Dave Cote Addresses, AmCham EU, Strasbourg, France, November 17, 2004

Honeywell – A Global Technology Company

Honeywell generates EUR20 billion in annual revenue, has a EUR24 billion market cap, and employs 108,000 people operating in about 100 countries. We have more than EUR5 billion revenue in the EU with 23,000 employees. Stand alone, our EU footprint and revenue would rank Honeywell in the top 300 of European companies. We have a big presence here and we’d like to get bigger.

Honeywell is a multi-industry company with a focus on Aerospace, Controls, Materials and Turbochargers. The unifying theme is technology. And we support it by spending over 1 billion Euros annually with 13,000 technologists around the world. We are the world’s leading supplier of navigation equipment in aircraft cockpits, the leading producer of sensors of all kinds, and the number one manufacturer of turbochargers. Our products include jet engines, facial recognition software, and aircraft collision avoidance systems that not only tell pilots when they are on a collision path with unseen terrain but may, in the future, actually prevent planes from flying into restricted airspace or sensitive structures like nuclear or chemical plants. At Athens airport you can see our closed circuit TV, access control, and monitoring all integrated into a leading edge security operation. We make home thermostats as well as sophisticated systems that control complex manufacturing environments. We manufacture Spectra fiber – a product ten times stronger than steel… and it floats. It’s used today in bulletproof vests and cockpit doors and in the future for mooring ropes in deep-sea platforms. We also make unique moisture and air proof blister packs to protect medication and the luminescent pigment used in Euro notes to deter counterfeiting.

Many of our technologies create energy efficiency, a particularly strong area for us. Honeywell controls and programs can save 20-30% of a building’s fuel usage. Our turbochargers (which are really small jet engines) are even more impressive because they allow internal combustion engines one-half to one-third smaller to produce the same power as a full-size engine. That means 20-30% fuel savings and of course a 20-30% reduction in emissions. They are used extensively on diesel engines in Europe today.

To pull these Honeywell technologies together we describe our Honeywell Company commitment as:

“We are building a world…
That’s safer and more secure…
More comfortable and energy efficiet…
More innovative and productive.”

We’re proud of what we do and how it helps the world today. And we’re proud of our extensive EU presence and our plans to grow.

The European Union – An Important Global Economic Force

With so much invested in Europe today and with even greater expectations for growth in the future, Honeywell and all AmCham EU members are profoundly affected by the priorities and initiatives undertaken by the European Union. That is why I was pleased to accept AmCham EU’s kind invitation to speak with you tonight. The European Union is a global economic force.

Most of the decisions you will face during your five year terms will have to do with the economy or at a minimum have economic implications. To put this into perspective, it is useful to re-examine Sir Isaac Newton’s First Law of Motion. Although originally pertaining to physics it clearly applies to economics also. That law states, “A body at rest tends to stay at rest. A body in motion tends to stay in motion”. The decisions made by this parliament will determine which of these applies to the EU economy.

Policies that encourage dynamism and transition, that encourage open markets and competition will create economic motion that’s essential to the well-being and standard of living for all EU citizens. Policies that slow transitions from old to new, that encourage stability instead of change, that create regulation without clear understanding of ramifications create dreaded economic inertia that ultimately damages the most, the people we are seeking to protect.

Business and industry are allies with Government in improving the standard of living of EU citizens. As a politician once said, “we can’t love jobs and hate the people who create them”. That’s why this session of the European parliament with ten new member states is so very important to both the new members and the incumbents. Your decisions will affect companies doing business in Europe, their employees, their customers and suppliers, and most importantly, all EU citizens. Your legislative actions can further the integration of the internal market and spur the free movement of goods, services, capital, and people.

The decisions you take in the next five years will have a major effect on economic growth, job creation, and innovation. The question should not be: will the EU look more like old Europe or new Europe five years from now, but rather what will the next Europe be? Will it be more or less competitive, more or less able to improve standards of living, and more or less able to expand education and foster change essential to creating economic growth? The choice is between inertia and dynamism.

Economic Considerations

We all recognize that economic growth is a good thing. Growth is essential to accommodate an expanding population and increase the standard of living. So how do we achieve that dynamism so important to generating economic growth? There are two critical concepts to consider. The first is the significance of productivity. The second is that economics is not a zero sum game.

Let’s start with the importance of productivity. “A nation’s level of productivity relative to other nations and its rate of improvement in productivity determine the standard of living for its people”. Productivity represents the Euros of output per Euro of input. Said differently, how much in goods and services (output) do you get for the material and labor (input) used to create them? The less input needed to create that output, the better the economy. And the faster that ratio improves, the better its economic prospects.

Assuming we all agree productivity is essential, how can we advance it? There are two drivers. The irst is having an aggressive retail industry. The second is fostering “Creative estruction”.

A competitive retail environment generates, without assistance, the demand for productivity all the way back through the production chain. It creates a virtuous economic cycle based upon consumers always wanting better quality at lower prices and generally being willing to shop around to get it. Retailers then apply backward pressure throughout the economic system to ensure they have the highest quality, lowest cost goods and services. An additional benefit is that consumer wages can buy more than they did before. That stimulates demand which results in growth and more jobs. The entire economic system and most importantly the people in that system benefit from competitive retail.

Creative Destruction is a concept developed by a European economist, Joseph Schumpeter, who was born in Trest, now part of the Czech Republic. For the world to advance, old technologies, old systems and old ways of doing things have to change as new technologies and new ways of doing things are invented and embraced. Horse-drawn carriage manufacturers didn’t believe automobiles would ever catch on…they were too loud, too unreliable, and moved too fast. Telephone operators were replaced by switching centers and typesetters and typewriters have become nearly extinct. Dirigibles were replaced by airplanes. Staff organizations in every company have been reduced because of Information Systems advancements. In each case, the old way of doing something declines or disappears, resources are redeployed, companies and people adapt, the new way grows and society benefits. The faster these changes occur, the better the economic outcome for that nation and its citizens.

One of the best ways to generate “the new”, is to encourage entrepreneurship. Making it easy for people to start companies with the hope their idea will make them a million euros or even more. It harnesses to the benefit of society human nature’s desire to get ahead ... a powerful catalyst for innovation and hard work. We should want to keep Europe open to the best ideas and people from the whole world! This is a good thing!

An implication of Creative Destruction is that companies have to be allowed to fail if they don’t do well. The specter of liquidated bankruptcy must be real. Risk is an important part of human nature and essential for a thriving economy. It applies to people and companies. It causes you to think differently about deployment of resources so you don’t waste them, helps to ensure the prize is worth the risk of failure, and causes everyone to adapt faster. But risk is not real if it has no consequences, if people and companies know there are no serious epercussions to failure. The bigger risk is roviding too much stability. It ensures the ystem declines. Risk for everyone is essential for people nd for the system.

The second important concept is that economics is not a zero sum game. This means that someone else’s gain is not my loss. In Economics, both sides benefit from a trade. When someone buys something…both the buyer and the seller are enriched…one is not enriched at the expense of the other. One side receives the money. The other gets goods or services they deemed worth paying that money to receive. Both benefit. Sounds simple but it’s extremely important. It’s incredible how often people still view economics as zero sum.

While it sounds simple and straightforward, let’s bring the issue closer to home. Consider a plant in Germany that’s closing because operations are being moved to another country either in the EU or in Asia for cost savings. If you view economics as zero sum, you would say Germany lost and the other country won. If, however, you view it as a mutually beneficial transaction, and assuming the other nation is competing fairly, you would say both nations benefited. The cost competitive country gains jobs that will help to create wealth and Germany gains lower cost goods or services that enhance the buying power of its citizens. In addition, the company has more money to invest in RandD and growth. The difficulty lies in that it’s easy for anyone to see the job losses because it’s focused and visible, while the purchasing power benefit is diffused amongst the population of an entire nation and it’s tough to see that it’s a net gain for the country.

Another implication of the concept that economics is not a zero sum game is that globalization, provided companies and countries compete fairly, is a good thing for everyone. All nations win as globalization expands. Countries that impede productivity and trade hurt the standard of living of their own citizens. The prosperity of other nations increases our own prosperity and our national security. Economic security directly contributes to national security for all nations involved. Increased trade between nations promotes peace because ties become closer. This was the founding principle of the European Union.

Consistent with globalization is the importance of free flow of information, of capital, of goods and services, and of people. Just like in business where people need the freedom to make decisions at a local level, it’s important for governments to allow freedom as well. In places where it’s difficult to let people go during difficult times, companies tend to be extremely cautious about adding workers during the good times. The result…resource deployment is delayed and so is economic recovery and growth.

Bad times happen and can’t be avoided. They can be minimized though, through flexibility and the ability to react. Regulation and legislation should not be employed to avoid the impact of Creative Destruction but rather to ease its effects, to create new opportunities replacing those that must disappear.

It’s important for politicians to encourage productivity, to support creative destruction, and recognize that both sides benefit in economics. The result is an improvement in the general welfare of the citizens they represent.

Balance

This is not a commercial for unrestrained or unregulated commerce. Unbridled business is as bad as any other unbridled force whether it’s government, military, or even lawyers in my own country. There is a balance required that eases the impact of Creative Destruction on people and regulates industry to ensure commerce is fair and that our air, land, and water are protected. No one disagrees. The disagreement comes from where to draw the line.

The problem with creative destruction is it’s painful for anyone involved in the old way. While it’s important that Government strongly support the constant transition that Creative Destruction generates, we should also smooth the rough edges. Quality education and life-long learning for all is essential to facilitate these shifts and provide the needed flexibility.

That’s why Honeywell, and many other companies for that matter, provides transition benefits for employees in this situation because it’s more than a little unreasonable to expect an employee being laid off to feel good about their job loss directly contributing to the productivity of the country. But it would be a mistake to do things that prevent transition or make it so costly it doesn’t happen.

Call to Action

Conceptually, encouraging competition and productivity while minimizing the impact on people, sounds logical enough. Managing this balance though is one of your essential roles as Parliamentarians. . . to develop regulation that serves the common good while encouraging innovation and transition from what was to what will be.

One of the reasons competitiveness is an issue in the EU today is because some countries have moved the line too far away from what’s needed to encourage the productivity and innovation so necessary to support improving the general welfare of its citizens. The new Commission, led by President Barroso, has identified competitiveness as the EU’s No. 1 priority. It is a smart initiative, one that will enable both balanced growth and responsible regulation. The Lisbon Agenda was a great written first step but, as we all know, concrete actions and impact were minimal. The need for a commitment to competitiveness has been brought into sharp focus by the thoughtful and timely recommendations contained in the Wim Kok Report. While it gives solid guidance for the next five years, it is hard to ignore how little progress has been made in the last five. Five years is nearly forever in business today. A change in approach and greater flexibility is an essential enabler for acting on the Wim Kok Report and finally achieving the promise of the Lisbon Agenda.

The current system errs on the side of stability. Stability sounds good but it means inertia which means decline. Change is needed. There is a real opportunity with the arrival of the accession countries to move the EU back to innovation, to change, to entrepreneurship. To remove those barriers that lead to economic stagnation. To support the freedom of movement of goods, services, people, and capital. There is huge opportunity for the European Parliament to reinvigorate not just the EU but the world. A revived, robust, European economy has benefits beyond EU borders.

In that process, please also consider how regulation can be developed and implemented in a way
that recognizes that while there may be benefits to regulation there are certainly costs to it. The former have to outweigh the latter. You can determine whether this is the case by performing effective and thorough impact assessments for all legislative proposals and significant amendments. Understanding competitive impact and effectiveness is also the key to avoiding the global law of unintended consequences. The Reduction of Hazardous Substances in Electrical and Electronic Equipment Directive – ROHS – which eliminates 6 substances – is an example of legislation whose impact was not clearly understood when it was adopted. Originally designed to address household electronic waste destined for the local landfill, it ended up including such things as factory machinery and other B2B waste products without considering the impact of expanding the directive’s scope. Far too little attention was paid to the unintended consequences of this directive that may now add billions of euros of compliance costs to industries such as aerospace that were not even included in the Directive’s scope. This could have been avoided. A comprehensive understanding of the consequences of new regulations before promulgation will go a long way to making them truly effective.

You can also help with productivity by ensuring uniformity in regulation. The Community Patent for example… a single Community Patent saves companies millions of Euros in registration, translation, and other costs while making patent enforcement significantly more effective. It will establish an EU Intellectual Property environment that generates technology growth and the jobs that follow. This debate has raged for 15 years. The Community Patent is a good idea and it is time to get it done.

The need for uniformity in both implementation and enforcement extends further. Why is the commission drafting a third money laundering directive when Greece, Sweden, France, and Luxembourg haven’t yet adopted the second one? According to the Commission’s own statistics, one in eleven EU Directives have not been implemented in all member states. Inconsistent application and enforcement hurts companies that are law abiding, putting them at a disadvantage to their less honorable competitors.

Summary

This European Parliament can have a historic impact in improving the economic lives of EU citizens. The need for global competitiveness is real and your leadership is needed.

Invigorating the Lisbon Agenda and embracing Wim Kok’s recent report, supporting change by fostering an environment where Creative Destruction can occur, and developing legislation that reflects industry input and is applied uniformly across the EU provides each of you the opportunity to make a real difference for your citizens.

There is a strong catalyst for this change with the advent of the accession countries. Their passion for market-based economies is exhilarating. It provides an engine that incumbent countries can use to propel change and receptiveness to change, to generate the dynamism so necessary for an economy to raise the living standards of our people.

We started this discussion with Sir Isaac Newton’s First Law of Motion describing inertia as adapted for economic use. It’s appropriate then to conclude with a quote from another famous scientist, Charles Darwin, that’s also very insightful economically.

“It is not the strongest of the species that survive, or the most intelligent, but the most receptive to change.”

It’s in your hands.

Thanks for listening.