BY STAS MARGARONIS
Jack Welch’s accession as CEO of General Electric in 1981 led to his maximizing stockholder value by laying off workers, outsourcing manufacturing and laying the ground work for China to take the lead in critical manufacturing that GE once dominated.
David Gelles’ new biography: “The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America” describes how Welch cannibalized the assets of one of America’s leading manufacturers to create short term profits.
After Welch’s departure in 2001, his investments in speculative assets, exacerbated by cheap credit and lax landing standards, helped bring on the housing bubble that exploded into the financial crisis of 2008 in which GE lost billions.
STORIED HISTORY
The company was founded by Thomas Edison the inventor of the electric light and developer of electric power generation.[1]
In 1922, GE began making electric home appliances such as the first electric stoves, washing machines, and refrigerators. In 1927, GE developed the first television. GE built the first American jet engine in 1941, and in 1957, opened the first nuclear power plant.
Before Welch took over as CEO, GE had advanced to become a world leader in areas such power generation, locomotive production, aviation electronics, consumer electronics and wind turbines.[2]
GE also provides the technology to support ship to shore cranes.[3]
WELCH RE-ESTABLISHES STOCK BUYBACKS WITH REAGAN ADMINISTRATION SUPPORT
Gelles describes how Welch focused on increasing profitability and driving up General Electric share prices in part by systematically cutting jobs and company divisions that manufactured products.
In 1982, the Reagan Administration accelerated the trend of U.S. companies’ transition from producers and into financiers and speculators by allowing company revenues to be used to buy back stock. This, in turn, contributed to the decline of American worker wages:
“Had so much of the wealth created by corporations not been ‘reverse distributed’ back to investors in the form of buybacks and dividends of the last forty-five years, and had pay kept pace with productivity, the average full time American worker would be making about $102,000 annually, roughly double what he or she is making today. And yet despite these unsavory statistics, buyback remain popular across corporate America, and few companies have spent more money in repurchasing their own shares over the years than GE. “[4]
Gelles pointed out that the Securities and Exchange Commission, under the Reagan administration, allowed the buyback practice to be re-established in 1982 after it had been banned for over fifty years:
“Buybacks effectively led companies manipulate their own stock price, and for that reason, had been banned for half a century. The Securities and Exchange Act of 1933, passed after the stock market crash that led to the Great Depression barred companies from intentionally meddling with their own share price. Buyback weren’t illegal, per se, but if companies did them, they could easily be exposed to charges of manipulation. Then in 1982, the Securities and Exchange Commission blessed a change to the law that gave companies the green light to start buying back their own stock. It was another gift from the Reagan administration to the business community. Rather than invest in new products and services, or their employees, companies could now use their profits to simply repurchase their own shares, driving their stock price up.”[5]
SPECULATIVE INVESTMENTS AT GE CAPITAL CRASH IN 2008
By the time of Welch’s retirement in 2001, the company was more a financer and less a producer based on its GE Capital division:
“During the second half of Welch’s tenure, GE Capital grew into a colossus. By the time he had retired, it had a whopping $370 billion in assets and operations in nearly 50 countries.
There was no master plan. The finance division grew by chasing money wherever it could be found. Even Welch admitted at that as much. “We never had a great strategic vision for GE Capital,” he conceded. The result was a hydra headed monster that grew increasingly difficult to control, let alone keep tabs on. GE Capital got into Thai auto loans. It issued consumer credit cards for companies like Home Depot. It underwrote commercial property developments in Europe. It became the world’s largest equipment lessor, with more than 900 airplanes, nearly 200,000 rail cars, 750,000 automobiles, more than 100,000 trucks, and 11 satellites. It handled the credit operations for companies like Kodak, fronting the bill for customers who need a new copy machine. It gobbled up portfolios of loans, lent out fortunes to ambitious developers, and got into arcane lending markets with razor thin margins, but enormous volume. GE even founded its way into Marquee real estate.
In the mid – 1990s the finance unit came to own a shimmering gold skyscraper on the southwest edge of Central Park and entered into an agreement to re-brand the property with Donald Trump as the Trump international Hotel & Tower.”[6]
Parenthetically, Gelles tells us, Welch became a devotee of Donald Trump and a supporter of his extremist views.
The unraveling would occur in September, 2008 after Welch had retired. GE acquired subprime mortgages that went bust requiring a $139 billion federal bailout to avoid GE’s bankruptcy:
“Days later Immelt (Jeff Immelt: Welch’s successor at GE) was in Washington asking for more help. This time, he needed the Federal Deposit Insurance Corporation to guarantee approximately $139 billion of its loans … Just how badly GE needed the cash became clear less than two weeks later when it reported a 22 percent drop in profits for the quarter, with GE Capital notching a stunning 38 percent drop in earnings. Without liquid capital markets, its black box financial wizardry was useless … Besides having industrial businesses that were shaky in a downturn, Immelt was also saddled with an unregulated bank that held a grab bag of bad Loans. GE would never recover.”[7]
LOSS OF AMERICAN JOBS
In 2021, the legacy of Welch was described by Chris Shelton, president of the Communications Workers of America which represents unionized General Electric workers. Writing in Forbes Magazine, he wrote:
“In 1989, GE employed 277,000 workers in the U.S. In 2019, that number was only 70,000. Years of offshoring jobs and abandoning workers and communities have left GE’s domestic manufacturing footprint a shell of what it once was.
With its decision to split, GE stands at a crossroads. Does the 129-year-old institution want to continue its 40-year track record of disinvesting, de-unionizing, and offshoring its U.S. manufacturing operations?[8] Will GE continue putting our planet and national security at risk or will it choose to be part of a historic rebuilding of America?
GE Renewable Energy … is now headquartered overseas. Revenue from GE’s renewable energy products was up 34% in 2020, yet jobs are being moved to China, Poland, and Germany. GE power generation and renewables work has also been moved to India and Vietnam. We have watched in frustration as GE shipped product lines and jobs overseas, despite good faith efforts by the union to work with the company to ensure a profitable future in the new green economy.
GE remains one of the largest defense contractors in the world. Last year, the company received over $4 billion in defense revenue from the U.S. government, dollars not invested in U.S. workers, communities, or facilities…
As a recent report from the University of Massachusetts, Boston, and Cornell University documents, GE has benefited mightily from taxpayer bailouts and government contracts, yet it has continued to move jobs, shutter plants, break promises to retirees, downsize domestic manufacturing, and implement other cuts that have irreparably harmed American workers. The company has slashed its U.S. workforce by 47% in just the past three years.”[9]
HELPING CHINA
In 2011, there was growing concern that GE sales of strategic technologies to China are undermining U.S. national security and competitiveness.
General Electric had announced sales to China that capitalize on GE’s advanced technologies:
- A joint venture between GE Aviation and Aviation Industry Corporation of China (AVIC) to develop and market the new generation of avionics systems with an immediate priority on supporting development of China’s first home-grown big passenger jet. The joint venture will result in $300 million in exports from Michigan, Florida and Ohio and support at least 300 high-tech jobs in each of the United States and China, the company said.
- A Letter of Intent signed by GE Transportation with the Ministry of Railways (MOR) to provide $350 million worth of U.S.-built locomotives, locomotive sub-assembly kits, service support and signaling systems to upgrade China’s railways. The export order supported 2,000 U.S. jobs, the company said.
A spokesman for GE Transportation argued in 2011 that GE exports of locomotives and other capital equipment abroad face localization requirements. If companies such as GE are to sell their products, they must meet these requirements.
The spokesman pointed out that in 2009, there were very few locomotive orders in North America and “what sustained our business was foreign locomotive sales including the sales of sub-assemblies.” At the time, GE employed 4,200 workers at its Erie, Pennsylvania plant.
In 1985, with Welch heading GE, General Electric sold China 400 diesel-electric ND-5 locomotives (also known as C36s), according to the GE spokesman.
At the time, China was dependent on outmoded steam locomotives.
China was undertaking a major modernization that required foreign companies to transfer vital technology so China could build up its own industries and reduce its foreign dependence.
In 1985, under Welch’s leadership, China’s Ministry of Railroads played the two leading locomotive builders, General Motors and GE off against each other before deciding on the GE locomotive model. The Chinese negotiators demanded GE build a locomotive manufacturing site in China so any additional purchases would be made from a Chinese builder and not GE in the United States.
The result, according to a GE executive based in Hong Kong, was that GE made no profit on the sale and lost future locomotive sales by transferring its technology and expertise into building a new locomotive plant in China.
The 1985 locomotive sale would be a model for China using the lure key component sales from foreign companies while requiring the transfer of technology and know-how to build new Chinese industries and requiring companies like GE to outsource jobs and technology.
On the surface, the locomotive sale generated the company $400 million in sales in 1985. In reality, the sale gave up future export sales and allowed a technology transfer to make Chinese locomotive building a competitor to General Electric’s locomotive building.
The GE spokesman noted: ““China’s leadership has staked a great deal on the country’s ability to absorb Western technology. The modernization of existing industries and the development of new technologies is to provide the transport, energy and science that will employ China’s huge labor force.”[10]
CHINA’S AVIATION INDUSTRY BENEFITS FROM GE TECH TRANSFER
Consistent with Welch’s corporate practices, GE embarked on a joint venture between GE Aviation and Aviation Industry Corporation of China (AVIC) to develop a market for the new generation of avionics systems that will support China’s first home-grown big passenger jet.
General Electric described the commercial jet collaboration with China as follows:
“GE is working to establish a commercial joint venture (announced in November 2009) with the Aviation Industry Corporation of China (AVIC) because it will provide global commercial opportunities in China and the rest of the world that GE would not have on its own. Specifically, GE will contribute its commercial Integrated Modular Avionics (IMA) technology to the joint venture. The JV’s first order is for the COMAC C919, a new narrow-body commercial aircraft being built in China. The JV will supply IMA technology, displays, onboard maintenance systems, flight recorders and flight management system for the C919.”[11]
The GE announcement defended the agreement insisting that there would be no loss of U.S. intellectual property:
“No military applications are involved in this joint venture, and significant measures are in place to safeguard against any unauthorized transfer of intellectual property.”[12]
However, in 2010, a report warned that GE’s sale of aviation electronics to China, could pose problems for U.S. aerospace builders. The “2010 Report to Congress by the U.S. China Economic and Security Review Commission” warned that China is using commercial agreements with U.S. aviation suppliers to challenge Boeing and U.S. military aircraft makers and cited the development of China’s C919 commercial aircraft project:
“The C919 large commercial aircraft: Building upon the knowledge gained from previous joint ventures with foreign aviation manufacturers as well as the experience acquired during the development of the ARJ–21, the C919 is China’s premier commercial aviation project. The developer of the C919, the Commercial Aircraft Corporation of China Ltd, intends the 150-passenger aircraft to compete with the Boeing 737 and the Airbus A320 in both the domestic and global markets.”[13]
The report says China has been targeting companies that it knows will transfer technology:
“In order to improve China’s aviation industrial base and successfully conclude the above-mentioned aircraft and turbofan engine projects, Beijing has implemented an industrial strategy for its aviation industry. During this year’s hearing cycle, the Commission heard about three factors in particular that help to promote China’s aviation manufacturing industry. First, China’s aviation industry enjoys strong government support. Second, the industry benefits from an offset policy that requires technology and know-how transfers from more-established foreign aviation manufacturing firms in return for market access in China. Third, the close integration between the commercial and military sectors of China’s aviation industry allows Beijing to bolster its military aviation manufacturing capabilities by exploiting advances in the commercial aviation sector.” [14]
Joint ventures are a key element on acquiring foreign aviation technology:
“As an example, in 2008, the deputy general manager of the Commercial Aircraft Corporation of China Ltd. openly alluded to the importance of offsets while discussing the bidding process for components on China’s C919. ‘We will choose international suppliers through bidding. But priority will go to foreign suppliers that design and manufacture products with domestic companies in China,’ he said…
One way Chinese aviation firms acquire technology and knowhow from foreign firms is through the establishment of joint ventures in China: “China has increasingly required that joint ventures be established as a condition for awarding manufacturing contracts. These joint ventures typically involve some element of technology transfer by the U.S. partner. The intention seems to be for China to develop domestic capabilities in subsystems in addition to airframes.”[15]
In April, 2020, General Electric confirmed “that approval has been granted for it to supply its LEAP-1C engine for the forthcoming COMAC C919. The approval is expected to last for at least four years, and will come as a dose of good news for GE as the firm struggles with the ongoing downturn in demand for new aircraft….As reported by Reuters, the Trump administration has this week announced approval of licensing for General Electric (GE) to provide engines to China’s forthcoming C919. The C919, in development by COMAC, is pitched to be a narrowbody alternative to the Boeing 737 and Airbus A320 lines.”[16]
As a result of these trends, the 2021 Report to Congress by the U.S. China Economic and Security Review Commission recommends against technology transfers that could undermine national security:
“Congress consider legislation to create the authority to screen the offshoring of critical supply chains and production capabilities to the People’s Republic of China (PRC) to protect U.S. national and economic security interests and to define the scope of such supply chains and production capabilities. This would include screening related outbound investment by U.S. entities. Such legislation would direct the secretaries of defense and commerce, along with the U.S. Trade Representative, to develop procedures to evaluate existing and proposed supply relationships with the PRC and identify whether critical U.S. interests are being adversely affected, including the loss of domestic production capacity and capabilities. The legislation would authorize the president to take appropriate action, including prohibiting supply relationships or certain transactions to protect U.S. national security”[17]
In May 2022 Bloomberg reported that the GE collaboration with China has resulted in China developing a new aircraft to challenge Boeing and Airbus using General Electric components:
“A Chinese rival to Boeing Co.’s 737 Max and Airbus SE’s A320neo narrowbody aircraft completed its first pre-delivery test flight, according to a CCTV report.
The C919 jet developed by Commercial Aircraft Corp. of China Ltd. was test flown for about three hours on Saturday ahead of its delivery to its first customer soon, the report said. The narrowbody plane was priced at $99 million, according to a filing this week by Shanghai-based China Eastern Airline Corp., which has signed a deal to buy five of those passenger jets.
China’s new C919 commercial jet aircraft built with GE parts
The pre-service test flight brings China’s homegrown passenger jet maker a step closer to challenging the duopoly of Boeing and Airbus in the global commercial aircraft market. Comac started development of the C919 in 2008, but missed the previous deadline of delivering its first plane by the end of 2021.
While the C919 marks China’s effort to reduce reliance on Airbus and Boeing, the aircraft still depends on foreign companies like General Electric Co. for many critical parts.”[18]
CONCLUSION: THE WELCH LEGACY
Gelles describes how Welch, was derisively known as “Neutron Jack” by angry GE employees whose jobs were eliminated by his policies. This has left a legacy of misguided GE executives who left GE to run other companies and transformed them into less productive stock price driven leaders.
The Welch disciples took jobs heading companies that included: 3M, Amgen, Boeing, Chrysler, McDonnell Douglas, Albertsons and Home Depot thus spreading the Welch doctrine, Gelles writes.[19]
Jeff Immelt, Welch’s successor, was a disciple of the cost cutting and financial speculation culture that caused disastrous results for GE after the banking and housing market meltdown in 2008.
These policies also had the effect of General Electric placing U.S. national security at risk and advancing China’s technological competitiveness.
Gelles concludes by pointing out that Welch was not alone in his speculative and deindustrializing practices:
“Welch wasn’t the only one responsible, course. Milton Friedman and other free market thinkers laid the groundwork for his revolution. Corporate raiders figured how to leverage small ownership stakes to effect dramatic changes, precipitating waves of layoffs and mergers. Other CEOs, including Roberto Goizueta at Coca-Cola, Lee Iacocca at Chrysler, and Lou Gerstner at IBM, all has a hand in changing what was acceptable behavior by big business. And Jack Welch’s many acolytes took his most brutal techniques and ran with them. c
Yet more than anyone else, it was Welch himself who created the schism between the Golden Age of Capitalism and the unequal, unsustainable era of shareholder primacy in which we now live.”[20]
FOOTNOTES
[1] https://www.businessinsider.com/the-rise-and-fall-of-general-electric-2019-8#1889-1892-edison-general-electric-1 Also see Ernest Freeberg, The Age of Edision: Electric Light and the Invention of Modern America
[2] https://www.ge.com/renewableenergy/wind-energy
[3] https://www.ge.com/news/press-releases/ges-power-conversion-technology-boosts-handling-speed-container-cranes, https://www.ge.com/news/press-releases/ge-technology-power-one-worlds-largest-crane-vessels
[4] David Gelles, The Man Who Broke Capitalism, p.66
[5] Gelles p. 65
[6] Gelles pp.58-59
[7] David Gelles, The Man Who Broke Capitalism, p.145
[8]https://fortune.com/2021/12/22/general-electric-has-tried-everything-except-investing-in-american-workers-ge-manufacturing-usa-unions-supply-chains-offshoring-unemployment-cwa-chris-shelton/
[9] See also https://www.theguardian.com/us-news/2016/nov/06/general-electric-factory-schenectady-new-york-manufacturing-jobs
[10] https://ajot.com/premium/general-electric-sales-to-china-generate-u.s.-jobs-and-u.s.-concerns
[11] https://www.geaviation.com/press-release/jv-archive/ge-aviation-avionics-joint-venture-jv-aviation-industry-corporation-china
[12] Ibid
[13] https://www.uscc.gov/sites/default/files/annual_reports/2010-Report-to-Congress.pdf, p.93. Please also see the 2021 report to Congress: https://www.uscc.gov/annual-report/2021-annual-report-congress
[14] Ibid, p.96
[15] Ibid, p.99
[16] https://simpleflying.com/general-electric-comac-c919/
[17] https://www.uscc.gov/sites/default/files/2021-11/2021_Executive_Summary.pdf, p.4
[18] https://airfreight.news/articles/full/chinese-rival-to-boeing-airbus-narrowbody-completes-test-flight
[19] Gelles, p 77
[20] Gelles, p. 229