To GE or not to GE

By Peter Pham - July 20, 2012 | Tickers: KO, GE, TM | 0 Comments

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General Electric (NYSE: GE), unlike its other western counterparts, which are focusing on fast-growing economies like China and India, is shifting its focus to resource-rich countries like Canada, Australia, and Mongolia. GE expects its revenue in resource-rich countries will rise as much as 25% for the next two years, compared with 10% to 15% in the fast-growing economies of China, India, and Southeast Asia.

Betting on Commodity Shortages

GE’s plan involves the understanding that commodity prices have to rise to meet the growing demand coming out of Asia, Africa, and South America, populations that are enormous in comparison to the developed markets of North America and Europe.  By diversifying into resource extraction, this will hasten the development cycle in the emerging countries without having to deal directly in the hassle of the commodity extraction itself.  As those economies create their middle classes then GE will be there to sell them power generation, health care equipment, and other infrastructure equipment. 

Kinda like vertically-integrating the process of nation-building. 

The strategy is definitely working.  Australia now accounts for nearly $6 billion of GE’s revenue, slightly more than China, and those proportions are expected to continue through 2012, as revenue growth in Australia is faster than it is in China. Revenues in Russia doubled in 2011 and rose by nearly 40% in Canada. 

Building on this strategy of targeting resource-rich countries, GE has entered into an agreement to acquire 100% of Australia-based Industrea Limited, a provider of safety and productivity-enhancing mining equipment and services.  The company is in the process of acquiring Fairchild International, an underground mining equipment manufacturer located in Glen Lyn, Virginia. The agreements with theses two companies will immensely improve its exposure to the mining sector.

The Power to Move Markets

GE is so big it really can be considered its own economy, a company so big one might as well look at its lobbyists as their version of the State Department.  So it should come as no surprise that where U.S. foreign policy goes, GE is right behind.  The recent lifting of sanctions against Myanmar was accompanied by a press release, as it became the first American firm to sign a business deal worth about $2 million in Myanmar to provide medical equipment to a pair of hospitals in the country. 

As Secretary Clinton moved around ASEAN recently, GE (and others, like Coca-Cola (NYSE: KO), which had been laying the groundwork for expansion into Myanmar for months) was in lock-step behind her, announcing deals in Vietnam as well. 

GE knows, like many U.S. multinationals, that growth is not going to come to the U.S. anytime soon.  The advent of cheap natural gas, while a boon to the U.S. eventually, will not be able to make an impact in the short term.   To counteract this, they have to go overseas.  GE’s plan is for 65% of total industrial revenue to come from outside the U.S. by 2020, up from about 59% currently. GE will invest $900 million in turkey, producing wind turbines. $40 billion will be spent in Vietnam, Indonesia, and Malaysia in the next 3-5 years developing oil and gas resources in those countries. 

Recently, GE alone won a $150 million contract to supply technology to Malaysia’s Petronas, as well as to upgrade the traffic control systems for Malaysia’s discount airline, AirAsia. 

While China has been a source of frustration, GE is finally learning to play the game of putting the money on the ground there if they want to grow past a certain point.  China has been adamant about embracing companies that invest more than just their manufacturing plants locally.  They want the supply chain and the labor force up and down it trained and sourced locally. 

Powering the World

GE’s lighting division has conveniently unveiled their LED replacement for the 100 watt incandescent bulb, recently made illegal in the U.S.  It also plans to spend an additional $70 million to expand its advanced battery factory in upstate New York, an expansion that is expected to effectively double production at the plant. The Durathon battery is an intriguing Na/Na+ battery that has serious industrial capabilities but not for providing burst power.  Storing tons of energy and releasing it steadily, however, is its strong point for applications such as cell towers and vehicles that require the high torque of an electric motor but don't need the acceleration of a highway capable automobile.  Though, of course, no one would accuse the Toyota (NYSE: TM) Prius of being particularly peppy.  The projected annual production capacity of the battery plant is about one gigawatt hour, which will be enough to power 1,000 typical American homes for a month. 

GE first-quarter profit fell by 12%, although this beats analyst estimates when some one-time items are excluded. For the first quarter, GE reported earnings of $3.03 billion, or 29 cents per share, against $3.4 million, or 31 cents per share, in 2011. Revenue slipped 8% to $35.2 billion. Profit increased by 10% in energy infrastructure, its largest industrial business by revenue. Profit also rose 48% in its transportation segment, 10% in health care, and 2% in aviation, while profit fell 11% in its home and business solutions segment. GE Capital reported a profit increase of 6%.  A long term focus on supplying the foundations for future growth, as well as nearly unprecedented access to the halls of power, make GE a hard company to bet against. 

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