Letter #34: Jack Welch and Reginald Jones (1980)

1980 General Electric Shareholder Letter from Jack Welch and Reginald Jones

Hi there! I go by KG, and I love studying the history of business and investing. I’ll be sharing some notes from one Investor/Shareholder letter per weekday (mostly from my compilations) here.

Today’s notes are on the 1980 General Electric Shareholder letter from Jack Welch and Reginald Jones. This letter was co-authored by Jack Welch, who was tapped to start as CEO for the upcoming year. This started off a 20 year streak that saw GE transform from an appliance and light bulb company to a massive conglomerate and multinational corporation with holdings spanning financial services, media, industrials, and many more. During (and after) his run, Welch was heralded as the greatest business leader of his era.

You can find this letter in my Jack Welch Compilation under Enterprise Operators. This particular essay starts on Page 1.

*Note: Trying out a new format here (for this week) — Letter printed in full (bolded phrases my highlights), and my comments in a separate section. If you like this format, please let me know by dropping me a line via kevin@12mv2.com or commenting below. Otherwise, I’ll be returning to the old format next week.

The Letter

The joint signing of these comments signals the approaching change of executive leadership at General Electric. On the retirement of Reginald H. Jones on April 1, 1981, John F. Welch, Jr., will become Chairman and Chief Executive Officer of your Company. He will be the eighth person to hold that office since the founding of GE in the nineteenth century.

John F. Burlingame and Edward E. Hood, Jr., continue as Vice Chairmen and Executive Officers with expanded responsibilities for realigned staff and operations.

General Electric’s diversity and financial strengths enabled it to turn in a solid performance in 1980 despite adverse economic conditions in the U.S. and many foreign markets. Sales of $24.96 billion represented an 11% increase over 1979. Earnings of $1.5 billion, or $6.65 per share, were 7% above 1979 levels.

The significance of these sales and earnings is not merely that they set new levels in a year when profits for industry generally declined. More importantly, they were achieved in a year when your Company sharply increased investments in new plant and equipment, new technology, new product development and new business ventures.

U.S. business today finds itself challenged by aggressive overseas competitors. National productivity has been declining and, in industry after industry, product leadership is moving to other nations. Companies that refuse to renew themselves, that fail to cast off the old and embrace new technologies, could well find themselves in serious decline in the 1980s.

We are determined that this shall not happen to General Electric.

Self-renewal

Your Company is engaged in a process of internal change that will transform the ways we design, manufacture and distribute our products and services in the 1980s. We are encouraging our people to probe constantly for new markets, new techniques and new business opportunities.

This stress on innovation has been gathering momentum and is perhaps best illustrated by the change in our sources of earnings, as emphasized in last year’s Annual Report. As the 1970s began, 80% of your Company’s earnings came from its traditional businesses in the manufacture of electrical and electronic equipment. These businesses remain healthy and growing, although they now provide less than half of our earnings. The majority of our earnings are presently derived from growth businesses in man-made materials, natural resources, aerospace and transportation equipment, services and other new lines of opportunity. And 42% of our earnings now come from international activities, compared with only 16% a decade ago.

The status of our current businesses is detailed in the pages of this Annual Report, but to give our share owners a “feel” for the present mood of self-renewal at General Electric, let us comment on the Company’s response to several fundamental challenges of the 1980s.

Electronics

There is wide agreement that the new electronics will be the dominant technological force of the 1980s. And so we have been engaged in a Companywide effort to apply the new microelectronics and the related information-based technologies to every possible product, service and process in GE.

The corporate commitment is embodied in hundred-million-dollar investments in the construction and acquisition of new electronics laboratories and manufacturing centers. We have established an Industrial Electronics Group and an Information and Communications Systems Group. GE training programs are under way to bring the thinking of our managers and technical people up to the state of the art in the new electronics, and we are vigorously recruiting more electronic engineers.

The proposed purchase of Calma Company, a leading producer of interactive graphics equipment, and the acquisition of Intersil, a maker of advanced microelectronic chips, are consistent with our intention to be at the leading edge of new technology.

Your management is determined to be a leader in the electronics revolution.

Productivity

After a decade of slow productivity growth, U.S. industry is poised for a major surge of investment in new equipment—the so-called “re-industrialization of America.” For GE the process has already begun.

Your Company has invested almost $6 billion over the past five years, including nearly $2 billion in 1980, to upgrade its productive capabilities. Interactive graphics for computer-assisted design, manufacture and test; robotics; programmable electronic controls; energy-efficient drives: these are among the advanced technologies that are transforming our factories into some of the most productive, quality-control operations in the world.

And what we develop for our own factories we will then sell to our industrial customers—a productivity-improvement market that is growing well over 20% per annum. With our own factories as a worldwide laboratory for the development of advanced manufacturing systems, and a customer base that urgently feels the need for productivity breakthroughs, GE expects to be a leader in equipping the automated factories of the future.

Productivity

From its beginnings, General Electric has been a producer of energy-conversion equipment for electric utilities. But that is now just a modest proportion of our total involvement in the rapidly growing energy field.

Through Utah International’s coal mines and Ladd Petroleum’s oil and gas wells, as well as our nuclear fuel operations, we are suppliers of basic fuel. Our equipment powers machinery in the mines and drilling fields, our diesel-electric locomotives haul the coal, and our gas turbines power the pipelines.

And as the world strives to reduce its excessive dependence on one energy source—petroleum—GE’s research activities seek commercial breakthroughs in significant new energy technologies such as systems to convert coal into clean synthetic fuel gas. Another profitable facet of the energy market is the redesign of our products to conserve energy—from energy-efficient lamps, appliances and motors to fuel-saving jet engines.

Innovation

Perhaps your Company’s commitment to broad-based innovation is best expressed by its rising investment in research and development. Since 1977, we have increased GE-funded R&D expenditures 85% to $760 million. Total R&D expenditures, with external funding, reached $1.6 billion in 1980.

General Electric is not merely in the electrical business, or any other particular business. This Company has moved forward to a new dimension of industrial capability that investors are only beginning to recognize. We are in the business of creating businesses to anticipate and serve the needs of a changing world.

This is, at least in scale, something rare. And it can make a constructive contribution to a world that is striving desperately for accelerated economic and social development.

Some Thoughts

  • Jack became only the 8th CEO in GE history (founded 1892, meaning average CEO tenure was 11 years)

  • Interesting that both Vice Chairmen and Executive Officers stayed onboard “with expanded responsibilities” — these days whenever someone is promoted it seems like other senior members leave. Is this is the sign of a strong internal culture? No power struggles?

  • Sales and earnings increasing when most of the market is down is always a good sign — but more importantly, earnings shot up despite significant increases in investments across the board (PPE, tech, product, ventures)

    • Sales: $24.96B (+11%)

    • Earnings: $1.5B (+7%)

  • Only innovation can fend off globalization

    • See Peter Thiel’s Zero to One

  • 5 Focuses

    • Self-renewal

    • Electronics

    • Productivity

    • Energy

    • Innovation

  • Self renewal

    • Traditional businesses went from 80% of earnings -> <50% despite healthy growth (rapid innovation)

    • International earnings shot up from 16% -> 42% in a decade

      • Globalization is a two-way street. While some companies outsource production and stop innovating, those who continue to innovate have new markets to tap.

  • Electronics

    • When you recognize a big wave (ie “new electronics will be the dominant technological force of the 1980s) — you build around it. GE applied their new microelectronics to every possible product, service, and process in GE.

    • Invest heavily in big trends

    • GE Training Program was world class — train managers and technical people from within rather than hiring from outside and hoping they fit the culture

    • Focus on bringing aboard (electrical) engineers

    • If you want to be a leader, sometimes you have to pay up. Don’t let price get in the way of a big wave

  • Productivity

    • “re-industrialization” of America

    • $6B in past 5 years, $2B in the past year alone

      • reminds me of Tencent’s Investment Arm’s recent activity — Invested over $50B over the past 5-10 years, and already pledged another $70B to high-tech infrastructure over the next 5 years (granted external vs internal investments)

    • GE is doing what Teledyne did in its heyday — develop technology for itself, then sell to customers (probably converting their competitors into customers too)

  • Energy

    • Start small and go big — dominate a niche and expand

    • GE went from producing energy-conversion equipment to supplying basic fuel, hauling coal, and powering pipelines

    • Oh interesting — they were doing work on converting coal into clean synthetic fuel gas. Wonder what happened to that research?

    • Focus on efficiency — redesign existing products if needed

  • Innovation

    • Commitment to innovation as shown by R&D volume (*Note: dollars invested != innovation, but it does show, at least on the surface level, a commitment to it)

    • Increased R&D by 85% in the past 3 years

    • *Note: check if this is separate or a part of their productivity investments

    • “We are in the business of creating businesses”

    • Recognize that the world is changing — it’s any company’s job to anticipate and serve its needs. Doing this (at least in scale) in difficult but necessary

Wrap-up

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