Riding the Indian tailwind
United Technologies Chairman and CEO Louis Chenevert wants to grow his
India business five times in as many years. He is not crazy.
For a company with nearly 12 decades in India, United Technologies Corp., or UTC, has oodles of ambition. Nowhere is it more evident than in Chairman and CEO Louis Chenevert's travel schedule, which has India popping up often in recent years. On each trip, Chenevert stresses on pushing sales of UTC brands here, which enjoy much more visibility than the parent company. Otis Elevators, Carrier air-conditioning systems and Pratt & Whitney aircraft engines enjoy top of mind recall, with names such as Sikorsky Helicopters and UTC Fire & Safety making their presence felt in India.
UTC believes India is today where China was ten years ago. "In 2000, China revenues stood at $600 million; it rose in nine years to touch $2.6 billion," says Chenevert. "Our revenues from India today stand at $500 million but we expect it to grow rapidly to $2.5 billion by 2015." Or, revenues doubling in each of the next five years. That is a tall order even for the most optimistic of salesmen but not for Chenevert.
One way of achieving the target is to recover the ground UTC has lost over the years. It entered the market when Otis installed the first elevator at Raj Bhavan in Kolkata in 1892. For the next 100 years, Otis had a stranglehold on the Indian elevator market and even today it is the largest UTC business here with sales of $200 million.
As late as 1996, Otis is estimated to have had a market share of 60 per cent. But it was around then that things began to go wrong for the elevator brand. "Persistent labour problems restricted the management's ability to be flexible and respond to the needs of the market," says A. Sankara-krishnan, a lifts industry veteran and a former managing director of the Indian unit of Kone Elevators, a Finnish company and Otis's rival. "A few strategic mistakes followed. They closed their factory and began outsourcing products from China which led to quality problems," he adds.
Otis, which to a large extent has overcome these challenges, today is planning to double its production capacity to 10,000 units at its factory in Bangalore and aims to increase sales to $1 billion a year (of the total $2.5 billion annual revenues UTC targets) by 2015.
Carrier similarly entered India in 1930 and enjoyed a large chunk of the market before Voltas, Bluestar, LG, Samsung, Hitachi and others carved up a sizable chunk for themselves. Carrier is hitting back and expanding capacity to half a million units from the current 200,000.
In this ramp up, UTC is betting on the rapid growth of India's cities. "Large scale urbanisation is the game changer for us,'' says Zubin Irani, Senior Managing Director of UTC's commercial business in India which includes Otis, Carrier and UTC Fire & Security. He quotes a recent McKinsey report on urbanisation in India, which estimates that by 2030 over 590 million people (nearly twice the population of the United States today), will be living in cities. Urban middle class households will rise to 91 million in the next 20 years from 22 million today. That will require up to 900 million sq. ft of commercial and residential space - equivalent to the size of Chicago - to be built every year.
Consumption bounce
Chenevert, on his twentieth trip to India in half as many years, also points out to the low per capita spending in India (see Headroom for Growth) in the businesses UTC operates in. Take air-conditioning. India's per capita spending is just $1 compared to $45 in North America, though comparative affordability - measured by the 1:4 ratio of India to United States GDP by purchasing power - suggests Indians can spend 11 times more. Similarly, the count of elevators per 1,000 people in Europe is 7.7 versus 0.1 in India. Indians spend half a dollar per capita on fire safety as against $50 by Americans.
"Such is the current consumption levels that demand can only grow," says Irani. It is expected that the elevator market will grow from the current 30,000 units a year to 70,000 units in 2015. Similarly, the air-conditioning market is expected to double to $3 billion by 2015 as also the fire and$3 billion by 2015 as also the fire and security market to $2.2 billion in five years.
While those estimates make for a healthy addressable market for UTC, not everybody is sanguine about new construction demand rebounding. From the middle of 2008, reckons Sasidhar Chidanamarri, a specialist in environment and building technologies at management consultancy firm Frost & Sullivan, the economic slowdown and its adverse impact on industries such as construction started testing the resilience of the building technologies market. "The impact of the slowdown will continue to limit the market growth in the next two-three years," Chidanamarri says.
And, then, even assuming that demand could bounce back, UTC's past in India does not lend confidence to its abilities to land big deals. It has so far not displayed the sort of aggression the market demands. UTC, it appears, is attempting to set a few things right. "We are empowering the local team. A dynamic market like India calls for faster decision-making to succeed," says Chenevert, almost echoing the strategy of its bigger rival General Electric. UTC has in India 4,500 employees, three factories and three engineering-cum-innovation centres.
A new management structure has been put in place with the heads of Otis, Carrier and UTC Fire and Security reporting to Irani. This move also paves way for historically independent brands such as Otis, Carrier and UTC Fire & Security to work together to leverage their strong customer relationships, bring about operational synergy and tap into their strong channel partners better.
"With the top 50 customers of the three businesses being common, it makes sense to cross sell and, more importantly, offer integrated business solutions,'' explains Irani. An integrated building solution team has been set up, which comes up with customised solutions across airconditioning, elevator, and fire and security systems.
Go local, target defence
Elsewhere, in the aerospace and defence segments, too, UTC is gaining from India being one of the hottest markets in the world for the two industries. While quantifying the exact growth prospects for UTC's aerospace business - Pratt & Whitney aircraft engines, Sikorsky Helicopters and Hamilton Sunstrand, which makes aerospace and industrial products - is difficult, the possibility of an expanded Indo-US military trade and the lifting of curbs on export of dual-use technologies from the US should open up a huge market for the company.
For instance, Sikorsky is eyeing defence deals worth between $8 billion and $12 billion by 2018. Boeing and Lockheed-Martin, both in the race for a multi-role combat aircraft deal valued at some $10 billion, could be clients for Pratt & Whitney engines, just as the case of Boeing transporters recently. The preliminary agreement for 10 Boeing C17s signed during the visit of President Barack Obama has translated into orders for 45 F117-PW-100 turbofan engines. "With the relaxation of export controls by the US government, India will get access to the best-in-class technologies in the world," says Chenevert. "We see gigantic opportunities in aerospace (in India)."
Pratt & Whitney engines currently power commercial aircraft of various airlines in the country. UTC sees an opportunity in the new commercial aircraft purchase in India, which is likely to exceed 1,100 over the next 20 years. The UTC aircraft engines business faces competition from the likes of GE Engines, which has a 60 per cent share in India, and Rolls Royce.
UTC has also come to realise, though belatedly after shaking off the past labour issues, the importance of localisation. Work is underway on a war footing to ensure that in the next three years almost 90 per cent of elevators and Carrier air-conditioning products it sells will be manufactured in India. "Localisation is key to our journey in India," says Chenevert.
Earlier in November, Sikorsky's joint venture with Tata Advanced Systems delivered its first fully built cabin for the S92 Sikorsky helicopters. The plan is to deploy these cabins in Sikorsky helicopters worldwide. Pratt & Whitney is planning at least five joint ventures in India to increase its sourcing of components ten-fold from the current levels of around $15 million to well over $150 million. Its India Innovation and Engineering Centre at Hyderabad is developing and localising fire and security products for customers in India besides "also supporting global product development", says Anand Stanley, Country Head, India, UTC Fire & Security.
The company has also learnt a few other lessons in the market place. "Its reluctance to bring in advanced products into the Indian market led to the company losing out to new entrants in the elevator segment," says Sankarakrishnan, the former MD of Kone Elevators India. Otis now has decided to bring in advanced, energy efficient and eco-friendly products into India.
Buildings account for 40 per cent greenhouse gas emissions, more than all the cars, trucks and buses on roads, and with rapid urbanisation in India, that will get worse. Juxtapose this against the Indian government's obligation to cut greenhouse gas emissions by at least 20 per cent by 2020 - and there lies a business opportunity.
UTC's reading is that this should inevitably push the country towards sustainable development initiatives such as green buildings. For instance, Carrier's 23XRV chiller, which is about 30 per cent more energy efficient than conventional chillers, is already in use at ITC's green-certified Gardenia Hotel in Bangalore.
UTC Fire & Security's Marioff Hi-FOG system uses 80 per cent less water than conventional sprinkler systems and is currently being installed at the Reserve Bank of India headquarters in Mumbai. "Otis is ready with its Gen 2 elevators with ReGen module, which generates electricity during descents and feeds it back into the grid. This product delivers a 70 per cent saving in energy consumption," says Laurent Bruyere, MD, Otis India.
UTC's second coming in India after 118 years is timed well with the country's barrelling pace of economic expansion. The real challenge for the conglomerate's growth in the world's fourth largest economy by purchasing power is quite simple: execute on the ground. The success in doing that will be as much a test of Chenevert's leadership as of Irani's execution.
One way of achieving the target is to recover the ground UTC has lost over the years. It entered the market when Otis installed the first elevator at Raj Bhavan in Kolkata in 1892. For the next 100 years, Otis had a stranglehold on the Indian elevator market and even today it is the largest UTC business here with sales of $200 million.
As late as 1996, Otis is estimated to have had a market share of 60 per cent. But it was around then that things began to go wrong for the elevator brand. "Persistent labour problems restricted the management's ability to be flexible and respond to the needs of the market," says A. Sankara-krishnan, a lifts industry veteran and a former managing director of the Indian unit of Kone Elevators, a Finnish company and Otis's rival. "A few strategic mistakes followed. They closed their factory and began outsourcing products from China which led to quality problems," he adds.
Otis, which to a large extent has overcome these challenges, today is planning to double its production capacity to 10,000 units at its factory in Bangalore and aims to increase sales to $1 billion a year (of the total $2.5 billion annual revenues UTC targets) by 2015.
Carrier similarly entered India in 1930 and enjoyed a large chunk of the market before Voltas, Bluestar, LG, Samsung, Hitachi and others carved up a sizable chunk for themselves. Carrier is hitting back and expanding capacity to half a million units from the current 200,000.
Chenevert with (immediately behind) Jothi Purushotaman, President of UTC India, and the local team
Consumption bounce
Chenevert, on his twentieth trip to India in half as many years, also points out to the low per capita spending in India (see Headroom for Growth) in the businesses UTC operates in. Take air-conditioning. India's per capita spending is just $1 compared to $45 in North America, though comparative affordability - measured by the 1:4 ratio of India to United States GDP by purchasing power - suggests Indians can spend 11 times more. Similarly, the count of elevators per 1,000 people in Europe is 7.7 versus 0.1 in India. Indians spend half a dollar per capita on fire safety as against $50 by Americans.
"Such is the current consumption levels that demand can only grow," says Irani. It is expected that the elevator market will grow from the current 30,000 units a year to 70,000 units in 2015. Similarly, the air-conditioning market is expected to double to $3 billion by 2015 as also the fire and$3 billion by 2015 as also the fire and security market to $2.2 billion in five years.
While those estimates make for a healthy addressable market for UTC, not everybody is sanguine about new construction demand rebounding. From the middle of 2008, reckons Sasidhar Chidanamarri, a specialist in environment and building technologies at management consultancy firm Frost & Sullivan, the economic slowdown and its adverse impact on industries such as construction started testing the resilience of the building technologies market. "The impact of the slowdown will continue to limit the market growth in the next two-three years," Chidanamarri says.
And, then, even assuming that demand could bounce back, UTC's past in India does not lend confidence to its abilities to land big deals. It has so far not displayed the sort of aggression the market demands. UTC, it appears, is attempting to set a few things right. "We are empowering the local team. A dynamic market like India calls for faster decision-making to succeed," says Chenevert, almost echoing the strategy of its bigger rival General Electric. UTC has in India 4,500 employees, three factories and three engineering-cum-innovation centres.
A new management structure has been put in place with the heads of Otis, Carrier and UTC Fire and Security reporting to Irani. This move also paves way for historically independent brands such as Otis, Carrier and UTC Fire & Security to work together to leverage their strong customer relationships, bring about operational synergy and tap into their strong channel partners better.
"With the top 50 customers of the three businesses being common, it makes sense to cross sell and, more importantly, offer integrated business solutions,'' explains Irani. An integrated building solution team has been set up, which comes up with customised solutions across airconditioning, elevator, and fire and security systems.
Go local, target defence
Elsewhere, in the aerospace and defence segments, too, UTC is gaining from India being one of the hottest markets in the world for the two industries. While quantifying the exact growth prospects for UTC's aerospace business - Pratt & Whitney aircraft engines, Sikorsky Helicopters and Hamilton Sunstrand, which makes aerospace and industrial products - is difficult, the possibility of an expanded Indo-US military trade and the lifting of curbs on export of dual-use technologies from the US should open up a huge market for the company.
| The new flight plan Empower the India team: Faster decision making a key ingredient in a rapidly growing market New management structure: Local heads of Otis, Carrier and UTC F&S report to head of India's commercial operationsIntegrated business solutions group: The historically independent commercial businesses will leverage their individual strengths and bring about greater synergy in operations Localisation: Strong focus on reducing imports and increasing local production. In three years 90 per cent of the building products sold in India would be made locally Energy efficient products: UTC will focus on its energy efficient products as India embraces sustainable development and green buildings become the order of the day Manufacturing base: Leverage India's frugal engineering skills by producing products or components and shipping it to the global market, especially in the aerospace business Look for newer opportunities: The lifting of curbs on dual-use technology products and a higher Indo-US military cooperation open up a big market Growth: Look at merger and acquisition opportunities in India |
Pratt & Whitney engines currently power commercial aircraft of various airlines in the country. UTC sees an opportunity in the new commercial aircraft purchase in India, which is likely to exceed 1,100 over the next 20 years. The UTC aircraft engines business faces competition from the likes of GE Engines, which has a 60 per cent share in India, and Rolls Royce.
UTC has also come to realise, though belatedly after shaking off the past labour issues, the importance of localisation. Work is underway on a war footing to ensure that in the next three years almost 90 per cent of elevators and Carrier air-conditioning products it sells will be manufactured in India. "Localisation is key to our journey in India," says Chenevert.
Earlier in November, Sikorsky's joint venture with Tata Advanced Systems delivered its first fully built cabin for the S92 Sikorsky helicopters. The plan is to deploy these cabins in Sikorsky helicopters worldwide. Pratt & Whitney is planning at least five joint ventures in India to increase its sourcing of components ten-fold from the current levels of around $15 million to well over $150 million. Its India Innovation and Engineering Centre at Hyderabad is developing and localising fire and security products for customers in India besides "also supporting global product development", says Anand Stanley, Country Head, India, UTC Fire & Security.
The company has also learnt a few other lessons in the market place. "Its reluctance to bring in advanced products into the Indian market led to the company losing out to new entrants in the elevator segment," says Sankarakrishnan, the former MD of Kone Elevators India. Otis now has decided to bring in advanced, energy efficient and eco-friendly products into India.
Buildings account for 40 per cent greenhouse gas emissions, more than all the cars, trucks and buses on roads, and with rapid urbanisation in India, that will get worse. Juxtapose this against the Indian government's obligation to cut greenhouse gas emissions by at least 20 per cent by 2020 - and there lies a business opportunity.
UTC's reading is that this should inevitably push the country towards sustainable development initiatives such as green buildings. For instance, Carrier's 23XRV chiller, which is about 30 per cent more energy efficient than conventional chillers, is already in use at ITC's green-certified Gardenia Hotel in Bangalore.
UTC Fire & Security's Marioff Hi-FOG system uses 80 per cent less water than conventional sprinkler systems and is currently being installed at the Reserve Bank of India headquarters in Mumbai. "Otis is ready with its Gen 2 elevators with ReGen module, which generates electricity during descents and feeds it back into the grid. This product delivers a 70 per cent saving in energy consumption," says Laurent Bruyere, MD, Otis India.
UTC's second coming in India after 118 years is timed well with the country's barrelling pace of economic expansion. The real challenge for the conglomerate's growth in the world's fourth largest economy by purchasing power is quite simple: execute on the ground. The success in doing that will be as much a test of Chenevert's leadership as of Irani's execution.
