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back to index backASIAtalk November,  2005 CFO Profiles: GE's Keith Sherin

With businesses ranging from power generation to television networks, aircraft engines to financial services, and healthcare to plastics, GE is arguably the world's largest and most successful conglomerate.

Keith Sherin, CFO of the US$152 bn-a-year firm, talks about GE's plans for Asia, the challenges it faces, and how the region's own legion of conglomerates can shape up.

How important is Asia for GE?

If you look at Asia Pacific as a destination for sales from GE companies, then revenues last year were US$17.9 bn. This year, our revenues in Asia will be US$20.3 bn, which [represents] year-on-year growth of around 13%.We've stated that 60% of our growth over the next decade is going to come out of developing markets, so places like China, India, and Southeast Asia are going to be a huge part of that.

Where is the growth coming from in Asia?

It's China. China is number one, two, and three for us at the moment. Back in 2001, we were doing US$900m of business there. This year, we'll reach US$5 bn, and our target for 2008 is to reach more than US$8 bn. We're expecting US$3 bn of growth in three years. That's a phenomenal opportunity for us. We're investing in power generation. We're investing in aircraft engines and the aviation infrastructure, the airports. We're investing in the healthcare system. We're moving into consumer finance. Our plastics business is doing tremendously there. China is really becoming a big center of gravity for our company.

In terms of Japan, we'd like to do more. There's not a lot of growth but there's pretty good profitability. Probably financial services have some acquisition opportunities for us in Japan still.

Southeast Asia is growing too, but it varies across countries and industries. The aircraft engine business is doing well, power generation, healthcare, and consumer finance are all growing.

What are your views on risk in China?

We spend a lot of time talking to our board about this: what is our appetite for risk in a place like China? It's a huge market for growth and we think it's important for us to be there. We don't want to paralyze ourselves and say something could go wrong some day so we're not going to participate. We have very robust investment decision-making processes. We do a lot of sensitivity analysis, looking at scenarios and outcomes that really question the assumptions of our investment case.

And, of course, we look at how we can limit our downside if someday everything was shut down in China. So far, we've done that by not having an excessive amount of investment there. We're not very big in commercial financial services. And, ultimately, our customers, like airlines, are going to have to come to us for engine spare parts. So we try to manage the risk.

What about India?

India is a frustrating market for us. We get all excited about it and then nothing happens. We're doing a little over a billion dollars of revenue in India today. Our growth goal is US$3 bn by 2008. The country has a lot of possibilities, but we're continually frustrated by the ability of the government to bring infrastructure investments to bear.

We've had some terrific successes selling aircraft engines to them. Consumer finance is exciting. We think there's a ton of energy opportunities, but the question is: will [the Indian authorities] bring together their desire to modernize the infrastructure of the country with the political will to actually get it done?

If you contrast China and India, three or four years ago our operations were about the same size in both countries. Today, we're US$5 bn in China and just US$1 bn in India.

Foreign banks have been piling into China at a tremendous rate in recent months. GE has just joined the rush with a US$100m investment for 7.3% of Shenzhen Development Bank. What's your strategy?

For a long time we've been thinking about how we can participate in consumer finance in China. We can't get a direct banking license, we can't make direct loans to consumers until 2008, so we decided to partner with Shenzhen and Newbridge (the US private equity firm which has a 17% stake in Shenzhen). We're going to put our people into the bank and run the retail side of it. It's a good fit. Shenzhen needs our consumer finance skills and we need access to the market. It's an entry point for us.

Will you try to instill GE's culture into the bank's operations?

Yes. Our teams are already having Six Sigma meetings about how we can implement the right retail banking processes. Newbridge has done a great job before us, bringing in professional banking talent, putting in commercial lending standards, risk management systems, and information technology. We'll bring in the consumer finance side of it. It's not a broken-down-fix-me-up bank; it's a bank with a great leadership team and a decent distribution and infrastructure and we think we can really build on it.

Does this strategy of taking a minority stake signal a different investment approach at GE?

Certainly in consumer finance we're trying to expand how we think about our growth. We don't want to limit ourselves to demanding full ownership and total control. In some countries, like Thailand, we're investing in growing a banking franchise of our own. In others, like Korea, we're doing it in partnership with local companies like Hyundai.

We're more open to partnerships now. We're more open to looking at the realities of what the market is going to give us. Asia offers lots of growth so we want to be open about how we can capture that growth.

Will you be looking to increase your stake in Shenzhen over time?

We'll see. We'll see how the partnership goes, how the laws change (governing foreign ownership of banks), and whether other investors want to sell down, or we want to improve our control. Right now all we did was make the first core investment.

What are the biggest challenges you face in running your finance operations in Asia?

My greatest challenge is developing first-class financial leaders. How do I develop a pipeline of local nationals in Asia who understand the GE culture, the laws and regulations, the client issues, how we think about risk and so on?

One of the foundations we have is a financial management program. We run that everywhere in the world. We hire students right out of the universities globally. We have 700 financial management trainees in the company today, and 52% of them are outside the US. Everybody is going through the same program. They take the same courses and rotate to a different job every six months. They all spend time on our corporate audit staff. We take Asians and put them on assignments in Europe and the US to give them global experience, to give them exposure to the company and confidence in the GE system.

How many of your regional CFOs are local nationals?

Seven years ago in Europe, just 15% of the finance council, the finance leaders of the businesses, were European nationals. Today, it's probably around 85%, although I could have 100% of those jobs filled by Europeans if I wanted to.

In Asia, about 40% of our CFOs are local nationals. In two years' time, 90% of my finance council in Japan will be local nationals. In three years' time it will be the same in China.

It's harder in Southeast Asia because there's no critical mass. In Malaysia, the total revenue is US$350m; in Singapore it's close to that. Across our businesses, you end up with a bunch of US$30m, US$50m, US$70m businesses. It's hard to have really high-level executives in each of those roles. So, that's one of the challenges I have. For some of the countries in Southeast Asia, I don't have the critical mass yet to put in place really big financial leaders.

Conglomerate structures are much more common in Asia than the West, and often criticized for leading to poor corporate governance and lackluster performance. What's the key to running a successful conglomerate?

From our perspective, although many of our businesses are different, we have some very common processes. Every single business goes through the same human resources process: they all use common systems for developing, evaluating, and giving feedback on talent. We use a common strategy process: every business goes through the same evaluation of markets, competition, regulatory risks, identifying opportunities for growth. Everybody goes through the same kind of financial reporting process. We have a ton of common processes that we use across the businesses that help us to get some leverage out of our size.

And we have a lot of things that help to create value out of the portfolio. If you look at our infrastructure business, our ability to invest in jet engines crosses over to our ability to invest in gas turbines. How we run our service business for engines crosses over to how we run our service business for energy. So there are synergies. These are not autonomous, separate businesses that don't have any commonality.

What about NBC Universal, your media and entertainment business?

Yes, that's the one exception. What's the commonality between NBC Universal and aircraft engines? It's hard to say. I think there are common processes such as evaluating resources, disciplined allocation of capital, a structure and reporting capability around meeting commitments. Those types of things have benefited NBC Universal. The discipline and the operating focus, and the rigor of meeting commitments that we lay out externally. I think those types of things play out across the whole portfolio.

And transparency?

It's vital, particularly for a conglomerate. We're big and complicated, so we've had to do a ton of work to communicate with investors to help them understand the portfolio, to help them understand how we operate. We've increased the amount of content in our annual report by three times over the past five years. Every single meeting we have with analysts and investors is webcast. We put all our charts up on the web from the meetings.

Any views on transparency in this region?

I think you'd have to say that, for some of the conglomerates here in Asia, when I try to penetrate some of the financial analysis where, for example, I have to make a credit decision, it's pretty opaque.

I'd say that [better transparency] would be a big thing that everybody could probably benefit from.

Source: - GAI

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