How Ukraine Has Highlighted Gaps in US Defense Technologies

ADI IGNATIUS: I appreciate that. You made some public comments a while back about how the conflict would likely result in an increase in your business. Some took issue with that. That’s seems like a logical consequence of what’s going on, right?

GREGORY HAYES: Yeah. That’s fair enough. Look, we don’t apologize for making these systems, making these weapons. The fact is, they are incredibly effective in deterring and dealing with the threat that the Ukrainians are seeing today. The Javelin anti-tank weapon system is a modern marvel. It can take out a main battle tank from two and a half miles away. The Stinger anti-aircraft missile, which frankly has been around since the late ’70s, is incredibly effective in targeting low flying aircraft, helicopters, and even jets and other missiles coming in at less than 10,000 feet.

So I make no apology for that. I think again recognizing we are there to defend democracy and the fact is eventually we will see some benefit in the business over time. Everything that’s being shipped into Ukraine today, of course, is coming out of stockpiles, either at DoD or from our NATO allies, and that’s all great news. Eventually we’ll have to replenish it and we will see a benefit to the business over the next coming years.

We don’t make a huge margin on these products. This is all cost-based pricing. But again, the idea here is to make sure that you have the capabilities to deal with whatever threat might be out there, and that has been the mission of Raytheon Technologies since our inception.

And Adi, please call me Greg, not Gregory. Only my mother and father still call me Gregory.

ADI IGNATIUS: All right, I appreciate that. Well, Adi’s my nickname, so let’s go with that too. I’m interested in how a company like Raytheon Technologies thinks about ESG, environmental social governance, for those who don’t play around with that acronym. Investors increasingly look at ESG ratings for companies as part of their assessment of their investment worthiness. I would imagine some of the rating companies are not particularly generous in their evaluations, given the business you’re in. Do ESG raters get your company?

GREGORY HAYES: I think for the most part they do, and I think, again, it’s the story that we need to be telling. As a defense contractor, there are certain investors that just don’t invest in us. In Norway, the sovereign wealth fund will not invest in defense companies. That’s fair. That’s completely up to them. But as you think about ESG and the various pillars of a good global citizen, I think Raytheon Technologies is doing many, many things to improve our standing in the community.

I think about what we’re doing from a diversity, equity, and inclusion standpoint, I think about what we’re doing in terms of community reinvestment. We’ve committed to spend $500 million over the next 10 years on underserved communities and providing opportunities. What we’re doing to educate our employees, what we’re doing with our suppliers in terms of promoting supplier diversity. There are many different pillars of ESG. We’re just about to put out our first ESG report. And I’m actually very proud of the accomplishments that we’ve made in these last couple of years since we’ve brought the two companies together.

We’re not perfect. We have a ways to go from the diversity standpoint, but we have published real goals and we have hope, are holding people accountable. We’ve made part of our executive compensation tied to diversity goals. And so I don’t shy away from DE&I.

On the environment side, I think what’s important to remember is jet fuel, unfortunately, does contribute to global warming. So what we’re doing about it is we developed the geared turbofan engine, which has reduced NOx emissions is by 50%. It reduced fuel consumption by 15% or 16%, and we’re in the process of developing the next generation of that engine called The Advantage, which will be able to operate on 100% sustainable aviation fuels. So we take these goals seriously. We realize climate change is not a myth. It is a reality, and we’re going to have to do whatever we can to support our customers in their journey to this net zero target in 2050

ADI IGNATIUS: I know you have a number of employees in Central and Eastern Europe. In terms of employee relations, how are you handling and managing the workforce there on the ground at this point?

GREGORY HAYES: It’s interesting, we actually had operations in Russia until the 24th of February, and upon the invasion, we closed our businesses in Russia. We’ve pulled all of our engineers out that were supporting the development of a Russian aircraft, a commercial aircraft. We have stopped servicing all of the Russian civil aircraft that are in-country. It’s unfortunate and we’re talking about less than 1,000 people out of a workforce of around 180,000 people. So not a huge impact.

I would say more importantly, though, we have about 10,000 employees in Poland, and about 5,500 of those employees are in one of our most advanced manufacturing facilities in a place called Rzeszów, which is right on the border with Ukraine in the south of Poland. And I can remember visiting there several years ago when one of the first questions I got asked in a town hall meeting is, “Will America protect us when the Russians come?” And I kind of laughed it off saying, “Guys, you don’t understand. That’s not the world we live in anymore. You’re a NATO country, NATO ally. Of course, America will defend you.” But I said, “You’re not going to see the Russians coming across the plains of Ukraine in our lifetime.”

Obviously I was wrong, as were many others about that. What’s most heartwarming though, talking to some of those folks in the last few weeks: Of those 5,500 people, more than 1,000 of those folks have opened up their homes to the refugees coming in from Ukraine, even providing them food, shelter, everything that they need.

And it is a human tragedy what’s going on in Eastern Europe today with all of these refugees. We’re, of course, providing financial support, we’ve contributed over a million and a half dollars. Most of that coming from our employees to provide humanitarian relief. But I think more importantly, all of our employees in Poland have opened up their homes and their hearts to these poor people that have been displaced by this atrocity of war.

ADI IGNATIUS: It’s really a tragic moment, an incredible moment.

Business for all of us has changed profoundly in the past few years for a number of reasons. I’m interested, particularly in the R&D sphere, how have things evolved for you and whether it was the pandemic or just over time: How are you thinking about R&D now that might be different from how you did in the past?

GREGORY HAYES: It’s an interesting journey that we’ve had over these past two years. We actually brought the two companies together on April 3rd, about two weeks into the nationwide lockdown because of Covid. Commercial aircraft were not flying anywhere. Our commercial aerospace business, which was really about 60% of the business, got cut in half. We had roughly 200,000 people the date of the merger—100,000 of the more essential coming to the office, but 100,000 had to be working from home. And the challenge became: How do you continue to innovate and collaborate over Zoom? And that has proven to be an incredibly effective tool. The idea of video conferencing has been around for a long time. I was never much of a fan, and I always thought you had to be in the office, working together every day to get things done. But I give credit to our organization. We figured out how to move 100,000 people to work remotely within two weeks of the merger.

We were able to continue to innovate, continue to invest. We spend roughly $7.3 billion a year on R&D. About half of that comes out of our own P&L, the other half comes from customers. And the question is, can you do that effectively? We’ve actually found that with the different video systems, whether it’s Zoom, or whether it’s Teams, or whether it’s Cisco, we can work together, and we can be very effective. What was amazing to me is productivity actually improved in our first year of working remotely. Some of that we attributed to people not standing around the water cooler talking, but more importantly, people were able to focus on their work in their own environment in a comfortable way.

As we think about the roughly 60,000 engineers that we have out there, they’ve really done a tremendous job of continuing to find ways to connect across the businesses. And keep in mind when we brought these businesses together, one was a commercial aerospace business, the other was a big defense business, but a lot of very common technology, and finding ways to work together across the enterprise was absolutely essential to make this deal work.

We’ve actually realized over a billion dollars of synergies in these last two years, but more importantly, we have also identified about $12 billion of additional revenue opportunities by working together, and it’s all been done remotely. So, kudos to the team. There was no playbook, certainly, when Covid struck.

ADI IGNATIUS: I imagine, particularly with a kind of hybrid and remote work aspect, you must think about cybersecurity issues a lot. I’m wondering if you have had to do more than others, given the industry you’re in, in order to make sure everything is secure?

GREGORY HAYES: Yeah. We spend roughly a billion dollars a year on IT, and a big chunk of that is for cyber. Actually, just to be fair, one of our businesses, our Information in Space business, our INS, actually has one of the largest cybersecurity operations in the world. We provide cybersecurity through the Department of Homeland Security, to most of the .gov organization. We also have what I would consider to be some offensive cyber capabilities.

So, we have used some unique capabilities within the four walls of Raytheon that allow us to do a really good job of protecting the four walls of Raytheon as well as all the way down to our suppliers. That’s not to say we haven’t been hacked. We get about two million attempts a week. Two million intrusion attempts a week that we have to deal with.

We certainly have had our share of misuse, especially, I call it. It’s the one-off server that might be at some remote location somewhere around the world that’s not part of our network that gets hit by a zero-day attack, some ransomware from some small business. But for the most part, it is a full-on team effort to make sure that these intrusions never mount to anything, and so far so good. But it is constant, constant vigilance. There’s no other way around it. You have to stay one step ahead. You’ve got to do your, you call it your daily hygiene, you’ve got to make sure your employees are aware of these phishing attacks. You have to be constantly vigilant.

ADI IGNATIUS: So, for viewers who maybe don’t have the sophisticated systems that you have in place, and maybe who are increasingly worried about cyber attacks given what’s happening in the world right now, what’s your advice? What do they need to do first?

GREGORY HAYES: There are always vulnerabilities in any software package that’s out there. And the idea is, the Microsofts of the world, the Oracles, SAPs, they find these things, and the question is, how quickly can you install these patches? We’ve got over 300,000 devices around the world that we monitor on, on a daily basis. We try to, within seven days, make sure all of those patches are put in place.

Also, if you don’t have the capabilities in-house, you really need to get help externally. And there’s plenty of companies out there that provide these services, but first and foremost, it is making sure that you’re following that daily hygiene of making sure your patches are put in place, monitoring what’s coming in, making sure your firewalls are in place, and no firewall’s perfect. I still remind people that the biggest cyber threat doesn’t come from Russia or China, it comes from our employees every day and the access to the data that they have.

Making sure that you have a robust process to monitor employee activity, and I don’t mean big brother, I just mean the ability to see if someone’s taking more data than they’re entitled to, or looking in systems that they’re not supposed to be in. You’ve got the ability to monitor that on a real-time basis. Not easy, and not cheap.

ADI IGNATIUS: Let’s go back to when we were talking about R&D. You have mentioned in the past that hypersonic weapons may be particularly critical in the not-so-distant future. There’s evidence that Russia is already using those. Is that the future of defense technology?

GREGORY HAYES: Hypersonics are an interesting concept. And again, just to level-set the audience, we’re talking about our weapons that fly somewhere between Mach five and Mach 20, and really, three different platforms. Some of them would be launched ballistically. Now this is a hypersonic glide vehicle that goes up into the atmosphere. It comes down much like a ballistic missile with a big difference that it doesn’t follow a ballistic trajectory. It actually is maneuverable in the atmosphere, which makes it very, very difficult to defend against.

Typical ballistic missiles we have something called the THAAD that we work with Lockheed [Martin] on that can actually take out a ballistic missile. Hypersonic glide vehicles, very, very difficult to hit, just because they have the maneuverability. The same with hypersonic air-breathing missiles, these are typically fired off of a fighter jet. They could also be fired as a cruise missile from a submarine, perhaps.

These will not be nearly as fast. The glide vehicles, Mach 20, right? 17,000 miles an hour. Hypersonic air-breathing, Mach five, 3,500 miles an hour. Again, they all represent challenges in terms of how do you defend? I would tell you right now, we last year, for the first time, successfully tested an air-breathing hypersonic weapon system with the DOD, but we’re a long way from being in full-rate production.

Chinese, on the other hand, are way ahead of us. And even the Russians are ahead of us in terms of having capabilities today to launch hypersonic missiles. For many years in the defense industry, the whole idea was stealth. How do you protect your air assets or your ships from enemy radars, such as you can complete a mission without endangering the crew? Hypersonics’ speed overcomes stealth. Because of the speed of these systems, and the range of these systems, the real question is, how do you now defend the homeland against these weapons systems? And we are working very closely with the Department of Defense to come up with multiple ways in which we can deal with them. It is a huge technical challenge.

As we think about this, and I know this may sound like a sci-fi, but literally, a high powered microwave for a millisecond could literally fry the electronics in one of these things if you hit it, and that might be our best bet. And again, that isn’t one of our core businesses is microwaves, high powered energy. But it’s only one answer, and we’re working with DOD on coming up with what would be a layered defense, but I would tell you right now, we’re behind. It is one of the key technologies that we’re investing in ourselves and the government is investing in, but this is going to be a 10 or 15-year process to catch up to where the Chinese are today.

ADI IGNATIUS: All of us in business are facing a battle for talent these days. I’m wondering what that looks like for you in your industry. What are the skills that you are trying to bring in and perhaps struggling to bring in enough of?

GREGORY HAYES: Last year we hired 19,800 people across Raytheon. We have been relatively successful in attracting talent, and we’re hiring on everything from coming out of college, to people with advanced degrees, to people with the 20 years of service. But the hunt for talent is real. It is a challenge for all of us. What’s interesting is I think of those 19,800 people that we hired last year, almost half of them haven’t been to the office yet. And we’re just in the process of reopening our offices around the world and it will be great to see these people in person and actually for them to feel like they’re part of the Raytheon Technologies team.

If you think about what talent we’re after, well obviously it’s engineering talent, program management talent, it’s supply chain talent, operations talent, specifically around AI and machine learning. Really, it runs the gamut. I say we get our fair share of people, people look at Raytheon Technologies as a place they want to work because they believe in our mission of defending democracy and connecting the world. I think our attrition rate, again, this is all public data, is about 6%. So that means out of 180,000 people every year we’re replacing about 11,000 and we’re still growing. So it’s a challenge that’s not going to get easier, especially with the demographics that we see here and in Europe.

ADI IGNATIUS: I want to turn to the first question from our audience. This is from Jesse from New York, who says, many leaders cite culture as a reason for a full return to the office. How has the hybrid remote model shaped your culture at Raytheon Technologies?

GREGORY HAYES: Since we have been working remotely for these two years, this idea of how do you develop a single culture for Raytheon Technologies has been first and foremost in our minds. And as we thought about it, really goes to values. And so as we have been communicating with our folks, and I’ve been doing videos on a regular basis, probably more than our people want to see, we have always gone back to values. Dignity, respect, trust, innovation, collaboration, and those are the values that we hold firm. I’d say culture is really a culmination of learning over time. And we are still, I would say, in the infancy in terms of developing our culture.

Having high integrity is absolutely essential. We always tell people we’ve got a code of ethics, as do most organizations, but I like to boil it down to some very simple phrases like, “we don’t lie, we don’t cheat, we don’t steal and we always try and do the right thing, even when nobody is looking.” And if you can follow those simple rules, you can be part of Raytheon Technologies. And reinforcing those values, reinforcing that culture is absolutely essential. And again, an organization as large as Raytheon Technologies, it’s not like we all come to a single office and spend all day together. We have over 200 operating sites around the world, we operate in countries from Australia to Japan, to Singapore, to Poland, to the UK, you name it, US, Mexico, Canada. So having a single culture across the globe is not easy. Having shared values though, I think is the key to that culture.

ADI IGNATIUS: We’re also getting some questions about the volatility of this period. And this is a question from a YouTube viewer, Gordon, who’s asking how your leadership has adopted new ways of working to respond to this crazy volatile world now?

GREGORY HAYES: When I go back two years ago in April when we brought these companies together and I always tell people I couldn’t even spell Zoom. I had no idea what Zoom was, I had no idea how this worked. The ability to adapt to these changing technology, to the changing conditions to all of the change that’s going on in the world, I think is absolutely essential.

I know change is difficult for people. I had this conversation, I was at a town hall meeting in Texas a couple of weeks ago, and someone said, when’s the change going to end? My answer was pretty simple: never. You have to learn to adapt and if you can’t adapt to change, you have to face the fact that you’re going to be irrelevant over time.

As I think about my own personal leadership style, I always enjoyed getting in front of people, going out, shaking hands, meeting people, traveling around the world. All of a sudden that all ended in March of 2020. So we’ve had to adapt and I still go out, I still visit, but it’s much, much different today with social distancing and the masks. But again, we adapted by using the tools that we have, especially something like Zoom, where we can go out and I do, again, regular videos, my staff does regular videos. We try and hit on key themes of each one. First and foremost of course, was employee safety. How do you keep everybody safe? And I think we’ve done a pretty good job over the last couple of years in doing that, not perfect, but a pretty good job. But I think the key for me is adapting to this rapidly changing world and that’s not always easy.

ADI IGNATIUS: Here’s a question from Julia, from Boston. I think I actually know her. The question is what innovations based around military advances do you think could be pivoted, maybe soon, to non-military use? Obviously there’s a long history of military products that are adapted to civilian use.

GREGORY HAYES: It’s a great question. So you really need to think about our whole portfolio of what we do. Some of the sensing technologies that we have, the radar technologies which we use both for military and commercial air traffic are absolutely interconnected. A radar system is a radar and the sophistication level may differ slightly, but not so much. And we have many technologies, I think about AI: we have invested a lot of money in artificial intelligence, as we think about what the next battlefield looks like and what the next airplane looks like. You’re talking about how do you have an autonomous vehicle? That is someone you don’t have to either put in harm’s way or a pilot that you don’t have to pay to fly 14 hours each way from Berlin to New York. And these are challenges I think that we’re uniquely positioned to solve because we have this technology that is really an ability to spread it across the enterprise in solving our customers’ most difficult problems.

As I think about when I talk to the engineers, I say we’re not here to solve simple problems, we’re here to solve difficult problems. And how do we take all the technology that we have in our tool bag and solve that next generation of problems. Whether it’s autonomous commercial aircraft or autonomous flight for fighter jets, we have the ability to do all of that.

ADI IGNATIUS: A number of the questions that have come in concern cyber war, cyber attacks. Are you surprised that in the war in Ukraine now that it is so much of a traditional war and isn’t more of a cyber war at this point?

GREGORY HAYES: Well, certainly we have seen cyber attacks leading up to the invasion by the Russians, that we know they were attacking infrastructure, but I would tell you the Ukrainians are very, very capable from a cyber standpoint, they have some of the best programmers in the world there. I know there are many companies in Europe that use Ukraine as a recruiting ground for cyber. So I would tell you it’s not that the Russians haven’t tried. They have been more restrained, perhaps, in not shutting down the power grid because of what that would mean in terms of trying to take over the entire country. But if cyber is out there it’s being fought every single day, but our ability to defend, and again, we’re working with these folks every day, our ability to identify the threats and deal with is unprecedented.

Again, this is a war that we thought we would never fight again. Now you think about, I mean, our whole military strategy for the last decade has been focused on the Indo-Pacific region and how do you deal with defending Taiwan? The idea of destroying tanks and helicopters in a European battlefield is something most of us thought went away with the fall of the Berlin Wall some 20 some years ago. And so again, cyber is out there, it’s happening, but our ability to deal with it is unprecedented.

It was interesting. I don’t know if you’ve seen the paper here, where I saw President Biden was at Business Roundtable the other night, speaking to a group of us and what he said is: be prepared for cyber because it’s coming. And I think that is our biggest fear, is the next wave of this Russian attack may well be upon US-European infrastructure. And so we are working closely with the all the government agencies, specifically DHS, to make sure that we are prepared for what could be a huge cyber attack by the Russians. So far we haven’t seen it. And I think, again, that may be a step that Mr. Putin doesn’t want to take because of the retaliation potential that the US and European allies have, but we’ll see. But we are concerned, but I think at least for right now we believe we’re on top of it, but it is a huge, huge risk.

ADI IGNATIUS: What do you say to a viewer watching this asking, “Uh-oh, what do I run out and do to make sure that my company isn’t collateral damage in all this?”

GREGORY HAYES: It’s having the cyber protection protocols in place. It’s making sure your employees know not to click on malware. It’s knowing that all of your computer systems that face the outside world, the internet, are protected and that the patches are in place. And we’ve seen this in the past. We know that the Russians have been out there, the Chinese, the North Koreans, the Iranians, they’ve been out there. For the most part, we have been able to contain those attacks. But we’ve also seen some successful attacks where they’ve been able to go in, you think about Maersk, the big shipping company who lost all of its computers because of a malware attack from the Russians not five years ago. I mean, it is real and all you can do is make sure that your security protocols are in place and that your people are hypervigilant to these threats that are coming in, really by the second.

ADI IGNATIUS: Here’s a question from James, who’s a YouTube viewer. It really has to do with the kind of toxic waste that comes from weapons production and the context of the ESG conversation we were having before. What is Raytheon Technologies doing to minimize the impact of these things, which I assume can be toxic, or carcinogenic?

GREGORY HAYES: We actually don’t make any, what’s called the “energetics”, which are the chemicals that are used in any of our missiles or weapons systems. We procure them from a couple of different companies, Aerojet Rocketdyne, Orbital which is owned by Northrop. The fact is we have a very robust process around materials of concern, we track them very, very closely. We have goals out there to try and eliminate chromate from production and many other things. I would tell you, the nasty stuff, we don’t deal with. We don’t deal with the energetics. We also don’t deal with the actual warheads, those are things that we procure primarily from either another company like Rocketdyne or from the DOD who handles most of that. But we have a very good program around making sure that, from an environmental standpoint, reducing solid waste, greenhouse gas emissions, carbon dioxide, all of those things, we have done, I think a pretty good job. And again, I would encourage you if you’re really curious, our ESG reports issue here in the next couple of weeks, take a look and we’ve got all the goals laid out through the end of the decade in terms of how we’re addressing all of those materials of concern.

ADI IGNATIUS: Here’s a question, this is Matthew from Alabama, this is about teams. Do you feel that the improvement in productivity that you have experienced is due to individual heroics or team collaboration?

GREGORY HAYES: Yes.

ADI IGNATIUS: Okay.

GREGORY HAYES: Yeah. Look, there’s no one thing that has given us this increase in productivity. I would tell you what’s been amazing to me is the ability to work remotely has actually improved our productivity because we’re not seeing the turnover that we saw prior to the pandemic. The ability to give people flexibility in their work life is actually promoted, I would say, more productivity. People are more focused when they get on their tasks, they get things more quickly and we have provided them the tools necessary. At the same time there’s always going to be individual heroics, people who have gone above and beyond who work to solve, whatever problem is out there. But I would say it really goes to the productivity benefits of technology that we didn’t realize until just recently.

I was on a call with the head of NASDAQ and she was mentioning that they had been fully remote since 2009. And I’m like, “How can that be?” She says, “Well, because we have operations in Japan. We have operations in Switzerland, in the UK, and in New York, and we just found it more productive.” And it has fundamentally changed the way we approach work, as I think about we’ve got 32 million square feet of office space, post-pandemic we’re going to take about 25% of that out. We’re going to go to a primarily hybrid work environment because I want to make sure we capture the benefits of this technology, as well as capturing the benefit to our individual employee in terms of the flexibility that we can provide. So I think about working parents, the ability to juggle schedules and not have to be at work at eight o’clock every morning until six o’clock every night and they have flexibility because of this technology. Those are real productivity improvements, real quality of life improvements that I think this technology has enabled.

ADI IGNATIUS: Greg, I want to thank you for being on the show today. This is a tough time to be a CEO, it’s maybe a profoundly tough time for somebody in your world. But I really appreciate you being on the show and I wish you all the best.

GREGORY HAYES: Thank you so much. And really thanks to all of those of you who’ve listened in. And I really want to say thanks to all of our employees around the world who have really done the heavy lifting here during the pandemic, and it’s almost over. So thanks very much everybody. It’s great to see you.