NASA Quality Conference, Alexandria, Virginia

Thank you. This is a big honor for me and UTC today. We are proud of our relationship with NASA and appreciate the recognition NASA gave to Hamilton Sundstrand last year with the George Low award.

First a few introductory comments. NASA is a major UTC customer, generating for us more than $350 million a year. Only a few other customers -- Ford and Boeing come to mind -- are larger.

Much more importantly, you are a fundamental and, especially, a long range technology impetus for us.

We also feel like we go back a long way with you, to the 1960s at least. We absolutely started manned space flight with you, and were proud -- with just a little stretch -- to have every one of our major divisions supporting the momentous Apollo 11 mission. Hamilton Sundstrand designed and built the space suits and provided cabin pressure and temperature control in the lunar module, Sikorsky picked up the astronauts at sea with a Sea King helicopter, Pratt powered the mission electrically with fuel cells, Otis took everybody up the gantry, and Carrier kept your cool at the Johnson Space Center.

Currently, we have products on every shuttle, including the SSME oxidizer turbopump (and, prospectively, the fuel turbopump), fuel cells, space suits, booster separation motors, and recovery and refurbishment of the Shuttle's solid boosters.

We also participate with NASA on major research initiatives to achieve the goals outlined by Administrator Goldin this morning, including lower engine emissions and noise, and, longer range, development of the High Speed Civil Transport.

Those of you who work at the Independence Plaza building may have noticed quieter, smoother and faster doors on three of the six Otis elevators there, with the other three to come. We are replacing the mechanical door drive linkages with closed loop control, linear induction motor drives, substituting magnetic force for mechanical motion. We hope you like them -- they respond faster and are materially quieter: 60dBA down to 49dBA. This is Otis' first such installation in the U.S.

This is a meeting about quality, and I need to recognize right up front the apparently defective fuel cell that prematurely ended STS 83 last week. We are exhaustively working with NASA to replicate and understand the failure mode, and we will, but we haven't succeeded yet. We completed the visual inspections without finding any leaks, and we have replicated operation and found it normal. I am quick to point out as well that fuel cells have been trouble free on Shuttle flights for 15 years and 60,000 hours of operation, but we can never be satisfied unless and until performance is perfect, 100%, period.

I am going to talk today on three topics: quality, cost, and globalization. All three relate -- the first two directly, the third indirectly -- to Administrator Goldin's and NASA's Enterprise Initiative.

I ringingly endorse that Initiative's 10 goals -- in all but one of which (the air traffic control system) our company is directly involved and hopefully at the forefront of advances -- and commit now that will turn ourselves inside out to support achievement of these 10 goals.

In aviation safety, we have a record we can be genuinely proud of.

According to the NTSB, the rate of accidents for all aircraft with more than 30 seats is down 86% since 1950 to rate of 4 per million departures. This is for all accidents, not just hull losses. Fatal accidents show a similar drop to a rate about 10 times less: four tenths of an incident per million departures. Performance for smaller aircraft, with 30 and fewer seats, are comparable and comparably improved.

I should add that these are U.S. rates, with non-U.S. performance being less favorable.

While recognizing that we can and must do better, we like to note that engines are smaller portions of these totals. The NTSB tells us that propulsion is involved in less than 8% of all fatal accidents, and recognizing that typically two or more causes bring an airplane down, we can see that engines are rarely singly responsible.

By our own tabulations, we classify Pratt engines for large commercial aircraft (100 passengers and over) as responsible over the jet age for a total of six accidents, five fatal, claiming 197 lives, and Pratt Canada turboprops as responsible for ten accidents, three fatal, claiming 50 lives.

I am quick to add that these are not our only flaws, with two fatal commuter aircraft crashes in the last five years, both propeller system caused, and helicopter events too.

We've seen same kinds of gains in basic engine reliability, what we call in-flight shutdowns (IFSD). When we began with high bypass turbofans in the late 1960s, we regularly saw IFSD rates in the forty per 100,000 engine flight hour (EFH) range, or 400 per million EFH, or an expected shutdown of about once per engine per year. Today's ETOPS standard (the long range, over water operation), is one twentieth that rate, 2 IFSDs per 100,000 hours or about one event per engine per twenty years.

And we are doing much better on the engines for the new, big twin aircraft. We are lead supplier for both the Airbus A330 and the Boeing 777, with engines in service since December 1994, for a total of about 500,000 EFH over a population of 57 aircraft.

Against the ETOPS standard, we should have had ten IFSDs when in fact we have had three, two of which occurred when airline mechanics tragically failed to remove a half cent plastic shipping plug on an oil line before installing the line in the engine. When the engine lit, oil pressure blew out the plug but left the plug's retention ring behind. When the engine accelerated to takeoff and climb power, the ring melted and we ended up with loss of oil and oil pressure, and a diversion. It is amazing how little things can cause trouble.

I represent that this is an astonishingly high performance standard: three in-flight shutdowns against a potential ten, two of which were arguably in a special category. It is also the kind of performance required to achieve Administrator Goldin's and NASA's very aggressive goals.

Higher quality comes in part from better design, but also because our manufacturing is better, much better. Much of our gains come from the influence of the Japanese, and I'd like to speak personally -- and with some passion -- about this.

My first trip to Japan was in 1968, and I have been back fifty times or more since. I am the chairman of the board of Nippon Otis, our Japanese elevator company, with $1 billion in sales and share of market that has grown to 15% based on one factor: quality levels at absolutely Japanese standards and ten times better than Western.

In the early 1980s I was responsible for Otis' North American business, and we shipped some early generation high speed electronic control elevators to Japan. They did not perform to Japanese standards, and our partner's response, the partner being Matsushita Electric, not a small company and under whose trade name we jointly sold, was predictable and direct: fix it or drop dead.

The pivotal change came when Chairman Matsushita, a long time and good friend and partner, assigned Matsushita's retiring corporate executive responsible for quality assurance to help with corrective action. Not only did we jointly lick that problem, but then Ito-san, at age 63 and with his wife of 34 years, moved to Farmington, Connecticut, to become the Corporate Quality Assurance Advisor to UTC's Presidents Council.

Ito-san has had more impact than any other single person I know at United Technologies. Surprisingly, his greatest impact has been in our aerospace divisions, against his background of consumer electronics. It's a long way from the insides of a radio or VCR to the insides of a gas turbine engine or a booster rocket, but he made these transitions with facility with simple quality methodologies applied with relentless discipline.

He taught us six techniques:

First, QCPC, or Quality Control Process Control. This fundamentally converts operatives to self inspection, in the course of doing so typically expanding inspection points six fold and catching non conforming material much faster and at source. Further, we train operatives to record, and to root cause correct -- typically by adjustment in their own processes -- defects.

A direct consequence of QCPC is that defects found at final inspection in one of our best and highest technology plants -- manufacturing high turbine air foils -- has been zero, absolutely zero, over the last five months, down from an annual rate in the 15,000 range a year before.

Second, 5S, which is the notion of a plant and a work flow so clean and so visually laid out that the process is totally clear not just to the operative, but to the casual observer.

The 5S's stand for sort (keep what you need and discard the rest), straighten (a place for everything and everything in its place), standardize (create an organized, logical work flow), sustain (keep it up), and shine (we know what that means).

Amazingly, you can tell from a long way away if a place has been 5s'ed.

Third, rejection tags. This is an obvious discipline. In our engine business, these are deficiencies discovered at final inspection, after test, and just prior to shipment. We used to have about thirty tags per PW4000 engine, and now we're down to ten. The difference: relentless root cause investigation per tag.

Here's another personal story about those early generation electronic control elevators in Japan. These were sourced from the United States, because the U.S. market was the traditional high speed elevator market, with more tall buildings than elsewhere. And one of the early installations was at a Matsushita facility.

Japanese elevator market standards allow you about a half a failure per elevator per year. American market standards are about four failures per elevator per year, and these elevators we installed for Matsushita were ten times worse than the American standard, about 40 failures per year.

I learned something that may surprise you. The elevator business has employees called field engineers: long time field and technically trained employees who know every kind of problem an elevator can have post installation and know how to fix it. Our field engineers also generate TIPs, Technical Information Publications, which are essentially a guide to fix nonconforming product in field service. It's a Band-Aid.

As the head of the American elevator company, I sent immediately two of our best field engineers to Japan to fix these elevators. They called me and said they could not get their job done. The Japanese would not let them apply TIPs. Instead, the Japanese stuck them in a conference room and began detailed and relentless root cause analysis. The Japanese were entirely willing to tolerate nonconforming product to get to root cause.

Americans, I learned, are too quick with the field engineer; too quick with the Band-Aid. The Japanese can't stand things that don't get fixed at root cause and this is what my friend Ito-san brings to us.

The fourth method is what statisticians call concentration diagrams. These were started by epidemiologists in London in the middle of the last century to track down Typhoid Mary. They are, simply, visual depictions of defect concentrations on parts to facilitate diagnosis.

Fifth: returned, failed parts. In NASA's applications, this will not normally be an issue. In most industrial applications, it is. Ito-san was stunned to find that we (and our airline customers) did not turn ourselves inside out to get a failed part back for analysis. Once, he went himself to United's shop in San Francisco fruitlessly searching for a failed pressure transducer. The Japanese view a defect as a gem, a treasure, to be nurtured, cared for, expensively cultivated to make it yield its secret.

And last, TPM, or Total Preventive Maintenance, evident by its name alone.

The sad learning from all of this is that Americans, and especially in old plants, develop sloppy habits. The good news is that they can be fixed.

And that's why we readily sign up -- officially and publicly -- for an in flight shutdown rate tenfold improved against the current ETOPS standard of two per 100,000 engine flight hours in the ten year period or even sooner.

My second topic is cost. Airplanes are expensive. Follow this calculation: a typical 747-400 airframe has an 870,000 pound maximum gross takeoff weight; less the payload and fuel leaves a dry weight of about 400,000 pounds. The airplanes cost $160 million each, or $400 per pound. And the engines cost us even more, about $750 per pound. Stated another way, aircraft capital cost has about doubled as a portion of aircraft direct operating and capital cost over the course of the jet age. As a wag put it, this is the second highest cost escalating function in our country over the last forty years, after only a college education.

We can do better, and again we learn from the Japanese. This time it's process reengineering, sometimes called lean production, continuous improvement, or the Toyota Production Method.

We know some things about this at UTC. We did and are doing the typical corporate restructuring over the last five years. We took a billion dollar plus charge against earnings in 1991, and we have subsequently seen rising physical volume with employment reduced, in our case in the U.S. by a little over a third from 108,000 in 1991 to 70,000 now.

Process improvement is a relentlessly familiar theme: process analysis, followed by reductions in numbers of operations eliminating hand-offs and therefore delays and inventories, facilitated in part by gigantic reductions in set-up times.

Editorially, I note why this happened. In the post-War period we as Americans -- inspired in large part by our far forward looking government, and funded by it too -- spent our resources on products, and we invented everything: semiconductors, lasers, digital communications, digital control, materials, the health sciences, space, and on and on. And we ignored process. And Japan did it the other way round, taking our products and making them better with higher quality and lower costs.

We have received some nice recognition in the Japanese press consequent on these efforts. Nikkei Business, the Japanese equivalent of Business Week, put Ito-san on its cover a little over a year ago and devoted most of an issue to our process reengineering and quality improvements at UTC. The Japanese love this theme because it's Edwards Deming in reverse: he taught them quality in the 1950s and 1960s, and now they are teaching us quality and productivity and are in turn making us an awesome and challenging force for the 21st century, so they had better get ready now.

My third and last topic today is geo-economics, where critically important lessons and changes face us.

For convenience, my remarks divide the world's economies into two parts: economically advanced (U.S., Canada, Japan, and Western Europe) and emerging nations (all others, recognizing that this group includes some comparatively high income and advanced societies too).

The world's GDP today is about $30 trillion, 80% of which has been created since World War II. The history of this new wealth is also this: 76% of the world's total wealth and incomes are in the economically advanced societies, but those same societies contain only 14% of the population. Incomes are consequently 19 times higher in the advanced economies.

Alternatively, the other 86% of the population, 5 people out of 6 on the planet, make do with less than one quarter of the incomes.

The startling fact is that this post-War experience is reversing: the emerging societies are growing much faster than the advanced societies. What has driven this change in the last decade and will drive it in the future is increasing trade and foreign direct investment (FDI). Global trade has grown at 11% compound for the last decade, from $2.2 trillion to $6.3 trillion, and the world's total FDI stock has jumped from $900 billion to $2.7 trillion at historic cost. Annual FDI flows are compounding at 14% annually to over $300 billion. And the associated value of output of all cumulative foreign direct investment is $7 trillion, more even than the sum of all trade.

Along with these explosions in trade and investment, and driving them and being driven by them, are the collapse of closed societies and the openings of borders among nations, both politically and economically.

The first cause is Mr. Gorbachev and his associates, who gave the world glasnost, both the word and the fact of opening, with the consequence that 40% of world's population has transitioned from closed to open societies.

The second cause is the growing role, in fact ascendance, of economic liberalism: deregulation, privatization, diminishing tariff and non-tariff barriers, the primacy of markets and market and competitive behavior.

Third is the growing role of multinationals, like our own, with ever more rapid transfers of technology and management methods among markets and nations.

Fourth and finally, torrential information flows across borders and societies.

These forces will remake the planet. Data Resources (DRI) tells that by 2016 more than half of world output will be in today's emerging markets, up from less than a quarter currently. Alternatively, nearly two thirds of incremental GDP will occur in emerging markets vs. their one quarter base today, which is to say 11% growth in nominal terms for emerging markets versus 5% growth for the rest, and what a ride for airplanes and even space exploration.

In short, this is a time for amazing optimism, and here is where these three themes come together: we have augmented our traditional intellectual productivity with an order of magnitude (even two in many cases) improved quality and production cost productivity. Corporate profitability is consequently at record high levels, inflation and interest rates are at sustainably low levels, economic news normally surprises on the upside, and we experience and expect on average very strong emerging market demand.

There has never been a better time for business and for progress and change, provided we keep our eyes absolutely on the basics: quality, cost, and innovation.

This is in fact exactly what NASA and your Enterprise Initiative are all about, and this initiative and these global forces are why we can all face our future with resounding confidence, optimism and hope.

Thank you very much.