The CEO of General Electric on Sparking an American Manufacturing Renewal from HBR.org
Written by by Jeffrey R. Immelt
Photography: Getty Images
The Idea: Labor costs caused many U.S. companies to outsource manufacturing. A broader set of metrics has led GE to reverse course and invest heavily in renewing American manufacturing operations.
More than 50 years ago, at Appliance Park, in Louisville, Kentucky, GE invested $1.2 million in a UNIVAC, the first computer deployed commercially in the United States. The UNIVAC was the size of a small garage, weighed almost 30,000 pounds, and took an entire workday to complete its calculations. Yet it was a game changer. In fact, in 1954 Roddy F. Osborn predicted in this magazine that GE’s use of the UNIVAC for business data processing would lead to a new age of industry: “The management planning behind the acquisition of the first UNIVAC to be used in business may eventually be recorded by historians as the foundation of the second industrial revolution; just as Jacquard’s automatic loom in 1801 or Taylor’s studies of the principles of scientific management a hundred years later marked turning points in business history.”
Today, again at Appliance Park, another investment is breaking new IT ground. This past summer we opened a cutting-edge data center in one of the original buildings in the complex. It is among the few data centers to have received Platinum LEED certification, and it is filled with refrigerator-size racks of servers, each of them with computing power millions of times greater than the UNIVAC’s. The facility carries 350 watts (versus the usual 70 watts) per square foot, significantly improving power and cooling efficiency. It has raised GE’s uninterruptible power supply (UPS) efficiency to 99%.
The $40 million data center and a multiyear IT project to replace more than 330 systems across the business with integrated software are just part of a larger $800 million investment in Louisville (and a total $1 billion investment in GE Appliances). We will create some 1,000 jobs in the United States by 2014.
Although IT is really the backbone of the business—critical to our success, job creation, and growth—the data center alone won’t usher in another industrial revolution. But the role it will play in helping to drive efficiency, productivity, and quality is symbolic of the transformation of Appliance Park, where we are redesigning all our product lines and the way in which we manufacture them. In some cases we are totally rehabbing factories that haven’t been used in 15 years. What GE is doing at Appliance Park, and what GE’s employees are doing in research labs and on factory floors across the United States, says something about how we make decisions concerning where to manufacture our products. It shows that when we invest in our people and our technologies and create new business models, we can bring manufacturing back to the United States and be profitable.
This doesn’t mean that we are simply reversing what we have done and retreating from performing R&D and manufacturing outside the U.S. The fact is that we are—forevermore—going to play in a global economy, where competition is tougher, customers are more demanding, and the pace of change is faster. To win, we must play and we must improve everywhere we do business. Thus we must find the place where we can develop and produce the best products and services at the lowest cost, wherever that may be. So we will continue to source commodities and manufacture products abroad and to invest in our R&D centers around the world to obtain the lowest costs, access talent, and be near customers. This isn’t bad for America. The fact of the matter is that thousands and thousands of U.S. jobs exist because of our ability to compete globally.
Still, today at GE we are outsourcing less and producing more in the U.S. We created more than 7,000 American manufacturing jobs in 2010 and 2011. Our success on the factory floor rests on human innovation and technical innovation—the keys to leading an American manufacturing renewal. When we are deciding where to manufacture, we ask, “Will our people and technology in the U.S. provide us with a competitive advantage?” Increasingly, the answer is yes.
Human Innovation at Appliance Park
About 30 years ago, as the business became less profitable, GE began moving manufacturing out of Appliance Park to low-cost countries in a combination of joint ventures and outsourcing. The decision was relatively simple. We had strong brand recognition and customer loyalty—two things we believed would continue whether our products said “made in Kentucky” or “made in Korea.” We reasoned that if we could lower our costs enough, we would quickly reverse the slide in profitability. We weren’t alone: Many other businesses saw outsourcing in emerging markets as a solution.
But for our appliances business, emerging markets eventually offered something else: competition from former suppliers of whole products, particularly in Asia. As these competitors improved their lines and lowered their prices, even customers who had grown up with and knew only GE refrigerators and dryers began to explore alternatives. Other forces were at play as well. Shipping and materials costs were rising; wages were increasing in China and elsewhere; and we didn’t have control of the supply chain. The currencies of emerging markets added complexity. Finally, core competency was an issue. Engineering and manufacturing are hands-on and iterative, and our most innovative appliance-design work is done in the United States. At a time when speed to market is everything, separating design and development from manufacturing didn’t make sense.
Complex trade-offs have always been involved in location decisions, but as these trade-offs shifted, around 2008, we came to the conclusion that outsourcing was quickly becoming mostly outdated as a business model for GE Appliances. In fact, I would say that we had a do-or-die moment. We considered selling the business but decided instead to develop the new products we would need to compete and win. To do that, we’d have to change swiftly and dramatically. The question was where and how to invest. In today’s economy, you can’t just compete on cost in a lot of businesses and ask “Where is the market? What is our superior customer-value proposition?” Regaining our competitiveness, delivering value to our customers, and generating shareholder return would require not just investment but an entirely new approach—one centered on ensuring not only that we had the best people but also that we empowered them to execute. Our business strategy could no longer rely on having employees literally hand off what they were best at doing. But we could change the environment in which they worked, engaging the entire workforce from design to development to assembly. That is human innovation.
Human innovation has three key elements. The first is building in-house innovation capability. In Louisville that has meant hiring more than 300 industrial designers, engineers, and other salaried team members with new skills and expertise in areas such as wireless technology and advanced manufacturing; investing in research to better predict and identify consumer trends; and building IT infrastructure like that state-of-the-art data center.
The second element is lean manufacturing. At Appliance Park we have torn down functional silos and replaced them with a “one team” mentality. Designers, engineers, and assembly-line workers together determine the best way to meet their goals; they own the metrics. For instance, we know that one key to success is driving down manufacturing hours per unit. The team decides just how to do that. Managers post their action items and deliverables for all to see, and employees have a strong sense of accountability. If they conceive an idea for redesigning an appliance that weighs less and has fewer components and lower material costs, they can build it. They take pride in this ownership, and the results speak for themselves: For example, in some factories it takes nine hours to build a refrigerator. Our employees in Louisville are working to cut that by more than half. By revamping what was a 25-year-old dishwasher line, the Appliance Park team has reduced the time to produce by 68% and the space required by more than 80%. While the focus remains on creating the best designs and the highest quality, everything leads to the intended cost-cutting by-product of reducing waste.
The third element in human innovation is a new model for labor relations, most evident in the competitive wage agreement between our union workers and management. It wasn’t easy for them to find common ground. Both sides had to face new realities, make tough choices, and accept concessions. The union accepted a lower starting wage for new hires; we pledged to create new jobs in Louisville and promised that if the new processes and automation that go along with advanced manufacturing led to redundancy, we would redeploy workers, not let them go. Last fall the appliances business announced about 450 new factory jobs at the negotiated competitive wage. We received 6,000 applications in less than an hour. Labor-management relations that are based on honesty, mutual respect, and the recognition that both sides have an interest in the success of the enterprise can lead to competitive advantage.
One result of our new approach to manufacturing was that in 2009 we announced that GE would make the GeoSpring hybrid water heater at Appliance Park—the first new product line we had brought to Louisville in 50 years. Six months later we announced a new washer and a new dryer. In October 2010 we announced that we would create four U.S. Centers of Excellence for the design and manufacture of refrigerators. When they are completed, GE will offer the highest percentage of U.S.-made refrigerators among full-line appliance makers. Between now and 2013 we will completely redesign all our appliance product lines. We will put thousands of Americans back to work, mostly at Appliance Park. And, most important, we will win in the market by not only investing in U.S. manufacturing but also transforming it with human innovation.
Technical Innovation at GE Aviation
We will continue to invest in products throughout our businesses, because technical innovation—more specifically, advanced manufacturing and materials processes—is the other key to America’s manufacturing revival. A great example sits about 600 miles south of Appliance Park, in Ellisville, Mississippi. That is where, in 2013, we will start production at a new manufacturing facility to meet accelerating global demand for GE Aviation’s jet engines. We plan to invest about $60 million and create 250 jobs in a new 300,000-square-foot facility to manufacture advanced composite components for our jet engines.
Why Ellisville? Why has GE Aviation invested hundreds of millions of dollars in more than 30 other U.S. sites? And why, this past fall, did we announce plans for another advanced manufacturing plant in Auburn, Alabama, that will produce precision machined parts for commercial and military engines?
The answer is technology and sophistication—in advanced manufacturing, computer modeling, and material sciences and composites. For example, the use of different qualities of carbon fiber and resins enabled us to create unique, impact-resistant fan blades, fan cases, and components that sharply reduce engine weight and offer more durability than the traditional all-metal versions. I’m biased, of course, but I believe that this level of sophistication is simply unmatched anywhere else in the world. That didn’t happen in a vacuum. Rather, it is the product of a decade of R&D investment—$12 billion, beginning when the entire aviation industry was reeling—that is now paying off. Today, with 50,000 commercial and military engines in service, we are the world’s largest producer of jet engines, and they’re the biggest, most powerful, and most efficient ones in the world.
If the GE Appliances story is about manufacturing teams taking ownership and working together with unions, the GE Aviation story is about the technical innovation and expertise that makes building our engines in the United States the only choice. Just as in our other businesses, when we decide where to manufacture, or where to open an aviation R&D center, a lot of complex factors are at work. With aviation we take into account the need to protect our proprietary technology. We consider that GE Aviation’s technical innovation is dual sourced, supporting both commercial and military engines. Finally, we look at where we can partner with the intellectual capability of American universities.
The decision to open a plant in Ellisville was based on our success in Batesville, a town in northern Mississippi, where we opened a facility three years ago. By partnering with Mississippi State University, we have developed a highly sophisticated proprietary process for manufacturing components made of carbon-fiber composites. We hope to replicate that relationship and its results in Ellisville, working with the University of Southern Mississippi. We are also opening an R&D avionics center on the campus of the University of Dayton, in Ohio. To spread risk and gain market access, we will continue to use some international suppliers. And our domestic facilities can’t become complacent. They need to remain competitive. But these partnerships—and, quite frankly, the battle among states to land them—are vital not only for designing and producing the materials, systems, and processes that will come to define air travel but also for developing tomorrow’s engineers, who are critical to America’s competitiveness.
Of course, the ultimate test at both Appliance Park and GE Aviation will be whether we can sustain what we have started. It is critically important that we drive down manufacturing costs. But that won’t be worth much unless we can offer reliable, efficient products at competitive prices. Two things are clear: First, outsourcing that is based only on labor costs is yesterday’s model. Second, GE employees will deliver—because of their ability, because of their attitude, and because they expect to. Every GE employee in the United States, from the factory floor to the boardroom, knows we can win. And we will win only if we’re not afraid to compete.
As a country, if we want to revive U.S. manufacturing and regain our competitive edge, we have to execute. But we also need confidence and the mind-set that we can outperform anyone. We should start by making a serious commitment to manufacturing and exports.
People talk about the Darwinian nature of markets. They say that America has undergone a natural evolution from farming to manufacturing to services, as have other mature economies. But nothing is predestined or inevitable about the industrial decline of the United States. China is growing fast because it is investing in technology and has zero intention of letting up on manufacturing. We shouldn’t be afraid of that; we should be inspired by the competition.
To meet that competition, we’ll need a strong core of innovation and a stable financial system built around helping small and medium-size businesses and industrial companies to succeed. We’ll need an updated infrastructure to support manufacturing, which the private sector can help fund—better roads and airports, broadband capability, and a bigger and smarter electricity grid. Finally, we’ll need well-trained teams. Like the Appliance Park employees building hybrid water heaters; the GE scientists developing composite materials for safer, cleaner, more-efficient jet engines; and the software engineers working on the industrial internet at GE’s newly announced center in Silicon Valley, only the best-trained workforce will make America faster, better, and more competitive over the long term. The nation’s consumers cannot lead this recovery. Business investment and exports must.
That is the imperative. But before an imperative comes an impetus for action. We can’t do any of this if we’re afraid to get in the game. We need to believe that we can design, develop, and produce here in the United States; that we can do it cost-effectively and efficiently; and that we can win. Then we need to find ways to collaborate and make the necessary investments. If we do, our workers will prove America’s potential.