By Ted Mann and Brian Spegele
MARHAURA, India -- General Electric Co. could hardly have picked
a less hospitable spot for its new locomotive factory -- but then
again, it didn't have much choice.
The land here regularly floods in the rainy season, which meant
work crews needed more than 500 truckloads of dirt a day to raise
the parcel by more than 11 feet out of the danger zone. The
facility required concrete pilings poured 82 feet below ground, on
account of earthquakes.
When finished, the factory -- the centerpiece of a $200 million
investment -- will sit 600 miles southeast of Delhi in a tiny
impoverished village in the eastern state of Bihar, a place with a
rich history of government corruption scandals. The new site,
handpicked by a powerful local politician, is reachable via narrow,
twisting roads choked with buses, cars and rickshaws, a three-hour
journey from the state capital on a good morning.
This is GE in the age of localization -- the company's survival
strategy for an era of slowing global trade, rising protectionism,
and increasingly powerful foreign customers, all of which is
forcing manufacturers to put down deeper local roots to win
business.
"Even many Indian companies would think five times" about
building in Marhaura, says Banmali Agrawala, GE's India CEO. "But
we said yes to it."
GE grew from a merger of electric companies in 1892 -- including
one founded by Thomas Edison -- into a global conglomerate by
building in the U.S. and exporting abroad. After World War II, GE
began to build global supply chains through manufacturing hubs in
advanced economies such as Japan, France and Germany. By the late
1990s, as the pace of globalization quickened, GE became the
ultimate global player, making jet engines, power turbines and MRIs
in the most economically efficient manner it could devise.
Now that world is slipping away. Trade as a proportion of global
gross domestic product hasn't recovered to levels seen before the
financial crisis in 2008 as protectionist measures exploded.
Once-impoverished nations such as India, China and Indonesia are
becoming economic powers and demanding that companies not just ship
them goods, but invest and build locally, teach local workers new
skills and share technological know-how.
To win big contracts, GE is trading a global footprint designed
for maximum efficiencies of scale for one that means greater
face-to-face exposure in local markets. The remoteness of the
Marhaura factory adds cost and complexity to the locomotive
project. "If something takes three months," project manager Shankar
Dhar said one day in April, in an interview at the worksite, "you
give it six months here."
To house the workers GE will recruit from other parts of the
country, the company is building a "township" of 100 residential
units next to the factory. The company also says it is working with
local officials to try to streamline bureaucracy and arrange the
widening and straightening of roads, to ensure it can get materials
to a site it never would have picked on the merits alone.
Global Trade Alert, a trade-monitoring service, counts nearly
350 regulations imposed world-wide since November 2008 requiring
local sourcing, hiring or operations, including a profusion of Buy
America provisions in the Obama administration. Another 466
regulations require some form of localization to bid on government
contracts. More are coming, especially in emerging markets such as
India, Argentina and Nigeria, says Simon Evenett, an economist at
Switzerland's University of St. Gallen who runs the monitoring
service. Government-backed development banks require projects to
buy or build domestically in exchange for inexpensive
financing.
GE says it has established engineering and research centers in
nations such as Poland, Mexico and Qatar, and flexible factories in
countries such as Brazil and India, which can easily switch
production lines in case political winds or market preferences
change. GE is also selling off some of its best-known businesses
such as appliances and lightbulbs, which are often the first
industrial products a developing country will master, and is
focusing on heavy industrial machinery that is more difficult to
produce.
"There is a strong trend toward economic nationalism all over
the world, " GE's CEO, Jeff Immelt, said in a February letter to
shareholders. He says the company can't depend on new trade deals
to ease global commerce, but must scatter production all over the
world.
Mr. Immelt won't be around to watch his experiment play out. The
company announced this month that the CEO would retire in August
after 16 years at the helm, amid investor dissatisfaction with GE's
sluggish stock-market performance.
Mr. Immelt's successor, John Flannery, most recently ran the
company's medical-equipment unit. He also once ran GE's India
business.
Mr. Flannery's first job is to evaluate GE's vast business
lines, although his career path suggests he's unlikely to reverse
course on localization. The health-care business has already headed
down this path through the customization of some product designs,
as in the case of inexpensive, hand-held ultrasound scanners it
developed for India.
"What works in Milwaukee doesn't necessarily work in Mumbai,"
Mr. Flannery says.
A localization strategy requires a deft political touch. GE must
balance the competing demands of national leaders to build plants
in their backyards. That has become especially difficult since the
election of Donald Trump, who has been quick to tweet about any
company that moves jobs out of the U.S. The White House is now
working on regulations to require U.S. government projects to buy
U.S.-made goods.
Not long ago, GE could boast that the products it sold overseas
were made in America. Robert Nardelli, a former GE executive who
ran the transportation business in the early 1990s, recalls 300
locomotives ordered by China during his tenure were built in GE's
huge factory in Erie, Pa.
Now GE makes a more subtle argument in meetings with Trump
cabinet officials. Overseas investments aren't coming at the
expense of U.S. workers they say, and, besides, they wouldn't win
the new contracts unless they agreed to manufacture abroad. The
engines for all 1,000 locomotives to be assembled in Marhaura, for
instance, will be built at GE's Grove City, Pa., plant.
"We can't let people think it's a zero-sum game -- that a job in
country X means one less job in the U.S.," says GE Vice Chairman
John Rice.
Today, many industrial-sector deals -- which often involve
governments -- require 30% to 70% of a machine's contents be
produced domestically, GE executives say, a figure that has been
rising in recent years.
Over the course of Mr. Immelt's 35-year career at GE, the
company has shifted its focus from supplying the U.S. market to
selling overseas. In 1982, when Mr. Immelt joined the company, 80%
of the firm's revenue came from the U.S. Today, it's only 30%. Back
then, GE operated 135 factories in 25 foreign countries. As of this
year, it has 325 plants spread across 40 countries.
Jobs have followed the changes. GE employs 104,000 workers in
the U.S., about one-third fewer than it did a decade ago. In 1982,
GE employed 261,000 workers in the U.S. In China, GE's workforce
has doubled in the past decade to about 22,000 today.
GE says it started pushing its localization strategy more fully
around the time of the 2008-2009 financial crisis when trade
stagnated as a percentage of GDP. The company dispatched Mr. Rice,
a tall Summit, N.J., native with a bald dome and a politician's
backslapping manner who previously ran its infrastructure and
energy businesses, to Hong Kong to build GE's business outside the
U.S. Company officials call him GE's Secretary of State.
Mr. Rice, 60 years old, says the world economy became less
predictable following the financial crisis, leaving GE hustling to
find what he called "tipping points" -- moments when new political
agendas brought opportunity.
Other companies made similar moves, including Honeywell
International Inc., Caterpillar Inc. and investment giant BlackRock
Inc. Honeywell introduced a line of hard hats in 2012 for Asian
markets it said were designed for the heads of Asian workers -- "a
superior Chinese fit," according to the company. Honeywell says by
setting up manufacturing in Asia it could better grasp the
"nuances" of emerging markets.
In China, GE also doubled down on localization. In July 2014,
Premier Li Keqiang told a group of U.S. executives that China
wasn't that interested anymore in having foreign companies take
advantage of the Chinese market, Mr. Rice recalls. China wanted
them to become partners of big Chinese firms and teach them how to
get business globally.
Rather than compete head-on with local companies on their home
turf -- battles GE feared it would often lose -- the company aimed
to piggyback on the growing role of China's state-owned enterprises
around the world.
GE threw its weight behind China's "One Belt, One Road"
foreign-policy initiative. The effort envisions reviving ancient
trade routes by building Chinese-backed ports, pipelines and power
plants in countries along the route -- in turn boosting China's
domestic manufacturing and deepening its global clout. Last
October, GE booked part of the lavish Diaoyutai State Guesthouse,
where Nixon stayed in his 1972 visit, for Mr. Rice to promote the
plan to Chinese executives.
For a One Belt, One Road project, GE teamed up with a Chinese
firm, promising a nation that chooses the team that it will also
get access to GE technology. The strategy only works because GE has
such a large manufacturing presence in China -- with more than 30
production sites nationwide -- that it can meet China's
local-production rules. Beijing makes financing available for the
projects.
One of GE's factories is in smoggy Wuhan, an industrial city on
the Yangtze River, where a factory boss named Chaoming Chen boasts
of his role as Communist Party secretary of the plant and his ties
to party higher-ups. "The trade union reports to me," he says,
noting that this makes it easier for GE to automate production in
Wuhan and potentially cut workers -- a process that elsewhere in
China has led to worker protests.
GE also teamed up with China's Central Organization Department,
which manages personnel moves for the Communist Party, to offer
training for state-owned enterprise leaders at GE's Crotonville,
N.Y., campus. More than 300 Chinese executives have taken part over
the past decade-plus.
In India, GE began to push harder on localization after Prime
Minister Narendra Modi was elected in 2014 on a "Make in India"
platform. He promised economic development fueled by major
investments in India's infrastructure.
GE says it wouldn't have won its India locomotive deal in 2015
without first expanding in India four years earlier, when it
started building a factory complex in the industrial city of Pune.
That helped GE train a cadre of skilled workers in an automated
facility, which is expected to produce about 30% of the components
in the locomotives to be assembled in Marhaura.
Selling new locomotives to Indian Railways, the
government-controlled operator of its vast train network, has long
ranked high on GE's agenda. But GE wouldn't make some major
investments in India, in part because it worried about Indian
bureaucratic inefficiency and political corruption.
In the end, GE decided it had no other option. A former railway
minister who hailed from Bihar picked the engine production site in
the late 2000s to spur economic development, executives say.
The $2.5 billion order for 1,000 locomotives over 11 years is
one of the largest deals ever for GE's transportation unit, and its
biggest order ever in India.
The company hedged its risk by agreeing with Indian Railways to
build the factory as a joint venture, including a $15 million
investment from the Indian partner. Workers will begin assembling
locomotives in the factory late next year.
So far the local government has eased the way. One steamy day in
April, S. Siddharth, the principal secretary at Bihar's Department
of Industries, bragged it is signing off on requests for clearances
and approvals within 48 hours of receiving them. He also says he is
working with local police to run off any "miscreants" in the area
around the Marhaura site.
In exchange, India wants jobs -- quickly -- from GE, a demand
the company wouldn't face if it was shipping locomotives in from
afar. "I am coaxing them every day" to use more locals, Mr.
Siddharth says.
GE executives say they will do their best to comply. "Two
decades ago, India may not have felt they had the skill set, the
capital or the wherewithal to have that leverage," says Mr.
Nardelli, the former GE exec. But now, "if you want the deal,
that's what it's going to take."
Write to Ted Mann at ted.mann@wsj.com and Brian Spegele at
brian.spegele@wsj.com
(END) Dow Jones Newswires
June 29, 2017 11:15 ET (15:15 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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