UNBEKNOWNST TO BOLZE, Tusa was preparing to drop a bomb on GE and its investors with the first “sell” rating on the company by a major bank’s analyst in recent memory. Given GE’s history with JPMorgan, from its historic founding through advising on the rapid exit from much of Capital, the vote of disapproval was a stinging slap.
Months of examining GE with his team had led Tusa to conclude that the company was overvalued and its outlook wasn’t as rosy as it presented. At the Power business, the core of the company, he detected that the aggressive use of upgrade packages was increasing sales, but not in a way that would be beneficial over the long term.
In essence, GE was selling upgrades to existing customers on the promise that it meant less maintenance and more efficiency. The problem was that the future maintenance would also be GE business, so in effect the company was making a sale today that would eliminate work to be done (and billed) tomorrow.
In finance parlance, GE was pulling sales forward. It was agreeing to pay Tuesday for a hamburger today. Not knowing what the analyst had concluded, Bolze approached the session with Tusa with his usual confident manner. He pitched the benefits of the Alstom deal and explained the importance of Predix, speaking about it as if most power customers were using the software and were now getting benefits.
“What is Predix? Predix is cloud-based operating systems that our customers can put on their equipment that allows them to more efficiently capture all the data on that equipment,” Bolze recited, noting that GE’s customers were increasingly eager to have the system.
Deeply entrenched in the GE view that the world was heading into the “Age of Gas” for decades to come, Bolze then made an assertion that would fall flat. It also gave a glimpse of GE’s blurred view of the market that it planned to corner.
“The world needs about 50 percent more power in the next two decades,” he said. “The biggest power source going into the next decade is gas . . . Gas will grow almost 50 percent more in the next decade, and we are positioned very well there in that space.”
Days later, Joe Kaeser, CEO of Siemens, would offer a different view. Kaeser was perhaps Immelt’s biggest rival. He looked a bit like Bolze, but with European styling (spread collars, modern eyeglasses) and hair that was more salt than pepper. The German conglomerate competed in a lot of the same markets as GE, and the two CEOs had an uneasy relationship. Kaeser had, of course, taken a run at Alstom with Mitsubishi and would later criticize GE’s cut-rate pricing in the power market, which would exacerbate an already tense environment.
To Immelt and his followers, Siemens’s interest in Alstom was proof of why the French company needed to be owned by GE rather than competitors. From Siemens’s viewpoint, they had succeeded in dragging out the Alstom process and pushing up the price for GE.
Unlike Immelt, Kaeser wasn’t sold on the conglomerate model and was moving Siemens in the opposite direction and breaking up the company, although he would never describe it in that way. But the outcome was the same. Siemens was slowly but surely separating its businesses and keeping a stake in the new entities under a strategy Kaeser called “Fleet of Ships.”
When it came to the power market that Bolze saw as ripe for harvesting, Kaeser conceded that there would be growth in the very large natural gas turbines that Bolze was touting. But he gave an ominous warning.
“So there will be growth . . . But at a cost, because every order is very, very competitive,” he said.
For Bolze, the path to success was like a rope bridge over a deep chasm—the only way to get to the other side. The summer before the Alstom deal closed, Bolze was giving another presentation, this time in the auditorium at Crotonville. Behind a desk, watching his every move, was Immelt.
When he concentrated, Immelt scowled slightly in a way that was almost a squint. He tilted his head back and looked down his nose. Bolze cued up his PowerPoint slides, the lightsaber of the GE universe, for his slot in the Growth Playbook, a grueling annual examination of GE’s eight major business leaders.
It was here that GE hammered out targets for sales and profit, setting the underlying assumptions for the financial estimates it would give investors. Under Immelt, the point of the exercise was determining how his executives would get to their financial targets—though not how they would determine what output the businesses would produce as a starting point. This practice had been ingrained at GE from the days of Welch, was continuing under Immelt, and presumably would roll on into the beyond.
It had been a few months since the plan to sell off GE Capital had been announced, and the Alstom deal was creeping toward completion. Just as he was at the JPMorgan conference, Bolze was confident and presented himself as the GE Übermensch. His face, résumé, and demeanor all declared that he was destined to run GE one day.
Bolze’s forthcoming global portfolio of new power plants and thousands of workers hired seemed to ensure that fate—as long as there were no major surprises. Moving through the slides, Bolze came to the proposed annual sales growth rate of the Power business: 5 percent.
It is difficult to put that prediction into context, even in the endlessly optimistic environment of GE. Suffice to say there was ample reason for skepticism. Power had been struggling to meet targets, and its sales hadn’t grown that quickly in years.
The reality was that global investment in new gas-fired power plants was slowing and promised to be lumpy at best. Energy efficiency was on the rise, and concern about the warming climate had raised real questions about the future of electricity produced by fossil fuels. Natural gas was cleaner than most fuels, and new turbines were very efficient—but there was still air pollution spewing out of those power plants, and the cost of renewable alternatives was steadily falling.
This pressure meant that future GE revenue from the highly profitable service contracts it had signed was likely to fall, or at least would not grow as quickly as predicted. Global gross domestic product, a reliable proxy for the power market, was below 4 percent.
The target Bolze gave Immelt was based on a rosy assumption that clearly cried out for interrogation—which, after all, was the point of having the formal review.
As the room watched, Immelt gave the desk in front of him a confident slap.
“Great, next page,” he said. He knew that the Power business was crucial to getting him to his precious $2 per share target for 2018. Bolze had to come through, and it really didn’t matter how. Immelt would make sure of it.
Immelt could be tough on executives in his own way in these briefings, but not usually for being too optimistic. “Where’s the guy I used to know?” he would ask an underling who told him that Immelt’s targets couldn’t be hit. Immelt’s locker-room chumminess and absolute power at the company made such comments sting. And even if it was never delivered explicitly, the lesson sunk in, down through the levels of the company. There was no market for hard truths or bad news. Not as far as the guy at the top was concerned.
A targeted executive never forgot this kind of rebuke from Immelt. It was better to figure out a better way to deliver the bad news, or make it go away somehow, than to present it to him straight.
When Immelt’s disappointment soured the mood, the tone changed. “Your people,” Immelt would say, “don’t want it bad enough.”
Executives would stretch far to avoid that tone. And that is exactly what they did in Power.