GE CFO Jeff Bornstein on the race to the industrial internet
In a follow-up to his interview with Capital Insights in 2015, GE’s CFO tells EY about balancing the company’s portfolio, transforming GE into a digital giant and being a pioneer in the industrial internet
In an interim office in the Fort Point neighborhood of Boston, flanked by development and construction works, the current site of GE’s Boston headquarters is a fitting parallel to how the company has rebuilt itself over the past decade. Helping to lead this transformation has been CFO Jeff Bornstein, a stalwart of the firm, having joined in 1989.
While Bornstein has faced and overcome many challenges during his 27-year tenure with GE, the transformation that the company has been through in recent years has been its greatest test. “GE has been under a significant transformation process for at least the last three to four years; you could argue even the last decade,” he explains. This process has focused on three areas: portfolio management, cultural transformation and digital industrial, or the industrial internet.
From where Bornstein stands today, this hard work is certainly showing dividends. GE’s 2016 second quarter net earnings totaled US$2.7b, delivering US$0.51 of earnings per share with strong performance in power, aviation and health care. Cash to shareholders totaled US$18b for the second quarter year-to-date, with US$13.7b through share buybacks.
Perfecting the portfolio: subtraction
“We set out post crisis with a goal of remaking the company back to our roots—a deep technology industrial company,” Bornstein says. Prior to the 2008 financial crisis, more than half of the company, from an earnings perspective, was financial services. GE set a goal to have 90% or more of the company’s earnings come from the core competencies “that make General Electric, General Electric,” Bornstein explains. “And we’ll be there this year, way ahead of the vision we laid out for our investors.”
This meant carrying out the largest corporate restructuring that has ever been attempted– as it exited multiple parts of its GE Capital business. “We made a commitment on April 10 of 2015 that, in a three-year window, we would reduce the size of GE Capital by almost US$300b and re-establish the purpose of GE Capital. We would do it in an investor-friendly way … [and] the excess capital that was freed up — roughly US$35b — we’d return to shareholders through buybacks.”
Included in that US$300b was GE’s US consumer credit card business, executing the largest equity exchange that’s ever been done and giving it to shareholders in return for GE shares.
When you add the almost US$20b buyback with freed capital, that’s about US$55b in capital returned to shareholders.
“We will largely be done with that restructuring at the end of this year -- about half the time that we told people it would take for us to execute it,” says Bornstein.
No more reliance on GE Appliances
Another major divestment from the GE portfolio was its appliance business. Formed in 1892, Edison General Electric merged with Thomson-Houston Co. and began marketing heating and cooking products 15 years later, marking more than a century of brand equity in the US. “It really didn’t fit in the company anymore,” Bornstein explains. “We weren’t creating real value in our appliance business — it struggled to compete for capital and resources. It really belonged with somebody whose sole purpose was to run the world’s greatest appliance business. That wasn’t us.”
In June, GE closed the sale on its appliance business to China group Haier. This deal was among the company’s most visible divestments, on top of historical deals like the paring of GE Capital and the sale of NBC Universal. “I don’t think the company’s ever had a cleaner-looking portfolio in terms of where we want to be, what we want to invest in long-term.”
Bornstein admits that there will be the odd project that will run into 2017, but the restructure will largely be complete by the end of 2016. GE has also undergone the process to make it the first company to lose its SIFI status (Systematically Important Financial Institution), meaning that the company is no longer regulated by the Federal Reserve. Bornstein hopes that by year-end, after selling GE banks in Europe, it will also have removed the UK’s PRA (Prudential Regulation Authority) requirements from its responsibilities.
“[The restructure] has been a huge execution challenge for the team, and it’s hard to find enough superlatives to describe what they accomplished. Investors and market participants are amazed that we’ve pulled of what we have at the prices and the values that we have – and it is one of the best execution stories in our company’s history.”
Building on a clean slate
The company is now beginning the process of aligning all the remaining pieces of GE with its industrial focus. One of the biggest components in this re-build was the French turbine maker Alstom’s power division. At a price of US$10b, this is the biggest industrial acquisition the company has ever made The deal increases GE’s international reach with the addition of Alstom’s installed base of power generators. “We increased our install base by 50% with the stroke of a pen,” Bornstein says. “Synergies are coming together in our electrical connections business, a combination of Alstom Grid and the elements of the grid business that we had — now we’ve got something that can really stand up and compete.
Printing the future
With its portfolio in good, lean shape, GE announced in September an intention to invest US$1.4b to expand its capabilities in the metal additive manufacturing field. On October 27, the company announced an agreement to acquire a 75% stake in Germany-based Concept Laser and enhanced its tender offer for Sweden-based Arcam.
These particular acquisitions fit into the company’s strategy to upskill in advanced manufacturing, which is as much about software as it is about supply chain. “We are absolutely convinced that when you look out over the next five to 10 years, 3-D printing is going to completely revolutionize how products are made and designed,” explains Bornstein.
“We are big engineers of complex systems in which the physics is really important to driving output and efficiency. But the reality is that today, our limitation is not physics, in terms of the way we talk about building and designing equipment. Our limitation is the manufacturing technology that exists today. We’re at the limits of what traditional manufacturing machines can actually machine, and they do it in a destructive way.”
An example of this “destruction” is in the construction of a high-tech jet engine part. Current processes start with a block of titanium or a metal alloy, which is tooled and cut to leave a component. In contrast, 3-D printing is a constructive process, as only the material needed to print the part is used, minimizing waste. “But just as importantly, the design limitations that existed yesterday, don’t exist anymore,” he says. “If you can imagine it, you can print it.”
With jet engines in mind, Bornstein believes that between 30% to and 50% of a jet engine could be printed rather than using traditional manufacturing methods. This can have a huge impact on supply chain.
“We are building a new engine – it’s a turbo prop engine – and it’s a market that we’ve really not played in. This engine has 900 fewer parts than the engine it replaces, with a very high penetration of 3D-printed parts. There are a lot of examples, but essentially, you could take a part today that is made of 50 components, sub-assembled, designed by 20 engineers with 50 suppliers somewhere in the process, and now, its six engineers designing a part, one supplier – ourselves.”
“It’s going to be massively transformative.” GE has told its investors that if the acquisitions close, new methods including 3D printing can take US$3-5b out of the cost of products over the foreseeable future. Bornstein believes that it’s going to be a much higher figure than that.
Championing a digital industrial future
This rigorous restructure is all about preparing for the future – one which will see the industrial sector meet the internet age, according to Bornstein.
“The consumer internet has massively changed the way that people live their lives and it’s a huge productivity tool,” Bornstein says. “However, the industrial world has not enjoyed any uplift associated with advancements in technologies and software. And part of this is that missing connectedness, the ability to capture data, the ability to do deep machine learning on that data and get differentiated outcomes.” The potential for revenue growth is vast - the consumer internet is about a US$200b market, Bornstein estimates the industrial internet will be valued at multiples of this.
The industrial internet is based on the premise that there is value locked up in machines that could be released to drive higher levels of productivity and efficiency if the machines were connected literally or virtually, which means savings to a company’s bottom line. Achieving this, however, requires sensors and data around how that machine operates, where it operates, and deep analytics around where improvements can be found and changes made.
“We generally operate in very large markets where 1% or 2% improvements can add up to billions of dollars of savings for ourselves and for our customers,” says Bornstein. “The deeper we worked in the field, we realized what was missing was an operating system to provide that universal connectivity.”
So GE produced Predix: a cloud-based operating platform that applications can be built on to collate and analyze machine-grade data at scale and deliver rapid outcomes.
In the lead, but not alone
In order to build out the Predix ecosystem, GE has signed over 200 partnerships with companies such as Microsoft, Oracle, Intel, Cisco, and EY. “We are making a ton of progress,” says Bornstein. “It’s validation that we are on the right track and a lot of these partners see us as leading the way, yet there’s still a lot of work to do.”
Of course, there will always be competitors. “We’re very much focused on asset performance management: that is where we think the value creation is and that is where we are really trying to differentiate,” Bornstein says. “There are people playing in pieces of the puzzle for sure – there are some trying to play more broadly, like an IBM or a Microsoft, but today I think that, at least as it relates to asset performance management, we have the most holistic solution.”
The difference GE can bring to the process is that the company can offer information and deep learning, as well as physically change the asset for greater efficiency. Unlike GE, other companies can’t go in and change the configurations of a jet engine, for example. It is this equation of software, deep analytics, physics and the physical ability to change an asset that puts GE at the front of the race.
GE’s success comes thanks to the talent and skill of its teams, Bornstein explains. “None of this is possible if you don’t have the right skill sets and the right people.” With recent hires from tech giants such as Apple and Google, GE is pooling top talent at its new Boston base and around the world. Part of the appeal of the location change was having the academic resources of MIT and Northeastern University on its doorstep, as well as a strong community of entrepreneurs, start-ups and tech firms. GE has strategically placed itself at the center of business intelligence.
“Part of the attraction for this talent is the mission,” Bornstein says. For GE, the mission is more than just innovating the next social media networking sensation – it is about making real change and achieving fuel efficiencies in a jet engine, for example, that might eliminate the need for coal plants.
“When we talk to people about joining the team and bringing their skill set with them, they are invigorated by how fast we can scale an idea globally across 180 countries in a big way,” he says. “They are attracted by the fact that the mission matters. The mission changes lives. The mission has real consequences for the world. People are intrigued by that.”
With all the divestments, acquisitions, cost savings and revenue boosting that Bornstein has seen over the past few years of GE’s transformation and restructure, he is philosophical when it comes to why it all matters: “At the end of the day, if the end result is not a better outcome than otherwise would have existed, then this is all for naught.”
What is the industrial internet?
The industrial internet is the connection of the world’s industrial sector with computer and data analytics and technology through the internet. GE sees the industrial internet as a game-changer for industrial companies.
Pushing machine data to the enterprise level allows businesses to leverage big data to optimize processes and asset performance. Applying predictive analytics could help to minimize unplanned downtime, increase throughput, improve product quality and drive resource efficiency.
In turn, the industrial internet drives a larger, more socially-aware agenda. With increased productivity and efficiencies, the industrial internet could, for example, reduce carbon footprints and lower dependencies on fossil fuels.
As part of their vision and preparation for the industrial internet, GE is developing Predix – a cloud-based platform for industrial internet application. What the iOS and android platform for mobile telephony, Predix will be for the industrial internet. Predix-based applications will connect industrial assets – collecting and analyzing data and delivering real-time insights for optimizing industrial infrastructure and operations.
EY Capital Insights explores issues vital to a company’s Capital Agenda and how they raise, invest, preserve and optimize capital.