Business Breakdowns
· Ramesh Narayanaswamy
[00:00:00] S1: GE goes back more than 100 years. It's a company that dates back to none other than Thomas Edison. For most of the previous couple of decades, GE was probably the very definition of a conglomerate, with a very diverse portfolio of businesses operating in industrials, in healthcare, and in financial services. But if you look at business history, there are very few things as reliable as a cycle of conglomeration and then deconglomeration. And under the time of Jack Welch and Jeff Immelt, their eras were defined by a focus on growth, on market share through acquisitions, and what I would call earnings-per-share management. A big part was played by GE Capital, which exposed a lot of leverage in the system, and the various businesses housed under GE were competing for capital, and there was no true business rationale for holding them together. Now all of that changed with the arrival of Larry Culp, who was really the first outsider CEO at GE. Culp was on the board at GE during the brief tenure of John Flannery, and he took over as CEO in October 2018. Now Culp, for those who follow industrials businesses, is a very well-known and proven operator and capital allocator, and had a fantastic performance—both operationally and stock price–wise—at Danaher, where he was CEO from 2000/2001 to circa 2014. So if GE needed to deconglomerate, then Larry Culp was the perfect choice.
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: Maybe you can detail some of the steps that he took in that deconglomeration. It goes beyond that in terms of how the operational execution has played out. What would you point to? Because I think the track record from Danaher was there to point to, but he certainly followed through with some of the execution on the GE side. [00:00:00] S1: In simple terms, I would say Larry brought the Kaizen-like lean manufacturing principles that he was so successful in implementing at Danaher to GE. To use a Japanese phrase, he walked the Gemba, as they call it: go to the place where the value is being added—the manufacturing floor, the shop floor—and really focus on very basic ideas of continuous improvement, problem-solving, and, more importantly, addressing the “don't shoot the messenger” culture, which was badly needed at GE, and also, crucially, focusing on the customer. I think I've heard Larry describe his philosophy as “common sense vigorously applied,” which is probably a good phrasing of what he did at GE. And for GE in particular, that meant simplification and deconglomeration and focus. So he spun off the healthcare assets as GE Healthcare, the power businesses as GE Vernova, focused on debt reduction, and what we are left with is just the aerospace assets. [00:00:00] S0: What do you think led him to sticking with the aerospace assets versus going with healthcare or Vernova? It's just an interesting choice. It might have just been market size, but do you think there's anything there in terms of what led him to continue on with this specific business line?
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: What do you think led him to sticking with the aerospace assets versus going with healthcare or Vernova? It's just an interesting choice. It might have just been market size, but do you think there's anything there in terms of what led him to continue on with this specific business line? [00:00:00] S1: If you go back in time to 2020, the board awarded Larry a one-time performance grant to incentivize him to stay. It was at the very high end of what you would normally see—something like $200 million in shares based on certain stock price targets. It was a little bit controversial at the time, simply because the share price was depressed given the fact that we were reeling from the pandemic. But it also aligned outcomes between management and shareholders. And similarly, a very similar grant was made in 2024, again tied to operating metrics but in smaller scale compared to the 2020 grant. As to why Larry decided to become CEO of GE Aerospace rather than Vernova or Healthcare, a couple of things I would point to. One might have been the fact that he was historically well versed in industrials businesses, so Danaher. And second, perhaps it was an implicit indicator of how strong aerospace was compared to their other segments. And he wanted to be the CEO of the crown jewel asset, so to speak.
· Ramesh Narayanaswamy, Matt Reustle
[00:00:00] S1: If you go back in time to 2020, the board awarded Larry a one-time performance grant to incentivize him to stay. It was at the very high end of what you would normally see—something like $200 million in shares based on certain stock price targets. It was a little bit controversial at the time, simply because the share price was depressed given the fact that we were reeling from the pandemic. But it also aligned outcomes between management and shareholders. And similarly, a very similar grant was made in 2024, again tied to operating metrics but in smaller scale compared to the 2020 grant. As to why Larry decided to become CEO of GE Aerospace rather than Vernova or Healthcare, a couple of things I would point to. One might have been the fact that he was historically well versed in industrials businesses, so Danaher. And second, perhaps it was an implicit indicator of how strong aerospace was compared to their other segments. And he wanted to be the CEO of the crown jewel asset, so to speak. [00:00:00] S0: You referenced some of the market shares that they have in this jet engine business. Can you just bring us back in time in terms of the origins of that industry, and that'll lead us on to how GE has captured the share and foothold that they have. But maybe go back in time. I have some sense of when jet engines came around. It was probably correlated to when airplanes came around, but maybe you can lay that out for us.
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: You referenced some of the market shares that they have in this jet engine business. Can you just bring us back in time in terms of the origins of that industry, and that'll lead us on to how GE has captured the share and foothold that they have. But maybe go back in time. I have some sense of when jet engines came around. It was probably correlated to when airplanes came around, but maybe you can lay that out for us. [00:00:00] S1: The jet engine business is nearly 100 years old, so it's a fairly long time. It was first invented in the 1930s here in the UK. Actually, the first jet engine built in the US, however, was a GE engine, which incidentally was a copy of the British engine developed by Frank Whittle. Historically, you would find that as technologies develop, they become cheaper to manufacture and to scale. But what we have observed in jet engines is that that has not necessarily been the case. Even inflation-adjusted, jet engines still cost at least several billion dollars to make. And if you look at the most recent Pratt & Whitney geared turbofan engine, it reportedly costs perhaps something like $10 billion. Now, it's a good question to ask why that is the case. I would suggest that because jet engines are constantly pushing at the leading edge of materials, technology, and engineering, and you're tackling new problems at the frontier, that keeps costs high and entry barriers high as well.
· Ramesh Narayanaswamy, Matt Reustle
[00:00:00] S1: The jet engine business is nearly 100 years old, so it's a fairly long time. It was first invented in the 1930s here in the UK. Actually, the first jet engine built in the US, however, was a GE engine, which incidentally was a copy of the British engine developed by Frank Whittle. Historically, you would find that as technologies develop, they become cheaper to manufacture and to scale. But what we have observed in jet engines is that that has not necessarily been the case. Even inflation-adjusted, jet engines still cost at least several billion dollars to make. And if you look at the most recent Pratt & Whitney geared turbofan engine, it reportedly costs perhaps something like $10 billion. Now, it's a good question to ask why that is the case. I would suggest that because jet engines are constantly pushing at the leading edge of materials, technology, and engineering, and you're tackling new problems at the frontier, that keeps costs high and entry barriers high as well. [00:00:00] S0: It's the type of product that I don't mind if it's a little bit more expensive as well, given what it actually does and how I might be a user of it. Let's discuss GE's evolution in that space in terms of leading to this place where you always hear about the duopoly atop, in terms of the OEMs with Boeing and Airbus, not so much about the rest of the value chain. Who else is in the jet engine market? I think you've referenced Pratt & Whitney a few times, but how has that evolved over time?