Why did GE and CAT buy Natural Gas Engine Makers?
Caterpillar announced an acquisition of Natural Gas engine maker today following GE’s similar acquisition couple of weeks ago. GE’s acquisition of Dresser was a bigger deal ($3B) compared to Caterpillar’s $800MM deal to acquire MWM.
Both these deals are obvious product diversification in the energy space (Dresser is mostly upstream and MWM is further downstream). For both GE and Caterpillar this could be one of the several repositoning efforts to build capability in the transition of US transport economy for dependence on crude oil to shale Natural gas.
US is the Saudi Arabia of Natural Gas reserves. Mr. Boone Pickens has been pounding the table on this for few years now. With the US dollar depreciating, the barrel of crude could soon surpass even the most optimistic predictions (remember the $200 targets when it hit $145 in 2008).
GE appears to be slowly entering into the automotive sector via the infrastructure/service provider strategy. Charging stations for the electric cars and now the Natural Gas IC engines. GE energy makes Natutral Gas Turbines used mostly in the combined cycle plants and peaker natural gas only units (for power generation). That might change soon as the demand keeps exceeding supply in the power generation sector and the long gestation period for Nuclear Plants combined with reluctance to build new coal plants and cheap shale natural gas makes it economical to build base load plants using Natural Gas Turbines.
The passenger car market could certainly benefit from small natural gas engines. Most US homes already have natural gas supply. It should not be that hard to get set up to fill ones automobile with Natural Gas at home. Will have to compress it first to liquify it. Home Depot and GE could collaborate (since Mr. Nardelli is not at HD anymore) and sell that capability to consumers.
Will we have a natural gas turbine or natural gas internal combustion engine powered on highway Heavy Duty trucks, rail and other machinery one day? Looks like it will make sense at $500+ barrel cude oil….
Energy Consumption(Demand), Supply, Stimulus and more…
There is a lot of debate going on about our Energy Problem and how the current stimulus is trying to tackle our Energy crisis. Yesterday, President Obama unvelied a $2.4 Billion grant to the private sector with the primary objective being to boost innovation in battery technology.
Solar firms in California have been significant receipts of grants in the energy renewables sector. This specific grant targeted towards battery technology in the automotive space was targeted towards firms in the midwest especially in Indiana and Michigan such as EnerDel (automotive lithium-ion batteries will receive $118.5 million in a matching grant), Delphi Automotive Systems LLC ($89.3 million), Allison Transmission ($62.8 million), Remy Inc. ($60.2 million) and Purdue University ($6.1 million).
Just as the Strategic Defense Initiative (SDI) program (aka Star Wars) funded research (mostly in the defense industry) in the 80s spawned numerous innovations even though the SDI as envisioned did not pan out, this (the current fiscal stimulus) too is likely to sow the seeds for innovative solutions for our gargantuan “Energy” problem.
The entire eco-system needs evaluation and new solutions – transportation and its power source (i.e engine/motor), fuel, fuel source, power generation, distribution, consumption. The current stimulus actually hits all of these aspects of the energy eco-system and is using the private sector and consumer incentives to change the behavior and investment/development focus.
Obviously not everything will bear fruit, even if 20 to 30% of all these efforts succeed, we would be well on our way to becoming an energy efficient society.
Shaker Cherukuri
Managing Principal
Process Improvement Solutions, Inc.
Lean – What does that mean to you?
The basic premise of a March 9th WSJ article on Lean is that in an automated system, the managers are unable to cut costs by letting people go. There is no one left to let go. There is all this capital equipment that is collecting dust, but no one wants to let it go. It is sunk cost. Substituting labor for capital (equipment) when demand is high might be the solution to increase capacity, the reverse might be needed when demand is low as eluded to by Toyota in the Feb 24th WSJ article. The decision needs to be made at the margin and not be based on the sunk cost of the capital equipment. Lean is about matching your supply chain and internal capacity with demand – not just having less people (labor) and more machines (capital equipment).
Looking ahead, with less demand, it might be cheaper to go back to an older process that required more people and less equipment – which is what Toyota was taking about. As for temporary issues in a JIT system causing issues with the supply chain or internal operations – that is usually an acceptable tradeoff due to the benefit of a JIT system over the long term. Dell did not abandon its JIT supply chain from Taiwan when an earthquake in Taiwan disrupted its supply chain for a few weeks. The shift from 90% of people in agriculture to 5% today is structural. What I am talking about here is a tactical short term issue of substituting capital equipment for labor since the variable cost of operating the capital equipment at lower capacity might be higher than producing at lower capacity with labor which can be phase in incrementally which may not be possible with the capital equipment.
Shaker Cherukuri
Principal
Process Improvement Solutions Inc.
3209 W. Smith Valley Road, Suite 224
Greenwood, IN 46142
317-258-3552
