Bloomberg Businessweek USA - October 30, 2017

19

○ BYD chief Wang Chuanfu’s bet on

electric vehicles is already paying off

Now, 22 years after he founded the company,

Wang may finally be proved right. BYD’s shares

are back to stratospheric levels as investors bet

new environmental rules in China will super-

charge sales at BYD, which has grown into China’s

largest seller of electric vehicles. The government

said in September it’s working on a timetable

for ending the production and sale of fossil-fuel-

powered vehicles on the mainland and unveiled

a cap-and-trade program that would force makers

of gasoline-powered cars to buy credits from elec-

tric vehicle makers or step up their own efforts

China’s Elon Musk Is

Ready for His Star Turn

For decades, financial pundits in China have been
placing Wang Chuanfu, the visionary green tech-
nology entrepreneur and chief executive officer of
battery and electric vehicle maker BYD Co., at the
doorstep of the pantheon of industrialists who dom-
inate the global automotive industry. Nine years
ago, mega-investor Warren Buffett took a 10 percent
stake in BYD. But gasoline-powered vehicles con-
tinued their dominance in China and worldwide,
leaving Wang in the shadow of auto chieftains such
as Renault’s Carlos Ghosn, General Motors’ Mary
Barra, and Volkswagen’s Matthias Müller.

GE cut its 2017 earnings guidance to $1.05 to $1.10
a share—far below an initial forecast of $1.60 to $1.70.
Likewise, its target for cash flow from industrial oper-
ating activities was cut almost in half, to $7 billion.
New CEO John Flannery’s frankness about GE’s fail-
ures is a refreshing change to many investors. But it’s
a sign of how much work needs to be done that things
had to get this dire for management to have an honest
discussion about cash flow and earnings challenges
that analysts have highlighted since at least 2016.
Flannery is set to reveal his turnaround plan
for GE when he meets with investors on Nov. 13.
Many of the specifics thus far are of the symbolic
variety: grounding private planes, pledging to get
rid of confusing earnings adjustments, and putting
a representative from activist investor Trian Fund
Management LP on the board. Those tweaks and
even the $20 billion in divestitures Flannery says he’s
considering will do little to stanch the bad operating
results that will persist at least through next year.
One change that could make a difference—though
a challenge to GE’s very DNA—is a reduction in its
dividend. The company was forced to cut the payout
during the Great Depression and again during the
financial crisis. The latter instance was dubbed by
Immelt as “the worst day of my tenure as CEO.” Now
Flannery may have little choice but to do so again.
After capital expenditure and pension commit-
ments, GE will have only about $2 billion of free
cash flow from its industrial businesses this year.
The dividend costs more than $8 billion. It doesn’t
take a mathematician to see that’s a problem. GE
does have cash on its balance sheet that it can
use to plug this year’s gap. But Vertical Research
Partners analyst Jeff Sprague estimates free cash
flow from its industrial businesses will again fall
short of what’s needed to cover the dividend in
2018, given the struggles in GE’s power unit.
GE has already lavished almost $50 billion on

investors via share buybacks in the past few years.

And directing proceeds from additional borrowing to

the dividend rather than investments that might actu-

ally help its businesses generate stronger cash flow

would be unwise. Without a dividend cut, Flannery’s

plan to divest $20 billion of assets would likely be just

another stopgap that would actually exacerbate the

cash crunch by reducing free cash flow.

That would be a continuation of a pattern that

helped create GE’s predicament. Under Immelt’s

watch, the company unwound GE Capital, put its

appliances, water, and industrial-solutions units

up for sale, and divested its stake in NBCUniversal.

While there’s nothing wrong with simplification,

JPMorgan Chase & Co. analyst Steve Tusa has esti-

mated those divestitures reduced free cash flow

by about $7.2 billion. Acquisitions such as the

$10.6 billion purchase of Alstom SA’s power assets

in 2015 don’t generate enough cash to make up for

that. So GE’s resources have gotten smaller, but its

dividend hasn’t.

Beyond dismantling the private-plane excesses

of Immelt’s tenure, Flannery may need to con-

sider tackling his own legacy, too. He’s a 30-year

GE veteran whose contributions include the Alstom

acquisition—a purchase that increased GE’s expo-

sure to power markets now being roiled by sluggish

demand and pricing pressure. About $3 billion of

the drop in GE’s 2017 expected cash flow is attrib-

utable to the power unit.

JPMorgan’s Tusa has argued that the challenges

facing the power division aren’t a blip but rather the

start of a slide to a new normal of lower profitabil-

ity. If that’s the case, perhaps the dividend isn’t the

only legacy Flannery may have to change. —Brooke

Sutherland of Bloomberg Gadfly

THE BOTTOM LINE GE has been forced to cut its dividend

twice during economic crises. Now that earnings are flagging, its

new CEO may have to bite the bullet again.

○ GE dividend payout

as a percentage of its

after-tax income

800%

400

100

0 %

2Q '15 3Q '17

○ GE dividend and

Bloomberg forecast*

○ GE share price

at quarter’s end

4Q '07 3Q '17

$30

$ 15

$ 0

2Q '15 4Q '17

$0.20

$0.10

$ 0

Projected

 BUSINESS Bloomberg Businessweek October 30, 2017