General Electrics (GE) hit the headlines several times with its plan to sell off GE capital, the company’s financial arm. The sell off was a strategic move as GE is restructuring to return to its roots as an industrial company. However, unpredictable market conditions have put major obstacles in GE’s path. These market conditions include tough regulations, plunging oil prices, and slow growth in emerging markets.
The most urgent problem that GE faces now is tough regulations. Regulatory bodies are watching GE very closely because its large market share allows it to have significant impacts on the market. The restrictive market environment becomes increasingly problematic for GE as it tries to consolidate its core industrial businesses. Sean Ross, an expert financial writer and consultant, shared his concerns on GE’s regulation issues in his published article. In 2015, GE planned to acquire a huge power unit from the French energy company Alstom SA in Europe as part of the restructuring effort. However, EU regulators halted the deal due to antitrust concerns. GE gained approval only after it agreed to sell parts of Alstom to Ansaldo Energia, a rival Italian company. Again, in July 2015, U.S. regulators invalidated a $3.3 billion sale of GE's appliances operation. The argument was that the sale would give rise to monopoly.These are just two instances. Going forward, we know that similar regulation obstacles will continue to hinder GE’s effort to restructure.
Plunging Oil Price
Even if GE eventually overcomes regulatory restrictions, another immediate problem that GE will face is the plunging oil price. This obstacle is just as significant as the regulatory restrictions for a newly consolidated industrial company. After restructuring, the $19 billion Oil division has become GE’s third-largest division, accounting for 20 percent of GE’s industrial sales. However, being reliant on oil is highly risky when oil price has been in free-fall. According to the Wall Street Journal, revenue from GE’s drilling and surface division indeed fell 10% in 2015. The falling oil price has posed a huge growth impediment for GE since its oil division is a key industrial growth driver. In addition, GE’s shift to focus on oil with such a bad timing has also shaken investor confidence drastically. Some investors are worried that GE’s share price will fall even more than the 35% share price drop since the current CE, Mr. Immelt, took over. If GE’s management team does not address such sentiments well, further share price drop might be a self-fulfilling prophecy when investors start panic selling.
Slowing Emerging Economies
GE’s problems are not limited to these immediate obstacles in its path of restructuring. One of the company’s long-term problems is the sustained slow growth in emerging markets. The slowing growth is going to put GE’s revenue on a downward trend. GE has traditionally relied on the emerging market’s strong growth to offset sluggish demand in developed economies. The emerging markets were the sole driver of GE’s revenue growth. For the past decade, GE's total revenue growth rate has been only 1.1%, but the Pacific Basin and the Middle East region have achieved 8% and 13% annual growth respectively. Keith Sherin, GE’s chief financial officer, publicly stated during an interview that GE was shifting its focus to these markets with higher growth. However, the recent slow growth in these economies has caused GE’s revenue to drop by 11% in 2015. As the emerging economies continue to slow down, GE’s revenue is likely to decrease as well.
With all these obstacles, GE’s future seems more uncertain than ever. The key to solving these problems lies in having an effective management team that will devise the right strategies at tough times. GE has made miracle happened once under Jack Welch whom was deemed to be “Manger of the Century”, but the investors are rather pessimistic that the new CEO Jeffery Immelt will have the same caliber to lead GE to new heights.