Doing Nothing Is Sometimes Best

For several years, Jeff Immelt of GE has spoken about GE's appliance division as being a non-core business that was out of sync with the GE Capital juggernaut and with the industrial businesses. Appliances were increasingly becoming commodities, with Whirlpool becoming the closest to a dominant, global marketer. The entry of manufacturers like Samsung and LG into the U.S. market increased the level of innovation and competition. A sale of the entire business to Whirlpool was probably not feasible, due to both economics and to anti-trust issues. A sale to either Samsung or LG was probably not in the cards either, as both those companies had created brand equity quickly and already had efficient manufacturing capacity. There were some concerns about a potential fire sale, but then the consumer meltdown began, and GE took the divestiture off the front burner.

Now, with the passage of time, GE Capital looks like the non-core business. GE recently announced the formation of GE Home and Business Solutions, which will be comprised of GE appliances, lighting and electrical switches, and sensors and factory automation. What gives? It's all the talk about the Smart Grid. In this new vision, which is being driven by the Department of Energy and the electric utilities, an intelligent grid will, among many other things, manage load and offer time-of-day rate savings to consumers by communicating with and controlling "smart" appliances, like refrigerators, air conditioners, washers, dryers and cooking devices. As this vision evolves, there would ultimately have to be a replacement cycle for the major energy hogs, especially refrigerators and air conditioners, but also the laundry products. This cycle would probably be subsidized with rebates, as has the early generation of Energy Star appliances.

So, the commoditization of appliances would be halted temporarily, as manufacturers ride this new cycle and attempt to differentiate their technological solutions for communicating with the Smart Grid and for controlling the compressors and motors in the units. There will likely have to be some modifications to the motors and compressors themselves if they are to be subject to frequent cycle adjustments by the load balancing mechanisms. Lighting is clearly part of this issue as well, which is included in the GE Home and Business Solutions Group.

Combining these with factory automation and sensors gives the company the potential to compete with Johnson Controls and Honeywell in these areas. The new executive in charge of this division is also tasked with developing the new generation of GE leaders, which is quite interesting because this business will need lots of new ideas, including embedded electronics, hardware and software in order to succeed. It sounds like a fertile ground for the next generation of leaders. Although it's not a slam dunk by any means, by not reacting rashly and by waiting, GE Home and Business Solutions may have a meaningful, value-creating opportunity on its hands with appliances as opposed to a fire sale.