GE’s decision to relocate its global headquarters to Boston is a turning point for the city and the state, not just because of what GE brings, but because of why it is coming. This decision was not about taxes and incentives — Massachusetts is not a low-tax state, and the Commonwealth stopped competing on incentives decades ago. While recognizing the need to compete for investments, ours are well below the kinds of incentives offered by other states.
What is the real story? First, it is about the transformation of GE that has been under way for a decade. GE has been the quintessential conglomerate, with a highly disparate array of businesses. Over the last decade, however, GE chief executive Jeff Immelt has been remaking Jack Welch's company by selling off nonindustrial businesses and focusing the portfolio on complex manufactured products, ranging from aircraft engines and medical devices to locomotives and power-generation equipment. GE has become perhaps the preeminent global industrial manufacturer.
This corporate restructuring took place in part because Immelt recognized that a historic transformation of manufacturing was underway. The nature of manufacturing is changing radically as IT — including sensors, software, computing power, and connectivity — is embedded in products. This third wave of IT's impact on the economy, after low-cost computing and the Internet, is what we call "smart, connected products," or SCPs, which is reflected in the popular phrase "Internet of Things.'' SCPs are having a profound effect on how manufactured products create value for customers, how manufacturers compete, and how companies operate internally.
Today, manufacturing companies are moving from just mechanical and electrical to becoming software and data analytics companies. Core business functions such as product development, sales, manufacturing, and after-sales service are changing radically. For example, after-sales service is shifting from reactive (break-fix) to predictive and preventive. SCPs allow knowing what is wrong to make service more efficient, repairing products before they fail, and even fixing problems remotely. For GE, with a $200 billion backlog of service contracts, a 5 percent improvement in service efficiency alone will have a huge impact on profitability.
GE started investing heavily in SCPs and the "Industrial Internet" about five years ago. It set out not only to start transforming its products, but to develop new software to help its customers capture the SCP opportunity — called Predix. GE has set an ambitious goal of being a top 10 software company by 2020, not just a manufacturing company.
So where does Boston come in? GE established a software development center in Silicon Valley in 2011. However, Silicon Valley did not have all the answers in this new field. The Boston region, in contrast, has long been a major hub in business-to-business software. Leaders such as PTC, Autodesk, Dassault, and others have a major presence here, and Boston has also spawned leaders in data storage, data analytics, sensors, and IT security. Leading competitors in the core platform technology for SCPs have emerged in Boston, and numerous companies have also emerged around specific technology applications, such as strong clusters in robotics and medical devices.
Boston's emerging strength in this field has been building for more than a decade. The Auto-ID Lab at MIT is credited with coining the term "Internet of Things" in 1999. When ATT, Cisco, GE, IBM, and Intel founded the Industrial Internet Consortium in 2014, they based it in Needham. The largest trade association in SCPs, the M2M Council, has its North American headquarters in Norwood. And, MIT, Harvard, and the Massachusetts Technology Leadership Council are all engaged in this field, just to name a few institutions.
Over the last few years, leading global companies have started locating major technology centers in Boston focused on SCPs. And, when GE spun out its new $1 billion energy business called Current last year, it chose Boston; Massachusetts state officials learned about the decision after the fact. There were no incentives.
So GE decided to locate its headquarters in Boston because this region is the center of an emerging cluster of interrelated technologies and companies that is critical to GE's long-term success. Plus, our region has a rich pool of talent that does not need to be convinced that jet engines and energy equipment are cool products to work on.
We are now building a second major economic engine in Boston in this field, to go with life sciences. Boston is recapturing lost ground in IT, leveraging a whole new generation of technology that goes far beyond tablets and computers.
We should celebrate GE as the first major global company to relocate its headquarters here in many years. How to build on this success now becomes critical to the state's economic agenda. We need to focus on the critical skills, technologies, and regulatory environment needed to fuel the revolution in products. Massachusetts needs to be aggressive in seeking out and attracting other companies that will deepen the cluster. We must continue to improve the environment for entrepreneurship in Massachusetts, so that the startups keep emerging. This game is ours to win.
Michael Porter is university professor at the Institute for Strategy and Competitiveness, based at the Harvard Business School.