General Electric Co. is in danger of losing one of its largest industrial contracts after a political shake-up in India, highlighting the risk of the conglomerate's chase to win business in far-flung markets by investing heavily in local operations.
GE won a $2.5 billion deal in 2015 to sell diesel locomotives to Indian Railways -- delivering 1,000 of the machines over 11 years -- using a structure the company said would be a model for the future. In exchange for a massive order from one of Asia's biggest economies, GE would agree to build the locomotives in a remote corner of the Indian countryside, boosting employment and the local economy.
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But a new railways minister, Piyush Goyal, stunned GE leaders earlier this month by declaring that India would pull out of the deal and instead seek to transform its massive rail network to use electric locomotives exclusively. GE executives met with Mr. Goyal last week, according to people familiar with the meeting, to keep the deal together.
"The contract is being reviewed, but has not been terminated as of yet," a senior official at India's Railways Ministry said. "We are discussing various options with GE. We are exploring if they can make electric locomotives for us."
In a nod to the importance of the deal, a GE spokeswoman said the contract "is being closely followed by the global business community" and the company is "fully committed to executing this project."
GE doesn't make electric locomotives.
In his public remarks, Mr. Goyal said the ministry would double its plans to electrify tracks, from 17,000 kilometers to 35,000 kilometers of track, obviating the need to invest in new diesel locomotives. It wasn't clear how the country would pay for such a massive project or supply the needed power, though Mr. Goyal suggested some could come from solar panels installed along the railroad right of way.
The still unfinished GE locomotive factory in a tiny village called Marhaura -- 600 miles from Delhi -- is the linchpin of the company's Indian investment, and a point of pride to executives such as former Chief Executive Jeff Immelt, who used the deal as example of how GE can prosper amid slowing global trade and rising protectionism.
The complication also comes at a tough time for GE, as new Chief Executive John Flannery conducts a wide-ranging review of its portfolio in search of costs cuts and ways to boost growth. GE's stock is down 21% so far this year, while the S&P 500 index is up 11%.
India's massive economy is enticing for corporations in search of growth, but it can prove difficult. Changing political winds and regional interests can derail progress, leaving steel mills unbuilt, and buildings sitting empty. Even successful tech companies such as Facebook Inc. and Amazon.com Inc. face unexpected challenges.
From the outset, GE officials acknowledged the difficulty of the Marhaura joint venture. Their confidence resided in part in Prime Minister Narendra Modi, who has made a point of inviting foreign investment and emphasized improvements to the country's infrastructure.
In an interview in April, Banmali Agrawala, GE's head of South Asia, compared the project to dropping "a very high-tech plant in the middle of a desert somewhere." But local officials had made the project development easier, he said, by streamlining red tape and speeding up approvals.
Most important, Mr. Agrawala said at the time, was "a consistent, stable policy regime.
"Don't throw surprises at us, because we are talking about infrastructure here. We're not making chocolates or toothpaste," he said.
The Railways Ministry now plans to have 95% of locomotives run on electricity over the next four to five years, according to the railway official, a big leap from 44% currently. The ministry is looking into all legal and commercial aspects of the GE contract and a final decision is expected in about a month, the official said.
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(END) Dow Jones Newswires
September 25, 2017 18:50 ET (22:50 GMT)