Two years ago, in the depths of the global economic collapse, I promised that GE would emerge from the recession a better company. We have. Our financial performance is accelerating. We have extended our competitive advantage, while investing in growth. We fortified our leadership and culture.
The world we face in 2011 is getting better. We see signs of economic strength every day. It doesn't always "feel great," because we have entered a new economic era. Growth around the world is happening at multiple speeds. Developing markets like Brazil and India are experiencing fast growth, while much of the developed world is dealing with sluggish growth and fiscal constraints. Globally, governments are more active, as they grapple with problems ranging from high unemployment to healthcare inflation to crumbling infrastructure.The World We Face in 2011 is Getting Better
Volatility has become a way of life. Commodity costs are increasing as the economy recovers. Geopolitical risk is also on the rise. Disruption in countries like Egypt and Greece can now shake the global markets.
Classic economic cycles will be shorter and more segmented. Long-term growth will be interrupted by short-term volatility. In this environment, companies must invest to grow, while staying fast and productive.
We made good decisions during the crisis that are benefiting investors. We invested in GE Capital to weather the crisis and retain a strong business model. This required tough calls, like raising equity in 2008 and cutting the GE dividend in 2009. But today, we have a competitively advantaged financial services business that is rewarding investors with strong earnings growth.
We invested more in R&D each year, despite the tough economy. Our R&D spending will have grown 54% from 2008 to 2011. We invested for the long term, while cutting cost in less-essential areas. We face the future with a stronger product pipeline than at any time in our history.
We simplified the GE portfolio. We sold our Security business, completed the joint venture of NBCU with Comcast and sold some non-core assets in GE Capital. These moves generated substantial cash for GE. They give us significant financial flexibility in the global economic recovery.
Because of these actions, GE is positioned for success.
In the 21st century companies must serve two roles. They must deliver positive returns for investors, and they must be a positive force for change. GE does both.
GE's value is more than the sum of its parts. GE is an innovative, advanced technology infrastructure and financial services company with the scale, resources and expertise to solve tough global problems for customers and society. We are a competitive force for change.GE's Enterprise Value
GE has financial strength and resilience. We ended the year with $79 billion of cash. We have kept the company safe through volatile times. Our business model allows us to invest in growth and generate free cash flow at the same time.
We innovate on a large scale. More than half the planes in the world have GE engines. Jet engines are a technical and manufacturing masterpiece. We have invested more than $10 billion in R&D over the past decade to serve our military and commercial aviation customers. Our new engines are substantially more fuel-efficient than the ones they replace. We track thousands of engine performance parameters while they are in service and use that information to improve our customers' performance. Our ability to execute large-scale innovation is based on GE's technical depth and scale. This capability is unmatched and creates customer satisfaction, employee pride and financial performance. There are very few companies on earth who do what we do.
We make globalization "work" for employees, customers, governments and investors. Nearly 60% of our revenue will come from sales outside the U.S. in 2011 and this will grow over time. GE is a reliable partner and global investor, with a culture of compliance. We are a leading American exporter. Last year, we created major ventures in China and Russia that will accelerate our growth in Energy, Aviation, Healthcare and Transportation, and supply important infrastructure in those countries. GE's unique breadth and compliant culture are massive advantages in globalization.
We know how to compete, manufacture and execute. We have a strong culture of productivity and risk management. We constantly share ideas across GE on processes to improve performance. We have reduced our manufacturing cycle time and boosted productivity. We have been able to invest in the United States even as we have globalized. Since 2009, we have announced 6,300 new American manufacturing jobs. At the same time, we are building capability around the world. We are prepared for a future fueled by human innovation, not cheap labor.
We are a catalyst for change—change that benefits our customers and society. We have had a long-term focus on clean energy through our ecomagination initiative. Last year, when it was clear that U.S. energy policy would remain uncertain, we continued to invest. One focus was to lead in Smart Grid development. To that end, we announced plans to order 25,000 electric vehicles (EVs)—the largest such purchase in history. By so doing, we took a large step toward building EV infrastructure based on GE technology. In addition, we hosted a "Smart Grid Challenge," where we solicited ideas for clean-energy solutions. More than 4,000 ideas were submitted, and we funded 20 startup companies and entrepreneurs who will extend our leadership in energy efficiency.
Some people remain cynical about business. And we live in an era where anger often trumps optimism. Despite this, GE has remained a competitive growth company; a positive force for change.
Our earnings growth should exceed the growth in the S&P 500. We are committed to a dividend yield that is attractive relative to our peers and other investments. We have more cash and lower leverage than our historical average. We will improve our earnings quality, which is associated with above-market valuation.
Earnings growth resumed in 2010 and should continue in 2011. As we predicted last year, GE Capital's earnings are rebounding rapidly. It earned $3.3 billion, more than twice than in 2009. And that positive course should continue in 2011. We remain committed to a smaller, more focused GE Capital. We look for significant earnings growth over the next few years.
The landscape for financial services has changed. GE Capital—like others in financial services—will be more highly regulated. We have been preparing for this outcome for the past two years and are ready for the new regulatory environment. For example, our Tier 1 capital, an important measure of financial strength, is close to 9%, already above the "well capitalized level" set currently by regulators at 6%.
Our Infrastructure earnings were about $14 billion in 2010. While flat with 2009, these earnings will grow in 2011 and beyond as the global economy strengthens. We outperformed our competitors during the financial crisis, with earnings about flat from 2008 to 2010, while theirs declined 15%. Our stability was a function of a strong service model that performed for customers and investors.
Our Infrastructure businesses are well positioned for long-term growth because we have leadership franchises and compete in attractive markets. Global investment in infrastructure is expected to be $4 trillion by 2015. GE has leadership franchises in Energy, Oil & Gas, Water, Healthcare, Aviation, Transportation and Consumer products.
Over time, we look to sustain organic growth in excess of the global economy, with high margins and returns. Our Infrastructure businesses are capital-efficient, and we generate a substantial amount of cash in excess of investment needs. In our key operating metrics, we are in the top quartile of our industrial peers. At nearly $100 billion in revenue, we are one of the biggest Infrastructure companies in the world, and we are certainly the most profitable.
Balanced and disciplined capital allocation is a key responsibility for the Board and your leadership team. We ended the year with $19 billion of cash at the GE parent. Maintaining an attractive dividend is the top priority. We believe that a high-yielding dividend appeals to the majority of our investors and is particularly attractive in a low interest rate environment.
We have announced five acquisitions in the last six months, totaling about $8 billion, that will accelerate our growth in Infrastructure. We will be disciplined in our acquisitions. They will increase our competitiveness in industries we know well. We target investments in the $500 million- to $3 billion-range with returns that exceed our cost of capital. In this way, we reward GE investors as we scale up these investments.
We will continue to buy back our shares, including the preferred stock we issued during the financial crisis in 2008. We will be opportunistic about buying back our own stock based on returns but plan to reduce our float over time.
We have reduced GE's risk profile, as we navigated through the crisis. We hold substantial cash on our balance sheet, have cut our commercial paper by 60% and have reduced our leverage from 8:1 to 5:1. We believe the most difficult losses in financial services are behind us. We recorded charges of more than $3 billion to address risk related to the environmental cleanup of the Hudson River and the consumer "Grey Zone" claims for financial services in Japan. We have changed our employee healthcare and pension plans to be more competitive over the long term. Looking forward, we have dramatically reduced GE's vulnerability to "tail risk" events.Balanced Capital Allocation and Reducing the Risk Profile
GE's earnings quality will continue to improve. Our goal is to maintain Infrastructure earnings between 60% and 70% of GE's earnings. Our tax rate increased in 2010 and will grow substantially in 2011. These elements should create a more valuable GE.
There are a few things we are working on in 2011 that should help build momentum for the future. Our financial strength in GE Capital should put us in a position to pay a dividend to the parent in 2012. We worry about inflation and have increased resources on material productivity and pricing to offset that threat. We are in a particularly heavy period of R&D investment in Aviation that will keep its earnings flat this year. However, Aviation has a record high backlog and its earnings growth should return by 2012.
The GE portfolio can perform for investors through the cycles: financial earnings surge back in the beginning of an economic cycle; service offers steady growth through the cycle; and infrastructure equipment grows later in the cycle. No matter what your investment thesis may be, the next few years look good for GE!
We have positioned the company to capitalize on some of the biggest external themes of the day, like emerging-market growth, affordable healthcare and clean energy. Internally, we treat "growth as a process" by focusing on innovation, customer needs, services and best-practice integration. We are executing six growth imperatives:Our Growth Imperatives
Launch great new products. GE's technical leadership is a function of increased investment, great people and a model for innovation. Our innovation is focused on solving big customer problems, partnerships that extend our capability and designing products across all price points. We are committed to sustaining technical investment ahead of the competition.
Our Healthcare business is indicative of the work going on across the company. We will launch 100 Healthcare innovations this year. These include important leadership products in molecular imaging and low-dose CT. We will open new segments with our hand-held ultrasound and extremity MR products. We have focused on affordable innovation, launching high-margin products at lower price points, with dramatic growth potential in the emerging markets. We have completed a Home Health venture with Intel, featuring new proprietary products. And we are entering new markets like pathology, with automation and diagnostic tools. Long-term growth in Healthcare, like other Infrastructure markets, is driven by a deep pipeline of high-margin innovations.
Grow services and software. Services represent 70% of our Infrastructure earnings. We have a $130 billion services backlog at high margins. In 2011, our services revenue should grow between 5% and 10%. Through our contractual service agreements, we reduce our customers' cost of ownership by providing new technology and productivity to their installed base.
We have an opportunity to expand our service business. About 90% of our service revenue is focused on the GE installed base. Meanwhile, our customers demand broader solutions. We plan to expand our presence in software into new areas in workflow, analytics and systems integration. We believe there is a $100 billion opportunity in software and services in infrastructure markets we know well.
Today, GE has $4 billion of revenue in infrastructure software in segments like healthcare information technology, Smart Grid, rail movement planners, engine monitoring and factory productivity. By investing in these platforms we can grow rapidly and move closer to our customers.
Lead in growth markets. GE has $30 billion of Industrial revenue in key global growth markets, where revenue has expanded by more than 10% annually over the last decade.
As commodity prices increase, the needs of our customers in what we segment as "resource-rich" regions grow as well. We continue to make long-term investments to drive growth across the Middle East, Africa, Canada, Australia, Russia and Latin America. In what we segment as "rising Asia," markets like China and India, there are over one billion people joining the middle class. We plan to have an increasing number of products localized in China and India in the next few years. This will give us the right technology to satisfy our customers' needs.
We use the breadth of our portfolio to build strong relationships in growth markets. We call it a "Company-Country" approach. A great example of this approach is Brazil. Last November, we announced the creation of our fifth Global Research Center, located in Rio de Janeiro. On that day, we highlighted manufacturing investments in Brazil across Energy, Oil & Gas, Healthcare, Transportation and Aviation. This broad capability gives GE the ability to better serve our customers in Brazil, while allowing us to grow exports. In addition, we are committed to training our employees, customers and suppliers. This makes GE a leader in the economic development of the country.
Expand from the core. In 2010, GE generated $20 billion of revenue from businesses in which we were not present in 2000. Investing and winning in Infrastructure adjacencies is a core competency for GE. We plan to generate another $20 billion of revenue in new markets over the next decade.
To do this, we have launched more than 20 Infrastructure adjacencies and are in the process of growing them. Each can be at least $1 billion in revenue, while some will reach $10 billion or more. By expanding our core, we accelerate growth while building stronger, more diverse business models.
This year, for example, we will scale up organic investments in thin film solar energy technology. Through the efforts of our Global Research Center, our panels are generating 12+% efficiency, a record for this technology. By utilizing our huge Energy footprint, we expect to achieve a meaningful market share in the next few years. This business could reach billions in revenue.
Over time, we create large global leaders like Oil & Gas. Here we have built a $10 billion business in about a decade, through organic investment and focused acquisitions. Oil & Gas has leveraged technical capability and global distribution from our Energy, Aviation and Healthcare businesses. Our big Oil & Gas customers know that they can count on GE to execute complex projects.
Create value in specialty finance. In 2011, a key priority is to better define the connection between GE and GE Capital. The strategic value of GE Capital is obvious: robust earnings growth; strong risk management; and cash dividends to the GE parent.
There are also key advantages that are shared by our industrial and financial capabilities. We have superior knowledge of assets; this allows us to win in aircraft leasing. We have deep and established relationships with mid-market customers, who desire better operations and best-practice sharing with GE's Industrial businesses. We have strong operating advantages versus banks in direct origination and asset management. This builds competitive advantage in businesses like Retail Finance. In other words, we can offer more than access to money.
GE Capital is our primary window to serve small- and medium-size businesses. We partner with them and invest in their growth and success. We are steadfastly committed to GE Capital. During the crisis, our exposure to financial services was an investor concern. In the future, leadership in specialty finance will provide new ways to grow and improve our competitiveness. As a smaller, more-focused competitor, GE Capital will return excess capital to the GE parent over time.
Solve problems for customers and society. We have built the GE brand on solving tough problems like clean energy and affordable healthcare, while building deep customer relationships. We know that we can solve big societal problems and earn money at the same time. And our customers buy from GE because we help to make them more profitable.
Through our healthymagination initiative, we are addressing the cost, quality and access of healthcare. We are working with the Ministry of Health (MOH) in Saudi Arabia to improve that country's system. For example, there are joint GE/MOH teams completing "lean" projects to improve operating-room capacity and lower patient waiting time. We are pioneering in "mobile clinics" that can take healthcare to remote areas. We are bringing technical innovation and process skills to improve healthcare in Saudi Arabia and around the world.
In executing these six strategic growth imperatives, GE is leading in the capabilities that will create long-term shareholder value.
There are certain fundamentals of leadership at GE that never change: a commitment to integrity, a commitment to performance and a commitment to innovation. Beyond this, as the world changes, leadership must evolve as well.
The GE leadership model has core pillars: domain competency, leadership development, team execution and global repositioning. We are constantly looking outside the company for new ideas on leadership. And we are investing more than ever to train our team.Committment to Developing Leaders
We are developing careers that are deep first, broad second. GE has always been a training ground for general managers. But very little is "general" in the world today. It takes deep domain knowledge to drive results, so people will spend more time in a business or a job. In addition, jobs like chief engineer, senior account manager, chief compliance officer and global risk leader are respected and rewarded.
We have modernized our leadership traits. We have built off the foundation we have had in place for several years: External Focus, Clear Thinking, Imagination & Courage, Inclusiveness and Expertise. Upon this foundation, we are training for attributes that will thrive in the reset world.
Leaders must execute in the face of change. Our markets are less predictable, but our teams must still be accountable. We still expect our leaders to outperform the competition. We are doing more scenario planning, and our leaders must be smart and disciplined risk takers.The Extended GE Team
Leaders must be humble listeners. We will make bold investments and learn from our mistakes. We will stay open to inputs from all sources. We are here to work on teams and serve our customers.
Leaders must be systems thinkers. This involves the ability to share ideas across silos inside and outside the company. Internally, we have always excelled at best-practice sharing. Outside the company, systems thinking requires "horizontal" innovation, connecting technology, public policy, social trends and people across multiple GE businesses.
And we want our leaders to be scale-based entrepreneurs. They must have a gift for making size a facilitator of growth, not a source of bureaucracy. Our unique strength is that of a fast, big company.
We have repositioned where decisions get made. Last year I asked John Rice, our most senior Vice Chairman, to move to Hong Kong and lead our global operations. Behind John, we will move more capability to the emerging markets.
Great global companies will reposition decisions and strengthen their culture. The biggest leaders—living in the growth regions—will make decisions more quickly with the benefit of experience and market knowledge.
We perform as a "connected meritocracy." In other words, the best performance wins. We want to expand this definition of meritocracy to include a view that every job counts. Senior leaders must have a better connection with front-line employees.
We live in a time where unemployment is high in every corner of the world. As a result, jobs are the real currency of reputation. Without jobs, confidence—and growth—lags. GE must be cost-competitive. But at the same time, we must know how to create and value front-line jobs.
We have a strong and unified culture. Let's face it: all of the GE team has persevered through the toughest times. It made us better. I have always said that I would not be CEO of GE if I hadn't spent three years at GE Appliances in the late 1980s. This is not because it was fun, but because it was so hard. Perseverance is a source of confidence.
Our ability to develop leaders continues to be recognized by the outside world. Last year, GE was voted "number one" for developing leaders in a prestigious poll conducted by the Hay Group and BusinessWeek.
One last element of leadership is the responsibility to serve broader interests. To that end, I was asked by President Obama and have agreed to chair the President's Council on Jobs and Competitiveness. Rest assured, I will continue to work as hard as I ever have for success at GE. At the same time, I will work with other CEOs and public leaders to improve American competitiveness and innovation. I run a competitive enterprise and remain an unapologetic globalist. GE is a "private enterprise," with only 4% of our revenue from sales to the U.S. government. But the world still looks to America for leadership, and I am committed to do my best to help.
I have begun my tenth year as CEO of GE. Looking back, no one could have predicted the volatile events of the last decade: two recessions; the 9/11 tragedy; Hurricane Katrina; the world at war; the rise of the BRICS; the financial crisis; the Gulf oil spill, just to name a few.
I took over a great company, but one where we had a lot of work to do to position GE to win in the 21st century. Despite our high valuation, we were in businesses where we could not sustain a competitive advantage, like plastics and insurance. We made a capital-allocation decision to reduce our exposure to media and invest in Infrastructure. And we had to rebuild our Energy business, where most of our earnings in the late 1990s came from a "U.S. power bubble" that created a decade of excess capacity.
Our team rolled up their sleeves. Ultimately, we exited about half of our portfolio. We invested in Infrastructure businesses like oil & gas, life sciences, renewable energy, avionics, molecular medicine and water. We restored our manufacturing muscle. And we focused and strengthened GE Capital. As a result of these actions, we have our most competitive portfolio in decades.
We made big bets in technology, globalization and customer service. We doubled our R&D spend over the past 10 years and it now equals 6% of Infrastructure revenue. We repositioned leadership and capability to win in global growth markets. We have grown global revenue from 36% of GE's revenue to nearly 55% in the last decade. We have invested in sales force excellence, marketing and customer support. Services have grown from 30% of GE's Infrastructure earnings to 70% in the last decade. And GE is the world's fifth most valuable brand.
We promoted a culture that demanded financial accountability and long-term thinking. Leaders understand their responsibility to invest in the future of their business. But we still compete hard. Our productivity, measured by revenue per employee, has expanded by 50% since 2000. Our Industrial margins and returns exceed other great companies like Honeywell, Siemens and United Technologies.
Despite all these changes, our cumulative earnings and cash flow over the last decade would rank in the top ten of all the companies in the world.GE's Best Days are Ahead
Being a CEO can be pretty humbling. I have made a few mistakes and learned a lot over the last decade. I am more resilient. To do this job well, you have to burn with a competitive flame that demands daily improvement. My desire has never been greater.
Repositioning GE in volatile times has demanded patience from our long-term investors. However, today we earn more money than we did when the stock traded at an all-time high.
The toughest years of my life were 2008 and 2009. They were difficult for the company, investors and the economy as well. But our team worked hard for investors and the company. We promised you we would come out of the crisis a stronger company, and we have.
There are many reasons to invest in GE. I have always described myself as a tough-minded optimist. I have never been more optimistic than I am today. GE's best days are ahead!
Jeffrey R. Immelt
Chairman of the Board
and Chief Executive Officer
February 25, 2011
Disciplined execution drove a 15% rise in GE earnings from continuing operations.
GE boosted company-funded R&D spending by 20%.
GE had $79 billion in consolidated cash and equivalents at year-end 2010, with $19 billion in cash at the parent.
Strong equipment and services orders growth resulted in a record $175 billion backlog.
In the past two years, GE has announced creation of more than 6,300 new U.S. manufacturing jobs, many in regions hardest hit by the economic recession.
GE total shareholder return (TSR) appreciated 24% in 2010, nine percentage points better than the S&P 500 TSR.
Two dividend increases in 2010 provided a total 40% improvement versus the beginning of the year.
International sales of American-made products totaled $17 billion in 2010, more than double the level of company U.S. exports in 2001.
GE's product and services offerings are aligned with human needs and growth opportunities around the world. As global population has grown over the past 118 years, GE's revenue has grown at an even faster rate.Back to the Chairman's Letter