General Electric Co. Chairman John F. Welch Jr. sometimes likens his company to a microcosm of the American economy.
Roughly one-third of its $2.28 billion in annual profits now comes from "smokestack" manufacturing industries; one-third from high-tech, and one-third from a broad range of services.
GE's proposed $6.28 billion merger with RCA Corp. demonstrates a strategy that has taken hold throughout the American business sector, particularly among big businesses, where billion-dollar mergers have become commonplace in the 1980s. GE represents, in microcosm, a guiding philosophy.
The key to that philosophy, Welch and his subordinates say, is a relentless struggle to build muscle and cut away fat, to add strength and eliminate weakness throughout the corporation. Greatly magnified, the same process is occurring throughout the economy.
GE's expansion will occur in services and high-technology businesses rather than smokestack manufacturing, because of the increasing vulnerability of old-line businesses to foreign competition. With the acquisition of RCA, high-tech and services will account for 80 percent of GE's earnings, and its push in that direction will increase, mirroring a shift by many other U.S. companies.
The flip side of its expansion is a continuing pruning of operations that cannot meet Welch's benchmarks for strength -- a policy of "aggressive restructuring" as GE executives call it. Since Welch took over, GE's absolute payroll has been cut from 400,000 in 1982 to 300,000 today. Within those overall numbers are cutbacks at many of the 250 installations that made up GE when Welch took over. Although Welch and other GE officials turned aside all questions on the subject, Wall Street analysts believe RCA will face the same scrutiny that resulted in those reductions, when the planned merger is completed in nine months.
There are more plant closings, and there is more automation in GE's future. As America's industrial base continues to erode in the face of competition, the survivors will be those with the lowest costs and greatest productivity, GE officials say. Making that transition less painful has become a primary issue between GE and its employes.
The strategy Welch laid down for GE four years ago, when he took over at the age of 45, was a demanding, unsentimental challenge. Each of its established businesses would have to be first or second in its market, or else GE would not keep them, said Welch. And within GE, there was no doubting the word of this no-nonsense, resourceful chemical engineer from a working-class Massachusetts family, who had rocketed through GE's management ranks.
Second, GE's new and growing businesses would have to possess what GE strategist Michael Carpenter calls an "unfair competitive advantage." That is, they must have some unique edge -- a better technology or a more efficient plant, for instance -- that would give them a richer flow of profits for each dollar of investment than their competitors could achieve. To survive within GE, businesses must meet the company's requirements for long-term returns on investments.
In GE's view of the world, there is no compromise. "The spread between winners and losers is widening," Carpenter said. "There is no middling ground. Long term, unless American industry is competitive worldwide, there are no jobs. The strategy for GE and the country that creates the greatest number of jobs is one that maximizes our world competitiveness in each of our businesses."
As Welch explained it last week, GE's continuing success in international competition depends on two factors, both of which were offered by a merger with RCA.
To run its offense, GE needs an expanding supply of potential winners -- the companies that can dominate their fields now or that have Carpenter's "unfair advantage" upon which to grow.
Defensively, GE requires a strong base of secure businesses that can generate profits to help operations that are exposed to international competition. RCA offered three such enclaves where there is no serious Japanese or European challenge: defense contracting, its NBC television network and a diversified services business. Japan's world-class manufacturers have benefited from a safe harbor at home, because its domestic markets have proved so hard for U.S. firms to crack, and GE wants the same advantage, Welch said.
These factors justify the GE-RCA merger, Welch said. The combination would be a healthier employer and stronger competitor than either of the two companies separately, both he and RCA Chairman Thornton F. Bradshaw said.
Not everyone agreed with that proposition last week. Donald Kendall, chairman of PepsiCo Inc., told The Wall Street Journal, "I don't see anything constructive at all in GE and RCA getting together. I'm sure Welch has figured out something, but it escapes me. It's just creating a $40 billion giant. Bradshaw has done a great job of turning RCA around, and it ought to stay alone."
To a few critics, the GE-RCA merger and others on its scale are essentially exercises in empire building by powerful chief executives.
Other critics are skeptical that two huge businesses that merge and combine similar operations really do produce greater strength from the combination. "There has to be synergy to justify the premiums" paid by acquiring companies, Carpenter agreed. And in most mergers, the acquiring company's stock does not rise enough to recover the premium paid, he said.
Synergy -- the idea that 1 plus 1 can equal 3 -- will exist, GE and RCA executives insist, when their consumer electronics, defense communications, semiconductor technology and other high-tech businesses are combined. Wall Street analysts tended to agree last week. Gail Landis of Sanford C. Bernstein & Co. said the GE-RCA combination in television "will be in an extremely strong position."
Moreover, GE has shown it can manage most of the kinds of business it will acquire from RCA, she said.
"We don't know any one business that well," said Welch, who runs a company whose operations run the span from locomotives, dish washers and electric lights to medical diagnostic equipment, jet engines and advanced plastics. "We know management and how to allocate resources and how to pick winners and people and markets, which makes us different."
Fifteen or 20 years ago, an attempt to marry GE and RCA would probably have caused an uproar in Washington. But today, Welch's argument about the competitive advantages of size and strength are in synch with the economic and political views of the Reagan administration and Congress. The proposed merger will have to be cleared by administration antitrust officials, but a merger of that magnitude wouldn't be challenged for size alone, as Assistant Attorney General Douglas H. Ginsburg indicated recently. "It's simply ludicrous today to suggest that conglomerate mergers pose a meaningful threat to competition," Ginsburg said.
The GE-RCA merger took place because in Bradshaw, Welch found a chief executive who shares his philosophy of "aggressive restructuring" to survive today's competitive pressures.
"RCA has been on the same strategy of focusing where you can win and extricating yourself where you can't, or where winning doesn't have any value," said Carpenter.
Although GE paid a substantial premium to clinch the deal with RCA, some analysts said yesterday that Bradshaw could have obtained a higher price for his company if he had put it up for auction, or if it had been sold in pieces.
Bradshaw acknowledged this in an interview but defended the decision to sell RCA as a complete entity. "We have been so determined that we will not be broken up . . . I think the grouping of businesses RCA finally came down to in the last year or so is a very important grouping of products insofar as America's competitiveness throughout the world is concerned. And just to break them up into little pieces and parcel them out to high bidders here and there, I think you lose the thrust, the real importance that RCA can contribute."
The GE-RCA merger, then, provides these things, according to Welch:
*A pooling of technology by two companies that are leaders in research and development.
*An infusion of cash from GE into RCA, which has more than $1 billion of cash and liquid assets of its own. Cash and technology are two keys to carrying out GE's goal of dominating its markets by gaining a unique competitive advange.
In justifying the merger, RCA's Bradshaw emphasized the financial power possessed by RCA's new parent -- not only the cash on its balance sheets but also the muscle of its credit and financial services subsidiaries.
"The one thing that has been keeping me awake at night is, did RCA have sufficient financial strength to carry out what it has to carry out?" Bradshaw said in an interview last week. "Do we have the patience of shareholders during periods of time when . . . earnings might not be as high" because of investments needed to turn businesses into winners? he said. "Those are the things that kept me awake at night. Now that, in my opinion, is what General Electric has solved."
RCA President and Chief Executive Robert R. Frederick echoed Bradshaw's views. "I think the thing that pleases me most about this merger is I am personally very confident that plans and initiatives we have in place for RCA are solid. Now the probability of success has gone up by several orders of magnitude by getting the financial strength and human resources strength of GE."
Welch and GE have argued -- with increasing success -- that the bigger the company, the greater the chance of succeeding in its strategy.
"We need all of the resources we have here to support us as we move around the world to win in world markets," Welch said in an interview last week. "Getting stronger to compete in world markets it the only way we are going to have an increased standard of living . . . "We're the best now in broadcasting; we are the best in engines; we'll be the best in aerospace; we're the best in lighting; we're the best in appliances; we're No. 1 in motors; No. 1 in engineering materials; we're No. 1 in medical diagnostic imaging. There isn't another company when you look across it, that looks like this."