USA TODAY CEO Forum: GE sees growth opportunities

PITTSBURGH -- Many executives would find it hard to be cheery as they enter a new year marked by a wobbly economy, uncertain political trends and new technologies that pose profound challenges to old business models.

Yet General Electric ge CEO Jeffrey Immelt seems buoyant.

He says GE revenue will grow as much as 15% next year. And he bases his confidence, at least in part, on some of his initiatives since he replaced his legendary predecessor, Jack Welch, just days before the Sept. 11 terrorist attacks.

Immelt, 51, has pushed the company to expand in growth markets overseas. He also has made GE a leader in manufacturing a new generation of environmentally friendly technologies.

Many investors remain skeptical. The stock has underperformed the market during Immelt's tenure and is flat in 2007.

Investors seem to find it hard to make sense of a company poised to end this year generating about $172 billion in revenue from interests that span jet engines, energy production, commercial and consumer finance, health care equipment, home appliances and entertainment.

Further complicating matters have been a huge write-down in 2007 from a lending subsidiary dealing in subprime mortgages and a strike by TV and movie script writers that could lead to dramatic changes for NBC Universal.

Immelt discussed his company's challenges and opportunities with USA TODAY's David Lieberman at the seventh USA TODAY CEO Forum, in conjunction with the Tepper School of Business at Carnegie Mellon University.

The interview took place in front of an audience. These are edited transcripts.

On GE's outlook

Q: You've spoken to Wall Street analysts. Next month, GE has its annual retreat in Boca Raton, Fla., for executives. What's your message?

A: We have always positioned the company to be a safe and reliable growth company. So if you think about what's going in the world, there's really kind of three big themes.

One is that the U.S. housing market is in retreat and the U.S. consumer is under real stress because of that.

Theme No. 2 is that global growth has never been healthier. I've never seen a time in my career where the global economy is less related to the U.S. economy than it is today, which is, I think, a good thing, not a bad thing.

And then the third thing is that there is a whole series of what I would call synthetic debt vehicles that just didn't work. Collateralized debt obligations, structured investment vehicles. They're ugly when they end.

So what we try to tell investors is that this is a company that can still grow earnings 10% and still generate high returns because of the diversity of what we have, because of the strength of our businesses and the quality of the risk management we have as a company.

In 2007, for the first time in the history of GE, we'll have more revenue outside the United States than we'll have inside the United States. Our business outside the United States will grow between 15% and 20% next year. We're a $172 billion company. In 2008, with the U.S. economy growing at 1.5%, we'll grow revenue by 15% because we're in the right places with the right products at the right time.

Q: Domestically, you're not projecting a recession?

A: CEOs are lousy economists. I take what the world thinks. The world basically pegs the U.S. GNP (growth) next year at somewhere between 1.5% and 2.5%. Basically, the U.S. is in full employment. Interest rates are coming down rapidly.

There doesn't have to be a recession in the U.S. if everybody keeps their wits and if the Fed does what it can do and things like that. I just think there will be a real slowdown because (of) housing. In 50 years, the median house in the United States has never declined. It will decline in '07, it will probably decline in '08 and might decline in '09.

On China

Q: You want to expand into China. Does it help GE to have the 2008 Summer Olympics in Beijing on NBC?

A: The Olympics are just a fantastic global brand. For those 17 nights, you really captivate the world. And if you're a global company like ours, you get a natural positive spin by being a part of the Olympics. It helps the totality of the company.

We also signed up in 2003 to be an Olympic sponsor. So at the Beijing Olympics, we'll do about $600 million of other GE business — health care, electrical equipment, things like that.

One of the things we were able to negotiate with the Olympic committee is that all of the events are going to be televised live, which probably means that the swimming that you're going to watch at maybe 10 o'clock at night is actually going to be 9 o'clock in the morning in Beijing. The athletes weren't so thrilled about it, but we think it's going to be great viewing for most Americans.

Q: You've hung your hat on the environment, but China doesn't seem to care.

A: Young Chinese want money. They want clothes. They want freedom. They want to have access to the Internet. They want everything you want. And they don't want to live in squalor.

Their point of view is that at the time in which this country had great economic expansion, we could have cared less about the environment. We used coal. We did whatever it took to grow this economy.

But I'm a firm believer that the environment in China and India has to be cleaned up, will be cleaned up, mainly because the population won't tolerate it any other way. And companies like GE will be big benefactors of those investments.

Q: Can you put pressure on them?

A: The basic answer is, no. We have a lot of influence. We may have as much influence as any other company. But, in the end, we're not political beings. We meet with the government and politicians (and) we very strongly endorse and suggest that they should be working hard on their environment and environmental policy. And we're trying to sell them stuff to help them do it, whether it's coal gasification, whether it's wind energy, whether it's water desalination, to be an active participant in it.

Q: Human rights activists also say you should put pressure on China to resolve the conflict in Darfur.

A: We've been a big contributor to a lot of the relief efforts in Darfur and throughout Africa and will continue to do so. But, basically, I'm not a politician. It would be not accurate to assume that I carry political clout when we go around the world.

The decision that every company has to make in China is: Are you going to be in or are you going to be out?

So you can sit on the sidelines. We can talk about how terrible everything is, how awful everything is, how backwards it is and how we wish they did this, that and the other thing as a sideline character. Or we get in the battle. We build factories, we try to establish political ties, economic ties. And I think if we don't do that progressively as a company, we're going to move backwards — as a company and as a country.

So, do I agree with everything, do I like everything? No. But, you know, that's probably true of my mother-in-law as well. Right? But I love her. In the end, you have to say, I'm either in or I'm out. And if you're in, you've got to be in all the way. And if you're not in, you say goodbye to that chapter in history.

On health care

Q: You're a major manufacturer of health care equipment as well as a major employer. What do you think of the health care system here?

A: Health care is about 14% of GNP (gross national product). It's growing roughly 10% a year. If you look at the bow wave of demographics that are coming in terms of how long people are going to live and how long people that are living are going to be on the government dole, if you will, it's a big challenge.

We've got to do something about health insurance. It adds cost.

We have to do something about the transparency of quality measures and have reimbursement follow quality in terms of outcomes.

We have to do something about getting information technology broadly into the system.

We've got to do something that modernizes the Food and Drug Administration and (help) new technology get to market faster, but have a way to measure its efficacy.

(However,) health care is one of the few export industries we have. We shouldn't dismember this important industry just because we get demagogued and things like that.

On TV

Q: How long do you think the TV and screenwriters strike is going to last?

A: The strike has been going on for six weeks. And (talks have) broken apart again. This is about something important, which is fundamentally how the digital revenue streams get sorted out between video content companies like NBC Universal and the writers and directors.

My hope is it doesn't last too much longer, but I think the differences are profound and, to a certain extent, they're worth taking a strong stand on.

Q: If it does last, will you lose money, or will you come out OK because your programming costs will go down?

A: What I would say is, prepare yourself for lots of reality TV. So, yeah, I'd like to put in a plug right now for maybe five nights a week of Deal or No Deal.

I hope the strike gets settled amicably, but I think everybody in the classic analog network (TV) business has to rethink the business model. You can't be in businesses where the revenues go down and the costs go up.

If you go back and take a classic TV show like TheWest Wing, that might be a $1 billion franchise. If you paid a billion dollars (for the show), you could sell advertising on air and sell it back into syndication for $2 billion.

If Heroes turns out to be as successful as West Wing, which I think it could be, we will have to have sold it 25 times. We will have to have sold it online, globally, (with conventional TV) advertising, in your Christmas stocking.

Q: How do you compete with someone who feels like he's on a mission from God? For example, Rupert Murdoch paid $5 billion for Dow Jones, which owns The Wall Street Journal, and will use it to help launch his Fox Business Network. You had the same opportunity to protect CNBC.

A: If there's anybody you should admire in the business world, it's Rupert Murdoch. I'm a rabid competitor of Rupert. I want to beat him so badly I can't even describe it.

But when I shave in the morning, I'm worried about investors. When he shaves in the morning, he says, "Hello, Investor. How are you doing today?"

So you've got to have some disciplines that maybe he doesn't always have.

When I looked at Dow Jones, there wasn't one person in the entirety of GE that knew a gosh darn thing about running a newspaper. Not a one. So we're not going to pay $5 billion for The Wall Street Journal when we have no domain, no expertise, just because he is. No, thank you.

Now, when it comes to CNBC competing against Fox Business Network, we're going to try to crush them. In other words, we won't spare any expense. We won't try to do anything other than totally beat them. I've got as many tools as Rupert does, and maybe then some.

On leadership

Q: What skills do people need to be leaders 10 and 20 years from now, especially in international business?

A: It's curiosity. It's being good with people. And it's having perseverance, hard work, thick skin. Those are three traits that every successful person that I've ever known has in common.

Most of what I learned when I was young was how to be a general manager. But successful leaders in the next 10 or 20 or 30 years will have to be real experts. They're going to have to know how to pick products. They're going to have to know how to pick countries.

What you should be learning is how to develop your own touch and feel for customers, technology, innovation, globalization — things like that. … And we're really in a what-and-where generation, not so much a who-and-how generation today.

Q: Generation Y has a different view of work. Does your management program need change?

A: Generation Y — whatever they call it — I've never seen people smarter, more curious, more worldly. I am so optimistic about the talent that I see.

The other thing I would tell Generation Y is that there's Generation A in India. And they want what you have. They want quality of living. They want a second car. They want a vacation home.

So either with you or with them, I'm going to build a future for GE.

Q: Does GE have a program to develop leaders internationally?

A: Our leadership programs are really global programs. If you walked into a GE factory in China, you could eat off the floor. It would have Six Sigma (quality improvement methodology). It would have managers that talk statistical process control, engineering control. So everything we do in one place, we do everyplace else. That is important, No. 1.

No. 2, the GE Foundation. We give about $100 million or maybe more to secondary education globally, mainly U.S., though. And this is to get more kids in high school to study math and science. Every successful country that I've ever seen — if you said, "What do they have in common?" — they graduate a lot of engineers. Or they have a lot of oil.

The biggest educational issue that we've got in this country: not enough people who are really strong in math and science, not enough kids who want to become engineers. And we've got to solve that.

Q: You can't be an expert in everything. Do you have a sniff test to be sure that you're getting good information?

A: I have things I watch. I watch rail loadings in the United States. I watch trailer rentals. I watch consumer delinquency. I get these things every day. So I have probably a dozen statistics that I have found, over time, are leading indicators of what's going on.

I'm on the board of the New York Fed, which I joined three years ago, so even though I didn't get A's in economics, I rub shoulders with people who got A's in economics at least once a month. And I kind of stir it all up in terms of how it feels and talk to the board — and that's how I make decisions.

The only way to run a company like GE, with our size and mass and everything, is: Bad news has to travel as fast as good news. You have to have a management team and a culture where people are trained to give you bad news on losses, bad news on what's going on in markets.

Q: A company as big as yours suffers from the law of large numbers. You have to grow much more than a smaller company for the results to be meaningful. Is there any logic in splitting up the company?

A: In the last five years, we've sold 40% of our revenue. So we're a company that always has refreshed itself. We should always be very tough-minded about what fits and what doesn't fit.

But we try to position ourselves in big themes where size is an advantage.

The first one is infrastructure and infrastructure technology. This is energy, water, oil and gas, things like that. That's a $70 billion business that will grow 15% a year for the next five years. That's a business where small people need not apply.

Emerging markets — $32 billion of our company's in emerging markets. This is China, India, Turkey, Eastern Europe, Russia, Latin America. That's going to pull the whole company along.

Our incremental growth next year will be $20 billion. So we're growing the company each year bigger than Nike, bigger than a lot of companies, but we can only do that if you make size an advantage and not let it be a disadvantage.

On politics

Q: You said you're not a political person. Does that mean you're not going to make any contributions in the upcoming presidential campaign?

A: My main political party is GE. The company has always stayed pretty bipartisan. Will there be contributions? Sure. But I would say they'll be equal as time goes on.

Q: So you haven't picked any particular candidate at this point?

A: No. And I won't. I'm a CEO of a public company. You know in many ways the only reason why people know me is because I run a big company. And I don't ever want to confuse that with me taking a public position on stuff that fundamentally doesn't help GE investors. And so I just think that's the right position to have if you're running a public company.

On subprime troubles

Q: You had a tough experience this year with the subprime mortgage market.

A: In about 2003, we bought a subprime originator called WMC in California. We ran it for probably two or three years. We paid, I don't know, $400 million, something like that, for it. We tracked it very hard. In the latter part of 2006, the market began to change. At the end of the first quarter of 2007, we basically made the decision to exit the business. And we probably wrote off $800 million, something like that, as we exited the business.

(Buying WMC) was a bad business decision, you know. It was the wrong business at the wrong time. It's not the first time we've done it. It won't be the last time we've done it. But that's kind of been the history.

Q: What lesson did you learn?

A: There are two lessons. One is the fundamental business decision that you could underwrite for somebody else to hold an asset, in the end, just was flawed. All of the other businesses we're in we hold ourselves. In other words, we underwrite for our own standards. The other one was: When you find something that doesn't work, exit immediately. And that's what we did here.

Look, if you run a big company, you're going to make mistakes. We bought Kidder Peabody in the '80s, sold it in the '90s. We got stuck on auto loans in the late '90s. We had a private-equity book in the late '90s.

At GE, we tolerate failure, but we don't tolerate a lack of learning. So, basically, we only let you make the same mistake once. That's the only way you can learn, I think, in a successful company of any kind.

On going green

Q: You're one of the first big companies to take a bold stand to go green. Was that mostly a moral decision or a business decision?

A: I'd say it's more a business decision. We were doing business reviews in 2003-2004. And when I spoke to our energy business, our rail business, our appliance business, really a bunch of different businesses, they were all working on fuel efficiency, conservation and greenhouse gas emission reduction.

Our team got together and said, "This is going to be a big theme." So we launched, in 2005, what we call Ecomagination. We committed to having a certain level of customer engagement. We committed to hard revenue numbers. And we committed to reducing our own carbon footprint by 1% a year.

The world's kind of come our way. Society has just changed its mind about the environment in the U.S. and around the world. I learned a long time ago that when society changes its mind, business better get on board, get ahead of it or you'll get crushed by it.

But if this was only about reputation, I wouldn't have done it. My name's not above the door. It's GE. I work for investors. Our reputation first and foremost comes from being a great-executing, high-performance company.

Q: How about President Bush? Is his administration doing enough in this area?

A: President Bush understands it. In the last year that he's got, getting something done in energy and the environment are things he'd like to do.

But it's going to be a big debate in the election. I run GE assuming that it's a question of when, and not if, we get carbon caps of some kind. I don't know if that's going to be '09, '08, '10, '11, but it's going to happen, and I want GE positioned for it.

Q: Al Gore wants to replace payroll taxes with a carbon tax (a tax on greenhouse gas emissions).

A: I'm a member of a group called the U.S. Climate Action Partnership, and our position really is about a cap-and-trade system (a cap on emissions and an exchange where companies could buy and sell allowances to produce them). At the end of the day, I think there should be a real dialogue between tax and cap-and-trade and things like that.

I think that there should be a market for carbon. That can be delivered with a cap-and-trade. It also can be delivered with a tax.

If you look at the most profitable energy asset in U.S. history, it's nuclear power plants. They're all 30 years old, and they're fully depreciated.

But if you're a utility CEO and you have to make a decision to invest in nuclear power, it's a hard decision. It's a $3 billion project. If you're 58, it's going to come online by the time you're long retired.

With no price for carbon, why would anybody take that kind of risk? That's why these market signals are so gosh darn important.