Although you've been here for a day I'd still like to welcome you to Hartford and United Technologies. We're honored to have you here, both to celebrate sustainability advances and to think about countless others to come. You will find us and me as UTC's CEO exceptionally strong sustainability advocates, and I hope you take this conclusion away with you.
UTC has a rich history. Pratt & Whitney was founded in Hartford in 1925 and four years later merged with other great companies to become United Aircraft & Transport. The companies amazingly included, in addition to Pratt, The Boeing Company, Sikorsky Aircraft, Hamilton Standard, Chance Vought (now LTV), and several airlines which in time became United Airlines.
But our government decided in 1934 this was too much horizontal and vertical integration and we ended with Pratt & Whitney, Sikorsky, and Hamilton Sundstrand. We added Otis and Carrier in the 1970s, and Chubb (commercial security) this year. We're a $30 billion company in revenues with 200,000 employees with products and presence in just about every country of the world.
Our companies have been market leaders for decades. We have also been innovation leaders, with R&D spending currently around $2.6 billion annually. Especially in the last decade, we have been sustainability leaders.
I read a certain amount of material on sustainability in preparation for these remarks. Pardon this distillation but lots of words boil down to a shorter definition. Sustainability is doing things efficiently to preserve resources and minimize environmental impacts. Not everyone broadens the definition to include human capital but I would.
UTC is absolutely committed to sustainability. We're also broad based in this commitment. Five themes are essential for us including:
- energy efficiency of our products in service;
- environment, health and safety impacts in our own operations;
- productivity in its conventional sense (more broadly doing more with less);
- opportunities for employees to develop themselves; and
- legal compliance and high ethical standards.
UTC's products in service account for 2 percent of world greenhouse gas emissions, a significant share. Our products are ubiquitous and our equipment long lived. This is why the number is what it is but every time I look at it I'm surprised. We work tenaciously at improvements and but for these the greenhouse gas impacts would be significantly higher. For example, aircraft fuel consumption per seat mile is about 100 miles per gallon, three times what it was forty years ago. Engine fuel efficiency is about half of this gain. Air conditioners are 40 percent more energy efficient than two decades ago, and we know how to and do make them more than 60 percent better with only economics holding back more general adoption. Our installed populations of engines and air conditioners each account for about a percentage point of total world greenhouse emissions.
Another UTC product is ubiquitous and stunningly energy efficient, the elevator. Think for a moment that an elevator in theory never does net work, i.e., what goes up comes down. We have known and rendered this in service for a century, with high rise elevator systems being regenerative. Until 20 years ago these were DC systems with a generator attached, all of which we run in reverse when the weight of the descending load exceeds the ascending load. Because elevators are counterweighted systems, half of all trips are net descending loads which spreads the generating capacity evenly throughout the day and nets this against the power drawn. The result is the amazing statistic that a high rise Otis elevator lifts a million pounds a day for a dollar an hour. All we pay for is system losses to friction and heat, and to a much lesser degree noise, and nothing for the net work itself.
Importantly for our future, where these regenerative systems have been 1 percent or less of Otis' product line for a century, they will become 30 percent in the next five years. We're also transitioning from geared systems for lower rises to permanent magnet gearless systems. The combination will reduce the net power requirements of these new Otis elevators installed worldwide by 70 percent as compared with even five years ago.
An innovative product Carrier will launch next quarter in Europe is a commercial hot water heater operating by heat transfer rather than combustion and conduction. Energy efficiencies are four times higher. Like the elevator example above we take advantage of energy otherwise wasted. In the elevator's case it's the potential energy of the people in the building. In the water heater's case it's the potential energy (latent heat) in the surrounding atmosphere.
Another current Carrier launch cleans indoor air catalytically with the result that installed system capacities and their resulting energy loads can be reduced by about a quarter while providing quantitatively purer air.
We also build fuel cells and have provided the water, electricity and heat (all by-products of a hydrogen fuel cell) for every American in space ever. Fuel cells are more efficient energy converters than many other means and importantly produce zero emissions of any kind when hydrogen powered.
More generally, my point is the biggest and shortest term impact on greenhouse gas emissions, which many hold to be the greatest sustainability problem we face, is reducing energy consumption by marked improvements in efficiencies of products installed. We have been at this for decades but it's clear there are huge improvements ahead for us and just about every other product category. Even for mundane things like hot water and how many more.
UTC's record of reducing direct environmental impacts is exceptional. Hazardous waste as reported to the EPA is down by 85 percent compared with 1990. Air emissions are down 95 percent. Employee health and safety using the most common measure of lost time incidence is down 90 percent. None of these gains happened without UTC care, effort and focus, and these have been great and sustained for more than a decade. Several years ago, we extended our environment, health and safety goals through 2007 with generally ten times improved targets over then existing levels. We added water and energy consumption and set 25 percent improvement targets. Then we met these ahead of schedule and bumped them to 40 percent.
Additionally we have identified 35 substances as Materials of Concern. Some are subject to outright bans like asbestos and PCB's. Others like heavy metals (lead, mercury, cadmium, and hexavalent chromium) and chlorinated solvents face growing customer and public concern. We have developed design priorities accordingly and our stated program is to eliminate MOC's from our new products designs (and associated production processes) by 2007 and from all legacy designs by 2012.
No single aspect has changed UTC over the last decade more than productivity. We measure this in lots of ways, one is simply unit production amounts in our principal operating companies. Otis produces twice as many new elevators today as in 1990 with a workforce 20 percent larger. Carrier produces two and a half times as many air conditioners with the same 20 percent larger workforce. I've never asked for a physical weight comparison but it's a fact our modern systems are materially lighter than those a decade or two ago with comparable environmental impacts.
Although in his characteristically condensed but complex circumlocution, I have always liked Chairman Greenspan's words: "The per capita physical weight of our gross domestic product is evidently only scarcely higher today than it was 50 or 100 years ago. By far the largest contributor to growth of our price-adjusted GDP, or value added, has been ideas - insights that leveraged physical reality."
The force for UTC productivity over this decade has been Japanese derived lean manufacturing methods. I like to characterize these as simultaneous work, doing things at the same time rather than serially or sequentially as before. The result is elimination of steps and inventories and errors that inevitably come between adjacent processes. Sometimes called lean manufacturing or process re-engineering, these advances have spread throughout Corporate America over the same decade and I conclude have been the single greatest force behind our economy since the early 1990's. There are great gains still to come, for us and every other producer.
It may seem a reach but profitability itself is a measure of sustainability. Profits are the excess of revenues over costs. Costs are lower when resource consumption of all kinds is lower. UTC operating income margins are up from 4 percent to 14 percent over a decade, and the reason why is straightforward and powerful: more with less.
I'd like to advertise and advocate UTC's Employee Scholar Program. It's the strongest statement we have of our commitment to employee development. We pay all costs, provide paid time away from work (equivalent to more than three weeks annually), have no course or degree limitations, and award UTC stock worth $10,000 on degree attainment. The evidence of success is the 13,000 degrees already attained and the 15 percent of our U.S. employee population currently enrolled as Employee Scholars. The evidence of our commitment is the $400 million invested by us since program launch in 1996 and the current spending rate of $60 million annually. Our conviction is that while we can't guarantee employment, we must guarantee opportunity, and we do.
Legal, regulatory and ethical compliance are essential to sustainability. We were embarrassed by EPA regulatory violations in the late 1980s which resulted in the EPA's then largest RCRA fine and settlement in 1992. Our environment, health and safety efforts and leadership since then trace to this bad experience. We were embarrassed as one of the fourteen Ill Winds defendants at the same time, a reference to our government's investigations and sanctions of aerospace and defense companies. A direct result was UTC's Code of Ethics and our Ombudsman and DIALOG programs, all begun in 1992. DIALOG provides for confidential inquiries and comments by employees to us with responses. Amazingly we have had 60,000 Ombudsman calls and DIALOG inquires since initiation, and countless ones of these have resulted in UTC changes and improvements. We have had a blemish free record for a decade and over a period when scandal has tainted many. I regard our compliance programs as pervasive and effective and responsible for this record.
We can and do spread these sustainability initiatives globally. In the mid 1990s UTC was one of the first multinationals to adopt uniform environment, health and safety standards globally, essentially exporting U.S. standards. Our compliance programs are equally global and date from the same time.
There were 11 companies in the Dow Jones Industrial Average in 1896 when it was formed. More than a century later, one remains. Over the last 10 years alone, 211 companies have merged or otherwise left the Fortune 500. The goal of organizations in the first instance is survival and beyond this growth and prosperity. We achieve this in countless ways, and short term profitability may not be one of them. The greatest force in the longest term is undoubtedly sustainability broadly defined. How many companies have gone away or been reorganized because they lacked sustainability along the lines here. There were two in the original Dow companies: a lead producer and a leather tanner. Johns-Manville (asbestos). Dow-Corning (silicone implants). Digital Equipment (personal computers). WorldCom. Western Union. Enron. Polaroid. Union Carbide. Global Crossing. PanAm. Texaco. Adelphia.
The tests and hurdles are many. Research and innovation and having products meet market requirements and changes in these. Productivity and cost reductions. A strong work force. Solid governance. Compliance broadly defined. Reputation. All fall under and are the essential elements of sustainability.
I'd like to leave you with three conclusions. First is that sustainability is broad scoped and appropriately so. It covers at least the themes included here of energy, environmental impacts, productivity, individual development, and compliance. Because it is such a diffuse concept, we have to set priorities and ensure we concentrate our resources and attentions on the right areas.
I like the approach of concentrating on the big ideas. Sustainability is itself the biggest idea, but at UTC the big ideas within this are capturing energy otherwise wasted (the elevator and hot water examples), no environmental badness, waste elimination (the essential theme in process re-engineering), employee development (Employee Scholar Program), and legal, regulatory and ethical compliance.
The second conclusion is that the best sustainability efforts, like everything else in human endeavor, are those coming from marketplaces not mandates (or at least mandates reasonably limited in scope and at reasonable standards). Thomas Edison said it well, "Anything that won't sell, I don't want to invent." External assessments like the Dow Jones Sustainability Index (UTC #1 among aerospace companies), Innovest (UTC AAA rated), Institutional Shareholder Services (UTC 95 percent percentile within S&P 500), and Fortune's Most Admired survey (UTC #1 in aerospace last three years in a row) help. But so does the recognition that all but one of the 1896 Dow companies have gone away.
Third is that companies worldwide are just getting started with sustainability and future gains are huge. Fred Rentschler, UTC's founder, said, "Let's stick with our own things. We know them best and have only scratched the surface." Seventy-five years later, we agree.
It is UTC's firm goal always to be at the top of sustainability rankings and judgments. We have accomplished this over the last decade as a result of convictions, focus and lots of hard work by every single employee. I am proud of our accomplishments and the solid and persuasive examples and rankings today. Our future directions are clear and a basis for real optimism.
