Whatever businesses new General Electric Co. (GE) CEO John Flannery may decide to shed after an initial review, he's fully committed to one: digital.
The Boston-based company is "all in" on its drive to reshape manufacturing through the Predix software platform that does for factories what Apple Inc.'s (AAPL) iOS and Google Inc.'s (GOOGL) Android did for smartphones, Flannery wrote in an essay published on the professional networking site LinkedIn.
"We have fully embraced the digital industrial transformation, and we believe in its potential to change the world," he wrote on Friday, Sept. 15. "For our customers, digital is bringing new levels of innovation and productivity, and they are seeing real, tangible outcomes."
The 56-year-old, who succeeded longtime CEO Jeffrey Immelt in GE's top job on Aug. 1, already faces pressure to improve earnings and cash flow while maintaining a dividend that's a priority to investors. He has promised a thorough evaluation of divisions that make products from jet engines to medical equipment and locomotives before outlining his strategy to investors on Nov. 13.
Any changes he makes would build on the streamlining begun by Immelt, who pared disparate businesses from a massive lending unit to insurance and the NBC broadcast unit while fostering development of Predix to leverage the industrial Internet of Things. Apps developed for the system allow customers to create a "digital twin" of their equipment to analyze performance and flaws, for example, and enable machines to alert operators to needed repairs.
In the three months through June alone, GE's digital orders grew 39%, pushing its equipment and services backlog to $327 billion.
"The company I joined 30 years ago made machines that made the world work better," Flannery wrote. "The world has changed, and the industrial world is increasingly powered by digital applications. We are part of this transformation, and we have a focused strategy that I believe is best for our customers and for GE."
Among the customers who have taken advantage of GE's digital services are power business Exelon Corp., which used the entire Predix suite across its fleet of generators, boosting annual output as much as 2%, he said.
GE's digital services are a unique product of its heritage, Chief Technology Officer Vic Abate said at a conference on Friday. The company, founded by light bulb-inventor Thomas Edison, has been in business for more than a century.
"We understand how these machines work, we understand the control knobs inside them and we can now take information -- business information, economic information, planning information -- and run machines differently," Abate said. "It's the intersection of physical and digital that really allows us to create value."
Flannery didn't offer any hints on his plans for the rest of GE, but analysts have suggested a broad breakup like the one CEO Ed Breen is orchestrating at DowDupont (DWDP) is unlikely.
Nonetheless, "we expect Flannery to articulate further scope for non-core asset disposals," Nigel Coe, an analyst with Morgan Stanley who has the equivalent of a hold rating on the shares, said in a note to clients earlier this month. "We see lighting, hydro, power conversion and potentially transportation falling into the jump-ball category."
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Flannery's review of GE's portfolio is likely to lead to "good things," Ed Garden, the investment chief for activist Trian Partners, said at a conference in New York last week. Trian owns a $1.7 billion stake in the company and has pushed for improved profits.
Still, GE will probably miss its full-year manufacturing cash-generation goal of $12 billion by about $500 million, JPMorgan Chase & Co. has predicted, while likely 2018 earnings of $1.53 a share are well below an original goal of as much as $2.
The challenges are driven by weakness in the power business as well as a less-than-expected bounce in the oil, gas and locomotive markets.
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