Discipline & Imagination: How United Technologies Chairman Louis Chenevert Keeps His Powerhouse Humming

Apr 2 2014, 1:56pm CDT | by

The performance of America’s manufacturing sector in the postwar era is often depicted as a chronicle of decline.  A sector that generated 25% of GDP in the 1950s now produces barely half that share, and the nation’s industrial heartland is littered with the ruins of once-great enterprises.  Baldwin Locomotives.  Bethlehem Steel.  Philco.  RCA.   Zenith.  All gone.

However, some U.S. manufacturing enterprises have managed not only to survive but thrive despite foreign competition, heavy regulation and the indifference of popular culture.  A case in point is United Technologies Corporation, the $63 billion industrial conglomerate headquartered in Connecticut’s capital of Hartford. UTC, as it likes to call itself (the ticker symbol is UTX), has managed to stay on the leading edge of innovation in building and aerospace technologies without abandoning the place where it was born, without oppressing workers, and without cutting corners on matters of vital public concern such as environmental compliance.

(Disclosure: United Technologies is a contributor to my think tank.)

UTC assembles the most advanced jet engines in the world for both commercial and military users in the Constitution State.  It operates the world’s biggest elevator and escalator company, Otis, from the community of Farmington.  Its Sikorsky unit produces more helicopters than any other U.S. company at a plant in Stratford.  Its Connecticut-based Climate, Controls & Security business is a dominant provider of heating, air-conditioning, refrigeration and fire detection technologies.  And it is hard to miss the numerous plants operated by UTC’s Aerospace Systems unit — which produces everything from aerostructures to actuators to brakes to landing gears to flight controls to sensors — as you drive through the state.

Now, Connecticut has a long history in American manufacturing, but it is nobody’s idea of a cheap place to do business.  So it is remarkable that United Technologies managed to generate twice the shareholder returns of average Dow Jones Industrial and S&P 500 companies during the ten years ending December 31, 2013.  The company has never missed a dividend payment in 77 years, and raised its payout last year by 10%.  How does UTC manage to so consistently reconcile the interests of shareholders, stakeholders and customers to stay on top?  Earlier this week I visited with United Technologies Chairman & CEO Louis Chenevert in his Hartford office to get some answers.

Louis Chenevert has had a remarkable run since joining UTC’s Pratt & Whitney engine business from General Motors in 1993.  His rise to the top of Pratt coincided with a renaissance in the unit’s performance that is now generating major gains in market share for the parent company.  Appointed CEO in the depths of the subprime recession, his tenure at the top has seen UTC’s share-price rise from a low of $37 to $117 this week — a 200% appreciation in shareholder value even if you don’t count the steady payout of dividends.

This impressive financial performance has not been bought at the expense of investment in the company’s technology or workforce, nor has Chenevert engaged in the wholesale offshoring or outsourcing of production.  In fact, several years ago he actually moved hundreds of aerospace engineers from a lower-cost locale back to Connecticut so the company would have the flexibility of applying their skills where needed in commercial and military markets.  As a result, UTC has managed to avoid the layoffs of engineers seen at other companies during Chenevert’s time at the helm.

Chenevert is a subtle thinker steeped in the dynamics of his businesses, so I will not presume to lay out how he sees the world.  However, in talking with him a few core precepts emerged that help to explain UTC’s success.  First of all, United Technologies is not really a conglomerate in the sense of being a collection of disconnected businesses.  It is focused in two broad markets, building technologies and aerospace, where it is constantly seeking functional and financial synergies.  For instance, it has combined Otis with its climate and controls business so that it can offer integrated solutions for commercial and infrastructure projects around the world, and it is doing much the same thing with Pratt and the recently-acquired Goodrich aerospace business.

Goodrich together with the company’s legacy Hamilton Sundstrand unit comprise a diverse aerospace-technology business that when combined with Pratt & Whitney engines offers the market equivalent of one-stop shopping for airframe integrators like Bombardier and Embraer.  The combination enables UTC to provide more content to new aircraft in much the same way that combining Otis elevators and escalators with Carrier air conditioning enables the company to offer comprehensive solutions for builders of office towers and transportation hubs.  This strategy works because UTC concentrates on a family of complimentary technologies — as the cover of its 2013 annual report underscores with the single-word theme, “Focused.”

In addition to focus, UTC seeks balance in its portfolio of businesses between different types of markets and users.  Chenevert told me that demand cycles in the commercial world and the military world often follow different rhythms that can smooth out revenues and results from year to year.  For instance, demand for commercial jet engines may cool during times of international tensions while demand for military engines surges, so by maintaining fungible capabilities and skills in both parts of the aerospace market, UTC can keep its resources productively deployed.  Companies that operate only in the commercial or the military segments of the business are more exposed to the boom-and-bust cycles that force mass layoffs.

Another facet of balance within the United Technologies business mix is the way in which revenues and returns are generated both in the manufacturing of new products and in the sustainment of delivered products.  In other words, UTC benefits at every stage in the product life-cycle of its business lines.  That is an long-recognized way of maximizing results in the aerospace sector — engine companies often give up some revenues on new production in the expectation they will book long-term gains in the aftermarket – but in perusing the company’s annual report it becomes clear that UTC applies much the same model to its building technologies. Once an Otis escalator or Carrier refrigeration unit is installed, who is better qualified to service it for the next 30 years than the original equipment manufacturer?

UTC’s recent acquisition of a controlling interest in the International Aero Engines consortium illustrates how a business strategy balanced across all phases of the product life-cycle can pay handsome dividends.  The engines in IAE’s installed base average eight years of age, implying an extended aftermarket life in which United Technologies can provide maintenance, repair, upgrades and technical advice.  In the process, its relationship with operators of narrow-body aircraft will be strengthened, potentially smoothing the way for transition to the geared-turbofan technology that Pratt & Whitney has pioneered.  Geared turbofans have emerged as this generation’s great leap forward in engine efficiency and cost effectiveness.

The geared turbofan is emblematic of another core feature in UTC’s corporate culture: imagination.  Obviously, producing and marketing long-cycle technologies in competition with dozens of other companies around the world requires deep discipline, but rigor and attention to detail are not enough.  You need a vision of where the marketplace is headed over the long run.  As CEO Chenevert told me this week, “when I took over at Pratt & Whitney, I knew if we missed the next cycle we were out for 20-30 years.”  So long-term success in UTC markets requires an unusual combination of precision and imagination — qualities that often are not found together in the same organizational culture.

Cheryl Lobo, a 25-year veteran of the Pratt & Whitney organization — she runs the company’s tanker-engine program today, and previously was in charge of testing the F-35 fighter engine — gave me some insight into what that means.  She says employees need to be excited about their jobs, and developing revolutionary products like the geared turbofan helps to keep them that way.  Her enthusiasm about the business is infectious, and with good reason: the commercial jet engines Pratt is now marketing (and on which she worked) are by far the most fuel-efficient and environmentally-friendly ever produced.  Similarly, the fighter engine she tested for the F-35 is easily the most capable powerplant for tactical aircraft ever conceived.

One of the ways in which discipline and imagination have converged for United Technologies is the company’s exemplary record of reducing the environmental footprint of its plants and products.  UTC has reduced its consumption of water by 53% since 1997, and its emissions of greenhouse gases by 26%, establishing the same global standard for all its facilities.  Within three years after acquiring China’s biggest maker of fire alarms, it reduced the unit’s greenhouse gas releases by 44%. What’s really striking about UTC’s environmental record, though, is the way the company has made such efforts pay off in the marketplace.  For instance, the Gen2 switch in its new family of elevators uses 81% less electricity than legacy systems, and Carrier’s latest hyper-efficient chiller uses refrigerants that pose no danger to the ozone layer.

Like the 75% noise reduction and reduced exhaust from the geared turbofan engine, these environmentally-friendly features have become major selling points for United Technologies products around the world.  So one facet of the company’s imagination is being able to look beyond the costs of environmental compliance, or workplace safety, or employee scholarships, to see the long-term benefits for shareholders and stakeholders alike.  Louis Chenevert says “companies like ours have an obligation to lead by example,” but during his tenure doing the right thing has turned out to be smart business practice too.  He’d like to see government embrace a similarly enlightened attitude towards tax simplification (UTC’s tax return totaled 18,000 pages last year), immigration reform, and multiyear funding of programs.  However, you get the feeling that even if Washington can’t fix itself, Chenevert has found a formula for United Technologies that will work for many years to come./>/>

Source: Forbes Auto


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