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It was early December in Lynn, Massachusetts, and Katahira-san, GE’s star ambassador for lean manufacturing, was conducting a coaching session.
The position is a GE defense jet engine factory, where the Japanese-born representative heads a kaizen (or “continuous improvement”) event. Walking through the factory along Katahira-san, none other than GE CEO Larry Culp. In Lynn, the chief justice, and the samurai of the assembly line moved in unison from one workstation to another as they exchanged concepts and answers with machinists and welders on how to move parts and inspect engines faster and better.
Katahira-san (full name: Yukio Katahira), Culp notes, “speaks almost no English” and delivers his exhortations to the troops through a translator equipped with a microphone. He’s “a force of nature, even in his seventies,” Culp marvels. “No one can follow him when he runs through a factory. “During five days at Lynn, the boss recalls, the sensei guided six individual production groups to refine and speed up their workflows. “He’s in the box 10 to 12 hours a day, as usual, pushing and pushing groups,” Culp says.
And Culp loves it. ” Unless you’ve noticed some of the things he’s noticed over the past 50 years, you’d think that a 10% improvement in the performance of a specific device is all you can imagine in the short term. Culp observes. . . ” Katahira-san will say, “How about a 50% improvement?” On Monday, the staff is in a position to hang it up. On Wednesday they conducted 3 rounds of experiments and saw a 40% improvement and agreed with him that they deserve to aim for a little more.
What cannot be debated is the improvement Culp has wrought at GE, which is nothing short of astonishing. Nearly six years ago Culp inherited a bulky, super-inefficient, possibly near-bankrupt enterprise. Now, through a lean manufacturing revolution and relentless deleveraging courtesy of rising profits and well-timed asset sales, Culp has successfully dismantled what was once the world’s most renowned conglomerate and in its place, succeeded in delivering what will soon be three independent, publicly traded names, all featuring investment-grade balance sheets. Culp started the Great Breakup by spinning off GE HealthCare last January, and early in the second quarter, GE Vernova, its energy powerhouse, will separate from GE Aerospace, leaving the giant commercial and defense engine manufacturer and service provider as the final piece of the old empire.
For 2023, GE recorded the highest inventory appreciation of any U. S. industrial sector, posting a 95. 8% gain, adding the price of GE HealthCare inventories that investors earned in the spin-off. Shareholders who held their GE HealthCare inventories fared even better: their inventories increased 33% last year. It’s a testament to Wall Street’s long-term estimation of GE’s remaining businesses that its current $144 billion market cap is still twice its valuation when it owned GE HealthCare. Oh, and GE stock has especially outperformed Apple, Google, and Microsoft in 2023.
Today, the biggest source of excitement in the market lies in the right customers of the aerospace franchise, GE’s longtime crown jewel, which Culp himself will spearhead as CEO and chairman. This is a great replacement, as he spends most of his career supervising CEOs. leading his conglomerate’s product suites at Danaher and GE. Culp tells Fortune that this replacement will mark the first time he will lead a single company and a single P.
GE Aerospace operates on the “razor and blade” model. It essentially sells the engines (including, with its partner Safran, the world’s bestselling engine for narrow-bodies, the LEAP) at cost, and reaps huge margins on overhauling, inspecting, and providing spare parts for those in service. Since GE harbors the largest installed base of commercial engines of any manufacturer by far, some 47,000 or over 60% of the world’s total, it should enjoy big earning years ahead as those youthful LEAPs accelerate into their servicing cycle. (It’s uncertain how much the temporary shutdown of Boeing Max flights, owing to the blowout of a fuselage panel on an Alaska Airlines flight, will impact future LEAP orders, if at all.) Aerospace still struggles to produce at full capacity, the result of supply-chain snarls that started during the COVID crisis. To meet fast-rising orders and the looming wave of overhauls, Culp must greatly ramp up the cadence for both production and maintenance, sans delays and problems with reliability. “The pandemic put the industry on its back,” he told Fortune. “But it’s come roaring back as airlines invest in their future. Demand really won’t be a challenge. Our challenge will be thoughtful execution of that opportunity.”
Among Culp’s biggest enthusiasts is activist investor Nelson Peltz, CEO and founding spouse of Trian Fund Management, the multibillion-dollar investment fund that has profited handsomely from holdings like Heinz and P.
In April of 2018, Culp became GE’s lead director, but his day job was teaching at Harvard Business School. As GE’s finances crumbled that year, the board looked to Culp as a savior. “I told the board no, twice,” he told Fortune. “I was flattered, but I didn’t think this was the right thing for me to do.” In that period of crisis, Peltz, whose funds were large GE shareholders and whose former partner Ed Garden served on the board, invited Culp to lunch in Boston. “I told Larry, ‘Come on, I love you, but you’re a CEO not a teacher.’ He said, ‘This might not play great with my family,’ and I said, ‘You’re too ideal for the one-of-a-kind challenge to let this pass.’” To Fortune, Culp declined to say if the advice from Peltz—who remains a shareholder and whom Culp describes as “wonderfully supportive”—proved decisive. But shortly thereafter, he heeded Peltz’s and the board’s call to arms. “On the third time, after reflection, I agreed to do it,” he says.
It worked to Culp’s advantage that, prompted by storms rocking GE in early 2018, his predecessor, John Flannery, had shrunk the lax, oversized board from 18 to 12, dumping eight mostly long-serving directors. The shake-up brought on, besides Culp, two new outside members, offbeat choices who proved key catalysts in the manufacturer’s resurgence during the years ahead. “A seat on the GE board was not necessarily as coveted in 2018 as it might have been in 1998,” Culp allows. After naming Culp as CEO, the board appointed one of his fellow recruits, Tom Horton, as lead director replacing Culp, an arrangement strongly endorsed by Culp. Horton was a veteran of restructuring and crisis management. As CEO of American Airlines, he’d engineered the massive overhaul that lifted the nation’s largest carrier from bankruptcy during 2013 and 2014. The third newcomer was Leslie Seidman, former chief of the Financial Accounting Standards Board. During Culp’s tenure, Seidman helped GE navigate the wind-down of its large long-term-care reinsurance portfolio that some experts, among them famed investigative accountant Harry Markopolos, predicted would sink Culp’s then-floundering vessel.
When Culp took charge, GE was reeling from a crushing load of roughly $140 billion in debt. That burden was primarily a legacy from the fall of GE Capital. GE’s legendary CEO Jack Welch had built GE Capital—the division that did everything from real estate investing to junk bond financing—into a giant, and Jeff Immelt made it far bigger. In 2007, it earned $12.7 billion, contributing over half of GE’s total profit. But the Great Financial Crisis sent the finance arm reeling, and in 2015, Immelt sold its assets at fire-sale prices to such buyers as Wells Fargo and Blackstone. To fill the yawning gap in earnings, Immelt embarked on a plan to restore GE to its industrial roots, shedding NBCUniversal and Synchrony private label credit cards, and going on an acquisition binge in power and oil and gas designed to remake GE as a high-tech, high-margin innovator and leader in energy. But Immelt vastly overpaid for such purchases as turbine manufacturer Alstom of France and a majority stake in oilfield services giant Baker Hughes, and the botched melding of the myriad units unleashed wave after wave of restructuring costs. Hamstrung by big deficits in power and weak overall earnings, GE couldn’t generate sufficient cash to lower the mountainous borrowings left mainly from the GE Capital fiasco.
After taking over in late 2018, Culp temporarily abandoned his plans to take the entire healthcare business public and instead decided that only large debt relief would allow GE to streamline its operations and potentially break up into sustainable, self-sustaining businesses. In 2019, Culp struck a deal to sell only one component of his healthcare business, the biopharma segment, to Danaher, his former employer. The timing was perfect: the deal closed in March 2020, just as the onset of the pandemic was severely damaging air and health. hampering GE’s deliveries of new engines.
Profits of $20 billion bolstered GE’s balance sheet during the crisis. As the pandemic has subsided, Culp’s lean projects in the aerospace, energy and other sectors have especially reduced production prices for jet engines, boilers and wind turbines. These operational innovations increased loose cash flow from negative in 2017 and 2018 to $2. 1 billion in 2021 and $4. 5 billion in 2022, further reducing debt. The biggest step that paved the way for the new GE: In March 2021, Culp reached a deal to sell GE Capital Aviation Services (GECAS) to AerCap, then and now the world’s largest aircraft leasing provider, Array GE , received around $25 billion in money. , as well as $5 billion in AerCap shares, a stake that has now been completely sold. The proceeds from the sale improved GE’s credit profile so much that the day after the closing, the company filed a tender offer that allowed the resurgent manufacturer to buy back $25 billion of its debt, on the right terms. The next day, Culp announced that GE would be split into three separate companies, all with strong balance sheets and modest amounts of investment-grade debt.
Culp introduced three bills that tore down the rigid, bureaucratic and ineffective practices that had long dogged GE. The first, of course, is his relentless pursuit of Lean style and mindset. The purpose of Lean couldn’t be more fundamental: to deliver portions on time, with the highest production quality, less load and less waste, and greater protection for staff and customers. The concept is to create standardized painting processes that are constantly improving. No detail is too small. Lean requires staff to do homework the same way both once, and both. The challenge is to identify the most effective series of steps in the manufacture or inspection of a part and to reshape this series into a repeatable and unchanging chain. Employees and managers are constantly reviewing those workflows to improve them periodically.
The secret of how Lean works: getting everyone involved in the process, and especially the staff in the factory, to contribute their concepts freely. Lean teaches that it is the box that puts the modules together and carries out the inspections. Who will be more productive in finding tactics to have a component travel a shorter distance around the factory or to check larger batches of portions per shift without sacrificing quality?
According to David Cote, who ran GE’s appliance business in the 1990s and enjoyed a wonderful fortune as Honeywell’s chief executive from 2002 to 2017, GE’s old processes were still all simple. The main problem: control has failed to make interaction the most necessary. -Have workers to make things run faster and better. “I installed Lean at Honeywell because I thought it would be a huge improvement over the way things were done at GE,” Cote told Fortune. “The concept was that everything can simply be made more efficient and that everyone’s concepts had to be taken into account, especially those of hourly workers. They’re the ones who know what’s going on, so they interact with their brain to figure out what it is and how to fix it.
Cote says that during his tenure there, GE necessarily ignored the other people in the trenches, and he doesn’t think things were replaced after that. “GE wasn’t manufacturing smart,” he says. At GE, manufacturing was considered a crude business, and everyone thought and the mafia did things. It was an outdated view.
Today, GE factories hold kaizen to the fullest every week, for one or more shifts. In most cases, participants are on-site staff and managers. Production engineers and foremen walk around the factory in gemba (Japanese for “real place”) to communicate with staff and gather tips that will drive the next kaizen session. At the agreed events, staff from all areas of the company will meet, from abroad. Eighteen months ago, a conclave held in Wales, with Katahira-san, drew participants from as far away as Brazil and the United States (including, of course, Culp).
While Culp was participating in a Kaizen team at the Lynn Military Engine Plant in 2022, staff discovered that a single component was delaying delivery times and discovered that the problem was a faulty welding process that rendered more than a portion of the elements unusable. . Workers corrected the challenge so that the new procedure eliminated virtually all defects and reduced production time by more than 8 weeks. Culp enthusiastically reported the progress in a memo to employees. At a facility near Cincinnati, reactors being inspected and overhauled were vertically in a constant position. The technicians had to go up and down the scaffolding to see, check and fix the rest of the sections and parts. Through a Kaizen session, the factory changed the formula so that the engines were enclosed in steel supports called “lobster traps” that staff could simply raise or lower mechanically. So now the engines move while the technicians stand still. Once lowered, they descend into pits whose openings are automatically covered with plates to prevent equipment and portions from falling. The new mechanics allow staff to move the motors more temporarily during the procedure.
Culp gets positively rhapsodic extolling the lean gospel. Describing the recent event in Lynn, he says, “This is not McKinsey, BCG, coming in laying 100 pages of PowerPoint. These kaizens that last five days long are hands-on, do it now, try or fail [events]—not something on someone’s to do list, but will be in place by week’s end.”
Culp also needs managers to tell him whether a task is on its way to misfortune or failure. In GE’s new language, managers describe a task as “green” if it meets goals and “red” if it struggles. “Part of the cultural transformation we’ve had is that we’ve had to make the ‘red’ territory safe; Think of it as an opportunity,” he says. Seeing red doesn’t force Culp to lower the target. He’s looking for a solution to get there. ” When those conditions arise, and they happen when you’re stretching, let’s go into problem-solving mode,” he explains. “Let’s settle for it. What can we do about it? Don’t dilute it. Don’t hide it. That’s the point.
Culp remembers the pivotal moment when his fears of admitting he was “red” began to fade. “I don’t vividly forget that specific meeting. . . where I became aware that something vital was not going as planned,” Culp says. No one had officially told me through the channels. And everyone looks at his shoes. The poor user who knew about this specific problem, and to his credit, I thank him today, answered a tricky question honestly and said, “We. ” We are off the path, but I think it is recoverable. But let me tell you what we’re doing. ” And I was able to use that moment as the beginning of this kind of change. At that point, we got into trouble. Resolution mode.
Culp concludes: “Because if you shoot the messenger, guess what? In this case, bad news doesn’t get around, and in fact it doesn’t get around, and any organization gets into wonderful trouble if it does. ” Cote, who is familiar with the likes of Culp from observing him at Danaher when they ran giant conglomerates, says Cote, “He encourages other people to talk, but with facts. You can’t just tell a wonderful story about how this task will be a success. ” wonderful, about a wonderful vision. ” It probably won’t work with Larry. He will need to know the facts and figures.
Within the company, Culp has reorganized GE into 30 separate profit centers, whose control groups control their revenue streams and balance sheets, and receive bonuses tied to the functionality of their teams. One key update: In the past, an inflated central staff provided much of the services, adding accounting, human resources, and marketing to the business suites. Culp has reduced the headcount at headquarters from just over 18,000 to a few hundred, and sent the maximum number of managers to the business clusters. Maximum recently in an attempt to split GE into 3 independent companies. ” It’s precisely the organization you want,” Peltz says. One user per fee for each domain in the company. Your overhead costs are minimal and you don’t replenish them from the company.
A basic question related to Culp’s strategy is why he didn’t abandon GE as a conglomerate. He proved to be one of the most successful people of all time by managing multiple businesses at Danaher. And even before GE HealthCare was spun off in early 2023, when GE was still comprised of energy, healthcare and aerospace, the company was modestly successful and improving rapidly. He never said breaking up companies was a good way to operate them together. But GE’s three pillars account for virtually none of the purchasing, co-branding and other synergies that Danaher’s much smaller business segments have achieved. Furthermore, the three core businesses that shaped GE before the split are incredibly important: GE Aerospace, the biggest player in its sector, generated $31. 8 billion in profits in 2023, while GE Vernova posted $32. 7 billion and GE HealthCare before the split. At just $18 billion in 2022, sales were gigantic enough to stand on their own. CEOs will no longer have to worry about the old curse of conglomerates where corporate headquarters use their profits to subsidize some other organization in poor health. Each board member can bring his or her experience to a single company. The value of your inventory, as well as the cost of your features and limited inventory, will directly reflect the functionality of your franchise and not the combined effects of a profit and loss pool.
However, one asset they would likely continue to leverage is Katahira-san, who painted his magic in GE’s factories and proved to each and every one of them that his universal Lean language can work anywhere, too. Certainly, Culp, as CEO of GE Aerospace, will continue to invoke the septuagenarian whirlwind that so inspired him three decades ago at Toyota. “If he’s at a Kaizen site for a week, I’ll visit him to stop by and have dinner with him,” Culp says. “Because I take advantage of it a lot. He really needs to see other people realize their potential. We cherish every hour we spend with him. Where do you have dinner?”We went to a Japanese restaurant with him, of course. ” says Culp. He hardly eats anything. ” The translator is also there, and when Katahira-san starts talking, Larry Culp makes sure his mentor has the floor.
This story appears in Fortune. com
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