Consolidating at Home, Expanding Abroad

United Technologies strips down and finds new partners for the long haul to boost revenues

he future glided into Perm in 1993 aboard a Gulfstream executive jet, which carried a high-tech investment plan prepared by the top executives of United Technologies Corp.

Perm is a relic of a previous era, 600 miles east of Moscow, a perfectly preserved smokestack city that has survived into the information age.

The airborne investment plan was to foster a high-tech joint venture between UTC and Perm's main company, Aviadvigatel Design Bureau, and its associated Perm Motors production plant, which once designed and mass-produced engines for the former Soviet Union's military and civilian aircraft. Now 15 to 20 UTC experts are working with select Russian engineers and workers to build a modern engine-production plant in a city where successfully making a phone call is like winning a small lottery.

If UTC is to make good on its international ambitions, the firm may need the joint venture as much as Perm needs the new technology. The project is one element of UTC's efforts to escape declining sales, financial losses and layoffs in its U.S. aircraft engine and military helicopter businesses. The firm, based in Hartford, Conn., now has joint ventures in 70 countries and employs more than half its 165,000 people outside the United States, where it earns more than half its $21 billion annual revenue.

"That is really the area of the business... where we are going the fastest," says Dave Manke, chief of UTC's international business.

UTC has been bleeding in the last few years from losses in its flagship Pratt & Whitney aircraft-engine division in East Hartford, Conn. Competition from rivals General Electric and Rolls Royce, a loss of revenue from the spare parts business, defense cuts, and the slump in the airline industry have hit the division hard, reducing 1993 revenue to $6.9 billion, and profits to only $156 million. To slash costs, UTC officials cut employees at Pratt & Whitney from 50,000 to 30,000, after losing $1.35 billion in 1991 and 1992.

On the bright side, cost-cutting, more disciplined research, manufacturing improvements and continued reinvestment of profits are improving the financial outlook for Pratt & Whitney. And a technology upgrade could generate new revenue streams. That includes planned development of a new engine for mid-size passenger jets, another engine developed with Perm for the Russian market, and a new propeller engine intended to replace gas-guzzling jets.

Still, the new engines will require much research money, and perhaps new international partners. And other once-steady businesses have stumbled.

UTC's flight systems sector's revenue dipped to $3.9 billion in 1993, although it earned a sizable profit of $385 million. Now business may get rockier.

For example, the U.S. Army will soon end production of UH-60 helicopters at UTC's Sikorsky plant in Stratford, Conn. Also, John Deutch, the deputy secretary of defense, recently killed production plans -- but not development plans -- for the multibillion dollar RAH-66 Comanche scout and attack helicopter. Sikorsky would share the resulting six-year, $2.1-billion revenue hit with its partner, Boeing Co. in Seattle, Wash. And even if Sikorsky is kept going with a last-minute bailout for extra UH-60 contracts, UTC must consider whether it wants to sell the Sikorsky division to other U.S. helicopter makers, according to Nicholas Heymann, a stick-market analyst for New York-based County NatWest USA. A suitable buyer might be McDonnell Douglas' helicopter unit based in Mesa, Ariz.

Other trouble spots include the company's Hamilton Standard division based in Windsor Locks, Conn., which makes aircraft propellers and engine-control mechanisms. Like Pratt & Whitney, it has been hit by downturns in the aerospace and military markets, and it may also be on the block.

So UTC's future, at least for now, belongs to two less than high-tech businesses: air conditioners and elevators. The $4.5 billion Carrier air-conditioner division and the $4.4 billion Otis elevator-building division are brand names in the industry. Together, the two Farmington, Conn.-based divisions turned a profit of $600 million in 1993.

"Carrier and Otis are the growth engines" for UTC, said Heymann. In fact, the two helped the company report stellar third-quarter 1994 results. UTC-wide income was $194 million, up 24 percent from $157 million in the comparable 1993 period.

And much of that growth comes from overseas expansion, said Manke. For example, in 1994, UTC's Otis unit sold more elevators in China than to any other country, said Manke. The sales were worth roughly $250 million. As a result, UTC plans to double its China-based production plant, which produced 4,000 elevators last year, he said. UTC has more than 6,000 employees in China.

"We make money, and lots of it, from our 10 ventures in China," UTC's CEO, George David, said in a December speech given at Harvard Law School in Cambridge, Mass.

Meanwhile, though the firm's China business is mostly focused on elevators and air conditioners, that trade may be sowing seeds for future revenue elsewhere. Company officials are negotiating 12 joint ventures between Chinese firms and Sikorsky and Pratt & Whitney.

So UTC seems to be a case of half empty or half full. Glance at the aerospace and defense end of the business, and you're bound to see an inevitable decline. But a shrewd exploitation of strategic non-defense business, combined with a willingness to ply new and risky areas, may make the glass look half full. "We believe a protracted period of growth lies ahead, and with it a rekindled affection for United Technologies," notes a report from Joseph Campbell at New York-based Lehman Brothers. "The $12 billion commercial enterprises of Otis, Carrier and UT Automotive, each with No. 1 market positions, each significantly international, and each growing steadily, will collectively earn almost $1 billion of operating profits in 1995 [and are] the vast preponderance of the economic value of UTC."

And Campbell has company. Howard Rubel, a stock analyst for Goldman Sachs in New York, estimates the firm's prospects should bump up its earning per share to $5.85 per share, up from $4.35 in 1994, and boost its share price to $75, up from $63.

Still, the firm's efforts in remote, risk-filled markets such as Russia could drag down company performance. And with the current uncertainties in that part of the world, banking on selling advanced technology to a former enemy could backfire -- and send UTC's Perm contingent packing their bags for friendlier shores.

United technologies; by the numbers

1993199219911990

Sales Revenue20,73621,64120,84021,442

Percent to U.S. Government19212122

R&D Spending1.1371,2211,1331,028

Restructuring Write-0ffs--851,275--

Long-term Debt2,1792,7693,1013.220


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