New York: General Electric Co. wants investors to know why the world’s largest maker of jet engines and gas turbines decided to set up shop on the edge of Silicon Valley.
The industrial behemoth intends to become one of the top 10 global companies in software—yes, software—by the end of the decade. While perhaps a tall order, the effort goes beyond buzzwords: GE is already generating billions of dollars from digital operations, which may grow to represent as much as 25% of earnings in the coming years, according to William Blair & Co.
By using sensors and software, GE wants to boost the efficiency and reliability of its marquee locomotives, oilfield equipment and other heavy-duty products. The manufacturer recently opened its Predix operating system to outside developers to use for non-GE applications, creating a new potential revenue stream.
“This is a business, it’s not just a productivity improvement tool," Nicholas Heymann, an analyst at William Blair with an outperform rating on GE, said by telephone. “It actually creates tangible sales and very high-margin earnings. Right now most people don’t have the concept that this is anything more than cotton candy."
GE executives are convening with investors on Thursday in San Ramon, California, to detail the digital operations, which the company sees as an essential complement to the 124-year-old industrial manufacturing business.
$5 billion in sales from ‘digital’
GE generated about $5 billion in sales last year from “digital," which includes software and related operations in each of the manufacturing divisions. The company, which had $115 billion in total 2015 revenue, has said the digital business may become a $15 billion business by 2020.
Expanding it is central to chief executive Jeffrey Immelt’s dramatic overhaul of GE. He has sold the bulk of the GE Capital finance arm and the home-appliances business while narrowing the Fairfield, Connecticut-based company’s focus on industrial manufacturing and the complementary software business. He is also moving the company’s headquarters to Boston, in part to tap the city’s research capabilities and tech-savvy workforce.
GE telegraphed its digital ambitions in 2011 with the hiring of Bill Ruh from Cisco Systems Inc. and the decision to open the San Ramon outpost. Ruh became CEO of GE Digital when the business was formally launched last year.
Building a software franchise from scratch isn’t without obstacles. Neither is competing in Silicon Valley.
“One of the challenges for GE is to build credibility in software engineering circles so that college graduates think of that as an exciting job,’’ said Philip Levis, a computer science professor at Stanford University and co-director of the Secure Internet of Things Project.
GE has made inroads with tech talent in recent years as the San Ramon center’s headcount has grown to 1,400 from 750 at the end of 2013. The effort has been aided by tongue-in-cheek television advertisements showing a nerdy-but-hip young man surprising friends and family by choosing to write code at GE.
The company has agreements with technology giants such as Intel Corp. and Cisco to bolster development of cloud capabilities, apps and other aspects of the Predix system. Digital orders are on pace to exceed $7 billion this year with growth of 30-40% in almost all divisions, according to Deane Dray, an analyst with RBC Capital Markets. While many industrial companies are developing complementary analytics businesses, GE “clearly has a head start in this sector-wide gold rush," he said in a 16 June note.
“Over the past year, it has become abundantly clear that building out digital/software capabilities is among GE’s highest priorities," Dray said in the note. With few exceptions, he said, “GE’s digital business strategy is the most ambitious" among industrial peers.
Efforts to develop software businesses vary across the industrial sector. Siemens AG is developing its MindSphere cloud platform. United Technologies Corp. lets each business unit determine its own digital strategy.
At an industrial conference last month, Immelt acknowledged that many competitors had been spotlighting their data investments. He couldn’t resist suggesting that some efforts didn’t have as much substance behind them as GE’s.
“You’ve been hearing this stuff all week," he said in the final presentation at the Electrical Products Group meeting. “Some of it’s B.S., this is real." Bloomberg