Business Blog: Hoover’s Business Insight Zone

In May of last year the Wall Street Journal ran an interesting interview* with George David, the highly regarded chief executive of United Technologies Corporation:

Transformer in Transition

(Note that the whole story is available only to WSJ subscribers.)

David is one of the all-stars of the corporate world: in the fifteen years that he’s run UTC, the company’s value has grown tenfold. Today its offerings include everything from Pratt & Whitney aircraft engines to Otis elevators.

One of the things that struck me in David’s comments was his insistence on the importance of energy efficiency and conservation.

I think the solution to the energy problem is actually not alternative energy. To me, the solution immediately is conservation by greater efficiency. Too much in the mind of the public is this idea that conservation means deprivation. You’ve got to be cold at night, shut off the lights, stuff like that. That’s simply not true. The bottom line is that energy is wasted in the world to a phenomenal extent. There’s enormous energy savings potential in the conservation agenda where you do it by efficiency. In our own internal operations, we dropped the energy consumption at UTC by 19% over a decade at the same time the company doubled its size. All of America can drop its energy consumption by 20% in a decade easily. We’re now working with the World Business Council for Sustainable Development to come up with a building that uses zero net energy.

This is music to my ears, especially considering its source. I happen to think that the solution to our energy problems must also include alternative sources of energy, but I also welcome mass adoption of David’s views about the current level of waste in our human operations.

The truth is, an abundance of cheap energy over the past century, while enabling huge strides in technology, global travel, and trade, has also instilled an ethic of waste in many of us. It has become incredibly easy and cheap, relative to the prior course of human history, to make more things, to ship them quickly, and then to whisk away the leavings. In other words, it has been incredibly easy to build pockets of waste into our systems simply out of habit, or for want of better forethought. It has become normal to waste. Indeed, in some cases it seems like we’ve come to see wasteful habits as our birthright.

George David isn’t buying it. He sounds like he wants a revolution in efficiency.

Mr. David: You can’t walk through life with a trained eye and not see the opportunities for productivity. Every time you sit in traffic, that’s a productivity loss. Every time you go to the doctor and fill out a bunch of forms and he refers you to somebody else and you fill out the same forms all over again, that’s a loss of productivity. Whenever you wait for something, that’s waste. I believe you can have 10 times more. I really do.

WSJ: Ten times more of what?

Mr. David: Everything. Everything. Just look at the differences in personal productivity between people, educated versus not educated. Or people in good, really productive labor environments, versus people who are kind of struggling because they’re in disorganized or ineffective companies.

Why am I thinking of this? Because this morning I pulled up to a light that had just turned red. Ah, well, what’s the rush, right? Then I waited . . . and waited . . . and waited while no more than a handful of cars passed on the cross street. It’s a busy street at rush hour, but not at the time I was trying to cross it — yet the technology we’re using so far isn’t smart enough to tell the difference. More sophisticated timing in the lights or, even better, sensor-based technology that tells the light when it should change patterns, would mean less wasted time all around.

If it were just me, and if it were only a couple of extra minutes in the car, it would be no big deal. But the truth is that it’s not just me, and the problems of waste extend far beyond the time, productivity, and fuel wasted sitting in traffic. As George David suggests, we surround ourselves with patterns of waste and call it normal. But it doesn’t have to be that way.

What’s the biggest source of waste you face every day?

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UPDATE, Thursday morning: I forgot that, back in May, my friend Dan Markovitz wrote something in the same vein in response to my initial thoughts on the subject:

The Normalcy of Waste

Worth a read.

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* Does it seem strange to anybody else that the date of the story doesn’t show anywhere on that page?

[Photo by Rivertay.]

The good news for Boeing: record orders in 2007, ahead of Airbus’s (also very good) numbers.

The bad news: the blockbuster 787 Dreamliner project looks to be delayed again:

Another big delay for Boeing’s 787
By Dominic Gates
Seattle Times aerospace reporter

Boeing is expected to announce this morning a further delay to its 787 Dreamliner program of at least three months, an industry source confirmed late Tuesday.

The news, first reported online Tuesday by The Wall Street Journal, could be a crushing blow to the aviation industry’s confidence in Boeing. After earlier delays forced the company in October to push out its production timetable by six months, Boeing’s leadership repeatedly assured customers and investors that it would meet the revised schedule.

What Boeing doesn’t need, if it wants to sustain its momentum, is a reprise of Airbus’s delays-upon-delays history with its blockbuster A380 program. (My take on the earlier delay is here.)

Delays like this seem to be more common — or more commonly reported — in the software industry. Given the complexity of the Dreamliner, it makes sense that the project could slip, but failing to nail down the length of the delay the first time around doesn’t reflect well on Boeing management. At some point, the story becomes less about the project itself, and more about the company’s ability to manage big projects generally.

Given the oohing and aahing over the Dreamliner, all this may be just a blip once the planes go into service. But for now, this new delay is exactly what Boeing doesn’t need.

That’s the takeaway message from the WSJ Energy Roundup item quoted below, which discusses Lafarge’s $12.9 billion deal to buy the cement operations of Orascom Construction Industries.

For a while I covered the Egyptian beat for Hoover’s, and became fascinated with the Sawiris family that controls Orascom. (Naguib Sawiris, who runs Orascom Telecom, is particularly interesting.) I’m also intrigued by any deal that merges environmental-green benefits with dollar-green ones. That appears to be the case with this deal, since Orascom’s cement ops run more efficiently than Lafarge’s European plants.

Green Cement in Egypt

. . . Why the rush to clean up? Cement makers aren’t any more altruistic than the next guy. But it takes a lot of energy to fire up kilns to 2,000 degrees Centigrade, and energy accounts for between one-quarter and one-third of the industry’s costs. To stay competitive, cement makers have to trim energy consumption and make their plants as clean as possible.

Precisely. Over the years, companies across many industries have become accustomed to the idea of a certain amount of waste in their operations as being inevitable. That works for a while, but only until a new wave of technology — or of new market entrants with different ideas — upsets the apple cart. Then you have to get leaner and make your operations (or your products) more efficient.

We’ve seen this in industry after industry, whether it’s cars (American makers responding to fuel-efficient imports) or lighting (consumers realize they can get much more cost-effective lighting using technologies besides Edison’s bulb) or mutual funds (Vanguard undercuts the rest by keeping such a low fee structure).

More and more we’ll be seeing this in heavy industry, as manufacturers come to embrace the mandate that has driven the semiconductor business for decades: eliminate more waste every year, or else get out of the business.

Lakshmi Mittal deserves the hype.

Lately I’ve slagged the myth of the CEO — the idea that CEOs have such incredible juju that they must be paid giant sums of money and have their egos catered to at every turn. For the most part, I’m convinced that this is correct, because for the most part, CEOs are just high-level corporate executives with fancier nameplates. We all know good senior executives and bad ones, smart ones and dumb ones, etc. What you get with most CEOs is just a slightly better cut of the run of the mill. In my humble opinion.

But then there are some folks who just seem to get it — who are made for it. It’s no one thing about them that sets them apart; it’s everything.

ArcelorMittal just handed in very strong results, especially impressive given the shaky results of other (i.e. smaller) steel makers, and considering the size of the merger that created the company last year. The company’s not perfect, and they warn that next quarter won’t be as strong, but I credit their high performance to the very special qualities of Lakshmi Mittal, who seems so comfortable and so superior in his role that it’s like he’s playing a different game than everyone else.

This New Yorker article — typically smart, given that it’s written by Elizabeth Kolbert* — reviews a couple of current books that address the directions the car industry might take, and why it isn’t yet taking them:

Running on Fumes: Does the “car of the future” have a future?

The review sketches some of the multiple challenges confronting Detroit’s Big Three: climate change, ever-better competitors, financial hardship, and so on. But for thinking about the future — or the potential right-now-this-instant — of the American car business, check out this Fast Company article:

Motorhead Messiah:
Johnathan Goodwin can get 100 mpg out of a Lincoln Continental, cut emissions by 80%, and double the horsepower. Does the car business have the guts to follow him?

The article is chockablock with the Goodwin’s successful experiments, which might not be ready for mass production, but which should make Detroit (and the world’s other car makers) sit up and listen. Do read the whole thing, but here are some choice tidbits:

Goodwin leads me over to a red 2005 H3 Hummer that’s up on jacks, its mechanicals removed. He aims to use the turbine to turn the Hummer into a tricked-out electric hybrid. Like most hybrids, it’ll have two engines, including an electric motor. But in this case, the second will be the turbine, Goodwin’s secret ingredient. Whenever the truck’s juice runs low, the turbine will roar into action for a few seconds, powering a generator with such gusto that it’ll recharge a set of “supercapacitor” batteries in seconds. This means the H3’s electric motor will be able to perform awesome feats of acceleration and power over and over again, like a Prius on steroids. What’s more, the turbine will burn biodiesel, a renewable fuel with much lower emissions than normal diesel; a hydrogen-injection system will then cut those low emissions in half. And when it’s time to fill the tank, he’ll be able to just pull up to the back of a diner and dump in its excess french-fry grease–as he does with his many other Hummers. Oh, yeah, he adds, the horsepower will double–from 300 to 600. . . .

Goodwin is doing precisely what the big American automakers have always insisted is impossible. . . .

Goodwin’s work proves that a counterattack [by Detroit on its overseas competitors] is possible, and maybe easier than many of us imagined. If the dream is a big, badass ride that’s also clean, well, he’s there already. As he points out, his conversions consist almost entirely of taking stock GM parts and snapping them together in clever new ways . . .

Goodwin’s feats of engineering have become gradually more visible over the past year. Last summer, Imperium Renewables contacted MTV’s show Pimp My Ride about creating an Earth Day special in which Goodwin would convert a muscle car to run on biodiesel. The show chose a ‘65 Chevy Impala, and when the conversion was done, he’d doubled its mileage to 25 mpg and increased its pull from 250 to 800 horsepower. . . .

“Most people try to make things more complicated than they are. . . . Detroit could do all this stuff overnight if it wanted to.”

Maybe it’s not that simple, given that Detroit operates with realities — costs, scales of production — that don’t hamper Goodwin’s experimentation. But the inventor’s point is still apt: the Detroit car makers could do very much more in this vein than they now do. But they will only do it when they make the hard choice to move in that direction, instead of continuing in the ways that have brought them to the plight they’re in today.

Relevant Hoover’s profiles:

• General Motors
• Ford
• Chrysler

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* Recommendation: read Field Notes from a Catastrophe.

Today’s Company of the Day is International Paper.

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Given the radical scope of International Paper’s overhaul in recent years, one is attempted to cross a pun with a dose of business jargon and say that the company “started over with a clean sheet of paper.” The whole paper and pulp industry has turned volatile as consumers have changed their behaviors in various ways, demanding more of some types of paper goods and less of others. International Paper has changed the mix of its business to build up some operations (such as high-end packaging) that yield high profit margins, while shifting away from low-margin or shrinking businesses like coated papers.

Restructuring such a vast enterprise as International Paper — the world’s largest forest products company — has meant years of buying and selling. Although the company still owns half a million acres of US forestland (with harvesting rights on nearly twice that much in Brazil and Russia), it has sold more than five million acres of woodland in the US. It has also hived off chemicals operations (Arizona Chemical), a building products maker (Masonite), and wood products factories (to Georgia Pacific), among many other deals. The result of all this cutting is a smaller but more profitable company: International Paper brought in about one-fourth less revenue in 2006 than it did in 2000 ($22 billion versus $28 billion), but with profit margins near 5% instead of less than 1%.

The company’s profit warning last week is a sign of how far it has come: International Paper’s share price slipped a bit after it announced the profits on land sales would be a little lower than expected for the third quarter of 2007. Yet the company is still on pace to turn more profit in the quarter than it did in the quarter before. That puts International Paper a country mile ahead of its loss-making performances of 2001, 2002, and 2004. That clean sheet of paper looks much better now that it has nothing but black ink on it.

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Today’s Company of the Day is Magna International.

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Magna International is a magnum-sized player in the auto parts game. Although its Canadian automotive roots go back 50 years, Magna now supplies car and truck parts to manufacturers throughout Europe and North America. Mind you, these aren’t the sort of parts you’re likely to pick up at AutoZone, but rather major body, powertrain, and interior components. Through its various divisions, Magna produces body panels and bumpers, chassis systems, lighting, carpets, windows, seats and seating hardware, engines, and transmissions, as well as complete vehicle assemblies. The company’s largest division, Magna Steyr, assembles Mercedes-Benz, Saab, Chrysler, and Jeep vehicles for the European market. (In 2006 the parent company won 45% of its revenues — more than $10 billion — from customers in Europe.) Magna Steyr also reaches beyond the automotive industry by making components used in European Space Agency launch vehicles.

Although Magna International trades on the New York Stock Exchange, the Stronach family still controls it 50 years after chairman Frank Stronach founded the little tool and die company that later grew into Magna. In recent years, Magna has zigged toward acquisitions and growth while most North American car parts makers have zagged toward downsizing and, in many cases, outright failure. Magna draws most of its business from top car companies like Daimler, BMW, and Detroit’s Big Three, and over the years has succeeded in winning contracts to make or assemble more parts of cars for these gigantic clients. Magna has also engaged in a long string of acquisitions, in particular by buying parts-making operations from big car makers like Daimler and Porsche. It has also kept up a brisk pace of expansion into new geographic markets such as Russia. Moves like these have allowed Magna to thrive even as many of its peers and customers have fallen on hard times.

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Given their enthusiastic, not to say swooning, reception of Boeing’s 787 Dreamliner, don’t be surprised if the airlines start crooning that old Everly Brothers tune:

“Whenever I want you,
all I have to do
is drea-ea-ea-ea-eam,
dream, dream, dream
Drea-ea-ea-ea-eam…”

But wait! (I can hear you say) — that song is about unrequited love! I thought Boeing was cueing up the Dreamliners to pass out to enthralled customers?

Well, uh, it’s a funny thing, but . . . you know how Airbus has had all those problems delivering its megajumbo A380? I don’t want to compare that situation to Boeing’s directly, but — well, read for yourself:

Boeing delays 787 deliveries for six months

Boeing on Wednesday pushed back for six months the first deliveries of its highly touted 787 Dreamliner jet, which now will not reach eager customers until December 2008.

The US aerospace giant, in a dogfight with Europe’s Airbus for supremacy in civil aviation, also delayed the first flight of its “green” long-range jet to late March 2008.

“We are disappointed over the schedule changes,” said Boeing chief executive officer Jim McNerney.

But the CEO said that despite the delays, “we remain confident in the design of the 787, and in the fundamental innovation and technologies that underpin it.”

The delay reminds you just how complex airliners are to build; the article I just quoted goes on to talk about problems in Boeing’s worldwide supply chain for the Dreamliner, which includes many super-lightweight parts made of fancy composites.

The delay also must have Boeing kicking itself: just when it was set to gain even more ground on its archrival Airbus . . .

Ah, well, the best laid schemes gang aft agley. Or, in the immortal words of the Everly Brothers,

“Only trouble is,
gee whiz,
I’m dreamin’ my life away…”

Today’s Company of the Day is DuPont.

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Almost from the moment Eleuthère Irénée du Pont de Nemours founded it in 1802, the company we call DuPont has been a force in the world of chemicals. Chemical makers have gotten a bad environmental reputation in recent decades, especially since Rachel Carson’s groundbreaking 1962 book Silent Spring raised public alarm over the effects of chemical pesticides in natural ecosystems. Large chemical companies like DuPont came under further scrutiny over the next couple of decades as the Clean Air Act and Clean Water Act went into effect, as as the Superfund program stuck them with large bills for cleaning up toxic spills.

Since the early 1990s, though, DuPont has taken major steps to remake itself as a leader in environmentally friendly business practices. Its Web site points to DuPont’s many successes in beating its own targets for energy efficiency and environmental footprint reduction. Among other things, the company has reduced its own greenhouse-gas emissions by more than 60% from 1990 levels, and has capped its energy use at 1990 levels. It has also committed to several ambitious goals for 2015, including at least $2 billion in annual revenues from products that enable greater energy efficiency or greenhouse-gas reductions for customers, and at least $8 billion in annual revenues from products derived from non-depletable resources. (This last point is especially significant when you consider how much of our modern menu of industrial chemicals come from non-renewable petroleum.)

All of these moves are part of DuPont CEO Chad Holliday’s larger plan to keep DuPont at the forefront of corporate environmental responsibility. The project allows the company to succeed on two fronts at once — first by cutting waste, saving money, and boosting DuPont’s bottom line, and second by cultivating public and commercial goodwill for a company that might otherwise be regarded as a big, bad polluter, rather than a surprising standard-bearer for the green movement in Big Business.

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With the exceptions of a few small holdouts like Hong Kong and Gibraltar, the sun set on the British Empire shortly after World War II. But not until this week did the sun set on British ownership of Imperial Chemical Industries (ICI), long revered by Britons as a symbol of their nation’s industry, and still a major player in the global markets for paint and industrial chemicals. Earlier this summer, ICI rejected the initial $14 billion overture of its Dutch rival Akzo Nobel, the world’s top paint company and an important player in chemicals and pharmaceuticals. But Akzo went back to the drawing board and recruited Germany-based Henkel, which makes cleaners and other chemical-based goods. The pair of Continental buyers sealed the deal after they sweetened their offer for ICI to more than $16 billion. All going to plan, the buyout should close by the end of 2007.

The pride of Britain has been wounded in the transaction, at least if the opinion pieces in Britain’s national news dailies are any indicator. (A sample from the Scotsman: “The sad surrender of Imperial Chemical Industries represents the latest chapter in an unfolding story of important Brits being snapped up by international buyers.”) Yet perhaps the sting should be dulled by now, since ICI had already shrunk over the years through divestments including Zeneca (now part of AstraZeneca), Uniqema (to Croda), and Quest (to Givaudan). Once the buyout is done, Akzo and Henkel plan to divide ICI’s assets between them. Henkel will pay Akzo about $5 billion for the electronic materials and adhesives units of ICI’s National Starch and Chemical subsidiary. Akzo, meanwhile, will absorb ICI’s other operations — including the Dulux and Glidden brands — and thereby extend its own empire of paint.

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* This article first appeared on our Company of the Day page on 17 August 2007.