David Farr has been CEO of Emerson since 2000. That is long enough to give you perspective on running a manufacturing business and to make you realize that your job involves two constants – change and learning. And while Farr, 61, is undoubtedly a successful business executive, he says that he has to do a better job in communicating to his employees the need for change in their jobs and in Emerson to ensure the company thrives as a global business in the future.
Farr has raised his game as a communicator considerably in recent months as he has become both the chairman of the National Association of Manufacturers and a member of the exclusive group of CEOs advising the Trump administration on manufacturing policy. He also was highly visible at the CERAWeek by IHS Markit energy industry meeting in Houston March 6-10, participating in two public sessions and sitting down for a brief interview with IndustryWeek.
Brexit, Donald Trump’s election on an America First pledge and the rise of nationalism in other countries has cast doubt on the benefits of globalization. Farr told CERAWeek attendees these developments are a “shock to the system” and represent a “rebalancing of what has happened over the last 25 or 30 years,” but that the world is “connected” and will remain so. Farr said companies such as Emerson are “truly global manufacturing and technology companies” and view the world as “one big playing field” where they must compete country by country.
“With evolving trade and regulation policies and the shifting energy outlook, the conversation about globalization is getting louder—but these are not new considerations for multinational companies,” Farr said prior to the conference. “Over the past two decades, Emerson has employed a regional approach to ensure that products sold in a country were also manufactured in that country. We’re proud to say that over 80% of products we sell in the United States were manufactured in the United States – and this is a strategy we mirror across the globe. We’ve considered this a crucial element of being a successful multinational company with deep U.S. roots.”
Over the last decade, said Farr, manufacturing had a “bad name,” but he says much of the trouble was due to public policies. Manufacturing was burdened by high taxes and too much regulation in the United States. “We had to adjust to an environment where basically we were not supported by our own government,” Farr said.
Farr expressed optimism that the Trump administration represents a new chapter in government support for the manufacturing sector. One area he hopes to see a dramatic improvement in is regulation. He noted that manufacturers face nearly 300,000 regulations and referred to NAM estimates that small manufacturers spend $30,000 per employee annually on regulatory compliance. He opined that a large manufacturer such as Emerson spends at least $50,000. Like many of his peers, Farr said regulation was necessary but the weight of regulation in recent years had become “so burdensome we can’t do things.” He said a broad review of regulations was needed not only to weed out unnecessary regulations but also to modernize regulations that have been in existence for decades.
“With this administration, for the first time, someone is saying…we’re freeing you to be focused on manufacturing, to be competitive and succeed,” he said. “I think that is exciting.”
First Fruits of Reorganization
Farr’s presence at CERAWeek was not surprising given that the energy industry is one of Emerson’s primary markets. Farr told attendees companies such as Emerson were there to support the big oil and gas companies and other energy players “as they transform.” Falling oil prices have given the industry a new urgency on increasing the profitability of its assets and the efficiency of operations. Farr noted that these companies are having difficulties in attracting people for field jobs and Emerson can help them not only automate to reduce manpower needs but also make operations safer, more efficient and more transparent.
In 2015, Emerson restructured its business from five divisions into two main platforms – Automation Solutions, led by Mike Train, and Commercial & Residential Solutions, led by Bob Sharp. In a letter to shareholders, Farr said this would help Emerson move to be a solutions provider that offered a comprehensive portfolio of “project inception and planning; engineering expertise; our leading product portfolio; software, sensors and secure data transmission; advanced monitoring centers; and real-time response based on analytic tools….”
The company has executed a series of moves to align itself with these main segments, selling its Network Power, Leroy-Somer and Control Techniques businesses. The moves initially shrank Emerson by about one-third. In August 2016, Emerson purchased Pentair’s valves and control business for $3.15 billion in an effort to strengthen its automation business.
Emerson also has been restructuring its operations to drive cost out of the company while operating in what it calls a “continued weak, low-growth global environment.”
“In 2016, we spent $112 million for restructuring which increased our two-year total restructuring spend to $333 million,” Farr reported. “By focusing on the things under our control we were able to limit the impact on operating margin to 40 basis points during this difficult year."
On February 7, Emerson reported first quarter results which indicated the company was beginning to see the fruits of an improving economy and its leaner operations. While sales were down 4% (3% on an underlying basis), earnings from continuing operations before income taxes increased 7% to $464 million and operating cash flow climbed 6% to $410 million. Citing improving conditions, Emerson raised its forecast for the year.
Replacing an Aging Workforce
Farr said in meetings at the White House, manufacturing CEOs had discussed regulations, tax reform and infrastructure, but “The number one topic was education.”
A major factor driving that concern is the massive retirement of baby boomers from manufacturing. The Manufacturing Institute and Deloitte estimate that 2.7 million workers will retire from manufacturing within the next 10 years. Industry leaders worry that manufacturing in the U.S. will be hobbled by an estimated gap of 2 million jobs left unfilled due to the skills gap.
Farr told a CERAWeek audience that the biggest challenge facing CEOs is that “the workforce is aging rapidly.” When he started as a CEO, Farr related, he did not worry about filling jobs but now “I map out across my company the top skill sets – where are we short, where do we really need to invest.”
Farr said more than a third of Emerson’s charitable gifts annually are to education. In Emerson’s case, it is very hands-on giving. “We demand that we have input on education. We demand programs we need,” he said.
As an example of Emerson’s focus on education, Farr referred to the company’s efforts to bring new jobs to Ferguson, Mo., after the shooting death of Michael Brown and the resulting riots. Emerson is donating $300,000 a year for five years to the Opportunity Scholars Program through the University of Missouri-St. Louis to support STEM education. The company is also contributing $750,000 to fund youth employment efforts through MERS Goodwill Industries and the STL Youth Jobs program. The program funds 100 jobs for eligible Ferguson-area youth between the ages of 16 and 23.
Farr said he sees the focus on preparing the next generation of manufacturing as his responsibility as a steward of both Emerson and the manufacturing industry.
“You do not succeed as a country without solid manufacturing and that is what this is about,” Farr stressed.
Farr said there was a need to invest in the current workforce to make sure they can perform jobs becoming more technical and to work effectively in teams.
“Manufacturing plays a vital role in the globalization story,” Farr said. “We can be strong and grow in the United States and also operate on the global stage. There are very clear, long-term career opportunities in modern manufacturing. We want to show how technology is preserving manufacturing jobs into the future—and the significance of educating and training our workforce to fill the industry jobs of tomorrow.”