over time, natural gas will probably be pushed from a primary role to a supporting, balancing one as alternative energy rises in prominence. Just look at the company’s business for the big turbines at the heart of electricity-generating plants. Although more coal is being burned and shipped this year in much of the world, the trends favor renewable sources, where production costs are rapidly falling. Fewer coal and gas-fired power plants are being built, leaving more companies fighting over fewer projects. The result: G.E. is sitting on a pile of excess inventory.
Amid the changes in production, demand for power is increasing at a slower pace as appliances and commercial buildings become more energy efficient. The global forces are roiling many big conglomerates that have long served the industry. Siemens, G.E.’s main rival, said last month that it would cut 6,900 jobs worldwide in units focused on power plant technology, generators and large electrical motors. “The power generation industry is experiencing disruption of unprecedented scope and speed,” Siemens said in a statement at the time.
The shifting dynamics are roiling the huge conglomerates that serve the industry. Siemens, G.E.’s main rival, said last month that it was cutting 6,900 jobs worldwide in units focused on power plant technology, generators and large electrical motors. In making the announcement, Siemens said that “the power generation industry is experiencing disruption of unprecedented scope and speed.” G.E. and its new chief executive, John L. Flannery, have been under pressure broadly to remake the company. The company’s stock has plunged more than 40 percent this year, the worst performance by far on the Dow Jones industrial average. The company reported a steep decline in profit for the third quarter.
The G.E. employees losing their jobs work in production and professional roles. They will notified about whether they are being let go over the next 18 months. About half are based in Europe. Last month, Mr. Flannery announced plans for a slimmer, more focused G.E. concentrated on three core businesses — energy, healthcare and aviation. The move is a departure from the empire-building amibitions of past chief executives who sought to create a vast conglomerate across disparate industries.
G.E. said the cuts would help it save $1 billion as it moves to reduce costs by $3.5 billion this year and next across its vast businesses. As part of the overhaul, Mr. Flannery has demanded more financial discipline, with plans to shed nearly $20 billion in assets in the coming years, including some that reach back to the days of its founder, Thomas Edison, like light bulbs and railroad locomotives. The company also cut its dividend for only the second time since the Great Depression.
“This decision was painful but necessary for GE Power to respond to the disruption in the power market,” Russell Stokes, the head of the company’s power division, said in a statement. “We expect market challenges to continue, but this plan will position us for 2019 and beyond.” Mr. Flannery, who took over in August, has called 2018 a “reset year.”
Although G.E. estimates that its equipment generates more than 30 percent of the world’s electricity, analysts at Stifel wrote in a note to clients on Thursday that a streamlining of the power division was “long overdue” and an “obvious next step” to improve the company’s cash flow and profit margins. “Flannery’s moves are the obvious, basic ones that he needs to play to turn G.E. around,” said Robert McCarthy, an analyst at the research firm Stifel. “If this doesn’t work, it could presage a larger break-up of the company.”
“GE Power is right-sizing the business for these realities,” the Stifel analysts wrote. The company, in part, is paying for past mistakes.
John Flannery, G.E.’s new chief executive, has called 2018 a “reset year” for a company that has ballooned into an enormous enterprise with stakes in medical-imaging equipment, jet engines and other sectors.
Investors have criticized G.E. for overspending, and its financial standing has suffered. The company’s stock has plunged more than 40 percent this year, the worst performance by far on the Dow Jones industrial average. Last month, G.E. said it would cut its dividend for the second time since the Great Depression.
Mr. Flannery had said he was “deeply disappointed” by the company’s third-quarter results, which were announced in October and showed a steep decline in profits and a less optimistic outlook for the year.
G.E.’s oil and gas business, which the company tried to expand just as oil prices sank, has weighed down earnings. But the power division’s poor performance was an especially nasty surprise.
G.E. is at the forefront of gas turbine technology and has a new line of large power generators that can each produce enough power for 500,000 households. But the company misjudged the market for smaller and replacement equipment and found itself with a pile of excess inventory as renewable power sources and energy conservation programs ate away at demand for gas turbines.
Two years ago, G.E. spent $13.5 billion to buy the power division of Alstom, a French company. The unit, G.E.’s largest industrial acquisition at the time, has since then “clearly performed below our expectations” and offered only single-digit returns, Mr. Flannery told investors in a conference call last month.Two years ago, G.E. spent $13.5 billion to buy the power division of Alstom, a French company. The unit, G.E.’s largest industrial acquisition at the time, has since then “clearly performed below our expectations” and offered only single-digit returns, Mr. Flannery told investors in a conference call last month.
But, he added, the Alstom unit “is also an asset that has a 20, 30, 40-year life to it.” But the Alstom unit “is also an asset that has a 20-, 30-, 40-year life to it,” said Mr. Flannery, who helped negotiate the acquisition.
G.E. also recently merged its oil-and-gas unit with a fellow services provider, Baker Hughes, to strengthen the business during the worst slump in the industry in more than two decades.
Now, Baker Hughes is underperforming rivals. And analysts said that G.E. may be looking for ways to exit the marriage.
G.E. is at the forefront of gas turbine technology and has a new line of large power generators that can each produce enough energy for 500,000 households. But the company misjudged the market for smaller and replacement equipment. Mr. Flannery told investors that the company had exacerbated a tough market situation “with some really poor execution.”
Russell Stokes, the head of the company’s power division, has told investors that he planned to cut back the division’s capital expenditures next year to nearly half its current level. His team, he said, will be “sweating every dollar.”
“There’s no doubt that the market has been soft, but they’re not telling every side of the story — that clearly there have been bad decisions made at the organization and about how they were going to market in select businesses,” Mr. McCarthy of Stifel said.
General Electric is also trying to navigate the energy future.
By 2024, solar and wind energy technology is expected to attract two-thirds of global investment in power plants and account for as much as 40 percent of total power generation by then, according to the International Energy Agency. As such renewables take hold, natural gas is likley to be pushed from a primary role to a supporting role when the wind does not blow and the sun does not shine.
G.E. has carved out a space in renewable energy, producing wind turbines. But it faces significant price pressure from competitors, particuarly in China.
All the while, demand for power is rising more slowly than in the past, owing to the improved efficiencies of appliances and commercial buildings increasingly engineered to save electricity. Power demand growth in China, for instance, has slowed to less than 2 percent a year since 2012 from 8 percent a year from 2000 to 2012.
G.E. said the job cuts in the power business would help it save $1 billion as it moved to reduce costs by $3.5 billion this year and next. The employees losing their jobs work in production and professional roles. About half are based in Europe.
“This decision was painful but necessary for GE Power to respond to the disruption in the power market,” said Mr. Stokes. “We expect market challenges to continue, but this plan will position us for 2019 and beyond.”