GE Is Beginning To See Strong Returns On Its Industrial Internet Investments

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General Electric

General Electric (NYSE:GE) announced recently that revenues from its Predictivity solutions, which make machines more productive, will exceed $1 billion in 2014. [1] In our opinion, this is just the beginning of a new revenue stream for GE that is the direct result of the company’s investment in industrial Internet. The convergence of industrial machines, data and the Internet to lift machine productivity is termed as industrial Internet.

GE is outfitting its machines from jet engines and gas turbines to CT/PET scanners with sensors and software that monitor and collect data on health of different parts of that machine. A cloud-based Internet platform then analyzes this data through advanced analytics involving historical data points to provide machine operators and maintenance engineers with real-time information, which is used to schedule predictive maintenance checks that improve machine efficiency as well as prevent downtime to improve overall productivity. This is the essence of GE’s Predictivity solutions.

In our view, the revenue potential from these solutions is immense. According to wikibon, in 2012, the total technology spend on industrial Internet was around $20 billion while the value created by industrial Internet was around $23 billion, which translates to a return on investment of around 15%. By 2020, the total technology spend on industrial Internet is estimated to reach $514 billion, and the value created by the industrial Internet is estimated to rise to nearly $1.3 trillion which translates to a return on investment of around 150%. [2] This creates a very compelling case for industrial machine manufacturers like GE to invest in creating industrial Internet systems and technologies so that they can take a significant share of the value that will be created through industrial Internet’s implementation. Accordingly, GE has invested several hundreds of millions to develop its industrial Internet ecosystem across industries which include aviation, power generation and healthcare.

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We currently have a stock price estimate of $27.68 for GE, around 5% ahead of its current market price.

See our complete analysis of GE here

GE Is Attempting To Capture Industrial Internet’s Revenue Potential

In November 2012, GE invested $1 billion to begin developing systems and technologies for its industrial Internet ecosystem. Thereafter in June 2013, the company committed another $2 billion in the healthcare space. [3] These investments have gone towards building sensors, softwares and Internet-based analytics platform that together produce a solution which is able to lift productivity of machines like jet engines, turbines and CT/PET scanners.

For example, GE has added multiple intelligent sensors that enable exhaustive monitoring of its jet engines. Analysis of data generated from these sensors in real-time on an Internet-based platform helps engineers schedule predictive maintenance or repair sessions, which help the jet engine work near peak performance. Now, if all the engines in an airline’s fleet work near peak performance, large gains in fuel efficiency can be realized. In addition, selective maintenance enabled by this technology brings gains in staff allocation and maintenance costs.

Additionally, not only in jet engines, GE has brought its Predictivity solutions to other parts of an airplane as well. Last year in June, one of GE’s joint venture companies, Taleris, signed a predictive maintenance contract with Etihad Airways. Under the contract, Taleris prevents unplanned airplane downtime resulting from among other things failure of aircraft air-conditioning. [4] Sensors fitted throughout the airplane provide ongoing data which is combined with historical data to predict when the airplane’s air-conditioning might fail. Engineers schedule maintenance sessions in anticipation of a failure to prevent downtime, saving money for the airline. Similar predictive solutions from GE focus on optimizing flight path and traffic flow airplane management. Air Asia, which uses these Flight Efficiency Services from GE, is expected to save $10 million in fuel costs in 2014, according to GE. [5]

The company has also built similar applications for the power generation industry. GE’s gas turbines utilize sensors and analytics to work near peak performance, consuming less fuel and causing lower emissions. Predictivity solutions for wind turbines have enabled E.ON to increase power output up to 4% from its 283 wind turbines that are equipped with GE’s solution. ((GE to open up Predix internet platform to all users, October 9 2014, www.ge.com)) In the healthcare sector, GE is working to increase productivity of its hospital machines like CT/PET scanners and other diagnostic equipment on the same concept.

To accelerate adoption of these productivity enhancing solutions, GE has also come up with tools that help customers identify their machines and processes that could benefit from increased connectivity and data analysis. In October, GE announced that by the end of 2014 it will have 40 Predictivity solutions ready, and in 2015, the company’s Predix software platform will be open for all companies to identify their machines that can benefit from GE’s solution. [5] In our view, overall revenue potential from these Predictivity solutions, which improve machine productivity, is immense. But actual gains for GE will depend on how many different solutions the company is able to develop and how effective these solutions are. Some of these solutions like those deployed in wind turbines and airplanes are already adding significant value to customers’ bottom line. So, GE could derive considerable incremental revenue from the value it will create for its customers. The company’s expectation that it will generate $1 billion from its Predictivity solutions in 2014 is a good starting point.

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Notes:
  1. GE’s 2014 Q3 earnings form 8-K, October 17 2014, www.ge.com []
  2. Defining and sizing the industrial internet, June 27 2013, www.wikibon.com []
  3. GE Healthcare to invest $2 billion in software development over five years, June 11 2013, www,ge.com []
  4. GE and Accenture joint venture Taleris provides Intelligent Operations for Etihad Airways, June 18 2013, finance.yahoo.com []
  5. GE to open up Predix internet platform to all users, October 9 2014, www.ge.com [] []