I was privileged last to talk to you in 1997, seven years ago. We were on the front end of the dot.com boom, a buoyant economy, and a comparably timed state budget surplus. It's been harder for the last three years but there is zero doubt the nation's economy is picking up and 2004 will be a strong year.
UTC's market capitalization in January, 1997, was $17 billion, and today it's $47 billion. We ranked 65th then in market cap among U.S. companies and today we rank 54th. Our operating income margin was 9 percent, today it's 14 percent. Our earnings per share (split adjusted) were $2.11, today they're $4.69. Lots of things have happened along the way over these seven years; the question is what we think of them.
In these remarks seven years ago, I told you a little about UTC. We were then just five years from the tough times we had in the early 1990s when our market cap was $6 billion and we were on the front end of a significant shrinkage in our Connecticut manufacturing work force. I touted process re-engineering and globalization as the two forces remaking UTC and said I felt the same things were true across the world. Sometimes we make speeches or say things that don't turn out the way we think they will at the time; this is one speech where I actually got it right.
Smoothing the 2000 bubble and its aftermath only for perspective, productivity drove the 1990s across our nation. This also had the counter-intuitive effect of the greatest jobs generation in any country in the world's history: 23 million net new American jobs created between 1990 and 2000. This was in spite of lots of companies like our own who had significantly higher outputs on lower jobs growth. In other words, the productivity didn't lead to net jobs loss but to net jobs creation.
Two of our companies, Otis and Carrier have reasonably uniform product lines (i.e., product mix doesn't distort the numbers). In both, we more than doubled physical throughput over the decade with work forces about 25 percent larger.
We did this essentially by incorporating Japanese manufacturing techniques, sometimes called lean manufacturing. The underlying principle is simple. Old production methods did factory work serially, in other words with lots of adjacent steps with inventories, handoffs, physical travel, and opportunities for error between these separate steps. Lean does things to the maximum extent simultaneously instead of sequentially. The results are truly amazing and the main reason why our market cap went from $6 billion to $47 billion.
The news for all of us is this productivity revolution isn't over. We basically didn't have productivity increases in the postwar period through the late 1980s, in part because we didn't know how to get them, didn't care, and instead worked on new products which themselves were essential and remade the modern world. So we have 50 years of productivity catch-up and there's lots of room for improvement still.
One way we can size this is UTC's operating income margin goals. We have told investors that 20 percent should be within reach for our aero companies and Otis (all with large aftermarket volumes and unusually long equipment lives) and 15 percent for Carrier (only because of its lower aftermarket). The combination should be between 18 percent and 19 percent compared to today 14 percent.
So what happened in the 1990s will happen again. For all of manufacturing and service America and not just a few companies like us.
I noted in the 1997 speech the concentration of wealth in just a few countries: 76 percent of total wealth and incomes in the world in the hands of the only 14 percent of the world's population so fortunate as to live and work in the United States, Japan and Western Europe. The flip side is that 86 percent of the 1997 world made do with only 24 percent of the world's wealth. I said this would change in the succeeding 20 years to 44 percent of the world's wealth in the emerging markets, almost twice the 1997 percentage. I got this one wrong because the percentage today has only moved from 24 percent to 27 percent but we'll get where I said we would, only a little later.
We see the same forces in our own company. In 1972, 24 percent of our sales arose outside the United States. Today 59 percent do. Ninety-five percent of our work force was U.S. based in 1972, today it's 34 percent. And neither set of percentages is because we're moving work overseas, instead it's where the markets and the revenues are.
These forces communicate a simple and powerful message: Knowledge, technology and productivity are spreading around the world. The emerging economies are learning, building their own economies, and becoming powerful competitors. The only way for the U.S. as the world's most advanced economy to stay ahead is to concentrate on the highest value-added activities and let the lower knowledge and wage work go. The same has been true inside our own country (i.e., the north to south migration) for a century. This isn't magic but a theme which seems to catch us by surprise all the time and again and again. And critics focus on the badness which is the short term jobs loss not the goodness which is the long term wealth creation.
The cause and result of this globalization are captured in trade and foreign direct investment statistics. The 50-year trends are stunning. One-way trade in 1950 was $62 billion, now it's 100 times larger at $6.5 trillion. This is 20 percent of world GDP where 50 years ago it was 1 percent. Foreign direct investment (which measures permanent foreign investments in things like companies and factories as distinct from portfolio investments) was $300 billion in the mid-1990s, it went to over a trillion reflecting the international telecom mergers in the 2000 blow-off but is back at $700 billion annually currently. That's growth over the last 20 years of 18 percent annually, higher than just about any sustained economic statistic anywhere in the world over this period.
Connecticut's challenges are greater than many. We're the highest per capita income state in the highest income per capita nation in the world. Which means we're the highest cost. The only way we'll survive and prosper is with the highest value addition work. We can do it with manufacturing but only of the most sophisticated and high technology kinds like aerospace. Research and engineering jobs are an even better bet. UTC does its part and while we remain our state's largest manufacturer we have still seen our jobs mix shift from 44 percent manufacturing in the mid 1990s to 35 percent today with a corresponding increase in the salaried and research and engineering percentage. Our results are echoed across the state with 420,000 Connecticut manufacturing jobs in 1984 and 220,000 20 years later.
Education is the fuel. UTC's Employee Scholar Program is a great example. Fifteen percent of our domestic work force is enrolled right now in college and university coursework. When I spoke to you seven years ago our program was then just a year old. Today 13,000 employees have earned degrees under this program and it may be UTC's most appreciated and valued employee benefit. It's the one where I get the e-mails and letters and the one employees stop me in the hall to talk about. We pay tuition, fees, books and course materials. We grant paid time away from work equal to more than three compensated weeks annually. We don't limit course selections in any way. And we grant UTC common stock worth $10,000 on degree attainment. In these eight years, we have granted more than 1.3 million shares of stock valued today at well over $100 million. Our program costs now exceed $60 million annually and cumulatively over $400 million since program inception.
We also continue program availability for a year in the unfortunate event of job loss and go to the extraordinary length of extending it for four years for any job lost to domestic or foreign job relocation.
We're still one our nation's largest exporters, more than $4 billion annually gross and almost $3.5 billion net of the modest imports we have. Pardon this pride but I think we are the example of what our nation wants: high value addition export jobs only slightly offset by low value addition work at the lower end of the technology and manufacturing sophistication spectrum. We have lost jobs overseas but to only a modest degree, since 1990 a little over 1,100 jobs on a UTC Connecticut jobs total of about 26,000 today. The wage content in these UTC exports averages about $50,000 and the same number in our imports is two-thirds less. We want the work we export, not the work we import.
I said seven years ago that we need more investment in public and especially higher education in our state. We spent then $7,900 annually per student on public higher education, below the national average of $8,900. We also collected in fees and tuition a higher share of this lower total than almost any other state, with the result that our public net spending (that is, the cost borne by the taxpayers) ranked 44th among all states.
We have made improvements since then and notably including our governor's program to support UConn and the CSU system. But we've dropped to 46th on higher education spending per capita. Almost half of our high school seniors going to college still leave the state for their further studies, and we rank 46h on this measure as well. We can do better.
Another lesson from economic development around the world is openness and migration. They're giant wealth generators, and we need only look at a country like China for the strongest confirmation. I liked the idea in the 1999 Michael Gallis study that metropolitan regions cutting across state, county and city boundaries are essential to competitiveness. He talked about our New Atlantic Triangle bounded by New York, Albany and Boston. We need transportation systems to make this happen and ours may not be the best.
Mr. Gallis noted the difficulties of moving around especially the western and southwestern parts of our state but I for one found the recommendations based on this report inconsistent with the opportunities. How about for example instead of reducing congestion in the I-84/Waterbury/Danbury area we set ourselves the goal of a transit time from Hartford to New York of an hour. It won't work in Connecticut and certainly not with our current attitudes. But I travel all over the world all the time and confirm that nations like France and Japan wouldn't give me wide eyed stares in response. I don' think we would disagree the results would be gigantic.
We can also note in passing that our state's transportation spending has dropped from 3.5 percent to 2.5 percent of total over the last decade, and that per capita we rank in the bottom five among the 50 states. This is while between 1994 and 2002 vehicle miles have increased 19 percent and lane miles (i.e., capacity) have stayed the same.
Lots of life is attitudes. As New Englanders we tend to resist change and outside influences and at the same time not be completely happy with our situations. Let's be reminded of the words of others. President Lincoln said, "The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think and act anew."
And more recently, President Gorbachev, "We need a revolution of the mind."
Central Connecticut is a great part of America. We have access to some of the greatest locations and resources anywhere and costs and convenience (relative to adjacent places like New York, Boston and Fairfield County) to match. Yet we don't make it work as well as we might. We can do better.
I expect there may be both confirming and alternative views in the audience and I'd be glad to take your questions and comments. Thank you.
This speech includes "forward looking statements" that are subject to risks and uncertainties. For information identifying economic, political, climatic, currency, regulatory, technological, competitive and some other important factors that could cause actual results to differ materially from those anticipated in the forward looking statements, see UTC's SEC filings as updated from time to time, including, but not limited to, the discussion included in the Business section of UTC's Annual Report on Form 10-K under the headings "General," "Description of Business by Segment" and "Other Matters Relating to the Corporation's Business as a Whole" and the information included in UTC's 10-K and 10-Q reports under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."
