Success comes from accomplishing both short-, long-term goals, Honeywell’s ex-CEO Cote says
For companies and business leaders, the trick to success is to figure out how to accomplish short- and long-term goals at the same time that are “seemingly conflicting,” according to David Cote, former chairman and chief executive officer at Honeywell.
Cote says that this paradigm-shifting method, which he shares in his book “Winning Now, Winning Later,” has been applied and proved practically effective during his tenure at the United States industrial conglomerate from 2002 to 2018, when he grew the company’s market capitalization from around $20 billion to nearly $120 billion, delivering returns of 800% and beating the S&P by nearly 2.5 times.
In a recent interview with Fastmarkets, Cote - who is now chairman of data infrastructure products and services provider Vertiv - spoke about how industrial companies can achieve short-term success against the backdrop of ongoing global supply-chain challenges and inflationary environments, while investing for the future in an era of decarbonization and digitalization.
Global trade today is caught in a perfect storm of supply-chain disruptions - with surging demand for goods amid a post-pandemic recovery - and a shortage of shipping containers, sky-high freight rates and a widespread energy crisis.
This supply crunch has put a question mark on what manufacturers could do to improve supply robustness.
“One of the things that the Covid-19 crisis pointed out was that no matter how robust we thought our supply chains were, they were not,” Cote said, suggesting companies make sure they always have two sources that also need to be diversified in different countries to prepare for a similar scenario in the future.
Even if manufacturers could get their hands on more sources of material, they would still face another concerning issue - higher costs arising from an inflationary environment.
Take China as an example. An ongoing power crunch caused by energy-related policies and a shortage of thermal coal have driven up sharply prices for a wide range of metal and ferro-alloy products, including silicon, magnesium, aluminium, nickel and ferro-silicon.
And there is only one solution for companies to beat inflation, according to Cote.
“There is no way you can generate enough productivity to offset the impact of high inflation, you just cannot,” he said. “So every company needs to be looking at how do they raise prices bigger and faster than they had in the past to get ahead of inflation.”
The consequences for a company that fails to offset higher costs can be harmful for its own cash flow and employees, Cote said.
In addition, great leadership is also crucial in handling an economic recession, which helps to make sure the company takes advantage of the situation against their competitors, including by managing staff and dealing with suppliers, Cote said.
“When you are up to your butt in alligators, it’s tough to remember the original goal was to drain the swamp,” Cote said. “But that’s the job of a leader - to put their head up above to take a look if I am draining the swamp when everyone else is caught up.”
In his book, Cote wrote about actual cases when Honeywell took advantage of economic recessions to negotiate with suppliers. And as a result, they managed to source material at better prices and generate a growth rate at their aerospace components business that was 50%
higher than that of their competitors.
Localization in China – “becoming the Chinese competitor”
For global companies, China has long been a popular market. As a pioneer in localization strategy, Honeywell succeeded in growing its Chinese market to become its single largest market outside the US.
In just about 10 years, Chinese employees at the multinational company grew from 500 to over 13,000. At the same time, its annual sales increased from $360 million - accounting for less than 1% of its global sales - to over $3 billion, one of the company’s most important sources of growth.
The secret to achieving such a success is to fully immerse the company in Chinese business and culture, Cote said.
“Too many Western companies going to China look at their competition - other western companies. If they do that, they only look at the top 5-10% of the market where a lot of high-price, high-value products [are targeted] but there is a big demand from the mid- and low-end market,” Cote said.
He argued that the remaining 90-95% market is where international companies should set their sights on, and the only way to be competitive is to become “truly local.”
“That means local in everything - management, staff positions, design authority, technology development, manufacturing, sourcing from suppliers,” Cote said.
Honeywell introduced the strategy of “East for East” in the Chinese market to meet local market demand through product development and innovation. It also introduced an “East to Rest” strategy to bring China-developed innovation to the rest of the world.
The race to zero carbon emissions
Cote addressed the importance of companies’ commitment to decarbonization in a world today where achieving net zero carbon has become a part of how stakeholders want them to operate.
Honeywell, which makes everything from aircraft engines to catalyst used in petroleum refining, is committed to become carbon neutral in its operations and facilities by 2035, according to the company’s website.
He pointed out about how the company had managed to reduce its greenhouse gas emissions by roughly 80-90% within 15 years by making an energy-reduction plan.
“We would do our financial budget, at the same time, we would have the business budget, energy and water usage, and what we are doing in order to reduce that,” Cote said.
“And we would have an energy-efficiency plan that looks just like a financial plan. Everybody would know at budget time, I wasn’t just reviewing the financials, I wanted to see their energy-efficiency budget and long-term plans.”
Honeywell has focused on some key technical fields to eliminate its carbon footprint. Earlier this year, it established a low-carbon center in China to focus on new energy, renewable resources, material recycling, as well as carbon capture, utilization and storage.
Sustainability has also been a focus for the metals industry, which has seen demand for recycled or low-carbon material - low-carbon aluminium, for example - rise in recent years.
And most recently at COP26 - the United Nations Climate Change Conference - in Glasgow, 41 countries including the US, United Kingdom and India launched an agenda to work together toward establishing clean power, zero-emission vehicles, near-zero emission steel, and low-carbon hydrogen as the efficient, affordable new normal by 2030.
In addition to carbon elimination, Cote also emphasized the importance of adaptation to climate change.
“Even if we are going to be net zero by 2035, we are still adding carbon to the atmosphere unless we find a way to take carbon out of the atmosphere,” he said.
“[While] we should be focusing on how to get net zero, we’ve got to be spending time looking at what are the ramifications of climate change happening, what exactly is going to happen and what are we going to do.”
Digitalization: ‘a long, long way to go’
Autonomous vehicles moving in a seamless fashion, people sitting in a living-room-like car with no need to worry about safety, traffic, parking - this is Cote’s “really long-term view” of future mobility.
Speaking about modern industries built around the internet, artificial intelligence, big data and 5G networks, Cote believes the digital transformation will continue to last at least 60-70 years, with disruptive changes taking place on “every physical manufacturer,” while the amount of impact will vary from one to another.
“It’s going to be very different for industrials, from digital-to-digital environment to digital-to-physical environment,” Cote said, adding that the complexity of the latter will challenge manufacturers to expand their knowledge from digital to different domains, as well as physical environments.
“You can fix an error in an app two weeks later, but you can’t have something fail that the factory doesn’t run for two weeks,” he said.
Despite the unpredictability of the speed and scope of digitalization, Cote sees a trend of traditional manufacturers and tech companies partnering up with one another to optimize their capabilities.
“Not every company has the Honeywell or Vertiv advantage where both digital and domain knowledge generally is in-house. There are companies understanding the domain but don’t have digital capabilities, I do believe companies will be better off if they find a way to marry up with somebody and partner in some way that allows us to be able to make the right type of interaction to make both things happen,” he said.
In October last year, Honeywell and Microsoft announced that the former would bring to the market its domain-specific applications built on the latter’s cloud platform to drive new levels of productivity for industrial clients.
The conglomerate has also been developing its software presence in sectors such as real estate, life sciences and aviation. Earlier this year, Honeywell released its quantum computer for commercial use.
“When you take a look at what quantum computing could do and how we can be using that 20 years from now, we can’t even envision everything that’s going to be possible,” Cote said.
“We can’t predict where this is going, I just know it’s going to be big changes, and all the incremental steps will get us to that point someday.”