Industry Trend Analysis - Strong Competition Will Keep GE Power Business Under Pressure - DEC 2017


BMI View: Focusing on the power sector will provide long-term growth opportunities to a streamlined GE, due to strong global demand for natural gas and wind power equipment , as well as for digital energy services. That said, fierce competition in the wind power sector and the energy IoT will mean the company' s profit margins are likely to be under pressure over the next several years.

On November 13, US-based industrial conglomerate General Electric (GE) announced that the company will undergo a strategic and operational overhaul in order to improve its financial results and revive its share price; in October, the company had announced profits well below analysts' expectation, and the company's value has fallen by more than 40% since the start of 2017. GE's CEO John Flannery announced a 50% cut to the company's dividend and almost halved its earnings forecast for 2018, and said that going forward GE will focus on three main business: Power (including renewable energy), Healthcare and Aviation. The streamlining process will involve the sale of around USD20bn of assets over an unspecified timeline.

Flannery acknowledged that GE's power business is facing a challenging near-term environment, with operational profits expected to fall by 20% in 2017 and 25% in 2018, before stabilising in 2019 - but the CEO also said that the business is "fixable" and remains valuable. In this context, we believe GE's decision to maintain its focus on the power industry is sensible from a strategic point of view, as the sector has the potential to provide abundant growth opportunities for the company over a multi-decade timeframe. However, in line with the GE management's cautious outlook for the business, we expect a number of hurdles - most prominently strong competition for contracts to supply wind turbines - to weigh on GE's profits over the coming years. In the paragraphs below we highlight some of the opportunities and challenges facing GE's power business from a strategic point of view.

Strong Growth In Wind Power Market Ahead
Global - Wind Power Capacity
e/f = BMI estimate/forecast. Source: EIA, IRENA, National Sources, BMI

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