Jeff Immelt

Jeff Immelt: Green is Green, Part II
by Justice Litle
The Rude Awakening
Wall Street, New York
Thursday, March 23, 2006

Justice Litle continues with his discussion of new GE CEO Jeff Immelt's "Green Is Green" plan.

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Eric Fry, a stone's throw from the PCB-laced Hudson River,
reports...

General Electric was not ALWAYS the environmentally
friendly company that it is now promising to become.
Indeed, throughout most of this industrial behemoth's 125-
year history, it made money the old fashioned way, by
spewing toxins everywhere it went. A simple Google query
tells the tale. When your editor queried Google with the
words "GE" or "General Electric" and "pollution" or
"pollutants," the search engine returned an astonishing
number of responses – 1,246,000 to be exact. To be sure,
that's fewer than GM's nearly 2,000,000, but still well
ahead of the number of responses returned by linking
"pollution" and "pollutants" to ExxonMobil, 3M or Dupont.

As one of America's most prolific industrial polluters,
General Electric gained a certain sort of notoriety for
dumping PCBs (polychlorinated biphenyls) into the Hudson
River. Between 1947 and 1977, GE dumped more than 1.3
million pounds of PCBs into the upper Hudson.

"Even as GE dumped these chemicals into the river," the
National Resources Defense Council recalls, "evidence of
their dangers mounted. By the mid-1970s, a growing number
of studies had found links to premature births and
developmental disorders, and had shown that PCBs caused
cancer in lab animals. Today, the federal government
classifies PCBs as probable human carcinogens. They are
also associated with reproductive problems, low birth
weight, reduced ability to fight infections and learning
problems...Because of PCB contamination, New York State
essentially shut down the Hudson River fishery in 1977. The
New York State Department of Health still recommends severe
restrictions on eating Hudson River fish."

The so-called Superfund law held GE liable for a $500
million clean-up of the Hudson. But that big clean-up still
has not occurred because GE continues to fight, and win,
various court battles against doing so. Despite General
Electrics ignominious environmental legacy (and its
present-day ripple-effects), a new-and-improved "green"
company is emerging. Under CEO Jeffrey Immelt, General
Electric is embracing what it calls "ecomagination" to
develop "next generation" environmental technologies. The
transformation has just begun, as Justice Litle explains.

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In 2002, General Electric's newly minted CEO, Jeffrey
Immelt, snapped up Enron Wind for the bargain-basement
price of $300 million (give or take; estimates vary). Thus
began GE's "green is green" transformation. Since then,
GE's wind division revenues have quadrupled, from $500
million to over $2 billion. The rapid growth of the wind
division illustrates GE's commitment to emerging markets as
well as alternative energy: Two of the firm's four
technology R&D centers are located in Bangalore and
Shanghai (the other two are in Munich, Germany, and
Niskayuna, N.Y.).

"GE has ramped up development of the towering 92-ton
turbines by seeking expertise from all four labs," Fortune
Magazine reports. "Chinese researchers design the
microprocessors that control the pitch of the blade.
Mechanical engineers in Bangalore devise mathematical
models to maximize the efficiency of materials in the
turbine. Power-systems experts in Niskayuna (which has
researchers from 55 countries) do design work. And
technicians in Munich have created a 'smart' turbine that
can calculate wind speeds and signal sensors in other
turbines to pitch their blades to produce maximum
electricity."

Sharing the wealth is good business and good politics:
Goldman Sachs estimates that more than half of GE's revenue
growth could come from India, China and the like over the
next decade. (South America could also play a significant
role.) Eco-friendly and alternative energy infrastructure
will certainly be a major portion of the bottom line.

Next to civil unrest, pollution and water issues are the
two biggest problems that China and India face. Because
pollution and water issues are prime causes of agitation,
they sit right at the top of the "urgent concern" list, no
matter how you slice it. The developing world's pollution
problem is also fast becoming the rich world's problem; for
example, the U.S. Environmental Protection Agency reports
that a third of California's air pollution could eventually
be traceable to China. Bad news for the planet, good news
for firms seeking to solve the planet's problems on an
industrial scale.

Jeff Immelt: Motives for Getting Ahead of the Curve

General Electric has another motive to get ahead of the
curve: the inevitable squeeze of tighter environmental
regulations. By committing to an aggressive greenhouse-gas
emissions reduction program, GE simultaneously puts
pressure on its rivals, prepares in advance for the arrival
of a strict regulatory environment, and establishes its
"green" credentials early in the game. The experience and
reputation gains of such an ambitious program could also
lead to future business opportunities, like environmental
technology consulting and energy infrastructure
development. As an added bonus, global warming concerns
give a boost to GE's nuclear power activities. As the
developing world blooms and the rich world places a higher
premium on clean fuel alternatives, GE's opportunities for
rapid growth will bloom alongside.

Now we come back to the concepts of variant perception and
structural change that I mentioned in yesterday's column.
The payoff for Immelt's strategic shift is still a ways off
in the future; though things got started with the purchase
of Enron Wind back in 2002, most of the ecomagination
initiative is still young. Wall Street has not yet paid
heed to this bold change in course. The focus is still on
General Electric as an industrial and financial
conglomerate, not as an environmental powerhouse.

Jeff Immelt: Decline

GE stock recently saw its largest decline in nearly three
years on news of an earnings shortfall. $2.9 billion was
plugged into the reinsurance unit to shore up reserves
before the Swiss Re handoff — a tacit admission that
financial claims may indeed have been understated in past
years — and analysts were disappointed by slowing revenues
and lower-than-expected profits in plastics and real estate
sales. Revenue weakness and disappointing growth were the
primary areas of concern.

With the energy and metals markets getting so much
attention from investors and speculators, it is rare these
days for a new Outstanding Investments recommendation to be
available at any type of short-term discount. General
Electric may be a rare instance of this. As a long-term
investment, GE is attractive for two reasons: First, Immelt
is putting GE's financial engineering past behind it,
positioning the company for strategic growth in emerging
markets and eventual dominance in alternative energy and
green infrastructure. Second, the general consensus still
views GE as "The House That Jack Built" and has not yet
recognized the long-term wisdom behind Immelt's creative
destruction. For the patient investor, the ultimate payoff
should come in the form of both accelerated earnings growth
and a "perception premium" that kicks in when Wall Street
sees the beauty of  "green is green."

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