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Extra Credit, Friday Edition   Pandit Skewered
May 16 2008 1:01PM EDT

Why GE's Selling its Appliances Division

GE looks as though it'll sell off its appliances business, and John Gapper wonders

why GE is not prepared to invest enough in the business to turn it into a global powerhouse when it clearly expects someone else to buy it for that reason.

I think the answer is the same as the reason why CBS bought CNet: publicly-listed companies, be they CBS or GE, feel the need to show impressive growth rates, not just in revenues but also in earnings.

A large investment in the GE appliances brand would certainly be expensive; it would also have a relatively low return even if it were successful, because appliances, even when you're a global powerhouse, are a pretty low-margin business.

Haier, of China, by contrast, doesn't have the same pressure from shareholders that GE has. It's perfectly happy to slowly and steadily build a global brand, and it's exported so much over the past few years that has lots of dollars to spend doing so.

The hardest nut to crack if you're trying to build a global brand, of course, is always the USA, so buying GE's appliances business would give Haier a very strong competitive footing against the likes of Korea's LG - and it could get that position overnight, rather than having to build it organically like LG has done.

Meanwhile, GE can take the proceeds from the sale and invest them (if all goes according to plan) at an IRR well above anything Haier might require. Everybody's happy - except, as Gapper notes, the GE Appliances brass in Louisville.

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