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UTC's global primer: George David has presided over a major international push. He says it's good for America.

United Technologies includes Otis elevators, Carrier air conditioners and Pratt & Whitney aerospace products. CEO George David believes his company's globalization has had a positive impact on the U.S. economy despite the closing of a Carrier plant in Syracuse, N.Y. Here are excerpts from an interview:


What percentage of your sales are from outside the United States?

It varies based on foreign exchange rates, but it'll be somewhere between 57 and 59 percent this year. Back in the early '70s, we were actually 75 percent dependent on the U.S. market. There's been a remarkable transformation in UTC over this time period, a big piece of which is acquisition-driven. The company was remade with the acquisitions of Otis in 1975 and Carrier in 1979.

In human terms, where are the people?

There's been an even bigger shift in employment. We were 95 percent U.S. employment in the early '70s; today we're 70 percent non-U.S. employment.

Do those international figures include things you make here and export?

They do. Our exports are virtually all aerospace. Our export-import ratio is remarkably favorable. That's a very important element in this whole outsourcing thing. We have $4 billion or so in exports. We have probably $300 million or $400 million in imports from affiliated subsidiary companies. So it's a 10-to-1 ratio.

The stuff we bring in is typically at the lower end of the value-added spectrum. And the stuff that's done here is all the intellectual property work and all the high-end manufacturing--all the aerospace. So, the best jobs in the company are the jobs that are behind the exports.

Which of your business lines is the most international?

It has to be Otis. Otis was 75 percent U.S. market dependent in 1955. Now it is 80 percent non-U.S. dependent. There's been a tremendous wave of acquisitions. What happened is that the elevator business in the past 30 years basically went from national to continental to global. Otis's share of market in Europe in the mid-1950s was 5 percent. A big wave of acquisitions and consolidation drove us to market leadership in Europe. We have 30 percent share of market today.

Where is Otis's strongest market now?

Otis is actually exceptionally strong in virtually every country. You have to look for countries where we are not No. 1. The notable one, obviously, is Japan. We're a 10 percent share competitor there.

What about China?

We made a near fatal mistake in China early. We bought an elevator company in Tianjin from the state in 1984. We took a 30 percent minority share holding, which was the best we could get. Then we also made a mistake because we gave the franchise for all of China to the Tianjin partner.

Why was that a mistake?

We misunderstood the situation because China is such a huge, huge country. China is not France or Germany. The country is so vast. It also tends to be regionally specific. So all of a sudden, we had our name and our technology in a minority-owned enterprise that was regionally specific with not a lot of willingness to reach across all of China to build a China-wide business.

What is amazing now, 20 years later, is that we have 80 percent share. We have done five or six major acquisitions, which has broadened the franchise to essentially the entire country.

What does the market look like today?

The Chinese elevator market, in unit terms, is twice the size of the next biggest market there has ever been in any country in history. Yet market saturation--that is, elevator installations per capita population--is less than 10 percent of what it is in an advanced developed economy that relies on elevators and mid-rise apartment houses for residential housing. China's obviously on the way to being a much bigger elevator business. Actually, our elevator sales in China today exceed our elevator sales in the United States.

What is Carrier's international profile?

Not as big as Otis's. If Otis is 80 percent non-U.S. revenues, Carrier must be 65 percent. Carrier is the market leader in most countries where it does business and it does business in literally every country of the world.

Adding up all the different strands of your business, what's the biggest market?

The fastest growth is in China. We have a bunch of countries that have around a billion and a half of sales each. That would include France, which for many years was our largest overseas market. Others are Japan, Spain, Germany, U.K. and Italy.

How do you manage all this? You have operations in 160 countries or so. It's all operating while you're sleeping. What's the key to managing it?

First of all, UTC has a long history of decentralization. That's in part because the company was built by acquisition. We added Otis in '75, Carrier in '79, and Chubb in '03. Each of these companies is a market leader for their global franchise, and they're full-function, free-standing, stand-alone companies. That's a great strength of UTC.

So each business has a management in control of international strategy?

Let me say it differently. We decentralize everything to the operating companies as the first principle. And then we pull back the functions that appropriately belong with the parent company. The parent company staff, by the way, is in the range of 400 people altogether. Basically, it's the human resources, legal and financial staff groups that preside over the company. You reserve for the parent a few things that are fundamental--shareholder relations, government relations, tax, treasury, cash. These are basically shareholder-driven kinds of activities.

So you personally haven't had to surround yourself with managers who have international experience?

Five of seven division presidents for UTC today are not American. The two who are American are at two of the three aero companies--Steve Finger at Sikorsky Aircraft and Ron McKenna at Hamilton Sundstrand. Louis Chenevert, who runs Pratt & Whitney, is a French-Canadian by birth. Ari Bousbib who runs Otis, Geraud Darnis who runs Carrier and Olivier Robert who runs Chubb are all French. Jan Van Dokkum is Dutch; he runs UTC Power. So you've got three Frenchmen, a French-Canadian, a Dutchman and two Americans out of seven operating presidents. I don't think you'll find a more international group in the world.

Let's turn to the globalization debate. Where do you come down on the outsourcing flap?

It's dramatically overblown. UTC is a very good case in point. The kinds of things we do are an absolutely powerful reinforcing statement of the benefits of free trade and globalization. Frankly, we want to do what we do, which is retain the high value work at home, where the best jobs in the company are the export jobs. Half of our 27,000 people in the state of Connecticut have their paychecks written by export sales. That's where all the aerospace stuff is and all the engineering work is done.

The things we import are at the low end of the value-addition spectrum--they make our products more cost-competitive. There couldn't be a stronger statement of the way America ought to work, which is that we export products made by $25-an-hour labor and we import products made by $8-an-hour labor. That is labor arbitrage, which is what trade's all about.

Has globalization been a win for the states and communities like Syracuse?

When we closed the Syracuse plant, we put part of the work in Singapore and China. Some went to southern U.S. states.

But what not everyone noticed was that we also concentrated R & D in Syracuse. We made Syracuse one of two engineering centers of excellence in North America, and we committed to New York State to add engineering employment. The whole idea, again, was to migrate from lower value-added work to higher value-added work. That's the way to deal with this as a nation.


Going up the ladder?

Correct. Our deal with our employees is that we will educate anybody without exception, without limitation. We have the most robust employee education program in the world. We have 16,000 people in our Employee Scholar Program. Our annual spend is over half a billion dollars.

This program is exceptional in several regards. One is we give paid time away from work on the basis that time is a scarce resource in the modern life--not money. We give three hours a week away from work--paid time--and I think more than three weeks a year. It basically doubles vacation entitlement if you go to school. We pay all the tuition and fees. Importantly, we put no limitations on course work. None. You can be an engineer and study law, or theology, or English, or whatever you choose.

You also give stock awards?

We give a pretty good common stock award--$10,000 of UTC common stock. Again, the whole idea is that bad jobs are going out of America; good jobs are coming in. So, become an educated, high-value employee and become a capitalist with share ownership. Today, 7 percent of UTC is employee-owned.

Does your education program help people who get displaced?

They can get it for four years after job loss. To me, that's the way you respond to outsourcing pressures. You cannot and should not hold onto low wage work. Let it go. We don't want to do that work. We should build high value-added work. And you have to build the work force to make it happen. To do that, you have to educate the people. I think the obligation of any entity, whether it's a family, a country or a company, is to give employees the opportunity to improve themselves.

Critics would say that is all fine in theory, but the reality is that too many displaced people don't get reabsorbed into jobs. What can be done about that?

Here's one tiny specific thing. We had a problem with the Employee Scholar Program a few years ago, which is that our tuition reimbursements were being taxed as income to employees. The Internal Revenue Code would only allow tax-free tuition reimbursement when your field of study was closely allied to your principal work occupation. Since we don't have that limitation, it ended up that some of our employees were paying taxes on our tuition reimbursement. We lobbied with our government, and I think maybe that finally got changed to take that disconnect out. That's a good example. I think our government could do a lot more in terms of tuition lending and tuition-expense buydowns.

You seem to have some sense that you have a responsibility to your home country.

We do.

How do you describe that?

We could get very philosophical here. Most of the work of the world is organized in for-profit activities. Eighty percent--basically, all the non-government work in the entire world--is done by for-profit organizations. You make a profit because people pay you more than it costs you to do things. That's how big your profit is. The way you get that is by being very good at what you do. And being very good at what you do to me is much broader than simply current period cost versus previous period revenue. It's the investment in future products. It's the investment in the quality of the work force. It's the investment in environmentally compliant work. And you obviously have to be compliant with law and ethical standards.

Good organizations win in the world. They may not win in the next quarter or two--but in the long term they will win. The responsibility of management is to make good organizations. It is everything that we do, including support for local jurisdictions in which our plants and people operate. That's very philosophical, very abstract, but I think it's absolutely what makes a good organization.

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Title Annotation:MANAGEMENT
Author:Holstein, William J.
Publication:Chief Executive (U.S.)
Article Type:Interview
Geographic Code:1USA
Date:Nov 1, 2004
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