General Electric’s largest industrial business unit is downsizing by 18% as it faces a disruptive marketplace, with depressed demand for natural gas and coal services and a surge toward alternative energies.

GE Power is planning to lay off 12,000 people worldwide, mostly overseas, from a workforce that numbered more than 55,000 in 2016. The business unit manufactures processes for natural gas, steam, reciprocating gas engines, nuclear and hybrid power.

“Traditional power markets including gas and coal have softened,” management said. “Volumes are down significantly in products and services driven by overcapacity, lower utilization, fewer outages, an increase in steam plant retirements, and overall growth in renewables.”

Siemens, a GE rival, in November said it is reducing its workforce by almost 7,000, stating at the time that “the power generation industry is experiencing disruption of unprecedented scope and speed.”

By “right-sizing” the business for what it called the new realities in the marketplace, management said it would work to improve “operational excellence” while reducing its footprint and structure to improve cash flows and margins.

“This decision was painful but necessary for GE Power to respond to the disruption in the power market, which is driving significantly lower volumes in products and services,” said GE Power CEO Russell Stokes. “Power will remain a work in progress in 2018. We expect market challenges to continue, but this plan will position us for 2019 and beyond.

“At its core GE Power is a strong business. We generate more than 30% of the world’s electricity and have equipped 90% of transmission utilities worldwide. Our backlog is $99 billion, and we have a substantial global installed base. This plan will make us simpler and stronger so we can drive more value for our customers and investors.”

The headcount reductions, combined with actions taken earlier this year, are designed to position the unit to reach an announced target of $1 billion in structural cost reductions in 2018. The announcement aligns with GE’s effort to reduce overall structural costs by $3.5 billion in 2017 and 2018.

"The magnitude of the announced headcount reduction illustrates the severity of the challenges that GE faces in its power segment, and the imperative to align its operations with the current demand environment for gas- and coal-fired power plant equipment and services,” said Moody’s Investors Service’s Rene Lipsch, senior credit officer.

“Over the next two years, we will be looking for the extent to which the measures taken by GE and its competitors like Siemens allay our concerns about overcapacity in the market, which would help to ease pressure on pricing for GE’s products and services. At the same time, we will be looking for the impact of this restructuring on the earnings and cash flows of GE’s power segment beyond 2018, which we believe are crucial to the overall credit quality of GE."

Changes also are rumored to be in the works for Baker Hughes Inc., a GE company (BHGE), which was launched two years ago and has since delivered disappointing losses.

In the third quarter, its first full period as a standalone unit of majority owner (60%) GE, BHGE reported a $104 million net loss (minus 24 cents/share). Including GE’s energy business, BHGE revenue was nearly flat year/year at $5.4 billion, with revenue from oilfield services alone rising 7.6% to $2.63 billion.