GE’s stock price surged by 8% on April 10, 2015 immediately after the announcement of shedding its GE Capital unit hit Wall Street. This announcement is certainly understandable especially when GE capital has so many toxic real estate loans on the books. However, it is not clear about why GE would hang onto some financial units for supporting its industrial business units (wind turbines, jet engines, medical equipment, etc.)
To understand why, we should note that GE’s industrial business units are operating in a highly competitive environment. For example, GE competes with Siemens and many other major players in the wind turbine market. However, GE continues to be the world-leader in the wind turbines business (Figure). What is GE’s success recipe?
As it turns out, GE uses “smart services” to beat its competitors. We have heard about GE’s smart wifi home appliances that can be monitored and controlled by your mobile phones ( http://www.geappliances.com/connected-home-smart-appliances/). However, for industrial products, GE has gone beyond basic connectivity between users and home appliances. Over the last 10 years, GE has developed two types of “smart services” for its industrial products: smart operations and smart maintenance. (See: https://renewables.gepower.com/wind-energy/turbines.html)
First, GE’s smart service can help its machines to operate more effectively. For example, a GE wind turbine can collect data on wind speed, wind direction, and air pressure. Also, this turbine can transmit this information to a nearby computer known as a controller. This controller can analyze the data and use an algorithm to determine if the turbine can generate more power by adjusting the angle of its blades. If it does, then this computer can rotate the turbine’s blade remotely and automatically without human intervention.
Second, GE’s smart service can provide proactive and preventive maintenance. For example, a GE wind turbine can send the data about the status of the operating characteristics of different parts to a nearly computer. Again, the computer can analyze the data and use an algorithm to determine if certain parts should be tightened or loosened or the parts should be swapped with other backup parts that are build-in. If it does, then this computer can execute this proactive maintenance automatically and remotely without human intervention. At the same time, this computer can dispatch engineers that are nearby to conduct preventive maintenance. This way, a GE’s turbine rarely fails.
By offering valuable smart services, GE can charge a price premium for its products and services. To make it easier to sell this bundle of smart products and smart services, smart financing can offer additional value to its customers and GE can earn additional interests.
No wonder GE is keeping its sacred cow. With smart products, smart services, and smart financing, GE is definitely smarter than we think!