For most of its 126-year history, General Electric Co. has been a proxy for the U.S. economy.
From light bulbs and locomotives to jet engines, nuclear power and medical imaging, the diversified conglomerate made cutting-edge technology the world needed.
But the industrial behemoth fell out of step in the past decade as the economy pivoted toward services, software and the internet.
So it was probably inevitable that GE – the last surviving member of the 1896 Dow Jones Industrial Average – would be dropped from the venerable index of U.S. blue-chip stocks. The company’s banishment, which takes effect Tuesday, is emblematic of how much the global economy is changing. Making things, as GE does, is no longer the It factor that drives corporate growth. Instead, it’s all about the production of ideas, intellectual property and experiences.
That shift is reflected in the five most valuable U.S. companies – Google-parent Alphabet, Amazon, Apple, Facebook and Microsoft. GE, which had the largest market capitalization in the world as recently as 2004, isn’t even in the top 10 today.
Manufacturing as a share of the global economy has dropped to 16.6 per cent in 2015 from 19.2 per cent in 2000. The decline has been even more pronounced in the United States, where manufacturing’s share of GDP has sunk to 12.2 per cent from 15.5 per cent.
And services are increasingly traded across borders. Trade in services accounted for 12.7 per cent of global GDP in 2016, up from 9.2 per cent in 2000.
The shift is even more pronounced in the job market. In Canada, for example, more than 80 per cent of working people are employed in services. Factory workers make up less than 10 per cent.
In spite of those trends, GE is still a massive company, with 300,000 employees and more than US$122-billion in revenue last year. But it’s a shrinking giant as it falls out of step with the most dynamic parts of the economy.
Former GE chief executive Jeffrey Immelt saw the future coming and tried to take the company there. He dreamed of turning GE into a digital business, centred on Predix, a Windows-like operating system for industrial machines. He talked about the “internet of things” and vowed to make GE a global top-10 software company by 2020, with digital sales of US$15-billion. The company even moved its head office from Fairfield, Conn., to Boston in 2016 to tap into the city’s large pool of young tech workers.
But the digital transformation hasn’t come fast enough. GE Digital generated just US$4-billion in revenue last year. Reaching US$15-billion will be a tall order, particularly as GE sheds assets and scales back its digital ambitions under new CEO John Flannery. Mr. Flannery has not ruled out a complete breakup of the company.
GE is still primarily a maker of things in an increasingly service-dominated world. As Dow officials put it as they dropped the company from its index in favour of pharmaceutical chain Walgreen Boots Alliance Inc.: “The DJIA will be more representative of the consumer and health-care sectors of the U.S. economy.”
The list of companies that, like GE, have been dropped from the Dow in recent years reads like the chapter headings of a book on faded U.S. corporate giants. Chrysler, Alcoa, Bethlehem Steel and Sears, Roebuck are all Dow alumni.
The transformation of the economy has apparently eluded the attention of the Trump administration. U.S. President Donald Trump is stuck in the 1990s or earlier, when GE and companies like it dominated the corporate landscape. The thrust of his economic policies is aimed at bringing jobs back in traditional industries, such as steel and auto making, using steep import tariffs as leverage. And he’s trying to revitalize the coal industry.
The problem for Mr. Trump is that he’s embracing the wrong sectors of the economy. Bethlehem Steel isn’t a steel maker. It’s a professional soccer team, based in Bethlehem, Pa., where the steel mill was shuttered long ago. Sears is in the store-closing business. And General Electric’s best days are in the rear-view mirror.
Mr. Trump is obsessed with the massive U.S. trade deficit in goods with the rest of the world. He never mentions the country’s dominance in intellectual property or its US$255-billion surplus in services.
That’s unfortunate because it’s where the future is.