Globalization and the American WorkforceA Conversation with Gregory J. HayesCOUNCIL ON FOREIGN RELATIONS, NEW YORK, NOVEMBER 1, 2016

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Gregory J. HayesChairman and Chief Executive Officer, United Technologies Corporation

The topic of globalization and free trade has come to the forefront of the public consciousness, thanks in part to commentary throughout the U.S. presidential campaign. There’s a great deal of misinformation about this issue, and in some cases a detachment from reality.

I see our discussion today as an opportunity to add my voice to the broader dialogue on globalization. My perspective is as a business leader who sees firsthand how the global marketplace impacts companies and their global workforce.

I have the privilege of leading United Technologies, a $57 billion business with 200,000 employees worldwide. The company comprises four industry-leading franchises that operate all over the globe: Otis Elevator, Pratt & Whitney, UTC Climate, Controls & Security, and UTC Aerospace Systems.

Globalization and trade matter to me, and to United Technologies. These are forces that have real impacts on the nation’s economy and workforce. I believe our voice can make an important contribution to the public discourse.

RetrospectiveTwenty years ago George David, the former chairman of UTC, stood in front of a similar group and talked about the impacts of globalization and how productivity, competition and innovation would profoundly affect the economy, businesses and the workforce in the coming years. While George was not omniscient, he clearly understood that the genie of globalization could not be put back in the bottle.

Looking back over the past few decades, globalization, free trade, innovation and productivity have advanced both business and social interactions in innumerable ways.

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• Over the past 50 years, the global economy has expanded sixfold, while average per capita income has nearly tripled.

• The average employee today generates 2.4 times as much output as in 1964.

• Twenty years ago, less than 1% of the world’s population was connected to the internet. Today it’s close to 50% – increasing 10X between 1999 and 2013.

We have seen the positive impact these advances have brought to people around the world.

• Poverty rates have fallen – in 1981, 42% of the world’s population lived in poverty; that’s now down to about 10%.

• In China alone, growth has pulled 680 million people out of poverty over the last 30 years.

• Globally, the middle class will more than double between now and 2030, increasing consumption and driving ever faster urbanization.

Coinciding with these changes is a rapid increase in technology.

• A basic smartphone today has a CPU that’s at least 10X more powerful than a 1995 PC – and costs about one-tenth as much.

• Globally, mobile phone subscriptions increased from 2.2 billion in 2005 to 7.4 billion today. There are 99.7 mobile phone subscriptions per 100 people.

But we also recognize the challenges these trends create.

Technological innovation and process improvement have transformed the way in which business operates by driving productivity into the work place, both on manufacturing floors and in back-offices.

In many cases, this productivity growth significantly reduced the number of workers – and changed the types of skillsets – required to perform certain functions.

The proliferation of these productivity initiatives also funda-mentally altered our traditional notion of middle-class jobs.

In 1960, manufacturing represented about 24% of the jobs in the U.S.…in 1980, it was 19%, in 2000 it was 13% and today it’s around 8%. Having said that, U.S. manufacturing output is growing; and our economy still supports more than 12 million manufacturing jobs today.

What is often overlooked is that these changes would have happened even without globalization.

I think about my grandfather, who worked for Bell Aerospace back in the 1960s. He was a machinist. He worked on a manual lathe, building parts for the Apollo space mission. It would take him a week to build a single complex machined part. In this case, it was the thrusters on the outside of the lunar module.

Today, that part goes on a five-axis milling machine, and it probably takes about an hour. And the quality is equal to what a master machinist like my grandfather could have done.

Even at United Technologies, we see the impact of produc-tivity gains and innovation on our workforce. Take our Pratt & Whitney business that is headquartered 114 miles from here in East Hartford, Connecticut.

Our newest engine, the Geared Turbofan™, entered into service on the Airbus A320neo in January of this year. This is the most complex commercial engine we’ve ever designed and built…and it will take us about 50% LESS time to build this engine than the last engine we introduced almost 30 years ago.

Because of technology, innovation and process improvement, the number of jobs we need to build engines and the nature of those jobs has changed dramatically.

This is just one example of many.

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The move towards more highly skilled, higher paying jobs is evident across many industries. The manufacturing job my grandfather had 50 years ago is gone and those jobs are not coming back.

Meanwhile, more advanced manufacturing jobs are left un-filled. Overall, openings for U.S. manufacturing jobs this year have averaged 353,000 a month. Technology is changing manufacturing processes – and companies need workers who can navigate this new reality. Increasingly, manufacturing operations require more advanced computer and machining control literacy, as well as data acquisition and analysis.

GlobalizationThe jobs of yesterday aren’t coming back because the world has changed. But let’s be clear, the problem isn’t globalization. The problem is that we, as a nation, haven’t proactively dealt with the dislocation associated with globalization.

There are many voices out there talking about job loss, pointing to globalization and free trade…voices that say it costs American jobs.

Those same voices also suggest that if we want growth and job creation – we need to limit trade, impose trade barriers and curb globalization.

Many of you will agree that this is absolutely wrong.

The world is growing rapidly and the forces of globalization are real and inescapable.

The genie is out of the bottle. It’s not open to debate. Globalization has already happened – and it will continue.

And it’s not just in the U.S. – it’s everywhere.

The global flow of goods, services and finance contribute between $250 billion and $450 billion of growth each year to world GDP, which accounts for 15% to 25% of total global growth.

Free trade is critical to the global economy, yet rhetoric in the U.S., and around the world, decries it. The fact is, developing an isolationist approach to the economy will not create growth…it will not create jobs…and it will not make any country great. It will simply take us backwards.

To be clear, the primary cause of manufacturing job loss in the U.S. is productivity growth…not globalization or free trade.

Manufacturing jobs saw their largest decline in U.S. history between 2000 and 2010. Approximately 88% of those jobs were lost that decade due to productivity growth. It was not free trade. It was not globalization. It was productivity.

Restricting free trade will actually hurt the economy and result in more lost jobs.

Recent estimates suggest that in a full-out trade war, by 2019, private sector jobs in the U.S. would fall by almost 4.8 million – and that doesn’t even include the impact to public sector jobs.

If you don’t believe those statistics…let me give you a real example in my own company:

Last year, UTC had $57 billion in sales. Approximately $30 billion of those sales were made by our U.S. businesses. Of that $30 billion, we directly exported about $10 billion, predominantly in our aerospace businesses.

That doesn’t even include the products we sell to our U.S. customers who subsequently export them.

We have about 40,000 well-paying aerospace jobs in the U.S. that support these direct exports.

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We also have about 30,000 U.S. aerospace suppliers, in every U.S. state. Those suppliers employ millions of people.

If our country implements barriers to free trade, many of those U.S. jobs will be negatively impacted or lost all together.

In 1947, 23 nations signed the General Agreement on Tariffs and Trade, or GATT. At the time, the average tariff was 22%. Today, the WTO, the successor to GATT, has more than 164 members and the average tariff is 9%.

We all compete in this global marketplace. Backing away from strong trade deals won’t help us – instead, it will give competing nations an opportunity to undermine the global system of trade that the U.S. has worked so hard to build.

Trade is not a one-way street. Any trade barriers we enact will be met by equal or greater barriers from our trading partners – making it more difficult for U.S. products to compete, and putting more American jobs at risk.

People rally against TPP, TTIP and NAFTA because these deals are perceived as exposing the U.S. to competition – and they have become synonymous with U.S. job loss.

While globalization does create dislocations in both developed and developing countries, we cannot overlook the benefits.

Global competition has inspired generations of leaders and innovators to be their best, spurring innovation and ingenuity that often results in breakthrough technology.

Trade agreements open up markets and encourage investment.

United Technologies supports trade agreements that fairly and equitably create such opportunities because it forces us to continue innovating to stay ahead of the curve and to be our best.

At UTC, our founders started the industries in which we still compete today. Elisha Graves Otis invented the elevator

safety brake in 1853; Willis Carrier invented modern air conditioning in 1902; and Fred Rentschler developed the first Pratt & Whitney engine in 1925.

Even 20 years ago, UTC was a much smaller company. We had $20 billion in revenue and about 170,000 employees, 40% in the U.S. We had operations around the world, but we certainly weren’t the global company we are today.

It was innovation that inspired our founders, innovation that drove productivity and innovation that allowed us to flourish.

Instead of resisting the forces of globalization and free trade, the question we really should be asking ourselves is: how do we inspire innovation that will enable us to effectively and successfully compete in a global economy and create those highly skilled, higher paying jobs that will support it?

EducationIt is my belief that it starts with education and lifelong learning.

One of the biggest challenges facing our U.S. workforce today is the inability to adapt to economic change.

• In the U.S., the share of the population with a university degree has essentially been flat since the 1990s. Today, 61% of adults in the U.S. have no degree past high school.

• If current trends continue, the global economy could face a potential surplus of up to 95 million low-skill workers, and a shortage of up to 40 million high-skill workers by 2020.

• Nearly 8 in 10 middle-skill jobs require digital skills.

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• Over the next decade, nearly 3.5 million manufacturing jobs will need to be filled. A skills gap is expected to result in 2 million of those jobs remaining unfilled.

Education and training can better equip people to adjust to these shifts in manufacturing work that will continue as the world moves forward.

Even the knowledge that change is coming is powerful information.

Twenty years ago, we described the urgent need to educate our workforce for the jobs of tomorrow.

Back then, UTC realized how quickly and decidedly the world would change.

We recognized that while no company can guarantee lifetime employment, we could guarantee our employees the oppor-tunity to learn…not just for their current jobs, but for the jobs that will exist in the future.

We wanted to create a program that encouraged employees to develop new skills and take control of their careers.

And that’s exactly what we did with the launch of our Employee Scholar Program 20 years ago. Looking today, we are proud to say that more than 45,000 employees at United Technologies have taken part in the program representing more than 60 countries. They’ve earned more than 38,000 degrees.

Among our workforce currently enrolled, nearly a quarter are hourly employees and we constantly encourage more participation.

Our program allows employees to obtain degrees from accredited institutions in any field of study, even if it’s not job related. It can be used to obtain a graduate degree, a four-year degree, or a two-year degree, which can include technical training.

We offer up to three hours of paid time off to study per week and there is no requirement that employees stay with the company for a specified period of time after completing the program.

We have invested more than $1.2 billion in this program and counting…why?

Because I have seen the benefits that this program provides, not only to employees, but also to our company. United Technologies makes complex products that are mission critical. We need to have the best, brightest and most highly educated employees for our business to be successful.

I often say that companies don’t innovate, people innovate. And that’s exactly what the people of United Technologies do. Like the Pratt & Whitney engineers who brought the Geared Turbofan (GTF) engine to life. This engine reduces fuel consumption by 16%, cuts regulated emissions by 50%, and slashes the aircraft noise footprint by 75%.

The technology that makes all of this possible was long accepted to be an insurmountable feat. But we ignored the naysayers and went on to invest 20 years and $10 billion making it happen.

The GTF engine went into service this year and it is a game- changer. Its benefits are real…not only for airline operators, but for travelers and the environment. We succeeded in what many people thought was an impossible challenge thanks to the drive to push boundaries, and never stop learning.

Or take the team of Carrier engineers that developed a state-of-the-art heating, ventilating and air-conditioning system for the Sistine Chapel. The Vatican Museums reached out to us with a problem: Michelangelo’s frescoes were being damaged due to the dust, humidity and carbon dioxide brought in by the chapel’s six million visitors each

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year. Unless a solution could be found, the chapel would be forced to restrict visitor access.

This was not an easy project. There were limitations based on the historic nature of the site. The new system had to be virtually invisible and maintain “church quiet” sound levels and limit air motion around the frescoes.

Carrier’s project team – representing the U.S., France and China – delivered an amazing solution with three times the cooling capacity and twice the efficiency of the previous system. It’s linked to an advanced video application to anticipate visitor levels and adjust performance intuitively.

Thanks to the work of those employees, Michelangelo’s frescoes will be preserved for generations to come.

What we do at United Technologies would not be possible without a workforce that is educated and committed to lifelong learning.

Stories like these are the reason we believe in and are commit-ted to providing employees opportunities through education. It’s one the most important investments we can make.

The Employee Scholar Program has helped us be successful by supporting intellectual curiosity and the desire to figure out how to do things better all the time.

You have no doubt heard a lot of commentary and discussion from other CEOs about free trade, and why it’s important to business. You have also heard dialogue about what needs to be done to support jobs and spur economic growth.

But those things are not enough. We have to do more. Every company needs to take responsibility for advancing the skills of all their employees.

We all need to do a better job of helping our workforce adapt to change and seize the opportunities that are and will be out there.

The cost of in-state tuition at public national universities has increased an incredible 296% over the last 20 years, making higher education out of reach for more and more people.

And it’s difficult to tell someone who is advanced in their career to go back to school and get a four-year degree to be able to take a different job.

That may not be the right choice for them…and they may not have the option of relocating to take advantage of other opportunities made available to them.

But this is exactly why we have to do more.

Case in point…We used to have about 150 people at Pratt & Whitney whose job included bringing carts from the receiving dock and putting them into kits that were taken to the shop floor to be assembled with the engines.

Three years ago we made a decision to move that work out of Pratt & Whitney to a third-party provider.

As for the people affected, we offered to retrain them so they could learn to do other things at UTC.

Some elected not to, and some opted to retire because they didn’t want to be retrained. But some of these employees went back to school and developed the skills they needed…and they’re still working at Pratt & Whitney.

It worked for them and it worked for us because we needed those people – we just needed them to do something different.

Of course, that won’t always be the case which is why we need to have plans in place to support people who are displaced.

Many of you probably know that our Carrier business has been the target of political rhetoric for our decision to move 1,400 jobs from Indianapolis to Mexico. In truth, we were behind the curve because most of our competitors have already moved to Mexico.

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But those 1,400 jobs that will be eliminated in Indianapolis are real people, with real lives. And we, as a company, have a real responsibility to these people.

Part of that was letting them know about the change three years in advance so they could prepare.

We are also providing them educational opportunities through our Employee Scholar Program to learn new skills – to help them compete in this new world.

Call to actionCompanies like UTC will continue to take steps to remain competitive in the global economy. It’s always an incredibly difficult decision to relocate work. Many in the nation reel at the news of factory closures. But let’s harness that sense of frustration, felt by so many, into action.

Employee education and skills training needs to be a priority for our country.

As I said, all businesses need to take the lead. That means partnering with state, local and federal governments, the unions and educational institutions to develop programs that will educate and retrain workers with skills that will be needed for the careers of tomorrow.

There are barriers in front of us, and I’m sorry to say that business is one. In my discussions with peer CEOs, I’ve found that, for many, there is simply not an appetite for educating employees. Many leaders feel this is not the role of business – but rather the responsibility of government. This needs to change. When business takes the lead in providing employees with the opportunity to gain new skills, it is the ultimate public-private partnership – delivering benefits to companies, employees and broader society as a whole.

Government also has a role to play in incentivizing employee education programs. Let’s start with the tax code. Twenty years ago, we noted how strange it was that the U.S. treated tuition reimbursement programs as taxable income for employees. It’s still an issue today, and I urge lawmakers to make a change. As a nation, we should encourage and celebrate those who have the initiative to expand their education – not punish them.

Another issue is tax deductibility of higher education. This is not a new idea, but it has yet to gain traction. The U.S. views home ownership as an important goal, so mortgage interest is tax-deductible. We are overdue in recognizing the benefits of a skilled, educated workforce. Let’s reform the tax code and give education the gravitas it deserves.

The world is constantly changing and we all must stay nimble. In the long-term, advancement in technology is positive for the economy overall; but in the short-term, individuals may struggle if they are not prepared to fill the jobs of tomorrow.

We have great reason to be optimistic about the future, here in the U.S. and around the world. The last 20 years have shown us that. But we need to take steps today to ensure that we have the workforce that can and will deliver that future.

It starts with acknowledging and accepting that our future success is deeply rooted in education and lifelong learning.

It is our collective responsibility to this country, to our shareowners and to our employees to provide that education today so that we can be prepared for the world of tomorrow.

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Contact:Alberto CanalVice President, Media Bureaualberto.canal@utc.com(860) 728-7000

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