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Monday, November 08, 2004

George David, CEO, United Technologies - A Perspective.

Chief Executive magazine has published an interview with George Davidin the latest issue available here.
United Technologies Chief Executive George David has presided over a major international expansion of his company, which includes Otis elevators, Carrier air conditioners and Pratt & Whitney aerospace. David believes strongly that globalization is positive for the U.S. economy despite his company’s closing of a Carrier plant recently in Syracuse, N.Y. Excerpts from the interview on various topics.
Percentage of your sales are 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 70’s, we were actually 75 percent dependent on the U.S. market. Now we’re down to the low 40s or so. We have $4 billion or so in exports. We have probably $300 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.
On 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 the elevator business in the past 30 years was basically their business went from national to continental, to global. It used to be in the post-war period that you had French elevator companies, Italian elevator companies, English elevator companies, Japanese elevator companies. And they’ve all gone progressively to continental. Otis’s share of market in Europe in the mid-1950s was 5 percent. We were a distant, remote U.S. market participant. And a big wave of acquisitions, consolidation in Europe drove us to market leadership in Europe. We have 30 percent share of market today. We’re half again bigger than the next biggest competitor. 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. We’re basically No. 4 in the marketplace after three big Japanese companies—Mitsubishi Electric, Hitachi and Toshiba. In china, we have 80 percent share. We have done five or six major acquisitions since then, which has broadened the franchise to essentially the entire country. The Chinese elevator market today 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.
On Carrier : Carrier must be 65 percent. Carrier is market leader in most countries where it does business. Carrier does business in literally every country of the world. A third of our sales, maybe 30 percent, are in Europe. We have a very strong relationship with Airbus.
On Decentrlisation :We decentralize everything for 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 HR, legal, financial staff groups that fundamentally presides over the company. The first principle is to centralize and then you reserve to the parent a few things that are fundamental—shareholder relations, government relations, tax, treasury, cash. These are basically shareholder-driven kinds of activities. Otherwise everything is decentralized.
On Imports and Outsourcing :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 we export products made by $25 an hour labor and we import products made by $8 an hour labor. To me, that is labor arbitrage, which is what trade’s all about. 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 workforce to make it happen. To do that, you have to educate the people. I think the obligation on any entity, whether it’s a family, a country, a company, or anything else, the obligation is to give employees the entitlement opportunity to improve themselves. That’s it. Without limitation.
On Building Good Organizations :Good organizations win in the world. They do. They may not win in the next quarter or two—in the long term they will win. The responsibility of management is to make good organizations, broadly defined. And that’s just not the P&L or the EPS for this quarter. It is everything that we do, from employee scholar to environmental compliance, to ethical and legal compliance, to long range research and development, current period cost, productivity, support for local jurisdictions in which your 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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