It was early December in Lynn, Mass., and Katahira-san, GE’s star ambassador of lean manufacturing, was performing a teach-in.
The location was a GE defense jet engine plant where the spry Japanese-born consultant was headlining a kaizen (or “continuous improvement”) event. Walking the factory floor alongside Katahira-san was none other than GE’s CEO, Larry Culp. At Lynn, the courtly chairman and the assembly-line samurai moved in unison from workstation to workstation as they swapped ideas and solutions with the likes of machinists and welders on how to move parts and inspect engines faster and better.
Katahira-san (full name: Yukio Katahira), notes Culp, “speaks almost no English,” and issues his exhortations to the troops via a mic-equipped translator. He is “a force of nature, even in his seventies,” marvels Culp. “No one can keep up with him when he’s sprinting through a factory.” Over five days in Lynn, the boss recalls, the sensei guided six individual manufacturing teams toward smoothing and speeding their workflows. “He’s on the floor 10 to 12 hours a day as usual, pushing and pushing the teams,” says Culp.
And Culp loves it. “Unless you’ve seen some of the things that he’s seen over the past 50 years, you might think that a 10% improvement in the yield on a particular machine is all that’s within the realm of possibility in the short term,” observes Culp. “Katahira-san will say, ‘How about a 50% improvement?’ On Monday, the workers are ready to hang him. By Wednesday, they’ve gone through three cycles of experiments and seen a 40% improvement, and agree with him that they should shoot for a little bit more.”
What cannot be debated is the improvement Culp has wrought at GE, which is nothing short of astonishing. Nearly six years ago Culp inherited a bulky, super-inefficient, possibly near-bankrupt enterprise. Now, through a lean manufacturing revolution and relentless deleveraging courtesy of rising profits and well-timed asset sales, Culp has successfully dismantled what was once the world’s most renowned conglomerate and in its place, succeeded in delivering what will soon be three independent, publicly traded names, all featuring investment-grade balance sheets. Culp started the Great Breakup by spinning off GE HealthCare last January, and early in the second quarter, GE Vernova, its energy powerhouse, will separate from GE Aerospace, leaving the giant commercial and defense engine manufacturer and service provider as the final piece of the old empire.
For 2023, GE posted the largest share appreciation of any U.S. industrial, clocking a gain of 95.8%, including value of the GE HealthCare stock investors received at the spinoff. Shareholders who kept their GE HealthCare stock did even better: Its shares jumped 33% last year. It speaks to Wall Street’s esteem for the future of GE’s remaining businesses that its current market cap of $144 billion is half again higher than its valuation when it owned GE HealthCare. Oh, and GE stock handily outperformed Apple, Google, and Microsoft in 2023.
Today, the biggest source of market enthusiasm is the excellent prospects for the aerospace franchise, long GE’s crown jewel, which Culp himself will pilot as its CEO and chairman. It’s a big change, since he’s spent most of his career overseeing the multiple CEOs helming his conglomerate’s product units both at Danaher and GE. Culp tells Fortune that the shift will mark the first time he’s run a single business and P&L since his early days at Danaher, when he headed Veeder-Root, a maker of automatic counting gauges, principally for the energy sector. “I’m just hopeful that I’m better at it than I was back in the 1990s,” he jokes.
GE Aerospace operates on the “razor and blade” model. It essentially sells the engines (including, with its partner Safran, the world’s bestselling engine for narrow-bodies, the LEAP) at cost, and reaps huge margins on overhauling, inspecting, and providing spare parts for those in service. Since GE harbors the largest installed base of commercial engines of any manufacturer by far, some 47,000 or over 60% of the world’s total, it should enjoy big earning years ahead as those youthful LEAPs accelerate into their servicing cycle. (It’s uncertain how much the temporary shutdown of Boeing Max flights, owing to the blowout of a fuselage panel on an Alaska Airlines plane, will impact future LEAP orders, if at all.) Aerospace still struggles to produce at full capacity, the result of supply-chain snarls that started during the COVID crisis. To meet fast-rising orders and the looming wave of overhauls, Culp must greatly ramp up the cadence for both production and maintenance, sans delays and problems with reliability. “The pandemic put the industry on its back,” he told Fortune. “But it’s come roaring back as airlines invest in their future. Demand really won’t be a challenge. Our challenge will be thoughtful execution of that opportunity.”
Among Culp’s most ardent fans is activist investor Nelson Peltz, CEO and founding partner in Trian Fund Management, the multibillion-dollar investment fund that profited greatly from such holdings as Heinz and P&G, and recently launched a highly publicized proxy battle versus the Walt Disney Co. Peltz professes amazement that Culp managed to revive an enterprise already headed for disaster when he took over that then got slammed with two giant external shocks. “He had every problem known to man, including a pandemic that led to the fall in air travel and the grounding of the 737 Max,” Peltz told Fortune. “It was the biggest job I’ve ever seen. Only Larry could have kept GE out of bankruptcy. As an operator, he’s the number one industrial CEO on the planet, there is no number two.”
Where GE lost its way
In April of 2018, Culp became GE’s lead director, but his day job was teaching at Harvard Business School. As GE’s finances crumbled that year, the board looked to Culp as a savior. “I told the board no, twice,” he told Fortune. “I was flattered, but I didn’t think this was the right thing for me to do.” In that period of crisis, Peltz, whose funds were large GE shareholders and whose former partner Ed Garden served on the board, invited Culp to lunch in Boston. “I told Larry, ‘Come on, I love you, but you’re a CEO not a teacher.’ He said, ‘This might not play great with my family,’ and I said, ‘You’re too ideal for the one-of-a-kind challenge to let this pass.’” To Fortune, Culp declined to say if the advice from Peltz—who remains a shareholder and whom Culp describes as “wonderfully supportive”—proved decisive. But shortly thereafter, he heeded Peltz’s and the board’s call to arms. “On the third time, after reflection, I agreed to do it,” he says.
It worked to Culp’s advantage that, prompted by storms rocking GE in early 2018, his predecessor, John Flannery, had shrunk the lax, oversized board from 18 to 12, dumping eight mostly long-serving directors. The shake-up brought on, besides Culp, two new outside members, offbeat choices who proved key catalysts in the manufacturer’s resurgence during the years ahead. “A seat on the GE board was not necessarily as coveted in 2018 as it might have been in 1998,” Culp allows. After naming Culp as CEO, the board appointed one of his fellow recruits, Tom Horton, as lead director replacing Culp, an arrangement strongly endorsed by Culp. Horton was a veteran of restructuring and crisis management. As CEO of American Airlines, he’d engineered the massive overhaul that lifted the nation’s largest carrier from bankruptcy during 2013 and 2014. The third newcomer was Leslie Seidman, former chief of the Financial Accounting Standards Board. During Culp’s tenure, Seidman helped GE navigate the wind-down of its large long-term-care reinsurance portfolio that some experts, among them famed investigative accountant Harry Markopolos, predicted would sink Culp’s then-floundering vessel.
When Culp took charge, GE was reeling from a crushing load of roughly $140 billion in debt. That burden was primarily a legacy from the fall of GE Capital. GE’s legendary CEO Jack Welch had built GE Capital—the division that did everything from real estate investing to junk bond financing—into a giant, and Jeff Immelt made it far bigger. In 2007, it earned $12.7 billion, contributing over half of GE’s total profit. But the Great Financial Crisis sent the finance arm reeling, and in 2015, Immelt sold its assets at fire-sale prices to such buyers as Wells Fargo and Blackstone. To fill the yawning gap in earnings, Immelt embarked on a plan to restore GE to its industrial roots, shedding NBCUniversal and Synchrony private label credit cards, and going on an acquisition binge in power and oil and gas designed to remake GE as a high-tech, high-margin innovator and leader in energy. But Immelt vastly overpaid for such purchases as turbine manufacturer Alstom of France and a majority stake in oilfield services giant Baker Hughes, and the botched melding of the myriad units unleashed wave after wave of restructuring costs. Hamstrung by big deficits in power and weak overall earnings, GE couldn’t generate sufficient cash to lower the mountainous borrowings left mainly from the GE Capital fiasco.
After taking charge in late 2018, Culp quickly scotched plans for an IPO of the entire health care business, and instead decided that only massive debt reduction would enable GE to simplify its business and potentially divide into durable, stand-alone enterprises. In early 2019 Culp clinched a deal to sell just part of health care arm, the biopharma segment, to Danaher, his old employer. His timing was quicksilver: The transaction closed in March of 2020, just as the pandemic’s onset pounded air travel and sharply curbed GE’s deliveries of new engines.
The $20 billion in proceeds buttressed GE’s balance sheet in the crisis. As the pandemic lifted, Culp’s lean initiatives at aerospace, power, and the other units substantially lowered the costs of making the likes of jet engines, boilers, and windmills. Those operating improvements lifted free cash flow from negative in 2017 and 2018 to $2.1 billion in 2021 and $4.5 billion in 2022, enabling more debt pay-downs. The pivotal step that cleared the way for the new GE: In March of 2021, Culp forged an agreement to sell GE Capital Aviation Services (GECAS) to AerCap, then and now the world’s largest aircraft leasing provider. GE secured roughly $25 billion in cash, as well as $5 billion in AerCap stock, a stake now fully exited. The proceeds so improved GE’s credit profile that the day after the closing, it floated a tender offer that enabled the resurgent manufacturer to repurchase $25 billion of its debt, on excellent terms. The next day, Culp announced that GE would split into three separate businesses, all boasting strong balance sheets featuring modest levels of investment-grade debt.
Culp’s turnaround playbook at GE
Culp introduced three initiatives that overturned the staid, bureaucratic, and inefficient practices that long haunted GE. The first, of course, is his relentless pursuit of the lean model and mindset. The lean goal couldn’t be more basic: delivering parts on time, with the highest quality, lowest cost, and least waste, and enhanced safety for workers and customers. The idea is to create standardized work processes that keep getting better. No detail is too small. Lean requires that workers do the job the same way every time. The challenge is identifying the most efficient series of steps in making or inspecting each part, and turning that sequence into a repeatable, unvarying chain. Workers and managers keep revisiting those workflows so that they continuously improve.
The secret that makes lean work: getting everyone involved in the process, and especially the workers on the factory floor, to freely contribute their ideas. Lean teaches that it’s the hands-on folks who actually assemble the modules and perform the inspections who’ll best find the ways for a component to travel a shorter distance around the plant or to check bigger batches of parts in a shift without any sacrifice in quality.
According to David Cote, who ran GE’s appliances business in the 1990s and went on a highly successful run as Honeywell’s CEO from 2002 to 2017, GE’s old processes were anything but lean. The main problem: Management failed to engage the employees most crucial to making things go faster and better. “I installed lean at Honeywell because I thought it would be a big improvement on how things were done at GE,” Cote told Fortune. “The concept was that everything can be made more efficient and everyone’s ideas need to be considered, especially the hourly people. They’re the ones who know what the heck is going on, so engage their brains to figure out what’s wrong and how to fix it.”
Cote says that during his tenure there, GE basically ignored those folks in the trenches, and he doesn’t think things changed afterward. “GE wasn’t good at manufacturing,” he says. “At GE manufacturing was seen as grunt activity, and everyone else did the thinking, and the rabble made the stuff. It was an antiquated view.”
These days GE plants host a kaizen virtually every week, either for single or multiple teams. In most cases, the participants are on-site workers and managers. Production engineers and foremen take gemba (Japanese for “actual place”) walks on the factory floor to talk to workers and harvest suggestions that spark the next kaizen session. At select events, employees will convene from all parts of the company, and often from abroad. A conclave in Wales 18 months ago, featuring Katahira-san, drew participants from as far away as Brazil and the U.S. (including, of course, Culp).
While Culp participated in a kaizen team at the Lynn military engines plant in 2022, the workers discovered a single part was delaying delivery times, and found that the problem was a faulty welding process that rendered more than half the components unusable. Workers corrected the problem so that the new process eliminated virtually all defects, and reduced production time by over eight weeks. Culp enthusiastically reported the breakthrough in a memo to employees. At a facility near Cincinnati, the jet engines being inspected and overhauled used to stand vertically in a fixed position. The technicians needed to scramble up and down scaffolding to view, test, and fix the different sections and parts. Thanks to a kaizen session, the factory changed the system so that the engines are encased in metal holders called “lobster pots” that workers can mechanically raise or lower. So now, the engines move while the techs stay in place. When lowered, they descend into pits whose openings are automatically covered by plates to prevent tools and parts from falling in. The new mechanics enable workers to move engines through the process more quickly.
Culp gets positively rhapsodic extolling the lean gospel. Describing the recent event in Lynn, he says, “This is not McKinsey, BCG, coming in laying 100 pages of PowerPoint. These kaizens that last five days long are hands-on, do it now, try or fail [events]—not something on someone’s to do list, but will be in place by week’s end.”
Culp is also adamant that managers tell him whether a project is tracking toward success, or failing. In the new GE parlance, managers tag a project as “green” if it’s on target, and “red” if it’s struggling. “Part of the cultural transformation we’ve had is that we’ve had to make the ‘red’ safe territory, to frame it as an opportunity,” he says. Viewing red doesn’t cause Culp to lower the target. He seeks a solution for getting there. “When these situations occur, and they always do when you’re stretching, let’s go into problem-solving mode,” he explains. “Let’s embrace it. What can we do about it? Not sugarcoat it. Not hide it. That’s the goal.”
Culp recalls the pivotal moment when the fears of admitting to “red” began to wane. “I remember vividly this particular meeting … where I was aware there was something important that was offtrack,” Culp declares. “No one had told me formally through channels. And everyone’s looking at their shoes. The poor person who was on point for this particular issue, to their credit, I thank them to this day, answered a tough question honestly, and said: ‘We are offtrack, but I think it’s recoverable. But let me tell you what we are doing.’ And I was really able to harness that moment as the beginning of this type of change. Then and there we were going into problem-solving mode.”
Concludes Culp: “Because if you shoot the messenger, guess what? Then bad news does not circulate, certainly doesn’t flow up, and any organization is in big trouble if that’s the case.” Says Cote, who’s familiar with Culp’s style from observing him at Danaher when they both ran big conglomerates: “He encourages people to speak up but with facts. You can’t just tell a great story about how this project will be a great success, about a big vision. That won’t fly with Larry. He’ll demand to know the facts and numbers.”
The end of the conglomerate curse
Inside the company, Culp has reorganized GE into 30 separate profit centers, whose executive teams have full control of their income statements and balance sheets, and get bonuses tied to the performance of their units. A key change: In the past, a bloated central staff furnished a large portion of the services, including accounting, human resources, and marketing, to the business units. Culp has slashed the headcount at headquarters from just over 18,000 to a couple hundred, and dispatched most of the managers to the business units—most recently in preparation for dividing GE into three independent companies. “It’s just the organization you want,” says Peltz. “One person in charge of each sector of the company. You have tiny overhead, and don’t tinker with them from corporate.”
A fundamental question about Culp’s strategy is why he didn’t leave GE as a conglomerate. He proved one of the most successful figures ever at operating multiple businesses at Danaher. And even before the GE HealthCare split at the start of 2023, when GE still consisted of power, health care, and aerospace, it was modestly profitable and improving fast. He‘s never said that splitting off businesses is a superior model to operating them in combination. But the three pillars of GE share almost none of the purchasing, co-branding, and other synergies that the far smaller industrial segments at Danaher achieved. Also, the three core businesses that formed the pre-split GE are all extremely large: GE Aerospace, the top player in its industry, generated revenues of $31.8 billion in 2023, while GE Vernova booked $32.7 billion, and the pre-spin GE HealthCare at nearly $18 billion in 2022 sales was plenty big enough to stand on its own. The CEOs will no longer need to worry about the old conglomerate curse that headquarters will use their profits to subsidize another group that’s doing poorly. Each member of the board can bring expertise in a single business. Their share price—and the value of their options and restricted stock—will directly reflect their franchise’s performance rather than the combined results of a collection of P&Ls.
One asset they may well keep sharing, however, is Katahira-san, who’s been working his magic at plants across GE, and has proved to all and sundry that his universal language of lean will work anywhere. It’s a sure thing that Culp as CEO of GE Aerospace will keep summoning the septuagenarian whirlwind who first so impressed him three decades ago at Toyota. “If he’s at a kaizen site for a week, I’ll try to drop in and go to dinner with him,” says Culp. “Because I always get a lot out of that. He really is just so keen to see people realize their potential. We treasure every hour with him.” Where do they dine? “We go to a Japanese restaurant with him, of course,” says Culp. “He hardly eats anything.” The translator’s there, too, and when Katahira-san starts speaking, Larry Culp makes sure his mentor has the floor.
