GE 'badly' misjudged the clean energy transition, costing investors almost $193B

https://www.utilitydive.com/news/ge-badly-misjudged-the-clean-energy-transition-costing-investors-almost/556420/

by toomuchtodo • 7 years ago

53 15 7 years ago

nemothekid• 7 years ago

E is "a case study in how rapidly and unexpectedly the global energy transition away from fossil fuels travels up the economic chain and destroys value in the power generation sector," the report says. It points the finger at large shareholders, like Vanguard, BlackRock, State Street and Fidelity, who IEEFA analysts say should be doing more to push companies away from fossil fuels.

This is interesting way to phrase things? It's the fault of the index/hedge funds, who likely did not have any say, for the reason that the executives running GE weren't forward looking enough?

xiphias22• 7 years ago

I don't understand what's so unexpected in an almost perfectly exponential adoption curve. Maybe only if the best tool GE has is a linear estimator.

toomuchtodo• 7 years ago

Index funds and the institutional firms that solicit them (Blackrock, Vanguard) aren't designed to be activist investors. Their role is to simply track a basket of stocks. This is a deficiency in passive investing. When management drops the ball (such as what GE did, not just in nat gas generation forecasting, but also how poorly Welch [1] and Immelt [2] managed the firm), there are fewer checks and balances until the value is already gone.

[1] https://www.bloomberg.com/news/articles/2019-06-12/reassessi... (Bloomberg: Was Jack Welch Really That Good? General Electric’s legendary CEO was good—but he was also lucky.)

[2] https://www.cnbc.com/2018/02/21/jeff-immelts-refusal-to-give... (CNBC: Jeff Immelt’s refusal to give or take bad news defined his leadership at GE)

ralph84• 7 years ago

It's absolutely not the role of index funds to dictate strategy to the companies they own. The whole premise behind an index fund is investors don't know which strategy is best, so just buy everything.

Where funds could have an impact is tying more of management compensation to long-term results. Longer vesting schedules on stock compensation would be an easy place to start.

basch• 7 years ago

Theres an observer effect type thing going on either way. If they invest in certain behaviors, companies will start behaving that way to get investments.

At the end of the day, the investors have agendas (the large stakeholders agenda is generally global stability aka lack of disruptive change) and they invest in ways to achieve said goal. GE fit that model AND their collapse is a great illustration of why attempts at safe passive investing eventually lead to stagnant and obsolete investments.

hangonhn2• 7 years ago

That's quite a stretch to blame everything on GE's Power division. I've been following GE for a while and the problems at GE go back many years. At the heart of the problem isn't its Power division (which is bleeding money) but GE's Capital division, which has a lot of liabilities still from the 2008 recession, its opaque finances, and its massive pension liabilities. The Alstrom acquisition (cost GE $10B) and being late to the wind turbine game can't explain $193B loss in market cap. It was basically really badly managed by Immelt for a decade. GE used tens of billions to do stock buybacks rather than pay down its liabilities.

The clean energy transition is just one of many problems for GE and isn't even its most urgent. Companies like GE make bad decisions like that all the time but it takes a series of bad steps and mismanagement to push a conglomerate like GE to the brink.

That said, I still think GE has a lot of very valuable assets that generate a lot of cash flow and things are starting to turn around. The massive amount of cash it got from offloading its biopharma division will give it a bit more runway so it doesn't have to sell its best assets (aviation, healthcare, etc.) to finances its bad debts.

Edit: Full disclosure -- the reason I know about GE's issues is because I've a long position on GE. So please read my comment with the view that I'm biased. Otherwise, I wouldn't be going long on GE.

Scoundreller• 7 years ago

GE used tens of billions to do stock buybacks rather than pay down its liabilities.

Is this such a bad plan if equity funding is expensive but debt funding is cheap?

If you can secure a loan against your assets at 3% and buy back preferred or common shares paying 5%, then it can make sense. It’s one way to avoid a dividend cut while decreasing dividend expenses. You can always issue the shares again later.

hangonhn2• 7 years ago

At a high level, I don't disagree with the idea as a whole but the problem with a plan like that is when you're facing a liquidity shortage, your shares may not be worth a lot. The problem with leveraging debt is that it can also compound and magnify your problems. Especially in the case of GE, the huge debt caused its debt rating to go down and that made the cost of borrowing higher, thus compounding the problem. If GE had paid down its debts, its book value would have gone up and eventually that would drive up its share prices (eventually... in a rational market).

karmakaze• 7 years ago

That makes more sense. I couldn't see how mis-estimating by about factor of 2 could account for $193B:

25 GW to 30 GW range "for the foreseeable future," less than half the amount it once expected.

SanchoPanda• 7 years ago

http://ieefa.org/wp-content/uploads/2019/06/General-Electric...

Here is a link to the actual report.

This reads like they started with the conclusion, and then kept googlig for facts to support it. Importantly, no where does it connect the energy transition to the number 193 billion. They say a thing happened in 2016 (an acquisition), in 2018 another thing was much worse (GE's mkt cap), so obviously that 2016 thing caused the 2018 thing.

Dissapointing givien the high caliber of donorsto the IEEFA.

AdamM12• 7 years ago

Yeah kinda reads of green energy propaganda imo. Not opposed to renewables at all (own PEGI).

tim333• 7 years ago

A lot of people seem to have misjudged the clean energy transition. Here are the International Energy Agency 'World Energy Outlook' projections and reality https://twitter.com/AukeHoekstra/status/866313289306963969/p...

It kind of fits with what Kurzweil bangs on about, about people thinking linearly and misjudging exponential growth. I hope this exponential continues as it would be a major plus for combating climate change. Here he is in 2011 saying solar will power the world around 2027. Which sounds a little optimistic. We shall see. https://bigthink.com/think-tank/ray-kurzweil-solar-will-powe...

woodandsteel• 7 years ago

GE is "a case study in how rapidly and unexpectedly the global energy transition away from fossil fuels travels up the economic chain and destroys value in the power generation sector," the report says. It points the finger at large shareholders, like Vanguard, BlackRock, State Street and Fidelity, who IEEFA analysts say should be doing more to push companies away from fossil fuels.

Big finance is finally waking up to the fossil fuels transition https://www.nytimes.com/2019/06/11/climate/climate-financial...

GE 'badly' misjudged the clean energy transition, costing investors almost $193B

Related Stories