The Future of Automation and AI with Honeywell CEO Vimal Kapur

Barry sits down with Vimal Kapur, Chairman and CEO of Honeywell. They discuss the future of Honeywell as well as Kapur's plan to split the company into three separate entities. They also break down how the company uses automation and what to expect from AI. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  At Brookfield, we invest in the thing behind the thing behind the next big thing. Our focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. We combine deep operational expertise with disciplined long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Learn how you can own what's next at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital.

• 0:34Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 1:16Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 1:59Speaker 01

  Bloomberg Audio Studios, podcasts, radio, news.

• 2:07Speaker 01

  This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 2:14Barry Ritholtz?

  This week on the podcast, yet another extra special guest. Vimal Kapoor is CEO and Chairman of Honeywell. He's worked there for the past 37 years. And not only has he been overseeing a fascinating transition, Honeywell is in the midst of breaking itself up into three distinct parts. I thought this conversation was fascinating, and I think you will also. With no further ado, my conversation with Honeywell's Vimal Kapur.

• 2:46Speaker 03

  Pleasure, Barry. Thanks for hosting me.

• 2:47Barry Ritholtz?

  Well, my pleasure to have you here. It's not very often we get a member of the Dow industrials as part of our guests. Let's start out a little bit with your background. You received a degree in electronics engineering from the Thapar Institute of Engineering in India. What was the original career plan?

• 3:10Speaker 03

  Original career plan was to work and get a job. That was a career plan. Yeah, that was a career plan. And then, you know, first I did two small stints of a job and then I joined Honeywell in early 89. It was a new company in India to set up. So I ended up joining a startup because it was set up as a joint venture between two large companies. There's a large Indian company called Tata Group. They jointly-

• 3:35Barry Ritholtz?

  Automobiles, everything. Tata is enormous now.

• 3:37Speaker 03

  So they invested in this venture. It's big Honeywell with a lot of tech. And then they create this joint venture in which you show up. And it's basically creating something from scratch. We had no revenue when I started. Our revenue was 0.00. So you learn how to build a company, how you scale. You wear multiple hats. Like in a startup, you don't have a very defined role. So I think that early experience of high flexibility and, you know, going through a very high pace in a short period of time, that laid some very strong foundations, you know.

• 4:12Barry Ritholtz?

  So in the United States, out in Silicon Valley, we notice a lot of these startups- Where they end up certainly isn't where they began. There's usually a pivot or three or four. What was the original idea in the joint venture and what did that eventually turn into?

• 4:29Speaker 03

  It turned into what it was planned for because Honeywell did not have its automation business footprint in India at that time. You're talking 40 years back. So they partnered with a local company to scale the business. They already had those products and capabilities in US and they were trying to get into Asia and they formed partnerships in few countries, India being one of them. And the strategy was to penetrate the local market, develop the local capability and we were able to do that quite well. So it's not that we have to change our product strategy, but we have to run, learn as we go through. We had intense local competition. How do you beat that? How do we create our own, you know, our own revenue stream there? So it was a very successful story.

• 5:11Barry Ritholtz?

  So you come up through the operating side, not so much the Harvard Business School Davos theory side. How much of an advantage has that been as your career clicked through all these different divisions?

• 5:25Speaker 03

  I mean, I think it's an advantage to, in a way, to work in a practical business because you have to deal with actual problems which the business deal with. And having worked in different businesses gave me an opportunity to deal with a different customer situation, different end markets, operational issue, commercial issue, product development issue, supply chain. So I would say, I mean, there is no replacement to formal education. I'm not suggesting that having a higher degrees is a disadvantage, but I would say that there is equal amount of advantage to get practical experience. And I was benefiting from variety of experiences I got in my long career in Honeywell.

• 6:05Barry Ritholtz?

  And you ran three very different businesses before becoming CEO. Process Solutions, Building Technologies, Performance Materials. Tell us, I mean, those names seem sort of ambiguous. Tell us a little bit about what each of those three divisions did.

• 6:23Speaker 03

  So Process Solution business is, you know, it provides automation system in the energy sector. So energy sector, think about it, refining petrochemical plants, other oil and gas facilities, pipeline terminals, even I would say facilities like which may paper.

• 6:43Speaker 03

  Metals and mining. So these facilities are very complex in terms of their operating procedures. And if they are not automated, it's nearly impossible to run them. So this business provides a sophisticated automation system to these large companies. So think about Exxon and Shell and BP as kind of typical customer or Ramco in Middle East and Adnoc. So this serving these customer, this business was very global, or is very global even today, the business still is very successful. And I became CEO in 2014 of this business. And oil downturn happened within six months of I becoming the leader of the business. So you learn through tough experiences. Oil price was from whatever

• 7:28Speaker 03

  hundred and forty, hundred and fifty dollars to like a big nosedive. And we did a lot of work in that downturn, learnt a lot. But primarily, your question, this this business is all about sophisticated automation in complex facilities. And then I moved to the building automation business, where we still do automation, but now in this case, buildings of different type, hospitals, airports, schools, university campuses, data centers. And there, the business model was very different. Now you serve multiple building through variety of channel partners across the world. And so our strength comes through product innovation,

• 8:08Speaker 03

  our strength comes through channel management, very different business model compared to what I did in, you know, in my in my process automation days.

• 8:20Barry Ritholtz?

  And then performance materials.

• 8:21Speaker 03

  Materials and technology, very interesting business. They build technology, they build energy infrastructure. So if you want to build a, if you are a refiner, you buy crude, which we all hear a lot about today due to, you know, ongoing Iran conflict. You don't sell crude, you sell product, you sell gasoline, you sell diesel, you sell jet fuel. So they have options to make multiple products. And as the input changes or the market needs changes, they need to decide what are the options they have to build different offering from their perspective. This business provides technology to energy company to build energy infrastructure.

• 9:00Speaker 03

  Because it's a molecule transformation. You're converting one molecule to another molecule. There's a heavy technology involved behind it. So performance material and technology provides technology to the customer to build, you know, energy infrastructure. So very high technology or research oriented business.

• 9:21Speaker 03

  You have a lot of chemical engineers who are going to invent the next best technology and you provide the technology to some very large companies. And that was fascinating to lead that business, to see that cycle of innovation and work in that business. So yeah, very diverse experiences in variety of sectors, different business models, which I'm benefiting today because now I have experience of dealing with different markets and different situations. And that practical experience helps you a lot as you really get into your CEO job.

• 9:54Barry Ritholtz?

  So in 2022, you were named Chief Operating Officer. We were just coming out of the pandemic. What was that environment like? How did you take your experience at these three prior divisions where you were either president or president and CEO? How did that affect running operations?

• 10:13Speaker 03

  I mean, I think at that time, the biggest challenge at that time actually was the chip shortages. And how do we really redesign our products? Because chips are simply not available. So you really had to learn how do we redesign our products in a much shorter period of time. So think about if we designed a product in one year, we had to do that in two months because there's no other option. If we don't do that, we can't have an alternative source of the supply and we can't ship our product. So I used a lot of experiences on dealing with such a different scenario in my earlier jobs. And we were able to successfully, you know, deal with that. That was also a job I also got exposure to the businesses of Honeywell, which I hadn't run before.

• 10:58Speaker 03

  Aerospace being the biggest one. Uh, so that got added into my responsibility. So there was a lot of learning there on how that industry works, which is totally different from everything else I had done.

• 11:08Barry Ritholtz?

  Is there a throughput through materials, processes, technologies and aerospace? Or are these all completely different animals?

• 11:18Speaker 03

  Different animals in the sense of the end markets, they're sir, right? There are some commonality of the business models and, uh, you know, there are, there are, there's a common denominator, but there are differences, which really led me to think about whether we are good to be one company or multiple companies when I started as a CEO. And part of it was the differences between them, but part of it was opportunities which is ahead of us, that how these businesses independently could shape or scale much differently versus when we are together, which, which led us to do a lot of work to think about optionality and pros and cons of each option, uh, and which led us to make a decision that we are better off to split into three companies.

• 12:02Barry Ritholtz?

  And, and we're going to spend some time delving into those three companies and the thinking behind it. Before we get to that, I, I want to ask you, um, a couple of more general questions about the firm. You've been there so long since, since the 1980s. I'm curious, how has the culture of Honeywell changed? It's almost 40 years, three and a half decades. Is it still essentially the same company or has everything changed like so many other companies?

• 12:35Speaker 03

  Yeah, it, it evolved a lot. I would say, uh, you know, we, there was a big change moment in early 2000 when Honeywell and Allied Signal merged together.

• 12:45Barry Ritholtz?

  I recall.

• 12:45Speaker 03

  Yep. So a little bit of, uh, fun fact, Allied Signal acquired Honeywell and changed its name to Honeywell. Which doesn't happen, the choir keeps name because they figured Honeywell brand was so powerful. It was more impactful, so they changed their own name. So that was a big moment, your question on cultural assimilation of two large companies. It was kind of merger of equals. And it did go through its own motion of ups and downs, and that's when Dave Cody came in as chairman and CEO of Honeywell. And Dave did a great job to rebuild the Honeywell culture, which was much more one company mindset. We are not two companies, we are one company.

• 13:25Speaker 03

  We're going to work towards one stock, one Honeywell mindset, put a lot of operational culture in the organization. So that was one phase of, you know, under his leadership. Then my predecessor, Darius Adamcheck, he became CEO in 2017.

• 13:43Speaker 03

  He further enhanced our operational excellence skill. He invested a lot of effort to build more digital backbone of the company, simplifying Honeywell in terms of internal systems we have. Darius was very passionate about digital, on how to mine data and create more capability for our customers. So he created a culture of more operational excellence, more operational rigor, while Dave was much more focused on one Honeywell mindset, culture integration, not multiple companies. And as my tenure comes in over the last now two plus years, we are now pivoting from the more growth oriented company. And the reason that's important is that over a period of time, our margin rates have grown up and

• 14:26Speaker 03

  we were sub 10% margin company in 2005, 2006, last year it was 23%. So our earnings growth is going to come more from the top line growth versus margin expansion. Not that we won't do margin expansion, but we can't get from another 15%. There's no headroom. So growth culture is important, which means we have to be more externally focused now. We need to understand our markets, need to understand our customers, what's changing, need to understand our competition. So our company, even though name preserves itself as a heritage and but it has been constantly evolving itself. And that's one of the reasons this company has survived 120 years, because it has courage to reinvent itself

• 15:08Speaker 03

  versus being inward looking and always saying that, okay, we are what we are and we are not going to change.

• 15:14Barry Ritholtz?

  Really, really interesting. So I, I, I used to hear people talk about automation.

• 15:20Barry Ritholtz?

  Um, pretty regularly as just the process of moving more and more things to machines. We kind of hear people using the phrase artificial intelligence and AI. The same way, kind of bluntly. I'm curious from the Honeywell perspective. When it comes to automation and AI, what are the customers buying? Is it productivity gains? Is it safety improvements? Is it cheaper labor or substitute for labor? What, what is the key selling point for your customers?

• 15:52Speaker 03

  So I would say the, we have to go back to where the automation industry started from to better appreciate. How will AI impact automation offerings or automation products? Go back to mid seventies when this industry got created somewhere in mid seventy five timeframe. Uh, when uh, computing was invented, chips were invented. Uh, there came the need to say the world has a lot of these expensive assets. Those assets are not running very efficiently. So can we move from the older technologies, which were kind of World War One, World War Two era, to more modern digital technologies? And the way automation system was created was that you sense a set of properties

• 16:37Speaker 03

  and how a particular equipment or a machine or a process is running. And then you have a software program running in a computer, which is going to make sure that it gets back to the desired condition, what it wants it to be. So it's a logic based predefined system. Uh, and the assumption was most of the time this will work in a normal situation. When exception occur, human will take a call. So automation systems were always designed with a human in the loop. And human was supposed to take care of change in input condition, change in output conditions, maintain the equipment, take care of maintenance requirement.

• 17:17Speaker 03

  Down the line now, you fast forward fifty years before AI and data science came in, the people who were running these equipment or automation system or different facilities in different environment, think of a pharma manufacturing facility or a data center, they acquired in knowledge on the exceptions which were occurring in those operating conditions. But when they retire or they move on, their knowledge went along with them. So when the next set of people came in, they kind of have the same learning cycle. Maybe some of it was captured in some documents, some manuals, but not a lot. So what AI is solving for is our systems have no intelligence layer on top of the core automation layer, so that when the next human being comes in, they're not starting

• 18:02Speaker 03

  from scratch. They have an advantage of all the learning over the last twenty-five years, all built in. So they get to say when this condition occurred, nine out of ten times, this was done, it always worked. So you as a human being can say, okay, I think I will choose this logic mix. So humans still needs to make a decision. So I think it's a changing the human and making them more capable at the heart of it. And the reason it becomes even more compelling now is the shortage of skills which are happening in the industrial sector for performing these kind of tasks. So I would say it's a perfect convergence of the situation that more capability is coming into our system because of availability of data science.

• 18:46Speaker 03

  And at the same time, situation requires this capability to be there because less people are available to do this work. And that's going to create more capability in automation system. So automation system remains, intelligence layer is on top of it. So it makes its automation system better in terms of what it can do by preserving its capability.

• 19:07Barry Ritholtz?

  Coming up, we continue our conversation with Vimal Kapur, CEO of Honeywell, discussing turning Honeywell into three standalone companies. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 19:32Speaker 00

  At Brookfield, we invest in the thing behind the thing behind the next big thing. Our focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. We combine deep operational expertise with disciplined long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Learn how you can own what's next at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital.

• 20:06Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 20:48Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 21:33Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Vimal Kapoor. He is CEO and Chairman of Honeywell International. He's been with the firm for 37 years. Honeywell is a highly regarded automation and industrial company. So, so let's start out with plans to break the firm up. You have three distinct entities, Honeywell Automation, Honeywell Aerospace, and then Solstice Advanced Materials. So let's talk about that split. That sounds fairly natural

• 22:16Barry Ritholtz?

  breakup based on industry. Tell us a little bit about the thinking behind that.

• 22:21Speaker 03

  The thinking behind that was when I started as a CEO, my incoming thesis was that we have to simplify this company. It's performed extremely well, great return to shareholder, great service to our customer, but what will we do for the next 25 to 30 years? Are we set up for that? And my thesis was that we need to simplify this into few things where we have a scale. But I started the job in middle of 23 as a CEO of the company. Two things happened in the year of 23, which is good to kind of reflect back just three years back. That was the first year when aerospace cycle really became very strong. That was the year one where everybody said, oh, this industry is growing a lot. Let's pay more attention to it. And this was also the first year when something called AI

• 23:05Speaker 03

  was talked, right? So if we were sitting here three years back, we wouldn't be talking AI. So it's that recent phenomena. So the question we had to really ask ourselves that if we have to simplify as a company, and these two external drivers are occurring simultaneously, a huge demand in our largest business, which is aerospace, automation, which is core to Honeywell, is going to probably redefine itself with AI, should we do it as one company or should we do it as a, in a different construct? And that question get into a problem solving by early 24 to say, let's look at all the scenarios, what's possibilities, what others are doing.

• 23:46Speaker 03

  Um. And as we did the work over twenty twenty four, we got more and more conviction. It's better to separate automation and aerospace into two separate companies. But we ended up making three decisions because specialty chemical is extremely good business, which neither fitted in any one of these two. And we said it's compelling to also spin that off as a separate company. So rather than, you know, two said they ended up becoming three. So they became a standalone business in October of last year, doing extremely well. Since we spun it off now for six months, very proud of the management team and the board which is running this company. Aerospace will become a standalone company in about six to eight weeks from now, six weeks actually as we speak today.

• 24:30Speaker 03

  Uh. Twenty nine June is a date and date is firm. We we quite committed to that. And it's going to be a leader in its segment in aerospace. And the Repinco will be a pure play automation company, which will be probably one of the largest, if not the largest automation company in the world.

• 24:46Barry Ritholtz?

  So so advanced materials, does that include building technologies?

• 24:51Speaker 03

  It's a pure play chemicals business.

• 24:53Barry Ritholtz?

  Just straight up chemical.

• 24:54Speaker 03

  Chemicals business. They make refrigerant, which goes into your car, which goes into your home. They have some other technologies which are related to chemicals. That business is doing extremely well uh as a standalone company. The automation which you mentioned, building automation or automation of industrial facilities, that's part of the remaining Honeywell, which is Honeywell Automation. Now, we will not be called Honeywell Automation. We're using as just as an equal descriptor on what the business will be. We will reimagine our name as we go by in a couple of weeks from now and will reveal that name what it should be. But for sake of simplicity, the chemicals business and aerospace business and an automation business.

• 25:34Barry Ritholtz?

  And and performance materials and technology is?

• 25:37Speaker 03

  So part of it became into advanced material, advanced material solstice. And then part of it is retained within Honeywell, so split into kind of two.

• 25:46Barry Ritholtz?

  Because this is really, everybody thinks of these very broadly, but there are some really narrow, specific use cases for different.

• 25:54Speaker 03

  Correct.

• 25:55Barry Ritholtz?

  Groups, so. I was trying to figure out what would align with what.

• 25:59Speaker 03

  So, so think about automation business serves three large end markets. All types of buildings, all types of energy facilities and all types of industrial facilities. That's what we have kept in the automation. And we also were conscious that we should not make automation business serving so many segments that it becomes confusing again.

• 26:20Barry Ritholtz?

  Right.

• 26:20Speaker 03

  So we want to narrow down to a few very large and impactful segments. This market size is about $200 billion. We will be just shy of 20 billion of revenues. We have a lot of runway to think about creatively what more we can do. How do we grow more? So we're not shortage of runway. Secularly, automation is a naturally high growth, you know, segment because it's something which is so basic to existence of an industrial facility or on an asset. And then when you add the AI story coming on top of it, it's going to have increasingly more growth momentum. So all things being said, yeah, it's very well positioned for a compelling future.

• 27:00Barry Ritholtz?

  And what does the aerospace group do? Not unlike GE, you're not making aircraft engines.

• 27:06Speaker 03

  Right, so we do make aircraft engine for the business jet, so more midsize.

• 27:10Barry Ritholtz?

  Smaller engines.

• 27:11Speaker 03

  Smaller engine, the business jet engines we make, we don't make the big engines. But we are a systems company. We make different component from the nose to tail of the plane. So our components are right in the cockpit.

• 27:24Speaker 03

  Our components, we make radars, we make navigation system. We make brakes for the plane. We make environmental controls in the plane. So we're a systems company. We make engines, we make APUs. So our, our approach is system design for a new platform. So every platform comes in and it could be a commercial plane, could be a business jet, could be a defense platform. We will pitch in different components and systems of Honeywell. Customers will select many of them, some of them. Then that will become part of that, you know, that fleet for decades and decades. So it's a multi-product business, not constrained to one particular product line.

• 28:05Speaker 03

  And the business model is more powerful because it's a systems approach and not a component approach. So you're right in the heart of the systems. You understand how the whole mechanics work. Uh, and really add more value for our customers.

• 28:18Barry Ritholtz?

  So over the past, let's call it ten years, there have been a number of activist investors like Elliot Management. That not just Honeywell, but lots and lots of other large conglomerates. They often agitate for share buybacks or increased dividends. Or sometimes just break the company into pieces. You seem to have landed pretty much in a, in a similar space as some of these activists. First, were they at all influential in your thinking? Or was this something that, hey, these are such different businesses, there's no longer scale advantages of having them under one roof?

• 28:59Speaker 03

  I, I would say the, the situation in our case was a bit unique. Because we started doing work to investigate our future optionality early twenty twenty four. And did a lot of work and actually even announced the separation of Chemicals Business in October. Elliot wrote a letter, which was in public domain, and I got to see it at the same time and everybody else saw it to say, we should further split aerospace and rest of Honeywell too. That was their argument, there's more value to be created. The good news was that we already had done the work and we were convinced that's the right thing to do, but we had not announced anything. So we treated them as another shareholder who has a point of view.

• 29:39Speaker 03

  And we have to articulate our strategy, so there was strong convergence on the thinking. And I think we worked with them very collaboratively on, you know, path forward. And I would say that there's lots being said on activist shareholder. But my experience is that they are, they are like any other shareholder who have a logical argument. If you have a counterpoint, you should support this with the facts and data. Or if you support their point, then you have to execute it. And in that case, it just becomes much more of not what to do, but how to do it. So our conversation with Elliot, like any other shareholder was, this is the situation. Here are the paths, this is how we are thinking about it.

• 30:22Speaker 03

  And we benefited from their expertise in capital markets. How the shareholders will react and definitely that helped us to shape our decision in terms of in a certain way, which was very constructive.

• 30:33Barry Ritholtz?

  Really, really interesting. So, so we seem to go through these long phases where conglomerates kind of become in style, they become favored.

• 30:43Barry Ritholtz?

  You oversaw fourteen billion dollars in M and A, which sounds like a lot of money, but we know really isn't, you know, that's not a, that's not a mega buying spree. And for a long, for the longest time, it seemed like there was a financial advantage to being a conglomerate. At what point does that structure stop being an advantage? What is it, what is being part, throwing all these different pieces under one roof? What does that prevent the company from doing?

• 31:15Speaker 03

  I think every business model has an era. So I think we have to go back to what created this era of conglomerate or larger companies. It really started from the, when the world was, started becoming more globalized after two thousand. China came into WTO, the world became more global, and there was much more global trade, which became the norm on how companies were growing. So all US companies started growing globally. But at the same time, they were able to drive a lot of productivity by taking manufacturing into Asia, a lot of, you know, manpower productivity by doing work in different virtual way, with a lot of IT skills coming in.

• 31:57Speaker 03

  So there was a case to make bigger companies bigger because they had the unique know-how to drive a lot of productivity and scale at a global scale because they were already present there. And that cycle persisted for almost fifteen years till the time that value was captured and that value capture became generally known. Therefore, the question started asking to say, is creating this complex company worth it or simplification or a sector focus is a better way to do it? So I think there was a reason that proposition really worked well and created a lot of value. Take a case of Honeywell, a shareholder value creation from a time of two thousand to two thousand seventeen, eighteen, one of the best in class in the entire S and P.

• 32:41Speaker 03

  So it's not that anything was wrong. We created tremendous shareholder value, but now this point of saturation comes in and then it really brings you to the point of specialization if the markets have scale. And you can preserve scale while you're a specialist, that's best of the both words. And that's what we are, we are doing now to create a scale aerospace company, a scale automation company. We are still very global, we still have very mature processes. But at the same time, we are focused on singular segment. So I, I guess like in everything else, you learn through cycles. And this cycle is all about having the mix of scale and specialization. This will persist till something else comes in now where there's a case to do something else.

• 33:25Speaker 03

  And I feel good about where we are in our position and it is going to create much more shareholder value.

• 33:31Barry Ritholtz?

  So 20 years before you started talking about breaking into three pieces, your fellow Dow component, General Electric, went through the same process, arguably with not a whole lot of success. They started out fairly richly valued, there wasn't a whole lot of room to grow. And I'm curious, when you're thinking about breaking into three, are you looking at other companies like General Electric and saying, what can we learn from what they did right, what they got wrong, what missteps they made?

• 34:06Speaker 03

  I think the situation for each company is very different because separation cannot create value alone by itself. You have to be convicted that the standalone asset has enough growth potential and invest in asset base which is going to grow, which is going to create value. So I think comparing the example you gave versus Honeywell is absolutely very different portfolio.

• 34:28Barry Ritholtz?

  Apples and oranges.

• 34:29Speaker 03

  Very, very different. I mean, so I would say that our drivers were more around what I talked about. Our stock price are more static. We were more, we did not destroy any shareholder values. Our question was, how do we create more shareholder value with external factors coming in, growth of aerospace, growth of AI? Is that inflection point for us to make a different decision? So we did it more from a point of strength versus we have some crisis coming in. So sometimes you use your point of strength to make the right decisions. And we did it fast and we did it right. I think every other company, it came from a different circumstances. But the decision on the outwardly look very similar.

• 35:11Speaker 03

  They look like they all did the same thing, but they all came from very different backgrounds and, you know, different set of assets.

• 35:20Speaker 03

  When we started looking at it, some people believe that we we got

• 35:27Speaker 03

  influenced by success of GE. I want to remind that GE's success came post our decision. That was a process which was occurring. So yeah, that's a data point to say they are also doing it, but some of the success we have observed, some outstanding work by the GE leadership team, that really started happening twenty four, twenty five timeframe. We were far along the way in our own analysis by that time. So I think those are kind of parallel things happening. So there's no one thing you can attribute to say that this thing influenced it. It's a combination of the reason which all come together. And that's what really brings us to where we are today.

• 36:00Barry Ritholtz?

  I like this phrase in your thesis of the current transition from automation to autonomy with artificial intelligence as the dividing line. How far along that process are we as a country, are the industrial sector and Honeywell?

• 36:21Speaker 03

  So let's say that we as a country have an advantage of being the leader in the space of cloud and data science. And companies like Honeywell has responsibility to take the know how which the tech sector is creating, beat Microsoft, beat Google, beat Nvidia and all the, you know, very capable tech companies. How do we bring that capability into our sector?

• 36:48Speaker 03

  Because our customer is not going to go and they are not looking to buy a cloud capability or they're not looking to buy AI LLM. They want to solve a problem. They want to run a business. They want to run an operation. They want to have more uptime. They want to have more, you know, profitability. So our job is to take our system to what I mentioned to you before and add this intelligence layer. And what this intelligence layer is all about, taking capability from the tech companies, take large language models from the likes of Google and Nvidia, use the cloud power which is there from Amazon and Microsoft, but really build a purposeful offering from the industrial sector. And as we are doing that, we are able to create a Models for our customers and that's what they buy from us.

• 37:33Speaker 03

  The underlying plumbing, what we have, they don't want to know it. They don't want to know how this is built. Say, yeah, so you're automating this piece of my work. That's great. So I'm going to get more productivity for that. How much I should pay you for it, right? So I would say we are in the state that this is no more a hypothesis. We are in the, not in the early innings, but we are in the stage of deployment of these capabilities across different customer base. The, why it is not taken up at scale is because our customers have to go through a significant change management in their organization. Because fundamentally, the roles of people are changing.

• 38:12Speaker 03

  Some roles require skills which are less important today and some more new skills are required. And they can't do that overnight just because I created a new set of technology. They have to absorb it, they have to ingest it. But we have some fabulous examples on customer using in scale in different sectors like university systems, quick service restaurants. People are using some of our technologies at a very large scale in refineries, et cetera. So I would say that if I'm sitting with you at 12 months back, I would have said very modest deployment. Sitting today, I would say I'm very excited on what opportunity we see. A year from now, I would argue that the penetration will go up substantially up because it's a

• 38:55Speaker 03

  real economic value creation from what we are really propping. And we as a country are leading because we have the core components of this technology. And now we have to, you know, take this capability across the world. And our customers are excited, they really like what we are doing.

• 39:11Barry Ritholtz?

  Earlier, you mentioned restaurant automation. What does Honeywell do for either fast food service or casual dining?

• 39:21Speaker 03

  You see, think about it, I mean, when you look at a small fast food dining restaurant, there's not much automation in that, but it consumes energy for sure. I mean, let's take a typical McDonald's restaurant as just an example. There's a kitchen there, there's a fryer, there's a refrigeration, it's just keeping a lot of products there. There's of course lights going on. These assets were never thought as a way to improve energy efficiencies by companies like us. We say we should automate a large hospital. Oh, it's massive, there's a lot of opportunity there, a large building. These assets were never paid attention by us because there was no technology available. But when the cloud technology came in, we are able to connect these assets flawlessly, you know, in a matter of hours.

• 40:06Speaker 03

  And then you're able to use a lot of AI-based rule set to understand what should be the energy consumption actual versus what it is today. And give that tools to the owner to say, you know, in example, we connected a quick service chain in UK. I think something like five hundred plus of their restaurants into a single operating system. And they are observing thirty to forty percent energy reduction. Like anything else, the good old management principle, what do you inspect is what you get. Once these were thinking running off by own, nobody paid attention. Even though they desired to do something, there was no mechanism. So we created an easy mechanism to make this available to the customer. So all of a sudden, they are able to generate a lot more productivity without adding too much of cost.

• 40:50Speaker 03

  And that's a part of the new tools which is coming in, which was not possible. And that gives me a lot of excitement that this is going to be much more level of, you know, productivity, efficiency, which is less talked about, you know, whenever there's AI dialogue, it's about jobs, it's going to cut jobs. Nobody talks about economic value creation. It is doing a real value for our customer base, making people more productive. Uh, that's the story of the industrial side, which is probably requires more, more amplification.

• 41:21Barry Ritholtz?

  So what, what's the Peter Drucker quote? You can't manage what you can't measure? So forget five hundred restaurants. What is Starbucks thirty thousand? McDonald's forty thousand?

• 41:31Speaker 03

  Applies to all of these kind of assets. And many people have done this work. So it's not that we have created some new inventions. Some of them have done this kind of discovery, but this effort was not very standardized. It's like a custom made thing somebody will do because you are a big company, you can afford it. But when you do it a large scale, there are hundreds of these chains, there are hundreds of retail stores. They're also doing similar work around the big retail store chains, very similar example. So these distributed assets are becoming a way of capturing value at one end of the equation. On the other end of the equation, when you have retirements coming and our customers are worried about knowledge going out of the door, they're looking at a mechanism of knowledge capture so they can perform their task.

• 42:17Speaker 03

  That's also penetrating with rapidity. So scenarios are different. Some scenarios are looking at, I never paid attention and now I can do it. Some are saying, I have less people, do something about it. And but the capability is fundamentally the same. It's the same capability which solves both the problem.

• 42:34Barry Ritholtz?

  Coming up, we continue our conversation with Vimal Kapoor, CEO and Chairman of Honeywell, discussing the state of automated technology today. I'm Barry Ritholtz. You're listening to Masters Business on Bloomberg Radio.

• 42:59Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. Not hired, candidates must demonstrate their achievements from past jobs. And hands-on experience matters more to recruiters than advanced degrees. With the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 43:43Speaker 01

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• 44:25Barry Ritholtz?

  I'm Barry Ritholtz, you're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Vimal Kapoor. He is CEO and Chairman at Honeywell, the company he has worked at for the past 37 years, since starting there as an engineer. So I'm curious as to how some technologies seem to just take forever to find their way into the real world. You know, if you travel around the world, I remember the first time I saw one of the point-of-sale handheld units in a restaurant in Europe, I don't know, maybe it was 15 years ago. And I was astonished, wait, I don't have to request a check?

• 45:10Barry Ritholtz?

  They come, then they have to give them the key, the card, they go away. Like, I will take a check, they come by. It seems to have taken a decade to make its way here. What are some of the impediments to some of this, some of the cutting-edge technologies? That's obviously using a bunch of tech that already existed. Is this a problem getting adaptation, even though it's clearly more productive, more efficient, faster turn of tables? Like, I was astonished how long it took for the United States to implement that.

• 45:45Speaker 03

  Fair. I think there's a scenario in your example because of the technology displacement of some old method versus a more new method. But the reason I believe more bullish about it is that we are solving a known problem. And the known problem is, word has less people to do a lot of work around skilled labor in the industrial world. That's a real problem. So our solution is not trying to find a problem. We are finding, we are giving a solution to a known problem. Adoption rates are lower because of the change management issue, but this is a change management of the order of 18 months, 24 months, 30 months.

• 46:22Barry Ritholtz?

  Not a decade.

• 46:23Speaker 03

  Not a decade.

• 46:24Barry Ritholtz?

  Right.

• 46:24Speaker 03

  So I remain very optimistic, given my, you know, experience in these sectors, the adoption rates are going to be much more quicker because the problem is real. We are not inventing the problem. This problem exists for, and by the way, this problem is everywhere in the world. This is not a US problem only.

• 46:42Barry Ritholtz?

  Skilled labor.

• 46:43Speaker 03

  Skilled labor. Europe has more population shrinkage than US. Go to Japan and Korea, they have the same problem.

• 46:49Barry Ritholtz?

  And China as well.

• 46:50Speaker 03

  China has population shrinkage.

• 46:51Barry Ritholtz?

  Right.

• 46:51Speaker 03

  So this is a universal issue. This is not invented here. Now we get excited on the job displacement happening with robots and humanoids. That's a small portion of a manufacturing industry. That probably is also displacing some tasks which humans are not willing to do, like lifting boxes.

• 47:10Barry Ritholtz?

  Right.

• 47:10Speaker 03

  Yeah, I mean, okay, it's not very interesting. Uh, but then there are other jobs with other sectors which we address, where a physical AI or intelligence layer is going to create tremendous amount of economic value.

• 47:24Barry Ritholtz?

  So I keep hearing people compare that intelligence layer of artificial intelligence to the internet. I'm wondering, and you seem very bullish and excited about everything AI can do. Is there a better comparison? Is the industrial revolution a better framework for thinking about the impact of AI over the next ten, fifty, a hundred years?

• 47:50Speaker 03

  I think the AI impact will be different in each sector. And I think if we make it too broad brush, we are losing the bigger picture. But when we are making it specific to a segment, then you're being more precise to say in context of the end markets we serve, of the industrial sector. I talked about examples. There it's all about the skill shortage issue, which is very different from if we are using AI for better search engine. If I'm using AI for, you know, making a summary of our talk, which somebody can do. And that's a very different use case. And one can argue, is it going to add productivity or not? Or is it going to take away jobs? That's a different scenario from simply not having people to do work. Very different scenario.

• 48:34Speaker 03

  And I think that makes our case more compelling. The adoption rates are driven by a near real, real need versus we are trying to create a need which is unknown. And that's not being talked a lot more. Lot more dialogue is around job displacements. But those are more in the jobs which could be automated, like finance function or HR function. Maybe to a certain degree, it's true. But not to the point. My personal view is that it's going to have the amount of impact which is being talked about.

• 49:02Barry Ritholtz?

  So let's talk about some of the challenges of this technology layer and, and some of the black hats out there. When Mythos came out, I would imagine a company like Honeywell. Set up and took notice the idea of AI taking over industrial controllers, power, water, air conditioning, all that stuff has to be thought of as a genuine threat. Nobody wants rogue thermostats or what have you. How do you look at the threat from a powerful entity like Mythos? And how much of an arms race are we in to harden all of our, you know, soft underbelly?

• 49:46Speaker 03

  So I think we have to appreciate the fact that where we are deploying AI, it is substantially different from what we are generally talking about in broader public domain. If you think of applying AI in an industrial system, let's take a case of a hospital and I want to apply AI into automation system to make it more efficient. The data of that is not in public domain. The data is in Honeywell system or one of our competitor system. So you cannot go to internet and train anything because there's nothing to train on. So that makes data friction as a big problem in industrial sector, which in a way becomes a protection layer for us.

• 50:26Barry Ritholtz?

  The friction becomes a protection layer.

• 50:28Speaker 03

  But it doesn't mean we should not do anything about it.

• 50:30Barry Ritholtz?

  Right.

• 50:30Speaker 03

  It's to say, oh, I'm protected. It means we should take it seriously to think of potential threats coming in. Because if the data friction is removed, which is hard to do, but it, humans are very intelligent. So we have worked very hard to remove the data friction and also use our domain knowledge because interestingly, you cannot solve a horizontal problem in industrial domain. What I mean by that is you do not have a software application like a CRM system or an HR system. The problems of each sectors are very different. If you're a refinery, you're trying to produce more jet fuel and more diesel. If you are a life sensors manufacturing facility, you're trying to produce drug with minimal quality giveaway.

• 51:15Speaker 03

  But if you're a data center, you want more uptime. Your problems are so different. So we can't create a magic AI application and sell to everybody. We have to be purposeful that where do we use our data and what problem we solve, which only come from years of experience. So those two really become in a way a constraint for a generic company to come in because the data friction and lack of understanding of domain. Which means companies like us, which possess both, have to solve this problem.

• 51:43Barry Ritholtz?

  Mm hmm.

• 51:43Speaker 03

  And that's why we are very bullish about it to say, we are going to do it. We are going to take all the capabilities from tech companies and build new set of capabilities to take our industry from a pure play automation to more towards autonomy. And autonomy doesn't mean humans will disappear. Humans will become more empowered. Humans will become more capable. And to the extent there's some skill shortages, it'll address that point.

• 52:07Barry Ritholtz?

  So let's talk a little bit about how tumultuous the past 12 months have been in terms of geopolitics. We not only have the war in the Ukraine, but now in Iran. We had the on again, off again, on again, and most recently, off again tariffs. How does this affect how a company like Honeywell thinks about reshoring and bringing manufacturing back to the United States? Thinks about supply chain issues? How do you plan in such a tumultuous environment?

• 52:40Speaker 03

  Well, it's definitely a challenge for companies to have more stability is what companies want. So I would say that companies like us have very mature processes to deal with it. So every time this issue occurs, we have some sort of disturbance for, depends, four weeks, eight weeks, 20 weeks, who knows, depending on the situation. So we have learned how to deal with it, but it doesn't come without a cost. You lose some growth in that window. You may have to incur extra costs like it happened in case of tariff, because when tariff got announced, we have no choice but to pay it.

• 53:13Barry Ritholtz?

  Right.

• 53:13Speaker 03

  Right, now whether we can recover it or not is a subsequent decision.

• 53:16Barry Ritholtz?

  Are you one of the many companies that have filed litigation to get refunds?

• 53:20Speaker 03

  We did not file any litigation.

• 53:22Barry Ritholtz?

  How big of a hit was?

• 53:24Speaker 03

  It was not big for us. We were mostly down to the second part of your question. We have been doing manufacturing local for local for multiple years. So we made for US, in US, made for Europe, in Europe, made for China, in China. So we don't move a lot of stuff around. However, what we cannot control is the global nature of the components we buy.

• 53:44Barry Ritholtz?

  Right.

• 53:45Speaker 03

  If I have to buy.

• 53:46Barry Ritholtz?

  Everything in the supply chain and raw materials.

• 53:48Speaker 03

  Correct, because we can't make everything. So if a component is made in Korea, like batteries, we have to buy it from there. And if a component is made in China or somewhere else, we have to buy it from there. So that impact is certainly not.

• 54:04Speaker 03

  Under our coverage because we don't have an endless capacity to invest in everything. But our core manufacturing, we have one hundred and fifty factories, you know, and they are well distributed.

• 54:15Barry Ritholtz?

  Around the world.

• 54:16Speaker 03

  Around the world, and they are well distributed across the world. I mean, so we are, so we don't have this foundational challenge of reshoring. But we certainly have to deal with changing environment in which we have to think about more local supply-based development aligned to what the expectations are at this point of time.

• 54:34Barry Ritholtz?

  So we've noticed that defense budgets, really around the world, not just here in the United States, have been rising, and there certainly has been fairly robust demand for aerospace. There's a big upgrade cycle just kind of starting. A lot of the fleets are pretty old. How do you look at this in terms of risk and opportunity? How are you thinking about defense and aerospace?

• 54:57Speaker 03

  The defense is a big opportunity for our aerospace business. That's about forty percent of the aerospace business. It's certainly, the current changes in geopolitical environment and government spending more money is only positive. So it's going to become a even more growth driver for the business compared to what it had. So when we started this thesis two, two and a half years back, we did not predict this level of demand in the defense. But now that's really a reality, whether it's in US, whether it's some of our US allies. There's a lot more growth opportunity across the board for different products and services we provide.

• 55:33Barry Ritholtz?

  And then there's been some debate about the future of technology and industry. China seems to be running away in a couple of areas, like energy transition and robotics. From where you sit, is the lead gonna pass back and forth, or is there a clear winner? And that's a potential problem for the United States, both strategically and economically.

• 55:58Speaker 03

  I think we have to look at what's look ahead. Was this trying to look back and be, you know, skeptical about it? I mean, we will look ahead. The problems which the world is in ahead of us, we clearly know the US lead in AI. So how do we? We protect the lead. We clearly have a lead in Quantum. It's one of the businesses we own that how do we really keep that scale?

• 56:20Barry Ritholtz?

  You do. I didn't realize. What what does Honeywell do in the quantum space?

• 56:23Speaker 03

  So we own a business called Continuum in which Honeywell has a majority stake. We spun it off a separate company in 2021.

• 56:30Barry Ritholtz?

  Oh, okay.

• 56:30Speaker 03

  All right. So it's not. It's Honeywell investments in that company versus it's not part of Honeywell.

• 56:36Barry Ritholtz?

  I I recall. I recall that way back when. That's right. Really, really fascinating.

• 56:41Speaker 03

  Correct. So there are technologies in which US have an advantage. US have to rebuild its supply base for some of the critical sectors like semiconductor, like pharmaceutical, which are mission critical. And I think that's underway, but we need to have patience that those things take years to happen. There's not a switch to say we want to do it and those things show up. They can take five, seven, 10 years. So I think it's heading in a right direction. We as a country has all the capabilities. We have the capital. We have the know how. But we have to refer by some of our skills which we lost over a couple of years in few portions of industrial sector. But let's not forget, we have very, very capable companies which created the same sector all over the world. So those have not gone away.

• 57:25Barry Ritholtz?

  So reshoring is not as challenging as a lot of people make it.

• 57:29Speaker 03

  It is more thoughtful in terms of which, how do you prioritize? All things being equal, reshoring is the right thing to do. But my personal view is we should pick up the top five and say, okay, here are the five we want to go really go after and make it successful. Because trying to do everything is going to be just extremely difficult in order of prioritization.

• 57:47Barry Ritholtz?

  So final question before I get to our our speed round. What do you think when when it comes to automation and artificial intelligence? What do you think business people and investors for that matter really are misunderstanding? What little nugget that you've experienced would give them a little more insight into what the future looks like?

• 58:08Speaker 03

  I think the point we discussed earlier that the automation gets heavily enabled by AI and really create the intelligence layer. And that opportunity it creates is being underestimated. I think this opportunity is real because of the skill shortage, because of the knowledge gap, which has got created over a period of time. So I truly believe that's something which needs more more conversation and more emphasis.

• 58:34Barry Ritholtz?

  So so I only have you for another three minutes. So let me click through these questions really quickly, starting with. Tell us about your mentors who helped shape your career.

• 58:45Speaker 03

  My early managers, I mean, I was lucky to have some very good managers who taught me different things. You know, not to be fearful about whom you're talking to, how do you think about value propositions? How to think global scale? So I think in Honeywell, you're blessed to have some very strong leaders in different part of my career. And in the first fifteen, twenty years, which really shape you. Because if you, what shapes you is the first fifteen-ish years of your life. Because once those value system is built in your brain, you kind of live with that. And I was benefiting from some very powerful mentors in in different parts of the company.

• 59:20Barry Ritholtz?

  Let's talk about books. What are some of your favorites? What are you reading recently?

• 59:24Speaker 03

  So books, I read variety, both from leadership to sector specific.

• 59:30Speaker 03

  The recent one book I'm reading is The Price from Dan Yergin. If anybody is interested about oil economy, please do read it. Six months back, I started reading Chip War. So some of the sector specific things, but also read about leadership of some of the people I admire. Dave Cody was Chair CEO of Honeywell for a long time. He has some very fascinating book. Winning now and winning later. Indra Noor joined our board recently. She has some fascinating leadership books. I read some of them. I read a lot of books on China. I think it's underestimated the scale of that economy. So I think we just need to. There's a book called Words View, China's View of the World, very interesting book. It's like, we have a view about China, what about their view?

• 1:00:14Speaker 03

  Have we ever asked them the question, why do you, what do you do? So I kind of have very diverse. The reading habits of, you know, waiting from my business specific to leadership to some of the country specifics. Yeah, talk it around a lot on that.

• 1:00:30Barry Ritholtz?

  And our final two questions, what sort of advice would you give to a recent college graduate? Interest in the career in either engineering or management?

• 1:00:41Speaker 03

  I mean, both are fascinating carrier. I would say engineering is a carrier which gives you a lot of options. So do pursue that because it gives you a wide variety of choices. Management is something that people should do who have more willingness to take a risk and have courage to make decisions. Because in the end, at some point in your career, you will have to do both. And if you think that's not your sphere, that's something you're not good at it, I would rather argue than you choose something you're really good at versus otherwise you're going to get saturated at some point. But management is an excellent carrier by itself. So both are excellent.

• 1:01:19Barry Ritholtz?

  And our final question, what do you know about the world of automation, engineering, and artificial technology today that might have been useful 37 years ago when you first started at Honeywell?

• 1:01:33Speaker 03

  I don't know. I think I'm always excited about learning new technology all the time. You know, I'm still very curious to read things, how they work. I think I will say that staying curious is very important for us as a human being. We should never be satisfied on what we know. We should always ask the question, what we do not know, whether it is about a technology or a business process, or for that matter, any fact of life. And more you are curious, more successful you are because you're open minded and you're always willing to learn. And that has been my principle all my life. Always learn something new about anything and you feel very fulfilled.

• 1:02:11Barry Ritholtz?

  Huh. Really, really terrific. Vimal, thank you so much for being so generous with your time. We have been speaking with Vimal Kapur, CEO and Chairman of Honeywell. If you enjoyed this conversation, well, be sure and check out any of the previous 637 we've done over the past 12 and a half years. You can find those at Bloomberg, iTunes, Spotify, YouTube, or wherever you find your favorite podcasts. I would be remiss if I didn't thank the correct team that helps put these conversations together. Amongst the many people who helped me, Alexis Noriega is my video producer, Sean Russo is my researcher,

• 1:02:55Barry Ritholtz?

  Anna Luke is my producer. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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