G.E. Makes a Sharp ‘Pivot’ on Digital
No old-line company embraced the digital wave with more gusto than General Electric. The industrial giant spent billions, hired thousands of software engineers, and even created image-morphing television ads to recast itself as “a digital-industrial company.”
The scope of G.E.’s digital ambitions were put on full display in 2015, when the company set up GE Digital as its own business within the industrial conglomerate. Jeffrey R. Immelt, then chief executive, boldly declared G.E.’s goal to become a “top 10 software company” by 2020.
Today, there are no such ambitions. The spending at GE Digital is being slashed, amid layoffs and sharply narrowed aims at G.E. under John Flannery, who became chief executive last August.
Last November, Mr. Flannery told investors that expenses at GE Digital would be cut this year by more than 25 percent, or about $400 million. While he insisted the digital initiatives at G.E. are “very key” to the company, he added, “we want a much more focused strategy.”
G.E. is now struggling with problems in its big power generation business, which badly misjudged the electric power market, and lingering uncertainties about the liabilities of its finance arm, GE Capital. Those two immediate concerns — along with how one of its engines made with France’s Safran was involved this week in a Southwest Airlines accident — will likely get the most attention from investors when G.E. reports its first-quarter results on Friday.
But the rethinking of GE Digital, with its future still under review by Mr. Flannery, points to the difficulty of producing modern software for industrial businesses as they adopt digital technology.
No one disputes the overarching vision of the so-called industrial internet of things — which includes low-cost sensors and a flood of data and clever software that should deliver insights to cut costs, conserve fuel and design better products, faster. But the company greatly underestimated the challenges of creating all the software needed to achieve that grand vision, said analysts and former G.E. managers.
G.E.’s technical prowess, they said, lies in designing and manufacturing big machines like power-plant turbines, jet engines and medical-imaging equipment. Its traditional software skills have been in the specialized programs that control the machines and factory operations. GE Digital was a striking departure into cloud-based internet software, data analytics and artificial intelligence tools like machine learning.
“G.E. reached too far outside its expertise and too fast,” said Steven Winoker, an analyst at UBS. “And it became a financial black hole.”
Just how much G.E. has invested in its digital initiatives is uncertain, but it has been several billion dollars. In an article last year in the Harvard Business Review, Mr. Immelt wrote that in 2016 “we put about $4 billion into developing analytics software and machine learning capabilities.”
G.E.’s digital effort dates to 2011, when Mr. Immelt recruited William Ruh, an executive at Cisco Systems. Later that year, the company set up a center in San Ramon, Calif., east of San Francisco. At the time, Mr. Ruh announced big plans to hire as many as 400 software engineers to write code for the industrial internet.
The San Ramon work force swelled sharply to 1,400 in the summer of 2016, and to a peak of 2,000 last summer — before coming down to about 1,800, after a round of cuts earlier this year.
During the buildup, G.E. recruited veteran software managers who had worked at leading tech companies including Google, Microsoft and Apple. With the cuts at GE Digital and its narrowed focus, some of them have departed.
In its early days, the San Ramon center concentrated on writing data analysis and modeling software for applications like predicting when a gas turbine or jet engine would need maintenance, before the machine failed. In 2013, G.E. called that software Predix.
The product plan later broadened to include a cloud-based software platform for handling all kinds of sensor and machine data, and secure communications from the factory floor to data centers. G.E. even built its own data centers.
The software platform under development was often referred to as an operating system for the industrial internet. When the product concept expanded, so did the Predix brand.
Today, according to former G.E. engineers, Predix has been pared back to mainly a set of software tools to help write applications rather than being connected to layers of code for automating data analysis.
The priority at GE Digital is now on selling products for specific industrial applications, sold as offerings in the “Predix portfolio,” and tailored for G.E.’s roster of existing industrial customers. Less emphasis is being put on all-purpose software for the wider industrial world.
In an interview, Mr. Ruh described the change at GE Digital as “a pivot” rather than a retreat. “We’re still 1,000 percent behind our Predix portfolio,” he said.
Two key products in that portfolio were acquired. In September 2016, GE Digital bought Meridium, a maker of equipment-tracking software, for $495 million. Two months later, it bought ServiceMax, whose software is used to manage industrial field service workers, for $915 million.
The current strategy, Mr. Ruh said, “is about industrial apps” like those. It is a measured, step-by-step approach but one, Mr. Ruh said, that capitalizes on G.E.’s strengths — its industry knowledge and deep customer relationships — and is lifting sales.
GE Digital remains a large player in an increasingly crowded field of companies offering industrial internet software of various kinds, in different market niches. The entrants include the big cloud suppliers like Amazon, Microsoft and Google; major business software companies like Oracle, SAP, IBM and SAS Institute; G.E.’s industrial peers such as Siemens, Honeywell and ABB; and start-ups like C3 IoT, Uptake and FogHorn Systems.
The opportunity for G.E., analysts said, centers on its longstanding relationships with customers and selling to them. And so far, only 8 percent of its industrial customers are using Predix portfolio products, the company said.
The New York Power Authority, the nation’s largest state-owned utility, is one of them. The utility is working with GE Digital to build apps that improve the efficiency of its power generation and distribution network. In pilot projects, the partnership has saved or avoided $3 million in costs, said Gil Quiniones, chief executive of the state power authority. The goal is $500 million in savings over the next decade.
But for a technology project to help its customers reduce energy consumption, the state authority went with a start-up, C3 IoT.
Brian Hurst, chief analytics officer at Exelon Utilities, a large electric utility corporation based in Chicago, is also working on early-stage projects with GE Digital. Mr. Hurst said the progress was encouraging and he saw no evidence that the cuts at GE Digital had affected their joint work.
But it is something he is watching closely. “The technology is moving so fast,” Mr. Hurst said. “Today’s players may not be tomorrow’s players.”
GE Digital, Mr. Ruh insisted, is building a business for the long term. Revenue from the Predix portfolio products reached $550 million last year, he said, and sales are growing rapidly. GE Digital’s total revenue of $4 billion also includes all of G.E.’s traditional industrial software, and the unit’s global work force is more than 4,000.
“Our approach is heads-down,” Mr. Ruh said. “We’re going to show you success.”
For his part, Mr. Flannery has consistently declared his support for G.E.’s digital-industrial vision — but that does not guarantee the future for GE Digital. Mr. Flannery is selling off businesses to streamline the company. The lighting and railway locomotive divisions are up for sale, and others could follow.
A smaller G.E. might not need a stand-alone digital unit. Some analysts recommend putting all the software in the industrial divisions, like power and aviation, closer to customers.
“San Ramon shouldn’t exist,” said Scott Davis, chief executive of Melius Research, an independent financial analysis firm.
Follow Steve Lohr on Twitter: @SteveLohr