INTRO: Have you ever heard of a company called GE?
You might not know them by name, but I’m sure you recognize their logo. They’re that company that
makes washers, driers, and refrigerators. But, did you know that they were the world’s largest
company not too long ago? In fact, it was just 13 years ago that they reached the top of the Fortune
500. Yet today, GE can’t even turn a profit. It’s actually been 7 years since they were consistently
profitable. This has forced them to liquidate dozens of subsidaries at rock bottom prices and
reduce their workforce by over a hundred thousand employees. As recent as 2017, GE boasted over
300,000 employees, but today, they only have about 168,000. All of this has caused GE stock
to tumble 85% from their peak shedding nearly $400 billion in market cap. Things have gotten so bad
that GE resorted to doing a reverse stock split of 1 to 8 just last year. And if you weren't already
convinced that GE was getting destroyed, just listen to this. GE was the original member of
the Dow Jones and they have continuously been part of the index since 1907. But, in 2018,
the Dow Jones kicked out GE. I’m not sure if they could’ve been insulted anymore than this. So,
here’s how GE vaporized a multi-hundred billion fortune before a newborn could become a teenager.
HOUSE OF CARDS:
While GE’s fundamental crisis didn’t become evident till the last 10 years,
GE has actually been making bad moves for over 40 years. It all started in 1981 when a man named
Jack Welch became the CEO of the company. Jack came from a rather humble family. His father was
a regular old railroad conductor while his mother was a homemaker. This meant that throughout his
childhood, he worked several odd jobs including being a golf caddie, a newspaper delivery boy,
a shoe salesman, and a drill press operator. And when he joined GE in 1960, he was simply
a junior chemical engineer. Considering this blue collar background, you would think that Jack was
sympathetic to the struggles of everyday Americans and that he would treat his employees really well.
But Jack was actually the exact opposite. He was ruthless, brash, and rather heartless. In fact,
by the time Jack became a well known businessman, most people would call him “Neutron Jack”
because he was like a Neutron bomb. But, wait a minute, what did Jack even do to receive such a
title. Well, he was basically the mastermind behind all of the worst parts of capitalism.
For example, he was the one that popularized the “Rank and yank” policy. This is when you fire the
bottom 10% of your workforce every single year. If this sounds familiar to you, it’s probably
because you’ve heard of Amazon adopting the same policy. While this strategy might sound
reasonable at first glance, it leads to terrible long term performance. Here’s the thing, when
you’re constantly firing the bottom 10% of your workforce, your employees are never able to focus
the big picture, they’re always worried about surviving next year’s cuts. This was especially
true amongst management which led to cooking the books. Now, they didn’t do anything illegal
per se, atleast at the begininng, but they were manipulating the numbers through every loophole
they could find. For example, lets say you were the manager of a department at GE and your goal is
to achieve $1,000,000 in profit this quarter. Last quarter, this department only pulled in $900,000
in profit, so you have to increase profits by roughly 10%. Ideally, you would look for ways
to grow the revenue that your department brought in. But this would take multiple quarters if not
years. So instead, you decide to simply fire ten employees that are being paid a few thousand a
month. This allows your department to beat the vain metric of $1,000,000 in profit. However,
your department is nowhere near as strong as $1 million department should be. And this wasn’t just
happening here and there. It was happening company wide from the top down, and Jack was most infamous
for it. He didn’t bolster the company’s profits by firing people, but he did bolster the companies
balance sheet by firing people. For example, let’s say you want to make a billion dollar acquisition.
You could wait a few years for the company to build up sufficient cash reserves.
Or you could just fire 5% of your workforce and use their payrolls to fund the purchase,
and that’s exactly what Jack did throughout his tenure. Jack was only CEO for 20 years,
but within this time, he made 600 acquisitions. This works out to 30 acquisitions per year or 2.5
acquisitions every single month. Obviously, this is by no means naturally sustainable.
Looking back, it’s obvious why GE eventually got destroyed, but at the time it looked like GE was
crushing it. Given Jack’s strict department wide goals, the company would always beat Wall Street’s
earnings expectations by at least 1 cent per share. On top of this, their assets were growing
exponentially thanks to all of their acquisitions which sent the company’s stock to the moon.
When Jack took over in 1981, the company was only worth $14 billion, but when he left in 2001, it
was worth $410 billion. But, Jack didn’t build a true $410 billion company. What he did was build a
machine that could consistently top Wall Street’s expectations. Also, the company wasn’t filled with
loyal employees who were excited to build up the company. Instead, it was basically filled with
contractors who were good at playing the purging game. This toxic culture was synonymous with GE
by the time Jack left, and though the company was doing well on paper, it was fundamentally
weaker than ever before. And it just took one economic downturn to topple the house of cards.
BUBBLE POP:
By now, I’m sure you’re all familiar with what happened in 2008: The Great Financial Recession.
Now, you might think that GE was relatively safe from this given that they mainly deal with
physical products like appliances. So, while sales could go down, they were in no risk of facing a
real crisis right? Well, this would’ve been the case if GE stuck to their original business,
but Jack had expanded GE into basically every industry you can think of including the financial
industry. The financial subsidiary was called GE Capital and they were the 5th largest lender in
the US. Given what happened to lenders in 2008, this was already a terrible position to be in,
but this was just half the story. You see, while many banks overextended themselves and engaged in
subprime lending, atleast they had deposits. They just lended out these deposits in bad ways. GE,
however, didn’t even have deposits. They borrowed money through commercial papers at low interest
rates and then lended that money to people at higher interest rates. GE even bragged about
being the largest borrower of commercial paper. At the time, they accounted for 4% of all commercial
paper in the US. For perspective, GE’s entire debt load translated to over half a trillion dollars.
Personally, I don’t think this was something to brag about because when the financial crisis hit,
they were screwed on both ends. They couldn’t collect payments from borrowers nor could they pay
off their own debts. And pretty soon, they needed a bailout. Now, I know a lot of you guys love to
criticize the big banks for getting bailouts of $10 to $30 billion, but all of that is nothing in
comparison to what GE got. GE didn’t get a bailout worth $10, $20, or even $50 billion. Their bailout
was worth a disgusting $139 billion. So, if anyone deserves criticism for bailouts, it’s these guys.
This bailout didn’t really help turn around the company either as the company was already rotten
to the core. It basically just ensured that the company didn’t go under in a matter of weeks.
THE RECKONING: Eversince the bailout,
GE has only been on a decline. Regardless of what metric you look at, they’ve literally
only gotten destroyed. Their assets are down from $781 billion to $185 billion. Their cash reserves
are down from $120 billion to $20 billion. Their revenue is down from $150 billion to $75 billion.
And as for their net income, well, it’s not even positive. This isn’t that surprising given that GE
has just been downsizing eversince the bailout. GE has basically sold everything even including
their appliance business. So, if you bought a GE appliance in the past 6 years, it wasn’t even
made by GE themselves. It was actually made by a Chinese company called Haier who has rights to the
GE brand. At this point, GE themselves are only involved in three industries which are aviation,
healthcare, and energy. And GE is planning on spinning these off into 3 different companies
as well. The healthcare spinoff is supposed to take place in early 2023
and the energy spinoff is supposed to take place in early 2024. This means that the original GE
will only be left with the aviation industry. This is honestly quite a shame given how large
GE was just a decade ago. The only good thing that has happened to GE over the past decade is their
debt has also gone down. Their long term debt has decreased from $336 billion to $27 billion.
Similarly, their total liabilities have decreased from $656 billion to $150 billion. While this is
far better than the position that they used to be in, it’s still not all that great. GE’s market cap
currently sits at $80 billion which means that their total liabilities is still nearly twice
their market cap. So, GE still has quite a ways to go. In terms of what GE will look like after
the spinoffs, it’s just even more disappointing. In the past 6 months, GE pulled in total revenue
of $35 billion out of $11.7 billion came from the Aerospace segment. This means that the Aerospace
segment roughly accounts for a third of their business. Given that their market cap is currently
$80 billion, once the healthcare and energy businesses are spun off, their market cap will
be closer to $26 billion. And $26 billion in 2022 is equivalent to just $8 billion 1981 dollars.
When Jack took over in 1981, the company was worth $14 billion which means that in just two years, GE
will be worth less than what they were worth way back in 1981. Now, that’s truly quite a tumble.
RECOVERY:
Despite GE’s terrible current position, some people are hopeful that splitting up and
focusing on just one industry is exactly what GE needs. The aviation industry is still very much
recovering from the pandemic slump, so demand for aircraft should only go up in the coming years.
Not to mention, GE’s other segments are starting to make a turnaround as well. For example,
GE Power is finally profitable again and their focus on renewable energy could pay off big in the
coming decades. Similarly, as supply chain issues finally cool down, GE Healthcare is expected to
boast margins in the high teens. So, it looks like net profitability is actually possible for GE in
the coming years. But, don’t let these short term outlooks fool you. Sure, this could be the bottom
for GE, but it’s not like they’re poised to launch the iPhone or become a leader in AI. Really,
all they’ll be doing is salvaging their existing businesses and finally making them profitable
again. In other words, they’re back to ground zero. Their time at the top isn’t helpful to them
in any way. If anything, it simply burdened them with debt that they’re still trying to pay off.
So, at this point, their chances of recovering to their former glory is just as good as any
other company with their same market cap. In fact, GE’s chances are probably worse because of their
remaining debt and lack of momentum. So, what can we learn from all this? Well, the takeaway
seems to be that the second a company starts to value shareholders over customers, they’ve
initiated their eventual demise. They might end up posting good numbers on paper for year
or even decades. But their fundamentally flawed approach does eventually catch up, and by the time
they realize it, it’s already way too late. So, if you’re a business owner, make sure you don’t put
profits over customers because that’s a surefire way to get screwed, but that’s just what I think.
Do you think GE deserved their downfall? Comment that down below. Also, drop a like if you’re not
a fan of GE’s bailout. And of course, consider checking out our discord community to suggest
future video ideas and consider subscribing to see more questions logically answered.