Competitive Advantage of GE Healthcare

The competitive advantage of GE Healthcare could be testified in its long relationship -more than 15 years – with Vizient. Formerly known as Novation LLC, Vizient Inc is one of the largest GE Healthcare clients. This Texas-based company is a giant purchasing organization of medical equipment that represents more than 2,500 hospitals in the US. Its contract with GE Healthcare includes a CT imaging scanner and machine.

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The Rumor of Healthcare segment spin-off has been blown up since 2018, yet, there is no indication it will come to reality. Personally, we believe this delay happens because the parent company still needs it. Keeping the part that supplying “life” for GE dying tree is a mandatory policy from management’s perspective…this segment is just too good.

GE Healthcare Competitive Advantage: In This Issue.

There must be a reason why the spin-off doesn’t happen, and we believe it is due to GE’s Healthcare competitive advantage along with its financial performance. In this article:

1. X-Ray: First Class
2. The Supply Chain
3. Scanning The Number
4. Financial Highlight
5. Key Takeaway

Talking about GE is talking about a company with 108 years of history – even, the rise of GE in its glorious day is associated with America itself, it is like Apple and Tesla today.

The Early Player in X-Ray

GE enjoys an advantage as one of the Prime Mover. It has been there – since the first age of the imaging industry: X-rays, CT scans, MRIs. These circumstances help the company to gain a large installment basis, and then the switching cost effect does the rest. Once a radiologist or hospital use the GE product, it will be difficult for them to move away to another vendor.

Why? Because every medical image equipment comes with a very different interface. GE MRI software will be different from Phillips’s or Siemens’. For hospitals, migrating to another manufacturer means new training, new workflow, and the most important is – risk. Misreading or misinterpretation of the scanning result will cost both dollars and reputation. So, why do hospitals have to switch to another product? Again, we see how business hates changes. Business is a field that jargon like “if it’s not broken why fix it.” or “don’t change the winning team” is absolute truth.

Thus, we should not surprise if GE Healthcare sits in a comfortable oligopoly nature. Along with Siemens and Philips, these three dominate more than two-thirds of the market share while another smaller player only accounts for a low single-digit.

GE Healthcare Competitive Advantage: Cost Leadership.

Reading phrases “GE Healthcare” and “cost leadership” in one narrative may be surprising for some people. It is well known that The GE CT scanner is one of the most expensive CT scans in the market – even with lower specifications and features compared to its peer.

To understand this, we need to know that GE’s strategy lies in its maintenance cost. GE Scanners have a lower maintenance cost due to their low-cost spare part and replacement. This could be achieved due to the “engineering” scale of its production. The Illinois-based company has a reliable supply of spare parts along with engineers to deal with that.

Think that the hospital could save the maintenance cost for let say $10,000 annually by using the GE device, thus in 7 or 8 years, it will be a serious amount of money. Moreover, with GE, the hospital has a reliable supply of components that guarantee the machine keeps operating. We are sure that the hospital doesn’t want their scanning machine only parking idly in the radiology unit. The case is similar to the auto industry, most customers buy a certain car due to its abundance of spare parts, sometimes they don’t even care whether it is manufactured by the carmaker itself or a third party. Customers just need it exists and the most important: affordability.

Portfolio

Having a wide range of healthcare technology and integrated solutions makes it is easier for GE to get a contract. In 2020, The firm gets its breaking-record contract with $11 M by St. Luke’s University Health Network, the deal cover GE ultrasound technology and IT workflow solutions. St. Luke’s represent 12 hospitals in Pennsylvania and New Jersey.

From a hospital or distributor perspective, choosing GE is almost a no-brainer since it provides a one-stop medical imaging solution.

Extra Protection. Blurry Business by Imaging Scanner

The scanning device is a multi-billion business. So it makes sense to protect it further. One strategy is to make non-disclosure agreements with hospital clients. This transaction hides the price deal from the public and competitors. This blurry practice has been conducted for two decades, creating an invisible barrier for any disruption.

Scanning The Number

Previous qualitative analysis gives us a clue how GE retains its customers, how about the number? We found:

1. In the last 3 years, the Healthcare backlog stable at 20 Billion
2. Stable profit margin (19%)

Backlog is the total number of undelivered orders. Let say a hospital needs 10 unit of CT worth 1 million on 1 January 2019. They request GE to deliver and complete that order on 1 January 2020. In this case, 1 million or 10 unit order is part of GE backlog between 1 January until 31 December 2019. Having a stable or growing backlog means good for business. It is an indicator of strong demand for a firm’s product.

A Need To Care About GE Healthcare Segment: Financial Highlight

To have a perspective on how important the Healthcare segment is for GE, we need to examine its financial report. According to the 2019 Annual Report, this segment supply more than 23% of revenue and 37% of earnings as you can see in the figure below.

Imaging Financial Statement: Cash Machine

Another remarkable note is its cash flow condition. For capital-intensive companies, GE’s low level of Capex has impressed us – it accounts for only around 15% of Operating Cash Flow in 2019. We believe this condition is due to its superior service that comes along with the product, thus cementing the firm strong position over both suppliers and customers.

GE Healthcare’s Competitive Advantage: Key Takeaway

1. Simply not buying GE – mismanagement for years, cruel competition for power and renewable energy business. Almost nothing’s good about GE in headlines – but finding value in certain circumstances is one of the investor’s tasks. Fishing in clear water gives you no fish, General Electric surely is not clear water.
2. The spin-off will offer opportunity – but this is still a rumor.
3. This insight gives better preparation if the deal really takes place. Please notice the word IF
4. GE Healthcare has a great competitive advantage, they are switching costs due to large installment basis, structural characteristic of the business in blurry contract, the massive scale that could bring the cost down, and a wide array of the portfolio as a one-stop medical technology solution. This business advantage is confirmed in its financial report for the associated segment.