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GE - IBM Industrial Internet deal: is it a win-win for investors?

Muhammad Bazil

Muhammad Bazil

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The Internet has highly impacted the way information is exchanged on different levels of communication. By capitalizing on its power to connect intelligent machines to each other and then, the entire system to people, using big data analytics, Industrial Internet is an innovative way to drive productivity revolution. Put simply, the Industrial Internet revolutionizes extensive operations by integrating big data, intelligent machines, and smart sensors to remotely monitor performance and maximize efficiency. General Electric (GE), one of the world’s leading companies of industrial equipment, is one of the Industrial Internet’s strongest advocates.

GE has invested $105 million in Pivotal, a big-data, spin-off company from VMware (VMW) and EMC (EMC), to provide analytics software and services to GE’s customers through the Predix platform.Predix industrial network enables operations optimization by combining advanced technology, big data analytics, machine-to-machine communication, and remote performance control.In October, GE announced three Industrial Internet partnerships with AT&T (T), Cisco (CSCO), and Intel (INTC). AT&T offers its cloud network to create a highly-secure wireless communications system. Cisco enhances GE’s expansion in industries like transportation, health care, oil and gas, and power generation. Intel provides a built-in infrastructure through cloud-based interface within the Predix. The new alliances followed GE's latest collaborations with Amazon Web Services (AMZN) and Accenture (ACN), which served to the development of Predix.

GE focuses on the energy sector

The energy sector is complex, thus allowing the generation and collection of big data by energy-related industrial equipment throughout the energy life cycle. GE, having the experience to use information technology towards the optimization of data collection, can create efficiencies, leverage performance and offer innovative services to energy consumers.

GE has both the expertise and the resources to employ effective optimization of energy. A key element is the size of the system. The more machines are employed to work together, the better the optimization level. One good example is GE's Fuel and Carbon Solution, or F&CS. Fuel and Carbon Solution identifies fuel optimization projects and implements advanced software analytics to improve fuel savings. It is estimated that F&CS can cut carbon dioxide emissions and shrink operating costs, while a 2% fuel-consumption improvement would equal 10,000 vehicles less in the streets.

GE joins forces with IBM

The Industrial Internet is intelligent. It integrates machine-to-machine communication with big data to realize efficiencies. It uses sophisticated algorithms to perform accurate calculations taking into account big data generated by an entire system of machinery. It deploys data from individual sensors and employs remote control and optimization at the level of individual machines. Additionally, Industrial Internet has a $150 billion potential of bringing unrealized efficiencies of intelligent infrastructure in the economy.

The bigger the Industrial Internet business, the more partners GE brings on board.IBM (NYSE: IBM) has been the largest big data company with its Smarter Planet division playing a key role in Industrial Internet. In March, IBM has joined forces with GE’s Pivotal to take advantage of the huge market opportunities in industrial equipment and big data technology. The deal will enable GE to build a broad portfolio of analytics software and enhance its products and services across its different lines of business, i.e. aviation, power generation, oil and gas extraction, and health care. GE expects an increase in its software sales by +15% annually, which, combined with the expected growth of the Industrial Internet by 2020, will benefit all other GE’s participating partners. The deal is also expected to improve IBM’s positioning in the competitive landscape of Industrial Internet.

Bottom line for the investor

On the upside, Industrial Internet is estimated to grow bigger by 2020. The potential gains are substantial: 1% gain in fuel optimization over 15 years would yield $30 billion in savings in aviation and $66 billion in power generation; 1% efficiency over 15 years would yield 27 billion in the rail industry and $63 billion in healthcare; 1% efficiency over 15 years would yield in $90 billion in oil & gas.GE views the Industrial Internet as a key factor of the Internet Revolution where productivity growth is directly related to accelerated economic productivity. GE estimates that the Industrial Internet will add $1.5 trillion to $2.3 trillion to annual U.S. GDP.

On the downside, the huge potential of Industrial Internet is not enough to improve GE’s and IBM’s valuations.Generating and collecting accurate data is a huge challenge because the data are available from sensors, which are placed into the machines. If a sensor doesn’t work properly, data will not be precise. Additionally, Industrial Internet should be applied in real life. For example, the developing world suffers from limited access to drinking water, exposure to air pollution, collapsing infrastructure and so on. Considering the expected increase in the global population to 8+ billion by 2025, these challenges are only going to get stronger. GE and IBM are expected to collect accurate data to address above challenges.

All in all, GE is a leading company with a growth potential. Industrial Internet can improve GE’s offerings to its industrial equipment customers. It can also increase investor confidence as GE takes careful steps towards the Industrial Internet revolution. IBM has been a leading company in big data software analytics for years now. Joining forces with GE can only be beneficial as the amount of data processing increases. For investors, the GE - IBM Industrial Internet deal is a huge opportunity to invest in two strong companies with a growth potential.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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