Weak electrical grids mean strong opportunities for power-management giant Eaton Corp. Although its automotive components side of the business arguably gets more buzz, Eaton’s biggest growth area is in industrial electrification.
A bevy of projects to increase manufacturing footprint in electrical solutions are coming online in 2024 and 2025. Construction has begun on a 200,000 square foot factory in Nacogdoches, Texas, to double production capacity of Eaton’s voltage regulators as federal infrastructure dollars flow in to modernize the nation's electric grid. Eaton plans 200 new jobs there, as well as 600 more across the state in El Paso where expansion is underway on a $150 million manufacturing facility to increase production of circuit breakers, switchboards, panelboards and other assemblies for power distribution. All told, the company is investing $750 million for plant upgrades and new construction in North America.
Mike Yelton, president of the Americas region, electrical sector, at Eaton, talked with IndustryWeek about his team’s strategy around growth and new plants and how Eaton uses vertical integration to its advantage.
What do you see as differentiating Eaton’s manufacturing?
Our strategy is “in the region, for the region." We invest not just in our factories, but in our supply chain. We do dual or triple sourcing, and vertically integrate where needed for flexibility and agility to meet our customers' needs.
Often people say, "Oh, I'm in manufacturing, but what I really do is assemble and test and everyone else manufactures for me." We're also quite vertically integrated where we're doing our own stamping, injection molding. We do fabrication in total. And we do that where we deem it's needed, based on our experience.
Say we set up a factory. We have build-to-stock categories—a finished good to a style or SKU—and we're putting that into distribution centers and our customers pull from there. We also have configure-to-order products where we're building something that is a common module, and we do late-point definitions. Again that make us more agile, more responsive to the market. It also makes our inventory more flexible, so we can apply it for different things.
And then the third tier would be our engineer-to-order. That's what we're reaching for. We're responding to a customer specification. We're designing and building a unique selection that meets our application. So when you go across the spectrum, you go from high-volume, low-mix, to low-volume high-mix, we design our factories differently based on what's the primary content of that site? Build to stock? Or engineer to order?
Beyond that, I've got just over 20 small manufacturing satellite plants in most of the major metro areas in the U.S. and in Canada. And they're small, agile plants that are doing final assembly, but they've got engineers and industry experts on our products and applications who work with customers in that field in that market. So they're more familiar with the utility standards in a certain area of California because they're specialists.
I bring that up because we call it local, custom and quick. They’re in the local market; they can put their hands on the product, and they can they can do customizing work because they're able to sit down with the individual and go over the drawings. And then there's quick ship capability. Those sites are set up not like large plants that have months and months of scheduled work to do. They can be a little bit more agile.
They’re focused primarily on some of our power distribution products, but they're a real differentiator for Eaton in the market. We put a lot of domain expertise and capability in those small sites.
What’s the strategy around electrification?
Electrical is a growth area for Eaton. We’ve got strong markets and strong customer demand. We're making some investments in North America. Those are being driven not by any single segment or industry, but by broad demand and growth driven by electrification in general. Energy transition and digitalization are the big broad categories.
We want to be the enabler, accelerating the transition to renewable energy. With the investments that we're making in North America, we’re showing our commitment to unprecedented customer demand. I don't know what else to call it but unprecedented demand.
We’re well-positioned, so we're increasing the supply of our electrical solutions, and that's broad. We're seeing notable growth and robust demand in utilities. We're helping the utilities, which clearly is oftentimes the first step to being able to provide this energy or this power into more locations.
Utility growth was really close to GDP for the last 25 years: It was 3%. For the last two or three years, utilities' spending has grown in the low double digit [percentages year-over-year], and we see that continuing.
The more growth in the grid, the more it requires investment. And then you add electrification, where things that weren't historically powered are now being powered, and you're charging vehicles and need the infrastructure behind that. That accelerates that need, and the pressure on the utility. So that's what's really driving that incremental spin.
We also have a long-standing commercial construction background that we're active with. And data centers are a big part of our growth. We consider ourselves an engineering and manufacturing company. We also have been at this for a long time, and continue to evolve. People historically thought of us as an automotive company, and we have an automotive side. But the electrical business is the largest part of Eaton today.
What electrical-sector area do you see having the biggest growth potential?
We’re seeing robust growth across segments. The industrial segment remains very strong, and the data center segment. The commercial construction segment remains robust.
If I look back in history in times of strength, it would have been one segment was strong while another was down—and, really, now we've got good tailwinds.
You’re investing in some plants, and then building an expansion in El Paso as well.
We made a notable investment in Nacogdoches, Texas, that was twofold. We've got manufacturing in Waukesha, Wisconsin, that builds a lot of products for the utility segment. That's an area where labor had been quite constrained. We're continuing to invest in that plant and in those people to get more products, but one of the things we're going to do is we're investing in Nacogdoches. We're doubling the size of that plant. We're adding 200,000 square feet and about 200 employees. We’re relocating a primary utility product—a regulator—from Waukesha to Nacogdoches.
The reason we're moving that is not to reduce what we're doing in Waukesha. The other products that we build in the Milwaukee area, three-phase transformers and regulators, are critical to what utilities need to expand, harden and improve the grid. So with this move, we're going to double our capacity in regulators primarily in Texas. And we're going to nearly double our capacity in three-phase transformers, which will come from our Waukesha plant.
Another related investment is less about utilities and more about industrials. I have a facility in El Paso that we opened five or six years ago. We've been in that region for years for 30 or 40 years, but this was a plant we added in El Paso in 2019. We continue to expand it. We’ve purchased another facility there and will add 600 jobs in power distribution infrastructure equipment—in our lingo, it’s switchgear switchboards and breakers that allow you once you have the power from the utility to distribute it throughout the facility. We’re moving there because we have strong demand. We've got a great workforce in El Paso and that area has proven to us that there's a good labor pool available. And there's good engineering and technical support for our factory and design engineers.
We're also investing in our existing factories. We've got fairly significant investments in Beaver Pennsylvania; Juarez, Mexico; Arecibo, Puerto Rico; Haida, Dominican Republic. It’s fabrication for us or components for subassemblies in many of these factories where we're building engineered-to order-assemblies, and things that are customer-specified to meet their specific application needs.
In addition to that, we continue to work on supply chains, which have been a bit strange since COVID. It takes a fairly notable amount of time to work closely with our global supply chain team to ensure that we're making good decisions to improve the resiliency and reliability of our supply chain, and then also the best supply chain position to grow with us.
Some of these investments that we're talking about, they lead with footprint, expansion and jobs. But there's also investment in supply—in our existing suppliers, and in some cases, new suppliers because we're moving to a new region, building a product we built somewhere else but want to localize those suppliers.
Our challenges are not unique to this industry. We’ve dual sourced in some cases, and have a third or fourth source for some things now. We're focused but we want to have resiliency and not just with our [first-tier] suppliers. In some cases, during a time constraint, you’ve found your supplier has a common supplier of two or three back. We've invested time to ensure that we have as much good separation and resilience as we can, where there's no single failure points upstream for us.
Are supply-chain challenges driving more vertical integration?
We evaluate supply constraints on what was best in the past and whether we're looking to move if we're not committed to just taking it in-house. We will evaluate whether we can set up a supplier somewhere else in the Americas to meet our needs. But I would say there's probably been more insource versus outsource in the past couple of years based on constraints in the market and the constraints of supply.
But that’s one thing we look at daily. Are we adding value for our customer by providing this capability? Or having this in-house? If not, well, we want to keep our factory employees focused on things that do provide and demonstrate value. In some cases the customer may not care if we stamp or not. But we may choose to stamp because that makes us more agile, more flexible, to provide either better lead times, or to deal with customer changes on those engineer-to-order assemblies.
Are you having challenges around raw materials?
Electronics, semiconductor type electronics, there's a long pole in the tent. Machine tools and factories take years to bring online. It’s better than it was, but still something we watch closely. Electrical steel used in transformers is a product that's globally constrained where we we work hard to ensure that we've got that supply shored up and available to meet our production plans and needs.
There’s other components that are a little whack-a-mole. We may have a problem with a certain resin or other products but things are considerably better than they were a year ago. But it's still hard work today to ensure that your supply is shored up. We've got material that we use to order. In the past, we’d keep purchase orders out there for two or three months. Now we have firm purchase orders out for two years. To ensure that you have the material available, it's changed our behavior and our approach and actually increased our partnerships with suppliers.
You have a wide range of experience with running different plants and working in different plants in the US and in, in Latin America. What role has been your biggest learning experience?
The first role that I had that was a large functional role was the operations leader for the Americas. I had all the Americas manufacturing sites reporting to me several years ago in our assemblies business. It was less about directing teams and more about influencing teams. A lot less on the direct reporting and more on demonstrating value, setting strategy, communicating a vision to others to follow and then following up with them and helping them accomplish their goals while also accomplishing mine.
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