HowUnitedTechnologiesbecameatopgunJune2,2014byShawnTullyhttp://fortune.com/2014/06/02/fortune-500-united-technologies

UnitedTechnologiesCEOLouisChêneverthasnurturedthedevelopmentoftheGearedTurbofanenginefornearlytwodecades.PhotographbyStephenWillkesforFortune.Theultra-profitableindustrialgianthasmadeabundleoutfittingskyscrapersinChina.Nowit’sshakinguptheworldofaviation.Likeaproudfather,LouisChênevertiswaitingexpectantlyformycompliment,awidegrinplasteredonhisface.Firmlygrippingmyshoulderinoneofhismassivehands,the6-foot-5CEOofUnitedTechnologieshaspositionedmeinfrontofhisbaby—asleek-looking,5,000-poundjetenginethatismountedanddramaticallylitfrombelowlikeanartinstallation.

We’restandinginacavernousairplanehangarnotfarfromtheUnitedTechnologiesheadquartersinHartford,Conn.InacoupleofhoursChênevertwillbehostingthecompany’sannualinvestorsconference,andthebuildingisfilledwithimpressivelyhugedisplaysoftheconglomerate’swell-knownindustrialbrands.NearbyisaSikorskyS�76Dhelicopter,anSUV-like13-passengeraircraftfavoredbytheenergyindustryforferryingworkersouttooilplatforms.NotfarawayisaCarrierindustrialair-conditioningsystempowerfulenoughtokeepanentireofficecomplexchilled.Andthenthere’sthedrivetrainofanOtiselevator—similartotheonesthatwillbehoistingthe50double-deckerelevatorsinthe117-storyGoldinFinancebuildingunderconstructioninTianjin,China,andexpectedtoopenin2016.ToChênevert,however,thestaroftheshowisthenewestjetenginefromPratt&Whitney(yetanothervenerableUnitedTechnologiesbusinessunit).CalledtheGearedTurbofan,orGTF,theengineisamajortechnologicalleapforwardfortheaviationindustry.TestinghasshowntheGTFtobe16%morefuel-efficientthanexistingenginesand50%quieter—hugegainsinabusinessthatinrecentyearshasmostlyadvancedinincrements.ButtheGTFismorethanjustanexcitingexampleofhiscompany’sabilitytoinnovate.WhenthefirstGTFenginestakeflightinBombardierandAirbusjetsin2015,itwillbeapersonaltriumphfortheCEO.Chêneverthasbeenchampioningandnurturingtheprojectfornearlytwodecades.Nowonderhecan’tcontainhimself.BeforeIcanmusteracomment,theboundlesslyenthusiasticChênevertbeginswavinghisfreehand,stillsmiling,andlaunchesintohissalespitch.“TheGTFisthefuture,”hedeclaresinhisthickQuébécoisaccent.“It’sthebiggestdisruptiveforceincommercialjetenginesindecades!”

WorkersintheOtiselevatorplantinTianjin,China—PhotographbyStefenChowforFortune.

Aswepeerattheengine’sgiantfanblades,Chênevertgleefullyexplainshowhispetprojecthasprovedtobeadisruptiveforceintheairlinebusiness—evenbeforehelpingtotransportasinglepassenger.“TheairlineswantedtheGTFbecauseitsavesthemsomuchmoney,soairplanemanufacturershadtoembraceittoo,”saystheCEO.“Itpushedthemtobringoutanewgenerationofjetlinersadecadeearlierthantheyhadplanned.”Untilrecently,UnitedTechnologies’archrival,GeneralElectric,easilydominatedwhatisthelargest,mostprofitablemarketforengines:thosefittedonnarrow-bodyandregionaljetliners.ButwiththeGearedTurbofan—marketedasthePurePowerfamilyofengines—UnitedTechnologiesis

mountingthefirstrealchallengetoGEindecades.“It’samazingthatUTC,whichwasfarbehindintheseengines,isnowthepioneer,”saysStephenVellaofKestrelAviation,afirmthatadvisesairlinesontheiraircraftpurchases.“They’reforcingGEtofollow.”TodayUTCiscollectingaround30%ofnew-generationsingle-aisle-jetengineorders—businessthatisexpectedtoaddaround$5billionayearinnewrevenuesby2020.UnitedTechnologiesisanindustrialconglomerateonatear.Infact,itisarguablyAmerica’smostsuccessfuldiversifiedmanufacturer.With$62.9billionin2013revenues,the85-year-oldcompanyranksthirdinsalestoGE($146billion)andBoeing($87billion),butleadsmost,ifnotall,ofthefieldinprofitabilityandperformanceforinvestors.Infact,UnitedTechnologies,No.45onthisyear’s500list,hasbeenonanunderappreciatedrollforthepast20years.Inthatperiod,ithasproducedshareholderreturnsof16.3%ayear,growingitsmarketcapfrom$8billionto$107billion,andeasilybestingGE(8.8%annualreturns)andBoeing(11.0%).SinceChênevert,56,becameCEOinearly2008,UTChasdeliverednearly12%averageannualreturns,vs.8.4%fortheS&P500overthesamespan.Asforprofitability,astudyperformedforFortunebyJackCiesielski,authoroftheAnalyst’sAccountingObserver,aleadingnewsletterformoneymanagers,showsthatUnitedTechnologiesgeneratedanoutstanding11.4%cashreturnontotalassetsin2013,wellabovetheindustryaverageof10.2%andwayaheadofthe8.9%figureforGE’sindustrialbusinesses.

Otisworkersconductingamaintenance-trainingsessiononthe35thflooroftheShanghaiWorldFinancialCenter—

PhotographbyStefenChowforFortune.Chêneverthasachievedthoseresultsinpartbysimplifyingandreorganizinghissprawlingconglomerateintotwohigh-growthbusinessunits:aerospaceproductsandbuildingsystems.UTCusedtobefarmorediversified.ButoverthepastseveralyearsChêneverthasexitedavarietyofbusinesses,fromwindmillstoindustrialturbinestowindowairconditioners.AtthesametimehegreatlyexpandedhisscopeinaerospacebyacquiringcomponentsmakerGoodrichin2012for$16.5billion—thebiggestacquisitioninaerospacehistory.TheGoodrichdealmadeaerospacethebiggerofUTC’stwosegments.Itnowcontributes54%ofrevenues.ThebusinessincludesbothenginebuilderPratt&WhitneyandSikorsky,aworldleaderforbothmilitaryandcorporatehelicopters.Goodrichwasaddedtotheaerospacesystemsgroup,

whichsuppliesvirtuallyeverythingelsethatgoesonanairlinerfromthenosetothetail,exceptavionics.Inbuildingsystems,UTCfurnishesthe“heavyiron”thatheatsandcoolsofficeandapartmentbuildings,andmovespeoplefromfloortofloor,aswellassupplyingtheinfrastructuregirdingtheworld’sairports,railways,andmetrostations.Thebranchcomprisestwomainsegments:the$12.5billionOtisbusinessofelevatorsandescalators,andclimate,controls,andsecurity,whichencompassesCarrier’scommercialheatingandACsystemsplusfireandsafetyequipment.Asmuchasitmaysoundlikeyourgrandfather’sindustrialcompany,UTCunderChênevertcontradictstheconventionalviewofmanufacturersasunwieldybehemothsdestinedtosimplyplodalongwithGDPgrowth.TheCEOfavorsbold,zoom-to-the-futureideas—suchashisbelovedGTF.(Otherbigprojectsincludeahyper-energy-efficientCarrierACsystemandanewSikorskymilitarymodelthatcanfly50%fasterthanitsbestsellingBlackHawkhelicopter.)Andattheinvestors’meeting,Chênevertunveiledgrowthgoalssoambitiousthatheleftmanyanalystsastounded.Hepledgedtoraisesalestowellover$100billionby2020.Thatwillrequireannualgainsof8%,farexceedingtheprojectedgrowthinworldGDP.“GettingtotheirgoalsisareallyheftyjobforacompanythesizeofUTC,”saysDanielHolland,ananalystwithMorningstar.“Pullingoffthatkindofgrowthisdifficulteveninreallygoodeconomictimes,andwedon’tknowwhatliesahead.”

Chêneverthassetthoseloftytargetsforhiscompanyatatimewhenit’sfacingpotentiallypowerfulheadwindsintwoareas.First,there’stheongoingshrinkageinU.S.militaryspending,drivenbythepulloutofforcesinAfghanistanandpressureinWashingtontocurbloomingdeficits.Pratt&WhitneyisthesoleenginesupplierfortheLockheedMartin-builtJointStrikeFighter.TheJSF,thoughplaguedbygiganticcostoverruns,remainsthePentagon’sbiggestsingleprogramandappearstobeastablesourceofenginesalesforyearstocome.Butotherpartsofthedefensebusinessarefeelingthepinch.LastyearSikorsky’ssalesactuallyfell7.9%,to$6.3billion,onlowerordersandservicingrevenuesforitsBlackHawks.Overall,UTC’smilitaryrevenuesshouldmanagenobetterthanmid-singledigitsthrough2020,abouthalfthepaceofthepastdecade.ThesecondreasonforconcernisdeceleratinggrowthinChina.FitchRatingsisprojectingChineseGDPgrowthof7.3%for2014.Whilethatisstillwellabovegrowthratesinthedevelopedworld,itwouldfallshortofthegovernment’sofficial7.5%targetandwouldbetheslowestannualrateinthePeople’sRepublicsince1990.IftheslowdownendsupputtingthebrakesonChina’surbanbuilding

boom,thatcouldbeaproblemforChênevert.UnitedTechnologieshad$4.8billioninsalesinChinalastyear,providingelevatorsandHVACsystemsforthegleamingnewskyscraperspoppingupineachChinesemegacity.IfChênevertisworried,hedoesn’tshowit.TheCEOtalksconstantlyaboutthetwoglobalmegatrendsthatinspiredhimtoconcentrateonconstructionandaerospace:Urbanizationandtherapidgrowthinairtravel.“Only16%oftheworld’spopulationhaseverflownonanairplane!”heexclaims.“In20yearsitwillbeone-quarter.Andtheworld’scitieswilladdwelloverabillionmiddle-classpeopleby2030.”Thebig-picture,world-is-moving-our-wayconceptsoundsgood.Buttofullyexploitthosetrends,UTCmust,ifanything,increasethepaceofinnovation.Asaleader,Chênevertblendsanebullient,hyper-optimisticpersonalitywithawealthofknowledgedrawnfromyearsofrunninglabsandfactories.Littleknownoutsidetheindustry,hehasareputationinsideUTCforsettingimpossible-soundinggoalsandthenachievingthemthroughamixtureofarm-twistingandinspiration.HisoccasionallyadventuroususeofEnglishaddstohischarm.Forexample,whenaskedabouttheadvantagesofspeakinghisnativeFrenchwhilewooingAirbusinToulouse,hereplies,“Itmakescharmingandenhancestherelationship.”

ThecabinofanOtiselevatorinthe101-storyShanghaiWorldFinancialCenter—PhotographbyStefenChowfor

Fortune.ChênevertgrewupinMontreal,wherehisgrandfatherhadco-foundedwhatisnowSNC-Lavalin—the“C”wasforChênevert—theCanadiancivil-engineeringcolossus.“Ialwayswantedtobuildthings—cars,boats,orplanes,”hesays.AftergraduatingfromtheUniversityofMontreal’sbusinessschoolwithadegreeinproductionmanagement,Chêneverttookajobin1980attheGeneralMotorsplantnearMontrealthatmadetheChevyCamaro.Herosetoheadthe45-personteamthatinstalledtheaxlesandframesonthe5p.m.to2a.m.shift.Evenamongthebrawnyautoworkers,Chênevertstoodoutbecauseofhisbigpersonalityandimposingphysique.“He’dweartworadiosonhisbeltandwalkaroundwithasix-footantenna,evenifhelefttheplanttogotothehardwarestore,”saysGuyHachey,whowasChênevert’sbossattheplantandisnowpresidentofBombardierAerospace.“HelookedlikeacrossbetweenG.I.Joeandanextraterrestrial.”

In1993,ChênevertjoinedthePratt&WhitneyplantinQuebecProvince,wherethecompanymanufacturedenginesforpropellerplanes.AcriticalcomponentinthoseplanesweregearboxesthatwerethenlittleusedinjetsbutwouldbecomethekeystoneoftheGTFtechnology.Chênevert’sskillsinmanufacturingattractedtheattentionofUnitedTechnologiesCEOGeorgeDavid,abrilliantfinancialandefficiencyspecialistwhowastransformingUTCfromahigh-costlaggardintoaleaderinglobalsupply-chainmanagement.DavidpromotedChêneverttochiefofPratt&Whitneyin1998.AtthetimePrattwasrunningadistantthirdinenginesforcommercialaircrafttoitstwobigcompetitors,GEandRolls-Royce.“We’dbeentheoverwhelmingleaderfromthe1960stotheearly1980s,”saysChênevert.“We’dlostourposition.”Intheearly1980s,Pratthadcededitsdominantpresenceinnarrow-bodyjetliners—single-aisleplanesthattypicallyhold120to190seats—toconcentrateonthemoreglamorouswide-bodiesthat,managementfelt,wouldcapturemoreandmoredomestictraffic.Bycontrast,GEsawnarrow-bodiesasthefuture.ItformedCFMInternational,afifty-fiftyjointventurewithSnecmaofFrancethatin1981wonanexclusivecontractwithBoeingonitsnew737family.CFMremainssolesupplieronthebestselling737tothisday.

UnitedTechnologiesCEOLouisChenevert,hereinPratt&Whitney’scustomer-trainingfacilityinEastHartford,Conn.,

hasguidedhisconglomeratebacktoprominenceinjetengines—PhotographbyStephenWilkesforFortune.Narrow-bodiesprovedamuchbetterbusinessthanwide-bodies,drivingGE’sriseandPratt’sdecline.“Thepricinginwide-bodieswasandiscrazy,”saysformerCEODavid.“We’dbebiddingonprogramsathalftheproductioncosts,meaningwe’dlosemillionsofdollarsanengineatthestart.”Norarewide-bodiesthebestplaceforaftermarketsales.Enginesareabitlikerazorblades:

Manufacturersselltheenginesinitiallyatbreakevenoratalossintheearlyyears,butmakeloadsofmoneyonreplacementparts,overhauls,andmaintenance.Servicerevenuesarebiggestonplanesthatdoalotofflying.A747or767willmake,onaverage,justtworoundtripsaday.Narrow-bodiesareworkhorses,moreliketaxisthanluxurycars.They’reinconstantuse,typicallymakingsevenroundtripsdaily.Hence,theaftermarketsalescomealotsoonerandaremuchbigger.Asingle-aisleenginethatcosts$5milliontypicallygenerates$20millionto$30millioninsparepartsandmaintenanceoverits20-to30-yearlife.Therearealsojustmanymorenarrow-bodiesintheair.Thetwoairplanefamiliesthatdominatethesingle-aislemarket,theBoeing737andAirbusA320,arethebestsellingseriesintheindustry’shistory.Single-aisleplanesaretheexclusivechoiceoflow-costcarrierssuchasSouthwestandJetBlue,andallowairlineseverywheretoschedulemorefrequentflightsondomesticroutesandstillfillalltheseats.AsPratt&Whitney’snewchief,ChênevertwantedtorestorePratttoamajorroleinnarrow-bodies.Sohechampionedarevolutionarytechnologystuckinthelab:theGTF.ButfirstChêneverthadtoselltheplantoGeorgeDavid.“Inthebeginninghewasnotenthusiastic,”saysChênevert.Prattwasdevelopinganewenginetocompeteasoneoftheofferingsonthetrophyofalltrophiesinwide-bodies,theBoeing787Dreamliner.ButChênevertandDavidultimatelydecidedtowithdrawfromthe787competitionandfocustheirR&DdollarsontheGTF.Asmuchasanything,thatwasthedecisionthatpropelledPratt&Whitney’scomeback.Ifyou’renotanaerospaceengineer,thedetailsofhowtheGearedTurbofanengineworkswillmakeyourheadspin.Buthere’stheshortversion:TheGTFisthefirstenginespecificallydesignedtousegearstodrivethefanpoweringajetliner.Andit’stheinnovativeuseofgearsthatmakesitsuchabreakthrough.Inconventionaljetenginesasingle“directdrive”shaftrunsfromthefanyouseeinthefronttotheturbinethatturnsthefan.Theturbinegetsitspowerfromfuelthatismixedwithcompressedair,thenignitedinthecombustionchambertocreateacontrolledexplosionofexpandinggas.Thefanandturbinearedirectlyconnected.Hence,theybothrotateatexactlythesamespeed.

Butthere’saproblemwiththatarrangement.Thefanismoreefficientturningatafarslowerpace,especiallywhenit’slarger.Andtheturbineoperatesbestathigherspeeds.Thereasonisthatabiggerfan,atslowerrotation,raisestheengine’scrucial“bypassratio”bygreatlyincreasingthevolumeofairthatswooshesaroundtheoutsideoftheengine.Thatbypassairiswhatgivestheplane90%ofits“thrust,”orpropulsivepower.Pratt’sinnovationistoplaceagearboxbetweenthefanandturbine.Thegearboxallowsthefantoturnatone-thirdthespeedoftheturbine.Theresultisamuchquieter,morefuel-efficientengine,whichjetmakersareclamoringtobuy.Thefirst,breakthroughorderofGTFscamefromBombardierofCanadain2007.ThemanufacturerofsmallregionaljetswasseekingtochallengeAirbusandBoeingatthelowendoftheirproductline,andembracingtheGTFwasjusttheliftBombardierneededforitsnewCSeriesofjets.“Itmakesouraircraftverycompetitive,”saysBombardierpresidentHachey,Chênevert’soldfriendfromQuebec.(HacheysaystheplaneissoquietthatonatestflightlastSeptember,mostofthespectatorsmissedthetakeoff.)TheBombardiercouphelpedChênevertlandthegiantbuyerheneeded:Airbus.GivenBoeing’sexclusiverelationshipwithCFM,thechancesthatitwouldswitchtotheGTFwereminimal.Butitsmainnarrow-bodycompetitor,Airbus,wasalreadyaPratt&Whitneycustomer.ForAirbustoemploytheGTF,itwouldhavetolaunchanew,re-engineeredlineofA320s,ahugedecisionforanymanufacturer.TherewasstillplentyofskepticismintheindustryaboutPratt’snewtechnology.“Manypeopleinaerospacewerequestioningitsreliabilityanditscapacitytobecompetitive,”saysFabriceBrégier,theAirbusCEO.ButBrégierknewChênevertwellandbelievedhim.“IknewthatifLouiswasputtinghisweightbehindtheR&Dandclaimingitwouldwork,thatitwouldwork.”Becauseitpromisedsuchhugefuelsavings,theGTFspurredAirbustointroducethenext-generationA320neo(for“newengineoption”).CFM,theGEconsortium,isnotsittingidlyby.Ithasdevelopeditsownadvancedengine,theCFMLEAP,thatdeliversfuelsavingsandnoisereductiononthescaleoftheGTFandcompetesforordersontheA320neo.TheLEAPtechnologyisdifferent:Itdoesn’tusegearsbutcompressesoxygenatfarhigherpressuresothatlessfuelisneededtogeneratethesamethrust,runningtheengineatmuchhighertemperatures.ButthankstotheGTF,UnitedTechnologiesisnowamajorplayerinnarrow-bodyenginesagain,challengingCFM’sdecadesofmajordominance.Pratt&Whitneyisprojectingtotalenginesalesofaround1,000unitsayearby2020.“That’sthebiggestnumberwe’veseensinceourheydayinthe1980s,”saysChênevert.Whenitcomestoelevatorsandescalators,Chinaboastswhatmaybethemostextraordinarymarketforanysingleproductlineontheplanet.Chinesedevelopersandgovernmentagenciesarebuying550,000elevatorsandescalatorsofthe850,000soldaroundtheglobe,ortwounitsoutofeverythree.Thatcompareswithatotalofaround20,000intheU.S.Nowat$15billion,themarketforelevatorsinChinahasbeenexpandingat20%ayearforadecade.ThedriverisChina’srapidurbanization.Between15millionand20millionpeoplearemovingfromruralareastocitieseachyear.Themassmigrationisspreadingavastwebofhigh-riseapartmentcomplexesandevennewcitiesacrosscentralandwesternChina—regionsthenewpremier,LiKeqiang,istargetingforrapiddevelopment.LastyearChinabuilt15millionresidentialunits,15timesthenumberintheU.S.Andmostofthosebuildingsneedelevators.Otis’sordersinChinagrewby23%in2013.

Butallisnotaspromisingasthestaggeringhistoryofnewsaleswouldsuggest.Thewesternandcentralcitiesexperiencingthebiggestboominbuildingnowfaceanoversupplyofhousing.“Thesalesandpricesarealreadyfalling,andconstructionwillfollow,”saysCreditSuisseanalystJinsongDu.“Allthebuildingisexceedingthemigrationtothecities.Thatwillslowconstructioninthefuture.”Evenifthebuildingboomskidstoahalt,ChênevertcanstillgeneratestronggrowthinChina.Butheneedstoshiftfromrelianceonnewsalestoafarstrongerpositioninservicing.Asinengines,that’swherethebigmoneyis.Todaythemanufacturersserviceonly25%oftheliftstheysellinChina,comparedwith75%inEuropeandtheU.S.TheChinesegovernmentispassingnewlawsrequiringmorefrequentinspections—andthatdevelopershiremanufacturerstoservicetheelevatorsafterthey’resold.ThattrendshouldgreatlyswellOtis’sservicingrevenuesintheyearstocome.ExpecttoseeUTCbuyingupdozensofChinesemom-and-popelevator-servicecompanies.“Clearlythebigopportunitywillbebuildingtheservicebusiness,”saysChênevert.Seizingthatopportunityisoneofhisbiggestchallengesgoingforward.Backinthehangar,asweturnawayfromtheGTF,Chênevertbeginstalkingenthusiasticallyaboutacominglandmark:his50thcareertriptoChina.Hesaysthatherelishesriding(inanOtiselevator,ofcourse)tothetopoftheShanghaiWorldFinancialCenter,whichfeaturestheworld’shighestobservatory.Fromthatheight,hesurveysthebuildings,newandold,thatOtiswillserviceinthedecadestocome.“IgotoChinaandIsmile,”saysChênevert.Andwhynot?Hehaseveryreasontolikewhatheseesahead.