Honeywell: A Lesson in How the Economy Works

One of the oddball counterpoints to the currently gyrating stock market is the constant stream of comment from market experts about “technology” and the “direction of the U.S. economy.”

Anybody who knows the real environment in which U.S. business operates these days can see that the market gurus know next to nothing about “technology” or the U.S. economy.

That real environment has changed in recent years in the scope of its operations and the application of technology. But those changes are not fully reflected in the stock market.

By looking closely at companies and industries, however, you can get a view of long-term trends--and pitfalls--in U.S. business and find a far more fascinating story than the daily chatter of the market watchers.

Perhaps surprisingly, many big changes are reflected in Honeywell Inc., a 111-year-old Minneapolis company that got its start with the invention of the Damper Flapper in 1885, a regulator for furnace vents that became the granddaddy of the thermostat.

Honeywell has led in home and building controls ever since and today has $3 billion in annual sales of heating and air-conditioning regulators.

It gets an additional $2 billion in sales of industrial process controls--for regulating chemical and oil refinery processes and running automated machinery.

And last year it had $1.5 billion in sales of aviation controls. Importantly, Honeywell supplies Boeing’s new 777 with the aviation electronics system for flight monitoring, navigation, air conditioning, communications and data management.

The company is solidly profitable: $334 million in net income last year on $6.7 billion in sales. And the market has kept its stock at a relatively high level, along with those of rivals General Electric, Emerson Electric and others. But Honeywell is not a prominent issue among market experts; they don’t regard it as representing “technology.”

Yet it is through companies like Honeywell that technology evolves, changing business and economies around the world. The humble thermostat, to begin with, is becoming a computerized control for homes and buildings, with a new potential to include telecommunications switching and other functions in its digital database.

A prominent innovation is a technology called LonWorks, developed by a private Silicon Valley company named Echelon. LonWorks consists of self-contained computer nodes capable of regulating lights, temperature, door locks and desktop computers in rooms, floors or whole buildings.

“We have worked for five years with LonWorks” toward setting standards for building systems, says Honeywell Chairman Michael Bonsignore.

The point for a stock market anxious about inflation is that technology is reducing energy costs and usage in ways not yet captured by inflation statistics.

In industrial controls, Honeywell’s business relationship with oil refiners has been changing. “We used to send a truck with process control equipment and a guy to help them install it,” Bonsignore says, referring to a recent job with Phillips Petroleum.

*

Now Honeywell employees perform more functions at the customer’s refinery. “We send our own people into their plant and keep their equipment upgraded,” Bonsignore says.

The reason: Phillips and every other refiner is under pressure to wring every last penny from costs. So it figures that having process control experts from Honeywell do the work is more efficient than having both Phillips and Honeywell people do it.

This is work sharing and certainly not contracting for cheap labor. Honeywell process engineers earn $60,000 to $80,000 a year.

The point for the stock market is that changing conditions make standard information about industrial capacity and skilled labor costs out of date.

Bonsignore, 55, is a Naval Academy graduate who has worked 27 years for Honeywell and led it since 1993. He is enthusiastic about Honeywell’s five-year agreement to help China’s national oil company, Sinopec, upgrade process controls on all its refineries.

Profits in China are lower short-term than those in U.S. operations, “but we plow back the profit, and $500 million in business today becomes $1 billion by 2000,” Bonsignore says. In Russia, Honeywell is applying controls to hot water heating systems and natural gas production.

But it is Honeywell’s contract with Boeing that reflects the high drama of business. In 1990, Boeing asked Honeywell for urgent development of an avionics system for a new plane, the 777. Time was pressing. Rival Airbus Industrie was ahead in the race to bring out an international jetliner.

“We put 800 engineers on the project and invested $450 million to develop the new avionics,” says Bonsignore. They produced on time and got the job.

“That could be very big business. Boeing is selling planes at an unprecedented pace,” says analyst Nicholas Heymann of NatWest Securities, who projects sharply rising earnings for Honeywell in 1997.

*

But there are threats. Litton Industries sued Honeywell in 1993 for patent infringement on an inertial guidance system for aircraft and won a judgment that was later reversed. Court proceedings climaxed Wednesday when a federal judge overturned a $234-million award to Litton and ordered a new trial on damages.

Honeywell welcomed the judgment, but Wall Street analysts recommend that it settle out of court with Litton because the lawsuit is holding back its stock price.

Why should Honeywell care about its stock price if its business operations are doing so well? Because other companies, covetous of those operations, might launch hostile tender offers.

It’s a jungle out there. Wall Street analysts note that Lawrence Bossidy, chairman of AlliedSignal, recently boasted that his company could easily acquire a company with a market value of $6-billion--which happens to be close to Honeywell’s value. Other analysts speculate that Rockwell International, with avionics operations of its own, might want to add Honeywell’s successful business.

So Bonsignore must cope not only with rivals like GE, which has a new and formidable cost-cutting program, but figure a way to keep wolves away from Honeywell’s stockholder lists.

Arid stock market comments somehow never capture how tough and yet fascinating a game U.S. business is these days.