Economy Needs Amazons but Mostly Has GEs -- WSJ
June 22 2017 - 3:02AM
Dow Jones News
By Greg Ip
When Amazon.com Inc. announced Friday it was buying Whole Foods,
the stock market got a taste of something long missing:
volatility.
The turmoil, however, was confined to retail. While the two
companies' stocks rose sharply and their competitors' tanked, the
rest of the market remained placid. Indeed, months of historically
low market volatility has begun to look like dangerous
complacency.
Yet there is another, potentially more troubling explanation:
stagnation. Muted markets may be the inevitable product of steady,
sluggish growth, low and predictable interest rates, declining
business startups and failures, and decreased competition. In other
words, the problem is, there aren't enough Amazons disrupting the
stock market and the economy.
Since Jeffrey Bezos founded Amazon in 1994, he has put expansion
and innovation ahead of profit. In its early years, free cash flow
-- cash from operations minus capital spending -- hovered around
zero. Mr. Bezos approaches new products like a venture capitalist.
Many will flop (like the Fire smartphone), but some will be home
runs (such as Amazon Web Services, its cloud computing arm).
Amazon launched Prime, which offers free delivery in exchange
for an annual fee, in 2005. John Blackledge, an analyst at Cowen
& Co., notes Amazon has repeatedly innovated in ways that make
Prime even more valuable to subscribers: the Kindle e-book reader
lending library, streaming video and music, discounted access to
FreeTime, which offers children's books, games and media content,
and Amazon Family, which offers discounts on baby products.
Innovation is also exceptionally rapid. Mr. Blackledge says Prime
Now, which offers same-day delivery, launched in New York in less
than four months after conception without so much as a focus
group.
Amazon is now profitable, yet cash retention remains secondary
to retaining customers. Asked by an analyst in April whether Alexa,
a voice-activated assistant, was boosting sales, the company's
finance chief, Brian Olsavsky responded: "The monetization, as you
might call it, is...not our primary issue right now. It's about
building great products and delighting customers."
If Amazon is one extreme in how companies invest, General
Electric Co. is the other. It has long been fastidious about
capital and cash deployment. On its last quarterly earnings call,
the company meticulously laid out profit growth by product and
business segment, the sources of margin improvement, cost savings
anticipated from specific restructuring moves -- even how five
uncollected aviation accounts were affecting profit.
Chief executive Jack Welch perfected this approach in the 1990s,
and it continued under his successor, Jeffrey Immelt. Last week,
Mr. Immelt said he would retire, after 16 years struggling to
restore growth. In part, that reflected how financial engineering
had inflated profits under Mr. Welch. Yet Mr. Immelt 's investment
decisions too often chased the conventional wisdom on Wall Street
and in Washington. Thus, GE Capital bulked up on residential
mortgages and commercial real estate in the run-up to the financial
crisis. From 2010 to 2013, the company announced many acquisitions
in oil and gas services, only to see the price of oil crash, taking
orders with it.
Growth is hard for any company that dominates its markets as
much as GE does. GE's size also attracts debilitating political
scrutiny. Its proposed acquisition of Honeywell was derailed by
European antitrust regulators just before Mr. Immelt took over. It
took 18 months for Mr. Immelt's purchase of Alstom's power business
to clear regulatory barriers. GE Capital after the financial crisis
became the poster child of dangerous, unregulated finance. In
response to new regulations and pressure from Wall Street, Mr.
Immelt largely dismantled the business.
Investors still want GE to return cash to shareholders, and it
has obliged, spending $79 billion on share buybacks and dividends
between 2012 and 2016 compared with $50 billion of capital
expenditures. Indeed, for two years, cash flow of U.S. corporations
has exceeded capital spending. Much of the difference has gone into
buying back stock.
Yet while good for shareholders in the short run, this is no
recipe for growth in the long run. GE's cash flow is shrinking
despite the company's focus on preserving it, while Amazon's is
growing despite that company's readiness to spend it.
Amazon is clearly not a template for most companies. Defying
conventional wisdom usually fails, which is why for every
successful long shot like Amazon there are hundreds if not
thousands of failed startups. Amazon has come near death more than
once, and may again. Moreover, the larger it gets, the more it will
bump against the constraints of size, such as antitrust concerns.
As for GE, a history of reinvention suggests it is more likely to
be around in 125 years than is Amazon. Given investors' tendency to
go to extremes, now may be a bad time to buy Amazon shares, or sell
GE's.
Yet the country as a whole badly needs some rules-defying
risk-taking. For business, that means a bit more Amazon in the
boardroom and a bit less GE.
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
June 22, 2017 02:47 ET (06:47 GMT)
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