“Any Cost” is Too High

an interview with Thomas O’Boyle

Thomas F. O’Boyle is the author of At Any Cost: Jack Welch, General Electric and the Pursuit of Profit. He has been writing about business and management issues since 1979. He covered U.S., European and Asian industrial corporations for 11 years at the Wall Street Journal. He is currently an assistant managing editor at the Pittsburgh Post-Gazette.

Multinational Monitor: What led you to write the book, At Any Cost?

Thomas O’Boyle: I felt pretty strongly that another side of the General Electric (GE) story needed to be told. GE in a financial sense and in the sense of pleasing Wall Street has been a great company. There’s no denying that. But I felt that the societal cost of their greatness had to be examined in terms of what [CEO Jack] Welch has done to society in the getting of the numbers, whether it be environmental issues, the persistence of layoffs or other manifestations of what they’ve done. I felt there was another paradigm under which you could examine the company.

MM: How did GE respond to the book?

O’Boyle: They didn’t really. They were fairly clever in how they chose not to respond to it.

Before publication, they were very adversarial, as they always are in their dealings with the media. They got a copy of the book proposal through channels that to this day are not clear to me, and they used the thesis as described in the book proposal to pepper me with threats. I must have gotten about a dozen letters that were threatening in nature from GE over the six years of writing the book.

Once the book was published, they laid low. They knew that on some level they had won in that the book did not get the kind of publicity that it might have gotten.

MM: Why is Jack Welch viewed as the most successful corporate executive in the country?

O’Boyle: I think he’s viewed that way mainly because he’s been CEO at a time when we are adulating CEOs to an extent that’s unprecedented in the history of business. I think that reflects the fact that until last year we’ve had a record bull run in the market that’s been unprecedented in the history of capitalism.

People want to admire Jack Welch because he’s made them wealthy. You can’t deny the fact that he has. The numbers are phenomenal. Market capitalization — the value of GE’s shares — is just under $500 billion today and it was only about $12 billion when he took over in 1981. That’s made shareholders immensely wealthy. That in itself explains why he’s so celebrated.

MM: What’s the other side of the Jack Welch story as you tell it in your book?

O’Boyle: It’s hard to discern whether Jack Welch created the environment in which we live or whether he is merely a byproduct of it. I would say one of the most phenomenal changes in the 20 years that I was a business reporter writing about these things was the extraordinary preoccupation of the market with quarterly earnings and the extraordinary narrowing of attention spans and the patience of shareholder capital.

Shareholders — whether they’re large mutual funds or institutional or small investors — are now extraordinarily impatient. They want their earnings now. I think Welch has been a major changer in the zeitgeist of that environment. He has been known as the CEO who delivered earnings. That has consistently been his record. In delivering those earnings, there have been some shortcuts taken at the company — and at all American companies — including the abandonment of research and development and getting rid of employees.

Downsizing, which was once a phenomenon that was done as a necessity of last resort, has become a standard practice at every major corporation in America in terms of achieving earnings. GE was one of the major propagators of that.

In the realm of research and development, it’s extraordinary how steep the reductions in R&D spending have been at GE from 1981 to 2000, while they’ve consistently improved their net income year after year.

So I would say the major thing that will be viewed in hindsight as so difficult is the short-term-sightedness of CEOs in general and Welch in particular.

MM: Can you estimate the number of jobs that Welch has cut during his term?

O’Boyle: It’s really hard to say. There have been so many businesses that have been bought and sold during the Welch era that comparing apples to apples is very difficult. I said hundreds of thousands in the book. If you try to ask the question in terms of how many people have been dismissed from GE during Welch’s tenure, and by dismissed I mean either fired or jettisoned from a business that GE sold, I would say it’s easily well over half a million and probably more. But in a conservative sense it’s probably on a net basis a loss of only 100,000 jobs, because GE in 1981 had 400,000 employees and today they have 300,000. But that net basis does not tell the whole story.

MM: What is GE Capital?

O’Boyle: GE Capital is the world’s largest finance operation. It is a wholly owned subsidiary of GE. It’s their finance arm and is an agglomeration of more than a dozen finance businesses in insurance and lending, both commercial and real estate. It includes leasing — GE Capital is the largest owner of aircraft. They own more aircraft than American Airlines, and they manage more credit cards than American Express. They service credit card operations for Home Depot and hundreds of other retailers in the United States.

GE Capital generated only about 8 percent of the company’s earnings when Welch took over in 1981 and now they generate about 50 percent. So most of GE is a bank. As a finance operation, it has great power in the marketplace for financing the purchase of GE products, which helps GE in its competitive position. When they go to sell an aircraft engine, for instance, vis-à-vis their main competitors — Pratt & Whitney and Rolls Royce — GE can offer financial terms and incentives for the purchase of GE engines. To some extent it can be anti-competitive. That’s why some governmental regulators have looked very carefully at the finance operation lately when GE makes acquisitions.

MM: How did it come to be that half of GE’s profits come from the company’s finance arm?

O’Boyle: It was Welch’s conscious strategy. GE Capital (once called GE Credit) is a very high-margin business. They have profit margins that are in the 20 to 25 percent range as opposed to some of GE’s traditional manufacturing, which had a much lower profit margin. They have few or no unions. They have fewer capital requirements. They’re tied to the global marketplace in terms of capital being a worldwide commodity, and I think they fit very much in the Welch strategy of wantng to advance that business for strategic reasons.

GE Capital was started back in the 1930s to finance the consumer purchase of GE appliances. It expanded through the 1960s, but Welch really put the accelerator to the floor. It’s a major explanation why profits have grown as greatly as they have at GE during Welch’s term.

MM: How does the Kidder, Peabody story fit into the overall GE Capital narrative?

O’Boyle: Kidder, Peabody was a finance operation that GE purchased in 1986. It was a prime example of failure under the Welch era. It was mainly a brokerage business run under GE Capital. They had huge losses in the mid-1990s through a bond trader by the name of Joseph Jett who made trades that turned out to be falsified and cost GE huge write-offs. The point I tried to make in the book is that the reason this was not discovered more quickly is that people wanted to believe that Joe Jett was doing as well as they thought he was, because he propped up earnings and he was part of turning Kidder, Peabody around in a way that Welch wanted. Joe Jett was extolled by Jack Welch at meetings because he was an aggressive pursuer of profit and seemingly was getting it — until everything fell apart and GE had to make $350 million in write-offs. That was a pretty big black eye for Welch and GE’s shareholders.

MM: To what extent is GE currently involved in military-related business?

O’Boyle: Not so much anymore. Their military exposure is limited to their jet engine business. GE is a very large manufacturer of jet engines both for commercial aircraft and for the military. GE greatly lessened their exposure to the military and Pentagon contracts back in 1993 when they sold their aerospace division, through which they made Minuteman missiles and triggers for all the neutron bombs.

They got out of that business and sold it to Martin Marietta. That story is also in my book. They were the target of very persistent anti-nuclear protests and controversy [led by the group Infact], and I think that had a major impact in forcing Welch to abandon the aerospace and military contract business and stay with jet engines.

MM: What’s the motivation behind GE pushing so hard on the Honeywell merger?

O’Boyle: I think you could make an easy argument that Jack Welch and GE have always been monopolists and that this has the potential to be a great monopoly.

If you look back at the creation of the company — the predecessor of GE was founded by Thomas Edison in 1892 — there’s a long tradition of GE being a dominant player in the businesses in which it competes. Welch sharpened that focus during his tenure to a point where he set down the rule that you have to be either the first or second largest competitor in any market in which you compete. That’s an extension of market dominance.

I think that is what is behind the Honeywell deal and why the European regulators have taken such a tough look at it. The merged company would have extraordinary market dominance in the field of aviation. Not just in jet engines — Honeywell is a player in smaller jet engines that are used for corporate-sized jets — but Honeywell is also a big player in avionics and a lot of the sophisticated instrumentation that’s used in aviation. I think that’s the major impetus for the deal. We’ll see in the next couple of months whether it passes antitrust muster.

It has in the United States, but whether it does in Europe remains to be seen. If it doesn’t, I think they’ll pull the plug and not continue with the deal.

MM: Do you think that the case can be made that the company is too diversified for it’s own good?

O’Boyle: There’s certainly a case to be made for that. GE’s stock now trades at about 35 times earnings, which is very high. That means shareholders have a high expectation of GE’s ability to produce earnings. That’s an earning multiple that’s higher than the typical Standard & Poors company, which would be about 25. So that price to earning ratio (P/E) reflects the sentiment in the market that investors are great believers in GE’s growth potential, much greater believers now than they were in 1981 when Welch took over. But I don’t think that once Welch hands the company off to his successor, Jeff Immelt, that it can continue. And if my prediction is right, the question becomes how impatient GE’s shareholders will be and will they suddenly demand that the disparate parts of GE be divided so that shareholders can get more return out of the company.

Furthermore, you can make the argument that each of the discrete elements can be sold to other corporations that are solely dedicated to that endeavor. Siemens, for instance, does many things in the electrical world — they make lightbulbs, they’re involved in the transmission and distribution of electricity. You could easily take GE’s power systems division and its lighting business and sell them to Siemens. You could take the plastics division of GE and sell it to Exxon-Mobil. So too much diversity could wind up hurting GE.

They’re really a kind of throwback to the 1940s, 1950s and 1960s when there were lots of conglomerates around. Only a few conglomerates exist now. The reason they do exist is because the sum of the parts must be greater than the whole, and if it’s not — if it’s less than the whole — then the market will figure out how to yield more value out of those parts.

MM: Can you say what GE’s business is now?

O’Boyle: No, though it’s mostly a bank. That represents an amazing historical transformation. We’re talking about a company founded by the hero of American ingenuity — Thomas Edison, who patented 1,093 inventions during his lifetime. The company he founded — of lightbulb fame — is now mostly a bank. That’s an amazing statement about American capitalism as it is practiced in the new century and was practiced in the last century. It has other sideline businesses in manufacturing, but it’s mostly a bank.

MM: Should citizens care about this change?

O’Boyle: Yes, I think it matters. That’s why I wrote the book.

It matters because an extraordinarily capable institution — General Electric — has been transformed into something that is not that any longer. Until 1986 GE was the number one patentee of inventions every year in the twentieth century among all U.S. corporations, every year from 1900 to 1986. Now they’re not even in the top 20.

They were the inventors of the modern corporate research and development laboratory. The number of things that GE invented in the last century is breathtaking. Of course there was the light bulb, but there was also the first jet engine — GE was the first to put it on an airframe; the first synthetic diamond; the first silly putty. There was also the first Noril and Lexan, which are polycarbonate plastics. Lexan was used in the visors of the Apollo 11 astronauts that landed on the moon. They also made the first diesel locomotive, the first x-ray machine and the first home refrigerator. The number of firsts that came out of General Electric is mindboggling. This is a company that once had extraordinary capability in manufacturing, engineering and research.

What has happened through a poor shepherding of those skills is that that value has been diminished. GE is not the same significant player in these elements of American life that it once was. You can make an argument about whether maintaining that role was even possible — that’s a legitimate and good argument. Maybe it was just inevitable.

But I would argue that Welch pushed the process by pulling the plug on lots of businesses that were sold and that foreign companies now control. That has diminished America’s competitiveness in the global marketplace.

MM: On some of the key cultural elements that you’ve highlighted from the Welch era — the focus on the short term, the underinvestment in research & development, the shift towards finance, disloyalty to workers — do you see any likely shift with Jeff Immelt taking over as CEO?

O’Boyle: No, I think he has to play with the hand that he’s been dealt. I don’t see GE returning to any kind of emphasis on technology. I think what I would expect to see is that they’ll begin to get out of certain businesses where they realize they can’t be competitive any longer. But I don’t expect any return to what GE once was under Immelt.