Company of the Year - GE Energy (exclusive audio content)

Drew Ermenc

January 1, 2008

"In this world nothing is certain but death and taxes," Benjamin Franklin famously once wrote in a 1789 letter. If the astute founding father were alive today, he might add another inevitable to his short list: the insatiable certainty of energy consumption.

Booming growth in increasingly industrialized international markets, and a rising demand for cleaner, more efficient power inside the United States, is making GE Energy – the very company that made the light bulb a household word more than 100 years ago – very profitable. Because of its long-standing commitment to innovation, a wide-ranging portfolio of energy interests and consistent bottom-line growth – all in a turbulent and politically charged industry – GE Energy is the Business to Business 2008 Company of the Year.

The Atlanta-based company has its powerful fingers on the world's energy-craving pulse, manufacturing electricity-generating products like nuclear reactors, generators, and gas and wind turbines. A subsidiary of the second-largest company on earth, General Electric, GE Energy employs roughly 36,000 people in more than 100 countries, and boasts its equipment generates roughly one-third of the world's electricity. "Ecomagination," the marketing tagline given to GE's environment-friendly initiatives, is working well for GE Energy's bottom line, reporting $19 billion in revenues in 2006 – an increase of $2.5 billion from a year earlier. As of press time, the subsidiary was up 8 percent on the year, with a 3-percent jump in revenues in the third quarter.

"Just about every area of our business is growing," says John Krenicki, president and CEO of GE Energy. "The areas of particular strength are renewables and high efficiency gas and fire power plants in the Middle East."

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Investing in renewables

And, as Al Gore will conveniently point out, renewable energies – such as clean coal, wind and solar power – are en vogue and here to stay, garnering serious mainstream media attention as governments, utilities and businesses scramble to find ways to go green.

That's good news for GE Energy, which has made a strategic investment in renewables for some time. "On the corporate level we've committed to spend about $1.5 billion on green products annually and GE Energy is the No. 1 spender of that," Krenicki says. "We want to be a leader in renewables. We want to have a tech advantage and superior products. And then we want to scale the business and make it more cost effective."

According to a 2006 study by the Global Wind Energy Council, global wind power capacity has grown at an average cumulative rate of more than 28 percent over the past 10 years. "Renewables are our strongest demand in the U.S. and it's our strongest market," Krenicki says. "Wind is at the top of the list by a large margin. We entered the wind business roughly five years ago, and we've scaled that business up tenfold. We're now the leading producer of wind turbines in the U.S. and the world ... We want to do the same with solar," he says.

"John Krenicki and his leadership team have developed capabilities outside traditional spaces," says John Rice, the second-in-command at General Electric and president and CEO, GE Infrastructure. "In the wind business, we acquired the manufacturing business from Enron in 2002. The revenue was about $400 million; today the revenue is $4 billion. That comes from good hard work, understanding the issues that are in the business that you acquired, fixing those issues, and having a market in the U.S. and elsewhere that support the development of the technology."

Tom Konrad, an energy stock analyst specializing in renewable energy, and who authors a weekly column for AltEnergyStocks.com, sees how companies like GE Energy are experiencing bottom-line results when its clients are transitioning to alternative energy sources. "The shift to alternative energy is a very interesting one for industrial companies because we essentially are replacing fuel with capital. With alternative energy, almost all the costs are up front and they're higher, and this leads to greater opportunities for these companies that make these products."

Competitive advantages

Always looking for the competitive advantage, a significant strength of GE Energy has been the research and development of next-generation technologies. It's hard not to have a strong influence of innovation, seeing how the company was founded in 1878 with arguably one of the greatest inventions in modern history.

"[Innovation has] been important since Thomas Edison started the company," Krenicki says. "If you look at all the different product lines that we're in today – like wind and solar and clean coal and nuclear – it's the foundation of the franchise. We have more than 7,000 engineers in energy and spend about $1 billion a year on new products."

In the energy business, staying ahead of the curve is critical, with cleaner, more efficient and cost-effective technologies always upping the ante. "It really starts with resources, not just in the business but even at our corporate labs," Krenicki says. "We take a long-term view to product development."

Serving as president and CEO of GE Energy from 2000 to 2005, Rice was instrumental in the wind-technology investment, and reiterates Krenicki's philosophy. "You have to take a long-term view," he says. "If you look at the development of gas turbine technology or wind turbine, any technology developments in energy takes time, sometimes 10 years or more, to develop to the point where it's ready for commercial introduction. You have to manage short-term results and achieve the kind of results your customers and shareholders are looking for short term.

"But you also have to be sewing the seeds for growth for the next decade. You're constantly balancing short and long term. That means research and development expenses, most of which won't have an impact for three to five years."

Illuminating the future

Krenicki credits his business success beyond the science of emerging technologies, and chooses to focus on the big picture. "These markets are huge," he says. "There's something to right place, right time, but the thing we control is execution: ramping up the supply chain, making products reliable. We're shipping thousands of wind turbines per year, on schedule all across the U.S. and around the world. Execution is not timing or luck; that's a real capability and something that we're real proud that our people are skilled at doing."

With salt-and-pepper hair and a prominent East Coast accent, Krenicki is a 45-year-old GE vet, most recently serving as the CEO of GE Advanced Materials before being promoted to his current position in July 2005. A poster child for corporate advancement, he started with GE after graduating with a mechanical engineering degree from the University of Connecticut in 1984. He quickly accelerated through the ranks, including a stint as the head of Erie, Pa.-based GE Transportation, a fertile breeding ground of leadership where many top-level GE executives have honed their management skills, including Rice.

"John is one of the great GE leaders," he says, who Krenicki succeeded at GE Energy in 2005, "and he has a leadership team that stands out in the industry. I'd take that group into battle anytime, anywhere."

Along the way, Krenicki has had some legendary bosses, including former GE head Jack Welch, and has garnered a leadership style that stresses a strong team atmosphere. "I want to create an environment where people want to come to work and won't quit on me," he says. "I try to spend more time connecting the dots in the organization rather than trying to do people's jobs for them because of the scale of this operation."

Konrad credits the leadership to the continued success of GE Energy. "It's competent management," he says. "They don't necessarily have the advantage in the best research, but they have the resources to recognize it when it comes along and buy it, and then manage it well. They are actually good at acquisitions, which is a very rare talent in business."

Always looking ahead, GE Energy recently awarded a $22 million grant to the Atlanta Public School system that will help steer students to more math- and science-based subjects. "We want to make sure this country has a healthy supply of engineers and scientists moving forward," Krenicki says. "When you look at the U.S. versus China, we just don't graduate enough engineers. So we want to intervene early in high school to get more students interested in technology and science. It will be a good investment for the standard of living in the community and ultimately for our company."

The gamble
With a significant client list that includes utilities and governments, customers of GE Energy often must navigate through complicated mazes of regulations and red tape. And because government policy is so influential – and varies dramatically in each country – Krenicki stresses the importance of diversification in products. "We believe in a diverse mix of generating options," he says. "Cleaner coal, nuclear, wind renewables. We can't pick just one. It's like a financial portfolio. If you're too exposed in one area, you'll get burned. This ties into energy security for countries; climate change policy. We believe in all of these options and we're building out all of these options aggressively.

"That's what's amazing about the energy space," he adds. "The scale of the industry, but there are things that are uncontrollable, like the price of oil. If it stays high, then sub-sea development will move fast. If there's carbon legislation, nuclear will move very fast. If China institutes regulation around mercury emissions, BHA [Holdings, a recently acquired company specializing in cleaning mercury out of coal plants] will move very fast. And it's very difficult to predict when those things will happen, but we want to be ready because we believe they will. And by having this diverse portfolio, we can ride through down cycles as well as up cycles."

So GE Energy is investing billions in a high-stakes horse race, patiently hedging bets until one – or all – eventually hits. "Basically, they are in every major alternative energy market; they're there and they're on the shopping list for anyone looking for energy," Konrad explains.

"We have a very diverse portfolio and we've managed through cycles," Krenicki says. "Take nuclear power. It's been dormant for 20 years. We were able to survive with other product lines and now it looks like nuclear is making a comeback. We have a diverse approach of products, lots of resources and a long-term commitment to the industry."

Taking a page from the Jack Welch school of business, Krenicki is looking to keep things simple, even in this highly regulated and politically charged industry. "We want to have the best products, making them more cost effective by scaling them up. The more we produce, the lower the costs are," he says. "The cost of electricity is what our customers are looking for and there are a lot of people around the world who don't have access to electricity, so if we can build up a learning curve, scale up these products and make them reliable, we'll benefit our customers and our shareholders."

Photography by Lance Davies.