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Water Industry News

GE water unit stagnates during merger integration

Monday, August 28, 2006

By Kathryn Kranhold, The Wall Street Journal

Shortly after taking over as chief executive of General Electric Co. in 2001, Jeffrey Immelt plunged the conglomerate into the water-treatment business. GE has since spent nearly $4 billion acquiring four companies, prompting executives to boast that the water unit could reach $10 billion in annual revenue within a decade.

But Mr. Immelt's initiative hasn't lived up to expectations. The unit's biggest business -- selling chemicals -- faces tough price competition, and multimillion-dollar projects to build water-desalination and reuse plants haven't materialized. The water unit has reduced financial projections; the current target of around $2 billion in sales this year roughly equals the combined revenue of the companies GE bought. Some employees have been laid off, and Mr. Immelt earlier this year replaced his handpicked head of the water unit.

The turbulence highlights GE's challenge in entering a new $400 billion market by building a business from scratch against global competitors such as Danaher Corp., ITT Corp., Siemens AG of Germany and, in Spain, both OHL Group's Inima and Abengoa Group's Befesa.

"Are we happy with all of the performance of the business so far? No," says Mr. Immelt. "Over the next five years and into the future, this is going to be a great part of the GE portfolio."

GE is struggling to meld thousands of employees from competing cultures with its own emphasis on strict processes and financial rigor. In one shift, more than 2,000 engineers who had made careers peddling chemicals for treating water at oil refineries and power plants were retrained to sell expensive equipment.

"We probably moved quicker than we should have in some areas," says Mr. Immelt, adding that training has taken longer than expected.

Creating a business through multiple large acquisitions is an unusual strategy for GE, says management consultant Ron Ashkenas, a managing partner with consulting firm Robert Schaffer & Associates. Dr. Ashkenas, who has written books about GE, says the company typically enters a new market by carving a smaller business from a larger one, then bolting on small companies. "In most cases, they know something about the market and the dynamics, and here they don't," he says.

Mr. Immelt acknowledges that GE is behind in integrating the acquisitions and reaching financial targets. In May, Mr. Immelt reduced the unit's estimated operating profit for the year to $200 million, from an initial $400 million. Some analysts doubt that GE will hit the lower number. In the first half of the year, they estimate the unit recorded $40 million in operating profit. For next year, GE has lowered its revenue target by 10 percent to $2.5 billion from $2.8 billion.

The difficulties at the water unit also show how tough it is for Mr. Immelt, who is now five years into his job, to move the needle on a 126-year-old company that expects $163 billion in revenue this year. Water is one of five new businesses that Mr. Immelt, who took over in September 2001, touts as platforms for long-term growth. The others are Hispanic television, security equipment, health-care information technology and oil-and-gas services.

Looking to turn the division around, Mr. Immelt moved aside GE veteran George Oliver, whom he had chosen to launch the water business in 2002. Colleagues were surprised by Mr. Oliver's departure, shortly after he led a sales-strategy session in Cancun in January. Mr. Oliver, now at Tyco International Ltd., declined to comment.

His replacement is Jeff Garwood, a 44-year-old chemical engineer who joined GE in 1992 and had been leading the factory-automation unit after stints in GE's plastics and aircraft-engine units. He also left briefly for two dot-com companies. Mr. Garwood started his career running a water plant in Victoria, Texas, for DuPont Co., and then worked for consulting firm McKinsey & Co.

Even before Mr. Garwood arrived, GE had tapped McKinsey to help the water unit refine its strategy. The unit has eliminated jobs, primarily in the U.S., reducing the number of district managers to 28, from 95, for example. Overall, Mr. Garwood says less than 5 percent of the unit's employees have been let go since 2000. Mr. Garwood describes his task as "a difficult evolution."

The market is attractive: GE is eyeing a $50 billion slice of the global water market, including treating water for power plants and building and running desalination and waste-water plants. Key to the reorganization, Mr. Garwood says, is a new sales and marketing structure introduced in the spring that primarily divides the sales team geographically. Within each region, one sales team now scouts new opportunities.

Most of the salespeople -- more than 1,500 engineers -- have been retrained to sell the unit's entire portfolio, from chemicals to equipment that removes salt and debris from water. Another group handles specific issues in industries including dairy products, electronics and health care.

As evidence the changes are paying off, GE says it recently won an $11 million contract to supply a Ukrainian fertilizer plant with a suite of products such as filtration systems and chemicals.

Mr. Garwood says GE is looking at more than $3 billion in opportunities to build, own and operate facilities around the globe. In some cases, GE will sell its equipment. In others, the water unit, working with GE's financial-services group, will secure an ownership stake in projects for GE, creating a revenue stream. "That's a big opportunity for us," Mr. Garwood says, noting that it is 10 percent of the water business now.

But those big projects are hard to come by and often mired in politics. Last year, GE said it planned to take a stake in at least two major projects a year. Since then, GE has announced only one such deal -- 70 percent ownership of a plant in Algiers.

A project GE inherited in the Caribbean nation of Trinidad and Tobago exemplifies the pitfalls. GE acquired a 40 percent stake in a desalination plant there in early 2005 by buying Ionics Inc. The Trinidadian government, which now opposes the plant, claims that Ionics's partner, a local contractor, committed fraud to win the contract for the plant. (A lawyer for the contractor denies the claim.) The government wants to renegotiate the 23-year deal to buy water from the plant, considered the largest of its kind in the Western Hemisphere, according to officials familiar with the matter.

Analysts expect GE to win its share of projects eventually. "They are the new kids on the block," says Debra Coy, a senior analyst with Stanford Washington Research Group, an investment and advisory firm. "GE is very sophisticated in terms of international energy projects. The water market is different. They've had to figure it out step by step."

And, like Mr. Immelt, analysts say GE has the finances to back big projects and has acquired top-notch water technology.

"There's nothing that I've seen that says this is not a good market for the company," Mr Immelt says. "We think we've got some of the best technologies in the industry."