We Develop Leadership Businesses
Management and the Board spend a significant amount of time defining what makes a “great GE business.” We invest in leadership businesses that reflect the essential themes mentioned earlier and leverage our key capabilities: brand, technology, content development, globalization, people, and financial strength.
We like businesses where good management results in superior financial results. We like broadly diversified businesses with multiple ways to grow. We believe that our process skills create a competitive advantage. We like businesses where we can “retool” our strategies to capture new opportunities for profitable growth.
We have aggressively reshaped GE over the past few years. Since 2002, we have exited businesses with revenues of about $50 billion — the equivalent of a FORTUNE 50 company. We have exited all or most of our insurance, materials, equipment services, and slow-growth entertainment and industrial platforms. We also exited our U.S. mortgage origination business and announced plans to sell our personal loan business in Japan. Strong and consistent actions have increased our growth rate while reducing volatility.
Over the same time period we acquired $80 billion of new businesses — the equivalent of a FORTUNE 30 company. We invested in Infrastructure, creating one of the largest renewable-energy businesses in the world. We diversified our Healthcare and NBC Universal (NBCU) franchises by investing in fast-growth markets such as life sciences, healthcare IT, and cable programming. We created a new high-tech industrial business called Enterprise Solutions. And we dramatically expanded our financial services businesses in global markets. Our strategic investing and execution have created a higher-margin, more global company that is well-positioned for today and tomorrow.
In 2007, we demonstrated the ability to create value for our investors through capital redeployment. We sold our Plastics business because of rampant inflation in raw material costs. With that capital we acquired Vetco Gray, adding a subsea platform in Oil & Gas; we acquired Smiths Aerospace to create an avionics platform; we built global cable content through the acquisition of Oxygen and Sparrowhawk; and we added several industrial service platforms. We significantly exceeded the earnings we lost from Plastics, increased our industrial growth rate, and launched new platforms for future expansion.
Today we have six leadership businesses: Infrastructure, Healthcare, Commercial Finance, NBC Universal, Industrial, and GE Money. Each of these businesses can hit our financial goals while adding to the strategic value of GE.
Infrastructure is an example of a business where GE has solid leadership. Infrastructure will drive our earnings for the next few years. It was approximately 40% of GE’s earnings in 2007. It grew revenues 23%, earnings 22%, and orders 26% in the year. About 60% of our Infrastructure business was outside the U.S. Eventually, the U.S. will begin to invest in new infrastructure, which should mean another five to ten years of rapid growth, at returns exceeding 30%.
Our competitive advantage in Infrastructure is based in technology. We invest $3 billion in research and development each year, so that we have a deep pipeline of new products. Our Infrastructure equipment orders have grown on average 39% annually for the last three years. While this has been great for current earnings, our equipment growth is even more exciting for the future. In 2007, we added approximately 6,000 thermal and wind turbines, engines, and locomotives to our installed base, which drives even greater service growth. We finished 2007 with a $100 billion backlog of service agreements built on the technology of our installed base. Our Infrastructure service business has $26 billion of very profitable revenues and should grow more than 10% annually for the next decade.
One of the things I love about our Infrastructure business is that we are always on the “same side as our customers.” In other words, we make money together. A great example is the relationship we have with Duke Energy. We worked together to form the U.S. Climate Action Partnership (USCAP), an important initiative for industry and non-governmental organizations to provide a set of principles that will guide future climate legislation. In 2008, Duke and GE are collaborating on wind energy, new gas turbines, and an investment to build the first commercial Integrated Gasification Combined Cycle (IGCC) coal plant. We are strategic, technical, and financial partners.
About 35% of our earnings are in Commercial Finance and GE Money. Financial services is a great example of how our execution enables us to outperform our competition. Our teams have grown their earnings more than 10% for decades, so we like these businesses. However, in 2007, “financial services” took on a negative connotation for investors. The equity value of banks and consumer finance companies declined by 20% in the second half of 2007. Conversely, our financial services earnings grew 20% this year despite the volatility in the industry. We earned $10.3 billion, and our write-offs were small relative to our size.
Our financial services businesses are inherently more valuable than those of traditional banks or other financial services companies. Why? Because we have significant global origination in end-user markets that we understand better than others. We have deep expertise in areas such as commercial real estate and commercial equipment leasing. We have sound risk principles that are deeply embedded in our culture and supported by a strong balance sheet. We underwrite risk to hold on our balance sheet, so that we can manage our exposure to an asset class or customer. We have a great global position. More than half of our financial services earnings are outside the U.S. As the rest of the world continues to expand, we can withstand a market slowdown in the U.S. and still grow earnings.
Our financial services businesses should do well in a year like 2008. Pricing will improve as banks retrench. There could be $300 billion of assets available at high returns. We plan to seize opportunities in the current turmoil and position our financial services businesses for years of profitable growth.
NBCU is a great example of a business that becomes more valuable as its market evolves. In 2002, 75% of its earnings derived from NBC broadcast television. But we realized that the broadcast model, while important, would grow more slowly in a digital world. We have refocused NBCU in global markets around fast-growth cable, film, and digital businesses. Today, driven by powerhouse brands such as USA Network and Universal Pictures, these businesses in total represent more than 80% of NBCU’s earnings and are growing at about 15% each year. In 2008, we expect to achieve double-digit growth in digital revenues. As a result, NBCU is positioned to grow earnings 10% in 2008.
As with the rest of GE, NBCU has exciting growth opportunities outside the U.S. This is approximately 20% of our revenues today, and will grow 20% annually. Last year, we launched a studio in London to produce global content. We recently agreed to acquire a significant stake in India’s NDTV, a major media company in one of the world’s fastest-growing markets. In 2008, we will have 15 cable and satellite brands that will be distributed in more than 100 countries around the world. We will double our revenues to $500 million in international cable. We are playing in a $100 billion market, so we have a massive runway for growth.
Should we sell NBCU? The answer is no! I just don’t see it happening … not before the Beijing 2008 Olympic Games … not after the Olympic Games. It doesn’t make sense. The business has outperformed its competition and the GE average for the last 20 years. Our diversified content position is very strong. Content is increasing in value in a digital world. We are in a good cycle, with momentum around the Beijing Olympics, the U.S. elections, and the 2009 Super Bowl. NBCU benefits from GE’s global footprint, financial strength, and human resource skills. And, NBCU provides us with a leading perspective on digital transformation. NBCU adds value to GE, and GE adds value to NBCU. This is true now, and it will be true in the long term as well.
GE has great leadership businesses. But there are two aspects of GE that are still under-appreciated. The first is our financial strength. GE remains one of only five “Triple-A”-rated companies in the U.S. Our free cash flow — cash available after we pay our dividend — was $19 billion in 2007. Our pension plans have $67 billion of assets, with a surplus of $15 billion. Our financial discipline gives us tremendous strategic flexibility and should make our investors feel secure.
The second is the importance of diversity. Earlier this decade, we were grappling with the collapse of the U.S. power bubble and a tough commercial aviation cycle. But we could keep investing in Infrastructure because NBCU, Healthcare, and GE Money were doing great. In 2008, our businesses that rely on the U.S. consumer will face challenges. However, they will be more than offset by booming Infrastructure growth and steady progress in Commercial Finance, Healthcare, and NBCU. Together, this strong portfolio will deliver reliable growth for you.