CHART 5 Earnings Growth GE Services Business 20% per year and Major Appliance Service, and Aircraft Engine Service. (Chart 5) The earnings contributions of these businesses have grown at an annual rate close to 20% per year in the last five years, at superior levels of return on investment. The opportunity to continue this growth rate is based on increasing our share of equipment services both GE equipment and the equipment of other manufacturers. And this is international business. For example, in 1966 we had 54 domestic and 6 international apparatus service shops. Today there are 128 domestic and 36 international shops, and the list keeps growing. And these service businesses are relatively immune to foreign competition and economic recession. MATERIALS BUSINESSES Another area of exceptional Company growth has been in man- made materials. Price and pro-fit equations have substantially changed in the materials industry in favor of General Electric's stable of proprietary high-per- formance materials. Carbide cutting tools, man-made diamonds, silicones, and engineering plastics satisfy such growing needs as higher productivity in metalwork- ing and lower weight in automobiles. And they are increasingly price competitive with the materials that they replace. General Electric's research and development laboratories, spending nearly a billion dollars this year, continue to produce more patents daily than any other company. And many of their patents are in proprietary materials. Over the past ten years, our earnings from the materials businesses have been growing about 14% a year. When we add to these man- made materials our new participation, through Utah, in the mining and processing of natural materials, you can see a decidedly new dimension emerging for General Electric. (Chart 6) CHART 6 Services and Materials (% of Company's Earnings) 14% '66 27% '76 40% '76 & Utah Back in 1966 service and materials businesses were producing only 14% of Company earnings. In 1976, they are producing about 27%. Adding in the Utah earnings, the ratio should be something like 40% services and materials, and 60% equipment manufacture. Quite a change. EQUIPMENT MANUFACTURE Of course the design and manufacture of high-quality equipment is still the core of our Company's business. We are still the world's leading manufacturer of electrical equipment for utilities, industry, and the home, and we intend to maintain that position. These are solid, high-return businesses which though growing more slowly provide a steady base of earnings. Our turbine-generators set the standard for the world in quality and reliability. In nuclear energy we are spending significant amounts on engineering and development in support of projects now in our backlog. Energy policy today is more a matter of politics than of technology, but whatever the mix of energy sources the nation decides to pursue, General Electric is well positioned to make a profitable contribution. And of course, the energy opportunity is worldwide in scope. Likewise, in our consumer and industrial products, we are pursuing a strategy of quality and technical innovation. New consumer products such as flip-flash photo lamps, lucalox lighting, the smoke alarm, and high-per- formance TV illustrate the continued emphasis on innovation. The same emphasis on quality and innovation marks our strategy for industrial components and systems a market with worldwide dimensions as other nations accelerate their programs of industrialization. Business spending for capital equipment is lagging around the world, and governments are finally beginning to recognize the need to stimulate greater capital formation if they want to return to economic health and full employment. We intend to participate broadly in the job of upgrading the world's industrial capacity. But in equipment manufacture, as in materials and services, General Electric is diversifying. Compared with 1966, the Company is much less dependent on its traditional products for consumers and electric utilities, and putting more of its resources into such fast- growing areas as medical systems, land-sea-and-air transportation, aerospace, and communications. Margins in some of these areas have been modest in recent years due to heavy development costs of new products and technologies. These investments are now paying off and are expected to yield above-average sales and profit performance. Aircraft engines represent a major technology investment, for example, that is now starting to pay off in major earnings. The CF6 family of engines has put us solidly in the market for commer- 12 cial jet engines, a market that has been depressed in recent years due to slower air travel growth and poor airline profits. These conditions are starting to turn around, and we are ready for the airline re-equipment job that lies ahead. There has also been a turnaround in public attitudes toward defense, and our participation in the F18 fighter and B1 bomber programs should enhance the profitability of our large existing base of military engine contracts. So you see, there has been a major change in the businesses from which General Electric derives its earnings. Since 1966 we have made a major strategic thrust into the material and service businesses, and significantly diversified our equipment manufacturing businesses. Let me run more quickly through several other important changes. MORE INTERNATIONAL As I indicated earlier, General Electric's international sales in recent years have been increasing at a rate roughly twice as fast as its domestic sales. (Chart 7) Ten years ago, international sales provided about 13% of our earnings; this year it should be about 25% of our earnings exclusive of Utah International. The addition of Utah will increase that percentage substantially close to 40%. I have already spoken about our highly selective yet diversified approach to world markets, both as to exports and investments in foreign affiliates. There is no need to repeat that story, but I want to add one more point with respect to exports. General Electric is a major contributor to the United States balance of payments, with a favor-able balance of trade totalling $5 billion in the past five years, of which $1-1/2 billion was achieved last year. Our exports also provide about 80,000 jobs here in the United States, directly and indirectly. As one of the nation's leading exporters, we are strongly urging that the Congress and the new Administration develop a more positive international economic policy that will help keep U.S. industry competitive in world markets, in the face of more intensive foreign competition. Certainly this is no time to increase the tax burden on U.S. companies by eliminating the DISC incentives to export, or trying to tax foreign- source income before it is repatriated to the United States. CHART 7 International Sales (% of Company's Earnings) 13% '66 '76 '76 & Utah LESS VULNERABLE TO INFLATION AND CYCLES Another important change since 1966 is that our Company is decidedly less vulnerable to inflation and cyclical fluctuations. I have already pointed out the significance of Utah's huge reserves of natural resources as a hedge against inflation, and its long-term sales contracts with good price protection. But it is also worth pointing out that our movement into service businesses, with their better ability to recover costs quickly, also improves our ability to cope with inflation. As to cyclically General Electric was already sufficiently diversified in 1966 to afford unusual stability. Consumer spend-ing, housing, industrial, utility, and defense spending these peak at different times, and usually help us smooth out the cycles. Add to this the service businesses, especially repair services which actually do best during a recession when industry and consumer alike are trying to make do with old equipment. And our sales in many different countries also provide opportunities to offset the cycles. For example, when U.S. orders for gas turbines dried up during the recession, the business was sustained by increased export sales. CONTAINMENT AND DIVERSIFICATION OF RISKS Another very significant development sice 1966 is our containment and diversification of risks. Back in 1966, you'll remember, most of the Company's growth resources were concen-trated on three major ventures: computers, jet engines, and nuclear energy. And they were losing a lot of money. Since then we sold off the computer business, and have deliberately diversified our risks, made them more manageable, and moved promptly to dispose of losers. I have mentioned our successful ventures in service and materials businesses and commercial jets. Less promising ventures, such as General Learning, Tomorrow Entertainment, the uranium enrichment proposition, some audio products, our Belgian medical operations, our European consumer affiliates, and our investment in AEG Telefunken, were disposed of when it appeared that they were not going to be right for us. On the other hand we have not lost our willingness to take well considered risks, as the new Canadian appliance merger and the Utah merger amply demonstrate. This is a dynamic Company, but prudent in the management of its risks. 13