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By Alwyn Scott
GROVE CITY, Penn. May 12 At a General Electric
Co factory in this rural town, Keith Spahn, 60, used to
take measurements of parts from railroad locomotives that are in
for repair by hand.
Now he uses a tool that reads the dimensions automatically
and sends them wirelessly to his computer, where software
decides whether the part can be reused or must be scrapped.
"It's definitely faster," he says.
Spahn's workbench in this 240,000-square foot plant is one
small example of a multibillion-dollar bet by GE Chief Executive
Jeff Immelt: digital technology will transform GE's factories,
generate new revenue and boost profits. For a graphic, click tmsnrt.rs/2pDvYUA
The $4 billion GE has spent on developing digital products –
ranging from tiny sensors in jet engines to augmented reality
and software that can crunch large volumes of data - is on the
scale of investments Google and Facebook Inc made to
build their businesses, Bill Ruh, CEO of GE’s digital division,
Now that GE has shed non-essential operations, including
most of its large financial unit, its fortunes will rise or fall
depending on whether that investment delivers.
GE's technology - and similar systems by IBM, Siemens AG
and others - is a hot new battleground in
manufacturing. The companies promise they can spot problems
before machines break down, yield cost savings of 30 percent or
more, and raise labor productivity that has slowed sharply in
By 2020, spending on such systems is expected to exceed $500
billion a year, up from $20 billion in 2012, according to an
estimate cited by consulting firm Accenture. GE says the market
for the sectors it is in will be $225 billion by 2020.
The company has spent $5 billion setting up new U.S.
factories in the last five years. As it now adds digital
technology to its plants, it needs fewer, and higher skilled,
workers than in the past.
"We're going to have a smarter worker," Immelt said in an
interview. "We're not going to have as many workers."
But as investment grows, so have concerns about whether
these bets will pay off - and about the cost and complexity of
keeping networked machines running and secure from hackers.
GE investors are especially impatient for returns. Since
Immelt became CEO in 2001, GE shares have fallen 29 percent
while the S&P 500 index has more than doubled. GE's dividend is
seven cents lower than it was in 2008. For more on GE's stock
That performance has some pressing for more urgency from
Immelt. When activist investor Nelson Peltz bought a $2.5
billion GE stake in 2015, he pressed for asset sales and cost
cutting, and barely mentioned GE's digital strategy as a source
of growth. Trian declined to comment for this article.
In March, Peltz reached an agreement with GE that tied the
bonuses of top executives to cutting $2 billion in costs and
hitting profit targets through 2017. Those targets don't rely on
GE's digital strategy.
"People aren't saying they don't like the technology" or
that GE is investing too much in digital, said Deane Dray, an
analyst at RBC Capital Markets. "But how does it translate into
profit margins and cash?”
GE poses an important test of the digital factory idea. It
has more than 500 factories around the globe that produce jet
engines, power plants, medical CT scanners and other large,
sophisticated equipment adaptable to the technology.
GE also earns very little from selling hardware. Nearly half
of its revenue and most of its profit come from selling
services, a natural fit for the monitoring and data analysis
that are the core of a computerized factory.
In addition to improving its own productivity, GE sells the
"Brilliant Factory" as a product, promising a combination of its
digital systems with advanced manufacturing techniques, 3-D
printing and lean production principles pioneered by Toyota
Take the industrial operating system called Predix. GE spent
more than $1 billion to create it along with applications that
can analyze terabytes of data from jet engines or factory
machines along with other data, such as weather or energy costs.
GE's venture capital arm is buying stakes in startups that
adapt robots, optical scanners and augmented reality to work
with Predix. Last year, GE spent $1.1 billion on two makers of
industrial 3-D printers, planning both to use the printers and
Predix systems work, in part, by creating a computerized
model, or "digital twin," of a machine that shows in real time
how it is performing, and when parts are wearing out. This can
eliminate unplanned breakdowns, GE says, saving time and money.
The system also creates a "digital thread" that logs, like a
medical record, every aspect of a machine’s life - from initial
assembly to repairs during its years of operation.
At GE's Grove City factory, digital systems that were
installed in the last 18 months time workers down to the second.
Flat screens over work bays count how long crews are spending
and turn red when jobs are taking too long.
"I can look at that screen and see everything I need to know
about how things are running," said Richard Simpson, vice
president of supply chain at GE Transportation, pointing to a
Even though it is still a grimy, greasy industrial shop,
Grove City is one of 17 “showcases” GE plans to have by
year-end, helping it sell its systems to outside customers.
When a massive railroad engine rolls in for repair, workers
check the digital twin to see what parts need to be fixed. The
system ensures spares are in stock. Older engines are fitted
with sensors so they can supply that data next time. The process
saves labor by eliminating unnecessary work.
"Instead of full tear downs, the factory workers can
refurbish just the parts that need it," said Anup Sharma, a
general manager at GE Digital. "That frees them up to do value
added work and gets the engine back to the customer sooner."
GE executives say the company has reaped $1 billion in
productivity gains during the last two years, with $700 million
more expected in 2017. Those gains are being reinvested into
Predix and applications, so they have not had a large effect on
GE's earnings, the executives said. The gains are not broken out
for investors to see.
GE's digital business expects new orders to jump 25 percent
to $5 billion this year, said GE digital division CEO Ruh,
resulting in $4 billion in revenue for the division from sales
to companies such as Exelon Corp and BP PLC. By
2020, GE expects $15 billion in revenue from its digital
Charlie Smith, Chief Investment Officer at Fort Pitt Capital
Group, with $2.1 billion under management, owns GE, IBM and
other industrial companies and believes digital will ultimately
pay off. But he shares the skepticism of many investors.
"I'm not completely all in on GE," Smith said. "There's very
little revenue from digital so far."
GE Chief Financial Officer Jeff Bornstein said in an
interview that the digital division “will become real for
investors” when it begins to boost revenue and profits, starting
in 2019 or 2020. GE has no choice but to invest in the strategy,
"If we don't do this then somebody else is going to,"
Bornstein said. "That is not a good thing."
(Editing by Joseph White and Edward Tobin)