Historic Industrial Companies Split Up
Three major industrial leaders: General Electric, Toshiba, and Johnson & Johnson announced major break ups of their business units this week. General Electric will split up into three businesses: Aviation, Healthcare, and Energy, Power, and Digital. Toshiba will similarly split into three companies to focus on infrastructure, electronic devices, and semiconductor memory. While Johnson & Johnson will retain its pharmaceutical business and spin off its consumer health business. Per Toshiba, the goal is “to strengthen shareholder value by creating independent companies that have different profit structures and growth strategies.” The same could be said for General Electric and Johnson & Johnson.
The split of General Electric could be similar to Siemens. But will it produce similar levels of success as Siemens or follow in the footsteps of DowDuPont? Following the spin off of Siemens Healthineers in 2018 then Siemens Energy in 2020, Siemens was able to focus on faster-growing and higher-margin software and technology. So far, this has worked out with success as sales are up 18% in the latest quarter. General Electric, however, makes no mention of software in its press release and moves its Digital business within the combined Energy business. As industry increasingly digitizes, General Electric will need to figure out its software strategy to remain globally competitive within Industry 4.0 and transition to Industry 5.0.
Toshiba, facing similar pressure as General Electric, also realized a split can create additional value for their stakeholders. Besides taking advantage of a relatively new Ministry of Economy, Trade and Industry tax rule that allows companies to defer payments when spinning off business units, the synergies of the split are less clear. Toshiba realizes, “the speed of change is accelerating. [They] cannot keep pace with change when operations (as different as semiconductors and infrastructure) are within the same organization.” The newly created infrastructure company will include their core digital technologies related to the internet of things, factory automation, smart grids and quantum computing. This presents and opportunity for Toshiba to maintain leadership in the development of smart cities.
Johnson & Johnson’s split of its medical device and pharmaceutical business from some of the most iconic consumer brands highlight a divergence in their end-markets. As consumer products become increasingly personalized the consumer business must invest in different strategies for connecting with consumers and sales via e-commerce. While pharmaceuticals require a much longer investment cycle to develop and depend heavily on the choices of doctors and hospitals as well as payment by health insurers. The types of technology investments needed to grow each business likely do not have much overlap.
The break ups of these historic conglomerates creates opportunities for investors, banks, and technology providers. Investors who are interested in health care businesses can buy the health care business rather than a business that also has aerospace and energy divisions. The banks will generate large investment banking fees, but for technology providers the benefit is vague. Technology providers, both internal and external, can now start smaller and find technology fit faster before worrying about large scale distribution. GE Digital struggled with Predix in part because they focused on the distribution first, hoping the applications would scale, rather than the providing just enough infrastructure and letting engineers work together to find solutions and productizing them later. The latter has enabled companies like Augury to become a unicorn. Also with a slimmed down corporate structure, startups and legacy vendors may find it easier to gain adoption of their technology in each organization. Lines that were previously left behind because they had little impact on revenue or profit in a large corporate structure may be re-evaluated for refurbishment. Ultimately, industry change continues at a rapid pace and each of these new organizations must figure out how to digitize operations and re-connect with the markets they serve. Managing that change and seizing the opportunity is best done with an injection of technology.
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