GE, the Ultimate Global Player, Is Turning Local -2-

MARHAURA, India -- General Electric Co. could hardly have picked a less hospitable spot for its new locomotive factory -- but then again, it didn't have much choice.

The land here regularly floods in the rainy season, which meant work crews needed more than 500 truckloads of dirt a day to raise the parcel by more than 11 feet out of the danger zone. The facility required concrete pilings poured 82 feet below ground, on account of earthquakes.

When finished, the factory -- the centerpiece of a $200 million investment -- will sit 600 miles southeast of Delhi in a tiny impoverished village in the eastern state of Bihar, a place with a rich history of government corruption scandals. The new site, handpicked by a powerful local politician, is reachable via narrow, twisting roads choked with buses, cars and rickshaws, a three-hour journey from the state capital on a good morning.

This is GE in the age of localization -- the company's survival strategy for an era of slowing global trade, rising protectionism, and increasingly powerful foreign customers, all of which is forcing manufacturers to put down deeper local roots to win business.

"Even many Indian companies would think five times" about building in Marhaura, says Banmali Agrawala, GE's India CEO. "But we said yes to it."

GE grew from a merger of electric companies in 1892 -- including one founded by Thomas Edison -- into a global conglomerate by building in the U.S. and exporting abroad. After World War II, GE began to build global supply chains through manufacturing hubs in advanced economies such as Japan, France and Germany. By the late 1990s, as the pace of globalization quickened, GE became the ultimate global player, making jet engines, power turbines and MRIs in the most economically efficient manner it could devise.

Now that world is slipping away. Trade as a proportion of global gross domestic product hasn't recovered to levels seen before the financial crisis in 2008 as protectionist measures exploded.

Once-impoverished nations such as India, China and Indonesia are becoming economic powers and demanding that companies not just ship them goods, but invest and build locally, teach local workers new skills and share technological know-how.

To win big contracts, GE is trading a global footprint designed for maximum efficiencies of scale for one that means greater face-to-face exposure in local markets. The remoteness of the Marhaura factory adds cost and complexity to the locomotive project. "If something takes three months," project manager Shankar Dhar said one day in April, in an interview at the worksite, "you give it six months here."

To house the workers GE will recruit from other parts of the country, the company is building a "township" of 100 residential units next to the factory. The company also says it is working with local officials to try to streamline bureaucracy and arrange the widening and straightening of roads, to ensure it can get materials to a site it never would have picked on the merits alone.

Global Trade Alert, a trade-monitoring service, counts nearly 350 regulations imposed world-wide since November 2008 requiring local sourcing, hiring or operations, including a profusion of Buy America provisions in the Obama administration. Another 466 regulations require some form of localization to bid on government contracts. More are coming, especially in emerging markets such as India, Argentina and Nigeria, says Simon Evenett, an economist at Switzerland's University of St. Gallen who runs the monitoring service. Government-backed development banks require projects to buy or build domestically in exchange for inexpensive financing.

GE says it has established engineering and research centers in nations such as Poland, Mexico and Qatar, and flexible factories in countries such as Brazil and India, which can easily switch production lines in case political winds or market preferences change. GE is also selling off some of its best-known businesses such as appliances and lightbulbs, which are often the first industrial products a developing country will master, and is focusing on heavy industrial machinery that is more difficult to produce.

"There is a strong trend toward economic nationalism all over the world, " GE's CEO, Jeff Immelt, said in a February letter to shareholders. He says the company can't depend on new trade deals to ease global commerce, but must scatter production all over the world.

Mr. Immelt won't be around to watch his experiment play out. The company announced this month that the CEO would retire in August after 16 years at the helm, amid investor dissatisfaction with GE's sluggish stock-market performance.

Mr. Immelt's successor, John Flannery, most recently ran the company's medical-equipment unit. He also once ran GE's India business.

Mr. Flannery's first job is to evaluate GE's vast business lines, although his career path suggests he's unlikely to reverse course on localization. The health-care business has already headed down this path through the customization of some product designs, as in the case of inexpensive, hand-held ultrasound scanners it developed for India.

"What works in Milwaukee doesn't necessarily work in Mumbai," Mr. Flannery says.

A localization strategy requires a deft political touch. GE must balance the competing demands of national leaders to build plants in their backyards. That has become especially difficult since the election of Donald Trump, who has been quick to tweet about any company that moves jobs out of the U.S. The White House is now working on regulations to require U.S. government projects to buy U.S.-made goods.

Not long ago, GE could boast that the products it sold overseas were made in America. Robert Nardelli, a former GE executive who ran the transportation business in the early 1990s, recalls 300 locomotives ordered by China during his tenure were built in GE's huge factory in Erie, Pa.

Now GE makes a more subtle argument in meetings with Trump cabinet officials. Overseas investments aren't coming at the expense of U.S. workers they say, and, besides, they wouldn't win the new contracts unless they agreed to manufacture abroad. The engines for all 1,000 locomotives to be assembled in Marhaura, for instance, will be built at GE's Grove City, Pa., plant.

"We can't let people think it's a zero-sum game -- that a job in country X means one less job in the U.S.," says GE Vice Chairman John Rice.

Today, many industrial-sector deals -- which often involve governments -- require 30% to 70% of a machine's contents be produced domestically, GE executives say, a figure that has been rising in recent years.

Over the course of Mr. Immelt's 35-year career at GE, the company has shifted its focus from supplying the U.S. market to selling overseas. In 1982, when Mr. Immelt joined the company, 80% of the firm's revenue came from the U.S. Today, it's only 30%. Back then, GE operated 135 factories in 25 foreign countries. As of this year, it has 325 plants spread across 40 countries.

Jobs have followed the changes. GE employs 104,000 workers in the U.S., about one-third fewer than it did a decade ago. In 1982, GE employed 261,000 workers in the U.S. In China, GE's workforce has doubled in the past decade to about 22,000 today.

GE says it started pushing its localization strategy more fully around the time of the 2008-2009 financial crisis when trade stagnated as a percentage of GDP. The company dispatched Mr. Rice, a tall Summit, N.J., native with a bald dome and a politician's backslapping manner who previously ran its infrastructure and energy businesses, to Hong Kong to build GE's business outside the U.S. Company officials call him GE's Secretary of State.

Mr. Rice, 60 years old, says the world economy became less predictable following the financial crisis, leaving GE hustling to find what he called "tipping points" -- moments when new political agendas brought opportunity.

Other companies made similar moves, including Honeywell International Inc., Caterpillar Inc. and investment giant BlackRock Inc. Honeywell introduced a line of hard hats in 2012 for Asian markets it said were designed for the heads of Asian workers -- "a superior Chinese fit," according to the company. Honeywell says by setting up manufacturing in Asia it could better grasp the "nuances" of emerging markets.

In China, GE also doubled down on localization. In July 2014, Premier Li Keqiang told a group of U.S. executives that China wasn't that interested anymore in having foreign companies take advantage of the Chinese market, Mr. Rice recalls. China wanted them to become partners of big Chinese firms and teach them how to get business globally.

Rather than compete head-on with local companies on their home turf -- battles GE feared it would often lose -- the company aimed to piggyback on the growing role of China's state-owned enterprises around the world.

GE threw its weight behind China's "One Belt, One Road" foreign-policy initiative. The effort envisions reviving ancient trade routes by building Chinese-backed ports, pipelines and power plants in countries along the route -- in turn boosting China's domestic manufacturing and deepening its global clout. Last October, GE booked part of the lavish Diaoyutai State Guesthouse, where Nixon stayed in his 1972 visit, for Mr. Rice to promote the plan to Chinese executives.

For a One Belt, One Road project, GE teamed up with a Chinese firm, promising a nation that chooses the team that it will also get access to GE technology. The strategy only works because GE has such a large manufacturing presence in China -- with more than 30 production sites nationwide -- that it can meet China's local-production rules. Beijing makes financing available for the projects.

One of GE's factories is in smoggy Wuhan, an industrial city on the Yangtze River, where a factory boss named Chaoming Chen boasts of his role as Communist Party secretary of the plant and his ties to party higher-ups. "The trade union reports to me," he says, noting that this makes it easier for GE to automate production in Wuhan and potentially cut workers -- a process that elsewhere in China has led to worker protests.

GE also teamed up with China's Central Organization Department, which manages personnel moves for the Communist Party, to offer training for state-owned enterprise leaders at GE's Crotonville, N.Y., campus. More than 300 Chinese executives have taken part over the past decade-plus.

In India, GE began to push harder on localization after Prime Minister Narendra Modi was elected in 2014 on a "Make in India" platform. He promised economic development fueled by major investments in India's infrastructure.

GE says it wouldn't have won its India locomotive deal in 2015 without first expanding in India four years earlier, when it started building a factory complex in the industrial city of Pune. That helped GE train a cadre of skilled workers in an automated facility, which is expected to produce about 30% of the components in the locomotives to be assembled in Marhaura.

Selling new locomotives to Indian Railways, the government-controlled operator of its vast train network, has long ranked high on GE's agenda. But GE wouldn't make some major investments in India, in part because it worried about Indian bureaucratic inefficiency and political corruption.

In the end, GE decided it had no other option. A former railway minister who hailed from Bihar picked the engine production site in the late 2000s to spur economic development, executives say.

The $2.5 billion order for 1,000 locomotives over 11 years is one of the largest deals ever for GE's transportation unit, and its biggest order ever in India.

The company hedged its risk by agreeing with Indian Railways to build the factory as a joint venture, including a $15 million investment from the Indian partner. Workers will begin assembling locomotives in the factory late next year.

So far the local government has eased the way. One steamy day in April, S. Siddharth, the principal secretary at Bihar's Department of Industries, bragged it is signing off on requests for clearances and approvals within 48 hours of receiving them. He also says he is working with local police to run off any "miscreants" in the area around the Marhaura site.

In exchange, India wants jobs -- quickly -- from GE, a demand the company wouldn't face if it was shipping locomotives in from afar. "I am coaxing them every day" to use more locals, Mr. Siddharth says.

GE executives say they will do their best to comply. "Two decades ago, India may not have felt they had the skill set, the capital or the wherewithal to have that leverage," says Mr. Nardelli, the former GE exec. But now, "if you want the deal, that's what it's going to take."

Write to Ted Mann at ted.mann@wsj.com and Brian Spegele at brian.spegele@wsj.com

(END) Dow Jones Newswires

June 29, 2017 11:15 ET (15:15 GMT)