GE's service push could bring profit margin boost
By Scott Malone | November 28, 2012 11:28 PM EST
General Electric Co
The drive is part of the largest U.S. conglomerate's effort to boost its margins and make more money in a sluggish economy, as sales of services are more profitable equipment than sales of jet engines, locomotives and other equipment.
GE's pitch is that by tweaking how they operate, its customers can cut their own costs. For example, a 1 percent cut in the amount of fuel the global aviation industry uses could generate $30 billion in total savings, GE estimates.
Investors said the company's service business has been more stable in uneven economic times than equipment sales. Last year GE's service business, including maintenance to its products, generated $42 billion in revenue, approached half GE's industrial sales.
"Given the environment, some of the uncertainties, etc., services is an area that plays for the long term because of the...ongoing desire from customers for new levels of productivity," said Steve Bolze, the chief executive officer of GE's power and water business, who is also heading up the company's services push.
The company is developing software systems that analyze data on how its turbines and other equipment are used to find ways to run them more efficiently and at lower cost, Bolze said. It plans to discuss them at an event in San Francisco on Thursday.
GE said it has lined up customers for its new services including: U.S. railroad Norfolk Southern Corp
The drive is part of Chief Executive Jeff Immelt's push to raise GE's profit margins by 0.5 percent to 0.7 percent of sales next year, a rise investors expect would propel the company's industrial operating profit to about 16 percent of sales, up from 14.9 percent in 2011.
"Growing margins into the future is a big credibility point for the leadership team and one we take seriously," Immelt told investors at a September meeting held at the company's training campus in Crotonville, New York.
GE also said at the meeting that it expects services revenue to grow by 5 percent to 10 percent a year over the next few years, reaching $50 billion to $60 billion by 2015, with the service backlog forecast to rise to $175 billion from $153 billion at the end of the third quarter.
During the 2007-2009 recession, service contracts played an important stabilizing role in sales at GE and peers including United Technologies Corp
"Increasing exposure to strong incremental margin businesses like services can help the company reach its margin targets in an environment where you may not get the same kind of manufacturing productivity leverage that you have in a higher-growth environment," said Daniel Holland, an analyst at Morningstar in Chicago who covers GE.
Fairfield, Connecticut-based GE has been ramping up its software focus since last year, when it hired former Cisco Systems Inc
(Reporting by Scott Malone in Boston; Editing by Leslie Gevirtz)
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