Ge lost $200 billion in market value between 2017 and 2018 as it struggled to cut costs and misjudged market changes. Since previous company executives only pursued market share, a large number of departmental orders in recent years have been obtained by sales staff and acquired subsidiaries, and these orders are very weak profits. The company's turnaround depends on whether it can revive its core power business in the short term. To achieve this reversal, CEO Culp must deal with a backlog of $9
General Electric Co. The CEO said that the equipment division had been under pressure in the past due to the pursuit of market share, beating off competitors at extremely low prices and obtaining a large number of low-margin orders.
Ge lost $200 billion in market value between 2017 and 2018 as it struggled to cut costs and misjudged market changes. Since previous company executives only pursued market share, a large number of departmental orders in recent years have been obtained by sales staff and acquired subsidiaries, and these orders are very weak profits. The company's turnaround depends on whether it can revive its core power business in the short term. To achieve this reversal, CEO Culp must deal with a backlog of $92 billion in low-margin orders.
Culp explained that when GE bought French rival Alstom SA's power business in 2015, it came with some low-margin items. In previous quarters, GE has used its cash reserves for some projects to cover expected shortfalls. "There was a belief at the top that getting these orders would be a good thing for GE and its shareholders." But that's not the case.
Ge bought Alstom's power business in 2015 in the biggest industrial deal ever, but the deal initially faltered because of delays, tough conditions compromised by regulators and the poor health of Alstom's assets. Last year, GE wrote down $22 billion in book value. The acquisition of Alstom not only expands the power business, but also allows GE to start building power plants as well as supplying power equipment. Analysts say the power plant business is more complex, has a longer time horizon and is harder to control than equipment manufacturing.
The power business is GE's largest and oldest. However, the division has been battered and eroded by poor management, a pile of bad deals and shifting market demand. The company also has a separate renewable energy division that sells turbines for wind farms and hydroelectric plants.
Since taking over as CEO in October, Culp has spent much of his time on the power business, hoping to make sure salespeople don't easily cut prices to make sales and keep piling up low-margin orders. The company changed its compensation system so that instead of paying sales by volume, sales executives were paid according to profit margins. The company says the new system is working, but the problem can be completely solved in a quarter or two.
At the end of 2018, GE had a total order backlog of $391 billion, a figure that has nearly doubled in just seven years and includes hundreds of orders for jet engines. The power sector has a backlog of $92 billion and lost $872 million in the fourth quarter.
Orders for the power business are piling up, but details are not known due to commercial confidentiality agreements. The backlog includes equipment orders and service contracts, some of which are more than 10 years old. The company registers the backlog as revenue only when the equipment is delivered or the service is completed. Ge said it had reviewed its order backlog, which includes more than 1,000 service and equipment contracts, to assess costs and other risks. The company will continue to review its future portfolio.
Ge Electric has accumulated too much inventory of unsold equipment during the worst downturn in the electricity market in years. Not only did the power sector not make good use of its size to raise prices, but it crushed competitors with extremely low prices to win sales, gaining market share but not making enough profits.
GE is also working on accounting techniques to make its business look better. When upgrading a device for an existing customer, the device upgrade service is included in the service service. The calculation is repeated. In addition, GE changed its profit forecast to become profitable, and the Securities and Exchange Commission and the Justice Department opened investigations into GE's accounting for service agreements.
Analysts expect it will take two to three years for GE to clear the backlog and that the power unit will not return to profitability until 2021. This month, Fitch Ratings cut its outlook on GE's credit rating to negative, citing the company's poor outlook and the need to cut costs, improve project completion and address quality issues. Fitch expects GE's cash flow to be significantly lower than other industrial companies over the next two to three years.
