While United Technologies (UTC) waits for final regulatory approvals from the U.S. and China so it can close its $23 billion-dollar acquisition of Rockwell Collins it is moving forward with plans for a breakup of the company. A portfolio review has led to talk about a possible three-way split with its aerospace business, including Rockwell Collins, combining with jet engine maker Pratt & Whitney.
The Otis elevator business would be spun out into a separate company, as would its Climate, Controls & Security division, which owns Carrier air conditioners. United Technologies CEO, Greg Hayes, has been quoted as saying, “We haven’t been waiting for the close to do the work.” A decision about the split is expected within the next two months.
UTCs’ plans to acquire Rockwell Collins were announced a year ago and had been expected to be finalized in the summer of 2018. However, the need to sell a business unit as part of the deal caused some delays. With the recent sale of one such unit to France’s Safran, the deal has been able to move forward in the approval process. China is waiting for the U.S. Department of Justice to approve the deal before it acts. There is some concern that growing trade tensions between the U.S. and China could result in Chinese approval being used for leverage in the larger trade conflict with the U.S.
Possible Procurement Modifications
Among the world’s top electronics OEMs, United Technologies was the 35th largest purchaser of semiconductors in 2017 according to data from IHS Markit’s Technology group. More importantly, IHS Markit data shows that UTC is the 11th largest purchaser of semiconductors for companies headquartered in the Americas region and the fifth largest purchaser of semiconductors for use in electronics production performed in the Americas.
United Technologies published total revenues for 2017 of $60.2 billion. Based on its analysis of the company’s electronics equipment production operations, including the types of electronics produced, IHS Markit estimates that UTC produced over $21.9 billion in market value in electronics equipment, which drove purchases of nearly $1.8 billion in semiconductors in 2017.
With its major focus in “Building and Home Automation,” United Technologies is the world’s largest purchaser of semiconductors for use in this category which boosts them to the 2nd largest purchaser of semiconductor components for industrial electronics overall, just behind Siemens. UTC’s major operations in the military/aerospace industry resulted in it being the eighth largest purchaser of semiconductors in this area. Combined purchases with Rockwell Collins would make it the fifth largest purchaser in the mil/aero segment.
However, Rockwell Collins does not give a notable boost to their overall purchase of semiconductors given that the value of semiconductors it purchases is less that 9% of UTC’s total semiconductor purchases. Given the diverse nature of industrial electronics, UTC’s purchase of semiconductors is also somewhat fragmented. IHS Markit data shows that it is a top purchaser of LEDs, power transistors, and thyristors, along with overall discrete components.
Of the three potential businesses to be spun out, two of them would still retain significant purchasing and supply chain power with the level of their semiconductor spend: Climate, Controls & Security and Aerospace. The Otis elevator business would have a relatively minor demand for semiconductors. It is yet to be seen how difficult it will be for UTC to split out its procurement organization into three separate businesses. Supply chain partners should anticipate the need for changes in serving the needs of the split-out companies that will continue to represent a highly valuable opportunity.