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LETTER TO STAKEHOLDERS
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Our other short cycle industrial businesses—Plastics, Consumer Products, Industrial Systems and Specialty Materials—are well positioned for the future. They have been affected by the global economy and earned less in 2002 than they did in 1999. To combat this they have lowered costs, invested in new products, built global distribution and added new growth segments. These businesses have transformed themselves during a tough cycle, and they can achieve double-digit earnings growth with only moderate economic expansion in 2003.Commercial Finance and Consumer Finance grew earnings by more than 15% last year, with attractive returns on equity. These businesses represent more than 80% of the earnings of the old GE Capital. We grew their assets by 16% in 2002, while losses and delinquencies remained stable. We acquired new platforms that are producing exceptional returns: Deutsche Bank’s inventory financing business, ABB’s structured finance business and Security Capital’s real estate operations. Commercial and Consumer Finance have broad and deep leadership teams—people who know how to get the most from each cycle. These businesses have solid competitive advantages in low funding costs, strong risk management and global origination, and should deliver double-digit earnings growth in 2003 and beyond. LEARNING THE HARD WAY ERC stands in sharp contrast to GE’s expectations for business performance. We pride ourselves on having sound strategy with strong operating accountability. A GE business can briefly get out of balance strategically or operationally, but rarely do we get both wrong at the same time. We did with ERC. ERC experienced more than a decade of strong performance from 1984 to 1996. However, we allowed ourselves to go into more volatile, commodity insurance lines and new geographies, and we did not manage this expansion well. Our poor underwriting in the late 1990s resulted in ERC’s losses in 2002. Although it offers little solace, our experience reflects that of the insurance industry, which has increased reserves by $25 billion to address poor underwriting during those years.When businesses underperform, we owe investors four things: state the financial results with complete clarity; correct the issues with our best people and intense management; maximize returns for investors; and share the lessons to avoid repeating the mistakes. We are doing these things with ERC.We have had a leadership team in place for the last two years that is fixing this business. ERC has exited its lower-return product lines, made a host of changes in operations and achieved $1 billion in price improvements in 2002—and expects to maintain this momentum in 2003. ERC is improving every day, in an industry that is heading toward stronger returns for the next few years.As you can see, GE will post solid growth in 2003 because of our business diversity. Power Systems will be down, as expected; however, the rest of the company is positioned for double-digit growth.OPERATING RIGOR Strong processes are the foundation of our operating rigor. We are in the ninth year of Six Sigma at GE, and it has become a permanent initiative—Six Sigma is the way we work. During the last year we completed more than 50,000 projects, focused primarily in three areas: working with our customers on their issues; improving our internal processes to improve our customer interfaces and generate cash; and improving the flow of high-technology products and services to the marketplace. We are in the fifth year of building a digital capability to make GE leaner and faster. Digitization is now generating $2 billion in annual productivity savings through sourcing and infrastructure. At the same time, we have used digitization to link with our customers’ workflow and improve service.Increasingly, the focus of our operating rigor is on growing cash flow. Cash is a priority for our leadership team and represents 60% of the measurement used for their incentive compensation. Six Sigma is creating repeatable and reliable processes that allow us to reduce cash tied up in inventory and receivables. Through digitization we are getting more from our fixed assets. We plan to generate nearly $30 billion in operating cash flow ex-progress in 2002-2003.We took several actions to strengthen our balance sheet in 2002. We improved our liquidity by reducing the commercial paper of our financial services businesses to 31% of their total debt outstanding. We also infused more than $6 billion into those businesses to increase capital and reduce leverage. GE’s Triple A rating was affirmed by the rating agencies, and our rigorous approach was recognized. We received four awards, including “Borrower of the Year” and “Best Corporate Issuer,” from bond investors and underwriters surveyed by International Finance Review.Financial strength gives us the ability to invest in growth, and we have viewed this economic cycle as a time to invest. We have increased the number of engineers, salespeople and service resources. We will invest more than $3 billion in technology, including major investments in our global research centers. We’ve strengthened our commitment to China, increasing resources there 25% in 2002, and we’ve increased our presence in Europe, where GE should exceed $30 billion in revenues in 2003.Acquisitions are a key form of investment for us. We have invested nearly $35 billion in acquisitions over the past two years. Acquisitions are a way to redeploy cash flow for future growth. The key is discipline: we buy the right businesses at the right price and grow them. Our acquisitions tend to be between $100 million and $2 billion in value, in industries we know. Our industrial acquisitions are companies with high margin rates and low capital requirements where GE can boost growth and cash flow. Our financial services businesses consolidate portfolios when GE can improve funding cost, risk management and growth. Our investment screen is simple: we expect a 15% cash-on-cash return by year five, or we don’t do the deal.In 2002, we saw just how this strategy can work. We acquired Betz Dearborn, an industry leader in water services. This business has a powerful asset: 2,000 sales engineers who are so committed to their customers that they practically live on site, creating powerful relationships and new cross-selling opportunities. Another acquisition, Interlogix, is a medium-sized player in security systems. It has excellent technology that, when combined with our services capability, will create new opportunities. At year-end, we announced the acquisition of Instrumentarium, a leading provider of medical equipment and services for the operating room. We view this as a new platform in the operating room, where GE can add services and integrate technology.Throughout our history, making smart bets at the right point in the cycle has improved share owner returns. This is an excellent time to invest for long-term growth. Assets are fairly priced, and with our financial strength we can move ahead of the competition.PEOPLE AND CULTURE My job is to attract and keep talented and loyal people who work together as a team. During a volatile year, our voluntary attrition among the top 600 leaders was less than 3%. We named 22 new officers, 41% of whom are global and diverse. We continued our $1 billion investment in training, and our Welch Learning Center at Crotonville remains a vital part of the GE culture. As some companies stopped hiring, we increased on-campus recruiting and launched a Commercial Leadership Program aimed at growing a new generation of customer-focused leaders. At the same time, we continue to build a culture based on performance, compliance and teamwork. The GE people appearing throughout this report represent the best of this culture. They imagine, they lead and they perform.They exemplify our new slogan, Imagination at Work. GE has a rich century-old tradition of great brand campaigns, and Imagination at Work upholds the standard. But the best thing about it is that it tells the world about the spirit and passion of GE employees—their curiosity, drive, hard work, warmth and humor. For GE employees, Imagination at Work is a daily rallying cry to say: “what we imagine, we can make happen.”We strive to make GE a meritocracy, where the best-performing people get the best rewards. But everyone must operate in a system where the company comes first. We all serve under the same integrity policy and compliance program, our compensation plans are broad-based, our businesses work together, and we have one human resources system. When the company wins, we all win.
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Click individual for profile The GE Leadership Team Representatives of GE’s operating and corporate management…united by curiosity, drive and imagination |
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| Dave Calhoun President and CEO, GE Aircraft Engines |
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| Keith Sherin Senior Vice President, Finance, and Chief Financial Officer |
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| Ben Heineman Senior Vice President, General Counsel and Secretary |
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| Charlene Begley President and CEO, GE Transportation Systems |
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| John Rice President and CEO, GE Power Systems |
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| Mike Neal President and CEO, GE Commercial Finance |
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| Bill Conaty Senior Vice President, Human Resources |
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| Scott Donnelly Senior Vice President, Global Research |
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| Lloyd Trotter President and CEO, GE Industrial Systems |
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| Dave Nissen President and CEO, GE Consumer Finance |
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| Lynn Calpeter Vice President, Audit Staff |
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| Joe Hogan President and CEO, GE Medical Systems |
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| Ferdinando Beccalli President and CEO, GE Europe |
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 GE.com Home Stock Chart Investor FAQs
Investor Relations Contacts GE Annual Reports 2003 Proxy StatementPrivacy Policy Terms and Conditions Order Reports Electronic Delivery *This is an interactive electronic version of GE's 2002 Annual Report to Share Owners, and it is intended to be complete and accurate. The contents of this version are qualified in their entirety by reference to the printed version. A reproduction of the printed version is available in PDF format on this Web site.
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