GE shifts strategy targets for business after missteps

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August 28, 2017

GE shifts strategy targets for business after missteps

NEW YORK (Reuters) – General Electric Co wants its industrial software business to cut costs and lift profits next year under new chief executive John Flannery, also is considering expanded partnerships and the potential sale of some equity in the unit, according to people knowledgeable about the business. Former chief executive Jeffrey Immelt spent six decades and more than $4 billion transforming 125-year-old GE into a “digital industrial” company. But GE has had difficulties and delays with its software platform which connects equipment like turbines and elevators. This spring, GE known as an unusual, two month “time-out” to handle the Predix problems, which haven’t been previously reported. With fixes in place, GE will now emphasize sales to clients in its own aviation, energy and oil-and-gas businesses, and scale back efforts to sell to customers. “Our resources will go to our fastest-selling markets,” GE Digital Chief Executive Officer Bill Ruh said in an interview. To help investors better understand Predix, GE also has redefined digital revenue to exclude $3 billion in hardware linked to its gas-fueled power plants, providing a clearer picture of the “pure” software firm and avoiding double-counting, Chief Financial Officer Jeff Bornstein said. The company now expects $12 billion compared with $15 billion under the old definition. Last year, the total revenue of GE hit almost $ 124 billion. An important course correction is marked by the changes for GE Digital, which so far has not delivered the revenue investors wanted and is partly responsible for a 25 percent decline in the share price of GE this year to a near low. GE estimates the industrial online market will be worth $225 billion annually by 2020, and Flannery, who became CEO on Aug. 1, seems committed to Immelt’s vision of becoming a significant player, according to two people familiar with his thinking. On how GE’s industrial internet works, to get a graphic, click tmsnrt.rs/2i9bZ0s But the leader, making tough decisions and famous for fund skills, is very likely to press GE Digital to reduce lift profits and costs next year. He may restructure GE Digital operates, bring in more partners and possibly sell a minority stake in the unit, they told Reuters. “There was a lot of money spent on Predix,” said a former senior financial executive at GE who worked with Flannery. “They are going to tighten the grip and make sure there’s a return.” GE declined to comment on Flannery’s plans. “ENDLESS CHECKBOOK” Immelt was to spot the industrial online wave and positioning the company. “That is an all-encompassing change,” Immelt said this past year, as GE increased its digital investment. Investors and analysts see potential for Predix to deliver profits and significant sales. It already has attracted some large clients, including electricity utility Exelon Corp and elevator manufacturer Schindler Holding AG, and orders rose 24 percent to $2.3 billion in the first half of 2017. But some analysts and investors say the business has taken and its growth rate is too slow to reach on the $ 12 billion target of GE by 2020. Spending soared under Immelt, which weighed on profits. “He gave Bill Ruh an endless checkbook,” Nick Heymann, an analyst at William Blair & Co., said of Immelt. Case in point: GE has budgeted $700 million more in digital spending this year – to a total of $2.1 billion – to further develop Predix and its applications, and to boost sales efforts. GE executives noted that this is very likely to indicate the peak for investment. GE Digital Chief Financial Officer Khozema Shipchandler stated the 2020 revenue target is within reach since recurring Predix subscriptions “heap on important revenue as time goes on.” FIXING PREDIX Immelt pushed GE to go digital earlier. As GE’s plan evolved, however, some missteps cost money and time. Engineers initially advised building data centers that would house the “Predix Cloud.” But after Amazon.com Inc and Microsoft Corp spent tens of billions of dollars on information centers for their cloud solutions, AWS and Azure, GE altered course. FILE PHOTO – General Electric Co’s incoming chief executive John Flannery is shown in this undated handout photo provided. Courtesy General Electric/Handout via REUTERS “That isn’t an investment we could compete with,” Ruh said. GE left its cloud strategy. It expects to be using Azure four months behind schedule and relies on AWS, the executives said. As GE pivoted away from building data centers, its engineers concentrated on applications, which executives saw more useful for winning business and more profitable than the platform alone. “That is probably the biggest lesson we have learned,” Ruh said. GE also confronted legacy challenges in adapting to Predix software. GE has for monitoring its machines, many algorithms, but they were written in coding languages and live on other systems in GE businesses. This makes transferring them to Predix time consuming, people told Reuters. The acquisition of Meridium and ServiceMax within the last ten months gave GE well-known applications and added about $150 million to annual digital revenue, GE said. Nevertheless, the new products brought code which needed to be converted to operate on Predix, people knowledgeable about the systems said. The result: software installation took the code had bugs and software lacked features that customers wanted, these people said. FILE PHOTO – General Electric Co India’s chief executive John Flannery reacts during an interview with Reuters in New Delhi on March 31, 2011. B Mathur/File Photo GE executives acknowledged Predix had experienced technical difficulties and was behind schedule in hitting some goals. During the “time out” in May and June, GE Digital’s developers made Predix more stable, they said. The changes in plan have come with a change in leadership. This year GE Digital Chief Commercial Officer Kate Johnson and Predix Harel Kodesh both left. Patrick Franklin, who triumphed Kodesh, known as the “time out” to fix Predix. Ruh said the leadership “evolved with the business” and that GE has the ideal people to maintain Predix growing. RIVALS TAKE AIM The competition isn’t standing still. Large rivals such as a harvest of nimble startups and Siemens AG are pressing to get market share in gas and GE regions of energy, aviation, locomotives, health care and oil. Chicago-based startup Uptake signed a deal in March to supply analytics on thousands of wind turbines. C3 IoT, based in Redwood City, California, won a deal last year with French usefulness Engie SA. Engie signed a venture arrangement with GE. Stewart & Stevenson, a manufacturer of pumps and other equipment, met with GE but decided against it. “They didn’t seem to have the ability to customize to meet the needs of our clients,” said Chris Harvell, the firm’s chief technology officer. “And if they did do any development, we would probably end up paying quite a lot of money.” The company chose Flutura, a 100-person, Houston firm started for a pilot, in 2012. Flutura lacked GE’s scale, but could produce custom code, he said. Ruh said that while GE faces competitors in every deal, many startups aren’t competitors that were true because Predix includes applications and is available . “No other competitor has these abilities on their own platforms,” he said. Inside GE, executives remain bullish. Predix will pay off handsomely if GE stays focused on building it and winning clients, said Joshua Bloom, co-founder and chief technology officer of Wise.io, an artificial intelligence company GE bought last year. But, he said, “doing this right and at scale is a massive challenge.” (For a graphic on an internet for infrastructure click, here) Reporting by Alwyn Scott; editing by Joe White and Edward TobinOur Standards:The Thomson Reuters Trust Principles.

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