GE: Adapting to Isolationist America and its Workforce
As the US becomes increasingly isolationist, manufacturing companies like GE are forced to determine where to locate their factories and to reckon with the STEM skills gap in the US.
GE: Adapting to Isolationist America and its Workforce
Kylie Lucas
November 15, 2017
US Manufacturing’s Reliance on the Global Labor Market
Manufacturing is evolving. As factory floors are flooded with automation, digitalization, and robotics, employees must also evolve. What was once perceived as a blue-collar job now requires significant technical expertise. This transformation is particularly prominent in manufacturing companies, such as General Electric (GE), in which the complexity of production processes is increasing to match the complexity of their products.
However, the US labor market is not keeping pace with US companies’ demand for high-skill manufacturing workers. Without adequate supply of skilled manufacturing labor, US companies could face several challenges within their supply chains including an inability to meet consumer demand and inefficient and costly operations. To mitigate the skill gap, US companies can access highly-skilled, foreign workers either by relocating manufacturing offshore or by hiring migrant workers via the H1-B visa program. The former option of offshoring is made even more attractive by cheaper labor and lower costs overseas. Both solutions are prime examples of the global nature of today’s modern supply chains.
Cut Off?
The shift of US manufacturing jobs offshore has been a subject of political contention for many years, and, most recently, President Trump gained voter support by promising to bring back or “reshore” manufacturing jobs to the US. To achieve this, the Trump administration seeks to implement policies that isolate US companies from the global economy, forcing them to adopt US-centric strategies. As the walls begin to close in around GE, it must determine how to react to the US trend toward isolationism.
GE Leverages the US Labor Market
Reshoring
While GE had shifted much of its manufacturing offshore in the latter half of the last century in pursuit of lower manufacturing costs, GE began to revive its US based manufacturing within the last ten years. Former GE CEO, Jeff Immelt, cited the advantage of having manufacturing, development, and design co-located in the US to increase the speed of innovation as the reason[1]. In the age of isolationism, GE’s reshoring of manufacturing jobs is encouraged by the US government through its tax and regulations policies.
Conversely, industrial agglomeration incentivizes companies in the same industry to locate near one another to share common resources such as labor[2]. Given that many manufacturing companies are located offshore, GE’s reshoring is risky. Pioneering reshoring also creates a first mover disadvantage in which competition continues to benefit from lower costs offshore. For GE Appliances, the disadvantages of US based manufacturing proved to be too great, and GE ultimately sold the division to China based Haier in 2016 for $5.4 billion after GE Appliances could not compete with the low prices of foreign manufacturers[3].
Upskilling
As GE reshores its manufacturing, the extent of the skills gap is felt. Exacerbating the existing skills gap, the US government, consistent with other isolationist policies, has restricted H1-B visa applications. GE is, therefore, looking to close the skills gap with US workers as a longer-term strategy to address isolationism. Recently, GE announced plans to re-train 150,000 workers[4]. Additionally, GE is promoting STEM education through technical certification programs[5] and universities[6].
Door #3: Rejecting Isolationism
Beyond getting out ahead of the isolationist movement and growing the domestic high-skill labor, GE is left with two other alternative courses of action. Rather than investing resources in promoting STEM education of US citizens, GE should lobby the government to reconsider restrictions on US manufacturing’s access to foreign, high-skill workers. Increasing the supply of high-skill labor within the US would have the added benefit to GE of lowering manufacturing wages. Furthermore, the size of the foreign, high-skill labor market can be measured with more certainty than the small, but growing corresponding US labor market. It could be that GE invests in STEM education, but the US labor market does not expand adequately to substitute the global labor market.
The other alternative open to GE in the face of isolationist policies within the US is to reverse course and determine whether being located within the US is the optimal side of the border to be on as the US draws firmer lines between it and the rest of the world. Offshore, GE would likely be separated from the large US consumer base by US isolationism. However, GE would be exposed to growing emerging markets while benefiting from cheaper labor and access to highly-skilled workers rejected from the H1-B visa program or otherwise deterred by US isolationism.
Conclusion
In attempting to force companies’ hands into isolationism, the US government has seemingly neglected one major issue: the cheaper labor and lower cost of manufacturing offshore. If GE does remain located in the US and is able to get access to skilled labor, how can GE contend with other competitors who maintain their manufacturing offshore?
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Bibliography
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Carrick, Gardner and Anne Kim. “Shortage of Skilled Workers Threatens Manufacturing’s Rebound.” GE Reports, August 3, 2015. https://www.ge.com/reports/post/115317859023/a-shortage-of-skilled-workers-threatens-manufacturings-r/, accessed November 2017.
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Ellison, Glenn, Edward L. Glaeser, and William R. Kerr. “What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns.” America Economic Review, June 2010. http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.3.1195, accessed November 2017.
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Immelt, Jeffrey R. “The CEO of General Electric on Sparking an American Manufacturing Renewal”. Harvard Business Review, March 2012. https://hbr.org/2012/03/the-ceo-of-general-electric-on-sparking-an-american-manufacturing-renewal, accessed November 2017.
Riley, Charles. “China’s Haier buys GE’s appliance unit for $5.4 billion”. CNN Money, January 15, 2016. http://money.cnn.com/2016/01/15/investing/ge-haier-appliances-sale/index.html, accessed November 2017.
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[1] Immelt, Jeffrey R. “The CEO of General Electric on Sparking an American Manufacturing Renewal”. Harvard Business Review, March 2012. https://hbr.org/2012/03/the-ceo-of-general-electric-on-sparking-an-american-manufacturing-renewal, accessed November 2017.
[2] Ellison, Glenn, Edward L. Glaeser, and William R. Kerr. “What Causes Industry Agglomeration? Evidence from Coagglomeration Patterns.” America Economic Review, June 2010. http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.3.1195, accessed November 2017.
[3] Riley, Charles. “China’s Haier buys GE’s appliance unit for $5.4 billion”. CNN Money, January 15, 2016. http://money.cnn.com/2016/01/15/investing/ge-haier-appliances-sale/index.html, accessed November 2017.
[4] Brennan, Morgan. “As General Electric upgrades factories closing the ‘skills gap’ is a top concern.” Yahoo! Finance, April 6, 2017. https://finance.yahoo.com/news/general-electric-upgrades-factories-closing-144428101.html, accessed November 2017.
[5] Carrick, Gardner and Anne Kim. “Shortage of Skilled Workers Threatens Manufacturing’s Rebound.” GE Reports, August 3, 2015. https://www.ge.com/reports/post/115317859023/a-shortage-of-skilled-workers-threatens-manufacturings-r/, accessed November 2017.
[6] St. Martin, Greg. “Northeastern to partner with GE in new federal education innovation program.” News @ Northeastern, August 16, 2016. https://news.northeastern.edu/2016/08/northeastern-to-partner-with-ge-in-new-federal-education-innovation-program/, accessed November 2017.
Kylie – Great piece. I learned a lot about a topic I wasn’t familiar with.
I’m wondering whether it is true that the government “neglected” the issue of cheap labor, and didn’t understand the difficulties faced by American companies to compete against cheap-labor based companies. I’m not sure the administration just “missed” this, but rather decided to ignore it and prioritize national interests first.
Your essay highlighted an important weakness in our business education: we mostly assume that companies are dealing with financial challenges, and working in an eco-system governed mainly by market forces. However, recently we learn more and more that the macroeconomic factors are actually extremely influential on companies’ performance and growth potential. It is extremely interesting to realize that many times the companies and governments have contradicting interests, in a way that adds more challenges and considerations to the corporate’s strategic choices.
Very interesting take on the massively complex topic of offshoring vs. reshoring. In my opinion, most business leaders and politicians focus on the cheaper labor cost part of the equation and don’t spend enough time thinking through the ramifications of the “talent drain” as more and more STEM jobs are taken up by other countries. GE seems to have recognized this issue by retraining workers and promoting STEM education. Is this enough? Will the innovation and creation process stay in the U.S. if the manufacturing and the “front-line learning” is done overseas?
The essay is very interesting as it shows clearly the disadvantages of many countries in the competition for having low costs and skilled workers. Argentina faced a similar situation in the last decade as the government pushed nationalism and many local factories had to close as they couldn’t compete with larger foreign corporations that were manufacturing in China or India. Besides, large corporation, which must deliver results to their stakeholders, decided to move their operations to more competitive places.
When taking protectionist measures, it is important to keep investing in which could give the country a competitive advantage. If USA applied protectionism but doesn’t invest in education, the gap with China and India will never be closed and all the efforts will not give any outcome. In the meanwhile, skilled workers from abroad should be considered for an H1B visa and companies will play a huge role in the negotiation of terms and conditions to accept these foreigners.
I think these large corporations are in a great position to work with the government to set rules/standards that allowed them to compete fairly in a global scenario and allowed the government to keep working on a sustainable future for the country.
This topic is really interesting and a huge concern for many companies with operations in the U.S. In my opinion, GE has 2 options. Either they should continue to manufacture outside the U.S. but within the Americas. This gives them logistic, cost and labour benefits but doesn’t go along with President Trump’s plan. Keeping isolation in mind, I believe the President is planning to levy some import taxes on products and hence companies that are manufacturing outside the U.S. and selling within, would be subject to this tax and hence leveling the playing field. This could also make the argument for producing within the U.S. as there may be additional labour costs for GE but they would benefit from being exempt of this import tax and could still be competitive. In either case, GE would need to preempt an increase in costs and hence would need to work out a long term strategy of price increases, which they should start doing gradually even before they make the decision on where to manufacture their products.
Great article, Kylie! When I worked at GE in Germany it was indeed one of the most pressing issues we had to deal with. I think that the organizational structure of GE is set-up to excel in an international environment. GE has a matrix organizational structural. Each division belongs to a region (e.g., Germany) and an industry (e.g., renewable energy). With its specific constellation GE is able to cater to country and industry specific needs. For instance, Germany’s renewable market is dominated by smaller wind turbines (for a conglomerate of households) whereas the renewable market in the US is dominated by large wind turbines (for large wind parks). By having the workforce and the sales force locally (e.g., in Germany) GE is able to reap two major benefits: 1) Cost benefits from minimizing transportation and 2) Knowledgeable sales force with local sales relations. Those benefits will definitely offset the tax benefits from manufacturing in the US. I think in the long-run manufacturing companies in general need to orient themselves more towards the sales market than their original country of origin.
Great topic, Kylie! I think when we think about isolationism, we tend to think about the impact on the raw goods supply chain and don’t think about the labor bottleneck. But, as we’ve learned in TOM, sometimes the human is the actual bottleneck, rather than the machine or the supply chain.
As I thought about the options you suggested, I took a look at GE’s US sales to see whether door #3 (exiting US manufacturing) was feasible. Per this presentation (https://www.ge.com/docs/works/brochure.pdf), it looks like US sales represent 40% of their business. Assuming the tariffs the Trump administration is posing go into place, I don’t think they’d be willing to give up 40% of their business (either by choice or by being forced out by being noncompetitive).
I think that option #2 is the best option because of how tied GE is to the overall economy. Increasing the amount of workers that are educated in STEM will not only help fuel GE’s growth, but it will also help fuel the growth of other local manufacturing firms. For GE, this creates an opportunity to sell more to both the more highly educated end consumer and the growing businesses (like in the case of selling more engines to airlines which service the end customer who is traveling more because they have more money). This article (http://www.theceomagazine.com/business/importance-stem-education-economy/) looks at Australia, but I would expect the impact on the US economy to be similar. In it, it mentions that a 1% increase in the labor market working in STEM would create a 5% increase in GDP. Because GE is so highly tied to the performance of the overall economy (very high beta, if you will), GE is highly incentivized to help educate the workforce both to tackle their own labor shortages, but also to fuel the demand side of their business too. Plus, it won’t be too hard to convince the US market – who wouldn’t want to be an engineer?
I agree that GE is in a tricky position: staying in the US and bending to isolationist policies can mean increased labor costs that make their products less competitive on price. However, I wonder if the lobbying you suggested could extend beyond labor and job creation, and head into the realm of restricting/taxing imports of foreign competition. Granted, I’m not sure if the American consumer would be pleased with this turn of events, but it could address GE’s ability to compete with foreign-made products — why not handicap the competition if GE is handicapping itself by reshoring labor in the US?
Thanks for your essay, Kylie. Though I also see isolationism as a major threat to GE, I also see a great opportunity here. Though labor costs would be higher than they would otherwise be for offshore manufacturing, the United Interconnect, Fasten and Marriott cases we discussed this week shed light on the importance of a company’s ability to operate in a cost effective way. For example, Asahi, Fasten and AirBnB have all been forced, due to varying contextual constraints or market drivers, to become profitable/successful under a lower-cost model. When these companies end up entering or disrupting new markets, higher-cost incumbents (e.g., United Interconnect, Uber, and Marriott) are at a disadvantage, even despite providing a better or more innovative product – in this case, the new, lower-cost entrants can work their way up the “innovation curve” and pose the threat that they could end up providing a better or more relevant product at a lower cost. This dynamic could be applied to the situation that GE finds itself in: if it becomes the first-mover to re-shore to the U.S., I would suggest that it find other ways to enhance cost efficiency (therefore allowing it to swallow inevitably higher labor costs) so that it becomes a low-cost operator relative to its competitors. If U.S. isolationism takes full form (I realize this is a major assumption), GE’s competitors will also have to re-shore one day. However, they will do so late and will be at a severe disadvantage to GE. Said another way, if GE could successfully manage costs in other ways, it could build a meaningful moat around its competitive advantage relative to its peers when they are all forced to produce on-shore.