Failure Mode: Welchification - by Rob L'Heureux
Re-industrializing the US has been a hot topic since the pandemic. It’s certainly on top of Americans’ minds given the upcoming election. While industrial policy efforts are just starting to bear fruit, I am thinking about the ways this bet might fail. The US deindustrialized once, starting long before China’s ascent to global manufacturing superpower ( manufacturing was already less than 25% of US GDP by 1990). This trend was celebrated at the time, and I suspect the root cause for deindustrialization has persisted: physical-world businesses moving atoms simply have different return profiles than digital-world businesses moving bits. Physical-world businesses have higher costs and no power law like Moore’s Law driving increasing performance and innovation.
Well into the second century since the Industrial Revolution, there are many books, articles, and case studies happy to tell future industrialists what to do and who to emulate—many of which are autobiographical and self-promoting. While Elon seems happy for others to write about him, Jack Welch was all too happy to tell you how great he was. From 1981 until 2001, Jack Welch was the icon of American manufacturing, pushing General Electric (GE) to become the most valuable company in the world. It was short lived, as the great financial crisis of 2008 exposed how his changes had hollowed out the company far more than investors had appreciated. During Welch’s era, GE would demonstrate tremendous material progress, enrich his investors and leadership team, become the envy of every other industrial company, and still set the company on a path to decline and breakup for one simple reason: financial engineering became more important than mechanical engineering. In his wake, leadership would keep his principles and strategies before gravity took hold and sent the company into decline. In April 2024, GE would split into three companies: GE would remain focused on aviation (the one, true GE), GE Vernova would focus on power generation and renewables, and GE Healthcare would focus on medical systems. In October 2024, their cumulative market cap was $316B, down over 20% from Jack Welch’s heyday.
