GE chief upbeat on US manufacturing

Jeff Immelt, General Electric''s chief executive, has spent the past couple of days being pursued around Detroit by Occupy Wall Street protesters angry about the group''s low tax payments.

In a city that is being crippled by its budget deficit, suspicions of tax avoidance are particularly inflammatory, and the fall in GE''s corporate income tax rate to 16 per cent in the first quarter of 2012 will have done nothing to assuage its critics.

Yet Mr Immelt was in Detroit with a message of hope for this and other US manufacturing centres.

 "The sheer competitiveness of the US is better than at any time in the past 25 years," he tells the Financial Times.

Higher productivity, faster innovation, greater flexibility to respond to market changes and "semi-competitive" wages meant US manufacturing could now "compete toe-to-toe with pretty much anybody in the world", he says.

Like the Occupy protesters, GE shareholders have been asking when they will start to see some of the benefits. At $19.49 on Wednesday, the shares are still about half the level of five years ago and just a third of their peak above $60 in 2000, when Mr Immelt''s predecessor Jack Welch was chief executive.

 However, analysts say there are now some signs that the improvements in business performance described by Mr Immelt may start to pay off in terms of shareholder returns.

 Globalisation has transformed GE over the past decade, he argues. For its products, such as aero-engines, power generation turbines, medical equipment and locomotives, the fastest growing markets are in emerging economies. The company has been forced to respond, both by improving the performance of its US operations and by developing more capacity – initially manufacturing but now increasingly research and development as well – in those countries.

 "We are an imperfect global company, but we''re a better global company," says Mr Immelt.

 "When I became CEO [in 2001] we were 70 per cent inside the US, industrially. Now we''re 60 per cent outside the US."

Like other US industrial groups, such as Caterpillar, the earthmoving equipment manufacturer, GE is "hustling harder"and has a "better attitude" to customers than in the past, he says.

"Globalisation makes companies like ours much more competitive," he adds.

"There''s nothing more humbling than when you have to sing for your dinner in every corner of the world ... It is harder to win at Emirates [airline] than it is with an American airline. It just is – it''s an away game."

GE''s first-quarter results last week showed signs that the company was winning more of those games. Strong revenue growth in emerging economies including China, Russia and Latin America helped earnings from the industrial businesses rise by an underlying 10 per cent over the equivalent period of 2011, excluding the effects of acquisitions and disposals.

Since 2010, the rebound in the group''s profits has been driven by GE Capital, its financial services division, which has been recovering after the crisis and accounts for about 44 per cent of earnings. That business was strong again, excluding the effect of disposals, in the first quarter but the upturn in the industrial businesses means growth is now more balanced.

The most encouraging news was that the industrial order intake was up 14 per cent, again excluding acquisitions. While there have been concerns over the health of the world economy, and Europe is weak, demand from industries such as aerospace and energy has generally remained very robust.

In the past six months, GE''s shares have outperformed the US industrial sector and the S&P 500 overall.

To keep that momentum going, Mr Immelt needs to show that he can turn those orders into profits. A squeeze on margins in several areas, including gas turbines and aero-engines, which began last year and continued into the first quarter, was a less welcome sign.

Keith Sherin, chief financial officer, last week said he expected that squeeze to be reversed in the second half of the year, thanks to improving markets, productivity gains and falling R&D costs but analysts still want to see proof. As Barclays Capital, which expects the shares to outperform, puts it: GE remains a "show me" story.

Meanwhile, for all Mr Immelt''s focus on manufacturing, one of the most significant factors for the company this year will be whether GE Capital is allowed by the Federal Reserve to pay a dividend to its parent, which would increase the cash available for distribution to shareholders.

However, regulatory constraints and GE''s self-imposed limit that financial services should be no more than 40 per cent of group earnings mean that the business is not going to be able to drive profits forward as it did before 2008. Shannon O''Callaghan, an analyst at Nomura, argues that the group''s reliance on GE Capital is still "too high".

The recent downgrade of GE''s credit by Moody''s, the rating agency, because GE Capital remained over-reliant on short-term funding, was a reminder of the persistent concerns about that type of business.

Nevertheless, Jeff Sprague of Vertical Research Partners believes that overall GE is "moving in the right direction".

Shifting away from financial services and towards manufacturing "is making a virtue of necessity", he says, but Mr Immelt still deserves credit for realizing this and reinvesting to revitalize the industrial businesses.

Building more successful and more profitable manufacturing operations in a highly competitive global market was always going to be a more arduous task than delivering the rapid growth available in financial services, for the US as a whole as well as for GE, but the evidence is accumulating that it is starting to happen.

The new more positive mood among GE and other US manufacturers can be seen whenever he visits a production line, Mr Immelt says. "The sheer pride and happiness that people have is extraordinary."

Investors are unlikely to feel so euphoric. For GE''s shares to regain the levels of 2000, or even 2007, seems unimaginable. But if Mr Immelt can deliver the plans he has set out, shareholders should be content.

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