Outsourcing production to other countries delivered a one-off cost benefit, says Chip Blankenship, chief executive of GE Appliances, but “we found over time that wasn’t that sustainable a business model”.
decision to bring back to Louisville, Kentucky, hundreds of jobs that had been outsourced to Mexico and China
Reverse the trend started by Boston Capital Group
ELMAT: The same Boston Consulting Group that is at the root cause of hollowing out of the US economy:
What was the measure of “doing better”? The price of the stock. This was a relatively novel concept in 1973, the year Bain & Company got started. As Walter Kiechel III explains in “The Lords of Strategy,” an entertaining history of the Consulting business that has a lot to say about B.C.G. and Bain, stock price was not a useful benchmark of anything in the nineteen-seventies, because the market was stagnant. On November 14, 1972, the Dow stood at 1,000. By 1974, it had fallen to 577, and it didn’t get back to 1,000 until 1982. In the rising market after 1982, though, the idea that the fundamental purpose of a publicly owned business is to make money for its shareholders became a basic tenet of capitalist faith. This is when the idea of launching a private-equity firm became a gleam in Bill Bain’s eye.
newyorker.com
GE takes $1bn risk in bringing jobs home
By Ed Crooks in Louisville, Kentucky
Jeff Immelt, General Electric’s chief executive, says the decision to put $1bn into the group’s domestic appliances business is “as risky an investment as we have ever made”.
He may well be right. The decision to bring back to Louisville, Kentucky, hundreds of jobs that had been outsourced to Mexico and China is emblematic of his strategy for GE. If it fails, it will be hung around his neck forever.
“Reshoring” production is a strategy being tried by many American manufacturers, as rapid wage growth in emerging economies and sluggish pay in the US erodes the labour cost advantage of offshore plants.
The US has added 429,000 factory jobs in the past two years, replacing almost a fifth of the losses during the recession.
For GE, the balance of employment has been shifting away from America, largely as a result of investment overseas and disposals such as the majority stake in NBCUniversal, sold last year. At the end of 2011, 131,000 of its 301,000 staff were based in the US.
Since 2009, though, it has announced plans to create 13,500 new US jobs, 11,000 in manufacturing.
A television advertising campaign boasting that “GE Works” reflects Mr Immelt’s vision for strengthening the group’s industrial operations, including the move away from outsourcing to bring capability in-house. For good or ill, he has made GE a poster child for the US manufacturing renaissance.
The appliances business, which together with lighting accounts for about 6 per cent of GE’s revenues, will present that revival with its fiercest test. North America, the heartland for GE appliances such as refrigerators and water heaters, is a tough market. Total sales dropped about a quarter between 2006 and 2011, according to Electrolux of Sweden, and is expected to grow no more than 3 per cent this year, says Whirlpool of the US.
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GE’s appliances and lighting division made a profit margin of just 3.5 per cent last year, compared to 15 per cent or more for the group’s other industrial businesses. Some of GE’s competitors are still transferring production away from the US.
GE’s Appliance Park in Louisville, which opened in 1953 as the group’s national centre for domestic appliances, has seen better days. Around the 10m sq ft of buildings there are rain-streaked sidings and several boarded-up windows. Yet there are also signs of new life. A giant video screen outside one building shows the purposeful workers inside.
A row of signs on the approach road reads: “Some claim America is in decline. They just haven’t seen what’s coming off our line.”
Inside, the change is even more dramatic. Untouched areas are still jumbled with old equipment, abandoned when production was moved elsewhere. Other parts have been transformed: gleaming with fresh white paint, brightly lit and cooled by huge ceiling fans. Assembly lines are busily turning out products such as water heaters and a new range of refrigerators.
Four years ago, it looked quite possible that Appliance Park would close. Employment had been dwindling, as production shifted to lower-cost plants in South Korea, Mexico and China.
In 2008, Mr Immelt announced that the appliances and lighting division could be sold or spun off. That plan was stymied by the crisis, however, and the company reassessed its strategy.
Outsourcing production to other countries delivered a one-off cost benefit, says Chip Blankenship, chief executive of GE Appliances, but “we found over time that wasn’t that sustainable a business model”.
He adds: “We found we had some extended supply chains, we weren’t as nimble as the marketplace needed us to be, and we started to ask ourselves: is there a better way to run the business?”
Three factors persuaded the group to bring production back to the US, he says: the adoption of “lean” manufacturing and design techniques that made the plant more efficient and took labour content out of production; the move to a two-tier workforce that means new employees are paid $13 per hour compared to $22 per hour for those employed before 2005; and $17m of government incentives.
The decision reflects a shift in international competitiveness. Rising pay in China means that US wages, which were 4.6 times Chinese levels in 2005, adjusted for productivity, will be just 2.3 times by 2015, according to the Boston Consulting Group.
High oil prices, which increase transport costs, make the case more compelling.
As a result, production of water heaters has returned from China, and of refrigerators from Mexico. Production of washing machines is set to be brought back from Asia.
Employment at Appliance Park, which is about 4,100 today, is expected to rise to 5,000 next year.
As Mr Immelt and other GE executives admit, though, the company still has a lot to do to prove that its US manufacturing strategy will work.
Roughly half the appliances sold in the US are imported, according to BCG. Companies such as Samsung and LG of Korea are strong competitors, and most of the other leading brands such as Whirlpool, Electrolux and Maytag have production in low-cost centres.
Whirlpool said last October it was shutting a plant in Arkansas, while Electrolux closed a plant in Iowa. Both moved production to Mexico.
Mr Blankenship says that as production steps up at Appliance Park, “we should feel good by the middle of this year?...?[but] we won’t declare victory”.
Fridges and dishwashers are not central to investors’ hopes for GE, which are pinned more on aero-engines and gas turbines for power generation. Together with lighting, appliances provided only about 1.5 per cent of operating profits last year.
Steven Winoker, an analyst at Sanford Bernstein, suggests that the division could still be sold, in spite of the investment GE has been putting in. “If you’re going to sell it, it’s important to put your best foot forward,” he says.
However, appliances are still, as Mr Blankenship puts it, the “brand ambassadors” for GE.
Speaking recently to the annual meeting of Greater Louisville Inc, the city’s chamber of commerce, Mr Immelt reflected that all the warm feelings about GE’s job creation would count for nothing if he could not sustain a competitive and growing business at Appliance Park.
“In as tough a business as we have in GE, I’m going to work my butt off to make that happen,” he said. “That’s all I can promise you.” |
