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'New house numbers in the US have fallen to lowest since WW II'

November 27, 2008

Louis R. ChĂȘnevert
United Technologies (UTC), the $54.8-billion (Rs 2,74,000 crore) diversified industrial conglomerate, and its 51-year-old President and CEO Louis R. Chênevert, are no strangers to India. The company’s relationship with India dates back to 1899, when elevator and escalator maker Otis made its first installation in Chennai. Since then, UTC has grown to become a $500-million (Rs 2,500 crore) entity this year. Chênevert, a (former) long-time employee of troubled carmaker General Motors, first came to India in the 1990s and has been a frequent visitor to the country ever since. His latest visit to India, to inaugurate a sourcing office in Bangalore for UTC’s aerospace business, comes just as the global economy heads for a bruising downturn. He took time out of a packed schedule to speak to BT’s Rahul Sachitanand on a range of issues. While UTC, which sells everything from aircraft engines to air conditioning equipment, is in the midst of a restructuring to survive the slowdown, it is also stepping up its presence in high-growth emerging economies, he says. Excerpts:

In the last 12 months since you visited India, the world seems to have turned upside down, rapidly moving from booming growth to a looming recession. A lot has changed in the past year…
Yes, a lot has changed but at the same time there are lots of opportunities for a company like UTC in energy and environment. We are globally diversified, with 60 per cent of our business outside the US. This is an important visit to India for me and UTC. We’ve opened a Bangalore sourcing office for our aerospace business. I see a lot of positive developments with local suppliers and partners. They bring better value to our end-customers and create strong job opportunities for our suppliers.

UTC means...
Otis Elevator: First one installed in India (Chennai) in 1899
• Carrier Air Conditioners: Willis Carrier invented the mechanical air conditioner in 1902; Carrier was acquired by UTC in 1979
• Aircraft Engine: Pratt & Whitney engines power the space shuttle
• The Hartford (Connecticut, US)-headquartered company employs 225,600 people across 180 countries

How has the slowdown affected United Technologies and has this given you an opportunity to cut costs?
We have seen downturns before, but not similar to this one. UTC is restructuring its operations to outperform in any market. We have a magnificent track record of outperforming in any market, so we are prepared for any challenges.

Despite a slowing market, five of six businesses have reported margin expansions. Some people within UTC must be wondering if there is a slowdown at all… where do you think the global markets are headed and are they even predictable anymore?
There are lots of rapid changes globally… if you look at our financials carefully, you would have seen organic growth decelerate. In 2006, our business grew organically at 9 per cent per annum and maintained this growth rate in 2007 as well. However, we have since seen growth rates dim to 7 per cent in 2008 and then to 6 per cent as the global economic slowdown worsens. On top of the revenue softening, we have seen softness in the US residential market and the credit crisis has also affected the commercial market, leading to delayed projects. There is no denying there is a slowdown. However, we have strong order backlogs across our businesses, with two years pending at Sirkorsky Helicopters, for example.

Does the slowdown give you an opportunity to make cheap acquisitions?
You recently walked away from a $2-billion (Rs 10,000 crore) deal to buy ATM-maker Diebold. Do you continue to be interested in inorganic growth? Always. On the M&A agenda, you need a willing buyer, which we are, but you also need a willing seller. In the case of Diebold, I guess they were not a willing seller and the circumstances changed. But there is no doubt that the current environment will create interesting opportunities for a company like ours, which has a strong balance sheet and strong cash flow generation. We try to acquire the pieces that bring our portfolio closer together.

Any specific areas?
Anything that adds to our core competency; we started our newest business— fire and security—through acquisitions of Chubb and Kidde. This has grown into a $6-billion (Rs 30,000 crore) business with double-digit growth. I like $10 billion (Rs 50,000 crore) businesses. I have said that before. Any one of our six franchises would be a Fortune 500 company.

How important is it for UTC to get 60 per cent of its business from its international operations?
Emerging markets have a higher rate of growth than traditional markets. China, Russia, India and Eastern Europe are all very important to us. We are very localised in these markets. I take India as a good example… we have an Otis (elevator manufacturer) factory in Bangalore that produces 6,000 elevators and escalators per year. We have a Carrier factory in Gurgaon, a sourcing office for aerospace in Bangalore and a deep relationship with the infotech industry in India, with around 1,000 engineers here working for us. We believe in establishing strong roots in every country we do business—we have been in India since 1899. A few years ago when I was here, our revenue was $100 million and this year they will be over half-a-billion dollars. If you add to that all the sourcing we do, it is a substantial presence.

Another area you have been talking about a lot is around the environment and cleaner and greener products. What work has UTC done on this front?
After oil hit $140 (Rs 7,000) a barrel, people realised that anything they could do to reduce their energy consumption is a good thing. I have driven some fundamental changes in the structure of the company, creating a President of Commercial Businesses to better integrate these solutions under one umbrella. I am very encouraged—we have lots of good products—the Gen2 elevator from Otis is 75 per cent more energy-efficient than competition and the latest Carrier products are 30-40 per cent more efficient. If you combine all this with UT Power—our fuel cell and micro turbine company—you will soon see companies that consume 30-40 per cent less energy. Customers have started to respond well to these solutions and their appetite has increased dramatically in the last 12 months. UTC is an aggressive investor with over $3 billion (Rs 15,000 crore) in R&D. Where do you see the US now positioned with the flight of manufacturing east to China, Taiwan and beyond? We’ve 70,000 employees in the US alone and they have created strong value for our businesses. I think there is yet a happy home for technology and manufacturing in America and elsewhere. The world is a global marketplace; people don’t necessarily look at where their products are manufactured; they look at the best value for their money.

How much restructuring do you need to undertake in individual businesses?
Otis is a very strong franchise with 30 per cent share around the world and a strong after-market presence. We always have some opportunities to do some small restructuring. When it comes to (air conditioning equipment maker) Carrier, we have restructured into four new businesses. In the US, new house numbers have gone from two million in 2006, to 1.3 million in 2007 and barely 900,000 this year. This is the lowest level of residential construction the country has seen since after World War II. This has some impact on the residential business of Carrier and we have done some restructuring there to cope with these challenges. The large commercial market for Carrier is developing. At the same time, we have seen slowdown in refrigeration trucks.

Is the slowdown in financial services having an impact on (aircraft engine business) Pratt & Whitney?
So far, we haven’t noticed the impact on commercial or business aviation orders. But I expect there will be some fallouts of this credit crisis, with customers, perhaps, not being able to take delivery or deferrals. What we have seen is the high price of oil impact the financial performance of airlines. Crude prices have, however, come down from $140 (Rs 7,000) a barrel to $63 (Rs 3,150). In 2007-08, we also saw some pressure on commodity prices, but again, we saw some drop in commodity prices. There are a lot of moving parts to this economy.

Are foreign exchange and commodity prices your two biggest challenges?
Those are big forces that move the company around and then you have the slowdown to compound problems. But let me repeat, we are positioned to outperform our peers.

So, how bad is the slowdown and how long will it last?
It could last 18-24 months before we see a recovery. We do know from previous experience that the markets do come back and they come back aggressively. We need to be positioned to make the most of this rapid recovery.

Will you continue to expand in emerging economies despite the slowdown?
We will go after all the big projects in these emerging economies. In India, for example, we are working on and bidding for large airport projects, the Commonwealth Games and many large projects. India has nice growth momentum and with a 7-8 per cent GDP growth forecast we are very focussed on this market. Despite some challenges, this country is on a great growth trajectory. I see $1 billion (Rs 5,000) in revenues in the next 2-3 years and then we will be on our way to $2 billion.

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