CEOs in the defense industry, hospitals and real estate identified the challenges before their businesses at a panel presentation today sponsored by National Association of Corporate Directors–New England. (Disclosure: I am on Advisory Board of, and Secretary to, NACD–New England).
The speakers: Gregory Hayes, Chair and CEO of RTX (Raytheon and two other major defense/aeronautics manufactures with c $75B annual sales and 186,000 employees); Ann Kilbanski, CEO of MassGeneralBrigham; and Ben Breslau, chief research officer of JLL (world-wide real estate company engaged inter alia in planning and finance of major realty assets).
Points of general agreement:
AI will impact everything at an accelerating pace and this time next year you will be surprised to learn this is a “today” issue: disruption of labor force, need for retraining, greater efficiencies impacting how things are manufactured, how manufactured products operate, what sort of real estate assets are needed (and not needed).
Labor force is a major player. RTX lost c 24,000 works last year and hired more than 34,000; labor markets are fluid, the fall-out of COVID has reshaped needs for real estate and ability to hire for particular roles, senior managers are mobile and particularly difficult to find/hold, costs of living in major cities for labor (as well as companies) tends to drive people and businesses to lower-cost venues (the South, Iowa [one of RTX’s 3 major components is in Iowa]).
The elephant not in the room: no one used the “R” word. When I reported back to my corporate department after the meeting that “recession” was not discussed, there was interest in this absence of mention, given the continuing though not universal drum-beat about this national and global risk.
Medical Care Highlights
The system of health care delivery in the US is broken. We remain somewhat stuck in the financial model of “fee for service.” What we need is a structure that pays for a continuum of care that has better long-term outcomes: preventative services, care delivered promptly by Zoom or similar, clinics in areas away from a centralized hospital, support for delivery of care within the home itself. Some types of care are already on that model: c90% of mental health care today is delivered on line. Medicine needs to come to the patients.
Real Estate Highlights
This discussion touches issues as which the anecdotal evidence is general knowledge..
While people are returning to the office, we do not know how far that trend will go. (Per RTX, huge percentages of their people are remote [40%] and many are hybrid-lite, which of course impacts space needs.) In cities, new properties with amenities are much more popular than older buildings. Older city buildings need to be repurposed, used for housing perhaps, but maybe demolished; non-use and high interest rates drive down property values to the value of the ground alone, so you demolish. Interest rates will stabilize at some point and at some future time likely drop but specifics were unclear. In a year, banks will clean up their finances and with rates stabilizing some values may come up. Grade B, C and even A-minus city properties and malls anywhere are at risk and candidates for repurposing or demolition.
Aviation, Defense Contracting, Space (RTX lines of business)
Air traffic will increase radically in the next decade. (Still, 80% of Americans have never been on a plane (!).) We lack pilots now, will get worse. Federal Air Traffic Control is outdated and does not use modern technology. Result is going to be very bad. Must use AI. Need to install new ATC technology, a multi-year $10B project. FTA was without a chair for three years until recently, which has been a delay. Main reasons for flight delays: lack of pilots and ATC lacks AI technology, which is here today, and could easily reroute many delayed flights. Planes of the future do not need pilots. Government does not know how to certify a self-flying aircraft so insists on pilots; passengers of course also wary. One pilot on the ground can control many aircraft with AI. Ideal on-board flight crew of the future: either no human, or one human and a dog (the dog keeps the pilot from touching any of the controls).
War in Ukraine: RTX products shoot down long-range and near-range missiles/drones. 90%+ success with missiles, 98% success with short-range objects (<5 miles). War is going to last 2-3 more years.
China: tension point is Taiwan which is 100 miles from China shore. China has tech we do not have, super-high speed air weapons (a mile a second in some cases) that we do not have technology to intercept; working on it. Goal of some Chinese weapons: to take out US military capacity at Pearl Harbor before it can be deployed, in case China make a move, so what US then could do would be too late (sound familiar?). This last section on China was something that neither I nor the folks with me had ever heard before.
These final two paragraphs affect supply chain design, onshoring and near-shoring (RTX has 14,000 discrete suppliers), but also have geopolitical ramifications that are unsettling in both economic terms and personal (risk of major war) terms.