GE’s Big Bet on the Industrial Internet

GE is spending a fortune creating the industrial internet. One application of their industrial internet could replace my former job at an oil refinery. Will their big bet pay off and replace my former job?

Background

GE was founded in 1892 and has a long history as an industrial manufacturing company. By the 1980’s GE had become a large international conglomerate that focused on “selling industrial products and repair services” [1]. One field that GE had ventured into was oil and gas. At the refinery where I was employed as a production engineer, GE had two full-time engineers who sold us various chemistries that improved the performance of the refinery.

Business Model Changes

Shortly after 2010, GE recognized the threat of analytics, disruptive data, and the internet of things and decided to jump on board [1]. GE’s CEO Jeffery Immelt said, “If you went to bed as an industrial company, you’re going to wake up this morning as a software and analytics company.” [2] GE’s vision is to collect lots of data from machines and then use that data to improve the performance of those machines.

GE attempted to sell one application of their new digital company to the refinery where I worked. At my refinery, one responsibility of a production engineer was to work with GE to specify how much of certain chemicals should be added to a desalter. The correct amount of chemicals to be added varied with multiple factors (outside temperature, current crude oil composition, crude oil throughput rate) and required a thorough understanding of management’s goals, chemistry, and specific knowledge of refinery equipment. Specifying too much chemical addition was a large economic waste and too little could cause costly tower performance issues. GE proposed adding a lot of sensors to input and output flows to better understand the system. Using all of this data GE could to use its digital platform to continuously calculate the ideal amount of chemical additions. I became convinced from this presentation that if the system was installed and data was collected from our refinery for multiple years, GE’s system would likely work more effectively than an engineer’s estimate. This would save the refinery a lot of money and reduce the need for onsite engineers. Similar to the change GE was making as a whole company, GE proposed changing the business model at our refinery to one focused on the industrial internet.

Operating Model Changes

To accomplish the company’s very large business model change, GE has spent a lot of money and made a lot of changes to their operating model. In 2016 GE is spending $1 billion on Predix, their cloud based industrial operating system. Additionally, GE has a goal of having 20,000 people developing the platform and writing the code for applications for Predix by the end of the year [3]. They need to hire or collaborate with those 20,000 developers. Third, to increase its software portfolio and software talent GE has been acquiring many software companies such as Bit Stew and Wise.io that are related to its mission. They have also been setting up partnerships with companies like Box and Ericsson to have more programmers on their platform [4]. Finally, GE is also trying to focus on its mission of being a digital company by divesting parts of the company not related to its new mission. GE is divesting 60 percent of the company they held in 2001 [5]. GE is getting a large overhaul to make their business model a reality.

At the refinery I worked at GE would also need to change their staffing to support the application of digital optimization of the refinery. The current staff at the refinery were chemistry and relationship experts, not network, modeling, or programming experts. GE will have to change their operating model at my refinery and all of the world to implement their new digital business model.

Path Forward

GE has a compelling new business model, but they need to work quickly to turn that model into profits. It is completely possible for GE to build great products, but that they will not be able to monetize them. For example, even though the ROI for GE’s proposed project at my refinery was likely excellent, the company decided not to pursue it due to its high upfront costs. A recent report claimed that GE’s industrial improvement software was behind multiple competitors in both technology and market share [6]. I think GE needs to quickly focus on finding profit sources to make sure they are getting enough short-term revenue from digital applications to fund their long-term growth plans. I would also recommend buying out some of their largest competitors to make GE the market leader. In many digital applications, only market leaders have been able to grow and survive (ex. iPhone vs Microsoft phone). GE is making a large gamble on the industrial internet that will likely lead to either fantastic growth or fantastic failure and their operating and business decisions will influence that outcome.

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Sources

[1] Ravi Vij, “How GE Make Money, Understanding GE Business Model.” revenuesandprofits.com. June 14, 2016, http://revenuesandprofits.com/ge-makes-money-understanding-ge-business-model/, accessed November 2016.

[2] “About GE Digital.” GE. http://www.ge.com/digital/about-ge-digital, accessed November 2016.

[3] David M. Katz. “GE CFO Eyes ‘Infinite Returns’ from Industrial Internet.” cfo.com. July 12, 2016, http://ww2.cfo.com/capital-allocation/2016/07/ge-cfo-eyes-infinite-returns-industrial-internet/, accessed November 2016.

[4] Stephanie Condon, “GE Digital Builds Up its Global Presence with Acquisitions, Partnerships.” zdnet.com. November 15, 2016, http://www.zdnet.com/article/ge-digital-builds-up-its-global-presence-with-acquisitions-partnerships/, accessed November 2016.

[5] Craig Resnick, “GE’s Industrial Internet of Things Journey” GE. February 4, 2016, https://www.ge.com/digital/sites/default/files/GE%20Industrial%20Internet%20of%20Things%20Journey%20(1).pdf, accessed November 2016.

[6] Katie Fehrenbacher, “GE’s Industrial Internet is a ‘Baby Startup’ Says Report.” Fortune.com. July 8, 2016, http://fortune.com/2016/07/08/ge-predix-weak-report/, accessed November 2016.

Cover Photo from https://twitter.com/ge_digital, accessed November 2016.

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4 thoughts on “GE’s Big Bet on the Industrial Internet

  1. It’s interesting that we almost have the same title for our posts about GE and Intel. But I think this highlights the challenges that all these traditional tech giants face now. In my previous company, we always like to quote “If you went to bed last night as an industrial company, you’re going to wake up this morning as a software and analytics company,” what GE Chairman and CEO Jeff Immelt told 100s of customers and analysts attending the third “Minds + Machines” summit. The challenges and opportunities are massive with the emergence of IoT. It’s not surprising that Intel and GE are the 2 most active investors in the segment.

  2. The company I wrote about (Siemens) has had a very similar approach to IoT in the industrial equipment and services space.
    I found it interesting to see how GE is using M&A to “acquire” the capabilities it will need to succeed. I reviewed Siemens’ Digitalization strategy and was not able to find anything similar.
    In addition to using M&A and partnerships, I think that both companies will need to come up with innovative human capital strategies, to ensure they attract top talent over the coming years to fuel growth of their digital portfolios. When it comes to software development, human capital is extremely critical. It becomes even more critical when you are competing for talent with Google, Facebook or Amazon – companies with a high degree of desirability as employers.

  3. GE’s investment in software companies to increase it’s strength in this area reminds me of the Dow-DuPont merger. The plan going forward is to actually spin-off the combined Dow-DuPont company into 3 smaller companies with more targeted focus. Many investors actually praised this strategy (see http://www.fool.com/investing/general/2016/02/09/what-the-dupont-and-dow-chemical-merger-and-spin-o.aspx). I wonder if the same concept would work for GE in this case; after all, GE is still very strong in equipment and heavy industry and I’m sure there are aspects of that business that can be separated from IoT. Going forward, one of the biggest challenges that large companies such as GE will face will be to determine what business model will best suit the uncertain digital business landscape.

  4. Thanks for the post, Nate. Another interesting organizational/operating change at GE has been the formal launch of the Digital division. For one, the new office centralizes all of the company’s IT, industrial security and software initiatives under one roof. Second, the new office is in San Ramon, CA (East Bay), which certainly signals an attempt to attract/retain top engineering talent (i.e., human capital management). Finally, the division was not setup as an independent business with its own P&L. Instead, it was funded by a $1B investment and positioned inside of GE Global Research.

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