GE and Industry's Return to the City

GE recently made the blockbuster decision to move its corporate headquarters to Boston. More than just another example of a company returning to an urban area, the move shows how a city like Boston benefits the kind of company GE wants to become.
February 16, 2016, 9am PST | Rod Stevens
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On the surface, GE's move from suburban Stamford, CT to the Seaport District of Boston seems like part of the now-established story of the corporate return to the city. For GE, however, this is not just another headquarters move, but part of a transformation from an old line manufacturing to a "digital industrial" company, a transformation that could add a trillion dollars to its stock value. Yes, you read that correctly: a trillion dollars.

GE's move is part of a larger industrial renaissance in places like Boston, Pittsburgh, and the Bay Area, which are becoming home not only to software and biotech companies, but engineering start-ups as well. The industrial renaissance is redeveloping old factories factories and warehouses into "hardware" communities, with shared tools and expertise. This renaissance is also turning these places into some of the leading workshops of the world, and a magnet for manufacturing companies like GE.

A Quiet Blueprint For Change

About 18 months ago Marco Annunziata, GE's chief economist, wrote a little-remarked upon white paper called "The Value of Connectedness," in which he described the value to industry of creating networked devices to keep trains and planes moving. He described a vision of GE essentially becoming the Microsoft of the industrial world, connecting the world together with smart devices. But the word "value" in the title of this white paper had a double meaning, and toward the end of the white paper he described how repositioning the company as a "digital industrial" company might lead Wall Street to revalue GE's stock more like Tesla's. Annunziata wrote:

Market valuations currently indicate strong investor confidence in the ability that software-driven companies have to create value, especially when compared with traditional industrial companies. Price to sales multiples are in a relatively tight 1-1.5x range for traditional companies such as industrial conglomerates…By contrast, multiples for software-driven industries average around 5x… Companies that position themselves at the intersection of digital and physical within industry should see their valuations move closer to those of software-driven companies…[1]

At the beginning of 2016, GE carried a market valuation of about $300 billion. If the company can get itself revalued as a "digital" company, it could gain up to $1 trillion in value. That's worth moving to Boston for.

A World Of Machines That Talk to Themselves

This is not just talk. The McKinsey Global Institute projects a total economic impact of the "Internet of Things" at a minimum of $3.9 trillion in 2025.[2] Rather than looking at value through the traditional lens of industry clusters (transportation, health care, manufacturing, etc.), McKinsey measured value in terms of "settings"—places where people use interconnected devices. This is where the surprises come in. While smart devices like Fitbit watches and Nest thermostats are getting the most of the attention today, the much greater value tomorrow will be in connecting factories and work settings (a minimum of $1.2 trillion in savings in operations, inventory control, and health and safety), rather than the home ($0.2 trillion, primarily for security and energy). Besides the workplace, the other major settings will be cities (about a $1.0 trillion in value for public safety, traffic control, and resource management), "outside" (as in rivers, skies, and highways—about $600 billion in savings on logistics and vehicle routing), and retail environments (about $400 billion in savings on inventory control, automated checkout and better layouts).

GE has already set up a central in-house software center in Pleasanton, CA, where it has committed a billion dollars and hired 1000 engineers. But to win big, GE needs outside developers and mechanical engineers to write for its Predix operating system. This means creating software and devices that don't just find, locate, and control what moves around us, but also analyze and take action. Imagine the overheating wheel bearing on an oil tank car calling for help before it seizes up and spills oil into a nearby river.

In the DNA

Boston's engineering environment is a good part of the reason it is moving there, but it isn't the only "hardware" center in the country. (That's "hardware" as in smart devices, not monkey wrenches and plumbing elbows.) Across North America, venture capitalists and big companies like GE are now hardware incubators not only in Boston (Greentown Labs and soon-to-open Mass Robotics) but also the Bay Area (Lemnos Labs, Highway 1, and Startx), Pittsburgh (alphalab), Los Angeles (Los Angeles Cleantech Incubator), and New York City (New Lab). These incubators typically share office space, a machine shop, a kitchen, and meet up space, to say nothing of the casual exchange of "how-to" help, financing and legal help, and personnel leads.

All of these places have major engineering schools, like MIT, Stanford, Berkeley, and CalTech. (New York City has effectively bought a branch of Cornell, now in Chelsea, which will soon move to Roosevelt Island.) Beyond these academic strengths, all of these places have a deep history of making things. In 1950, New York was America's biggest manufacturing center, with Grumman anchoring a big base of industry on Long Island. Pittsburgh still has world-class expertise in alloy metals and machining. The Boston area still has a machining industry anchored by rich defense contracts. The difference is that today's start-ups are focusing on smart, high-value, low-volume devices, for which the flow of people and ideas is vastly more important than freight costs.

Not Your Father's Foxconn

For the last 50 years, industry has moved out to the suburbs, generally locating in big, tilt up boxes located behind landscaped berms along America's freeways. But this new generation of hardware start-ups has gone back to the city, because this is where the young engineers want to live. Not coincidentally, many of the new hardware firms are within a ten-minute bicycle of a major university or gentrifying streetcar neighborhoods.

Generally speaking, these locations are not the "innovation districts" like East Cambridge or South Lake Union in Seattle, where well-established software and biotech companies can afford to pay top dollar rents for newly constructed lab and office buildings. To the contrary, they are often located in the overlooked-over old factories on the wrong side of the rail tracks near the cheaper neighborhoods, buildings that have sat empty or functioned as mini storage for the last 20 years. But as Jane Jacobs said, "new ideas often need old buildings," and these start-ups are sparking the rebirth of these old industrial districts. It is not just the start-ups, but a whole ecosystem of uses that nurtures a new generation of talent and companies. Uses include gyms, cafes, and breweries.

Take Greentown Labs, for example, located a ten-minute bicycle ride north of MIT in the old factory complex of the old Ames Envelope Company, itself put out of business by the internet. Walk down the street there and you'll find not only Greentown Labs but Artisans Asylum, a maker space where about a quarter of the tenants work on robots; Brooklyn Boulders, a rock gym with a work space on the mezzanine above; Aeronaut Brewing; a yoga studio and judo club; an Indian grocery store; Tasting Counter, a restaurant which wraps the seating around the food prep; and, AirCraft Aerial Arts, with slings, swings, and a trapeze for the circus-y inclined.

Greentown and Somerville are a peek into the future, a view not just of what we may be working on—hardware and tangible technology—but of how we'll be working, the mixing and matching of different parts of our lives. Both companies and communities need to take note of this. GE already has, both with its sponsorship of Greentown Labs and its move to Boston. For that company, staying ahead of this change is a trillion dollar proposition. For communities, there is something equally valuable at stake: the pride and prosperity that comes with high-paying, value-added work. There are questions about how to translate this prototyping of new devices into production that puts more people to work, and how to find space for this growing industry in the city, somewhere other than expensive new office buildings. These are the practical questions that need to be answered next.

[1] Annunziata, Marco, "The Value of Connectedness," page 11, undated but circa August 2014.

[2] Page 7, McKinsey Global Institute, "The Internet of Things: Mapping the Value Beyond the Hype," June 2015 Executive Summary.

Rod Stevens is principal of Spinnaker Strategies, which provides place-based business strategy for attracting talent and investment. He can be reached at rodstevens@seanet.com.

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