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Get Four
|  | MARCH 16, 2005
Emerson's Apostle of Lean "You get rid of a lot of unproductive people," says President James Berges. "I don't need an expeditor or a scheduler or a forklift driver" Emerson Electric was long Corporate America's best marathoner. The St. Louis-based manufacturer boasted higher earnings year-to-year for 43 years in a row. But with the collapse of the telecom industry and a drop in most of Emerson's other businesses, the streak came to an end in 2001. Now, Emerson (EMR ) is on a roll again. The company, which makes everything from electric motors and air-conditioner compressors to computerized equipment that can run an oil refinery, reported improved results in fiscal 2004 for the third consecutive year, with sales up 12% to an all-time high of $15.62 billion. Emerson expects net income to climb 10% to 15% on a sales increase of 9.5% for the fiscal year, which ends Sept. 30. Emerson is benefiting hugely from the rebound in the U.S. industrial economy and China's economic boom. But that's only half the story. James Berges, Emerson's president, is a disciple of Toyota Motor (TM ) and its "lean manufacturing" practices. Emerson has closed or sold 140 factories and cut its payroll by 13% since 2000. At the same time, it has been shifting more and more of its work to China, Mexico, and other low-wage countries. Berges, 57, a former engineer at General Electric (GE ), hired on at Emerson in 1976 as director of manufacturing planning and worked his way to the company's No. 2 post in 1999. Berges was recently in Chicago for the National Association of Manufacturers annual trade show. While there, he spoke with BusinessWeek Senior Correspondent Michael Arndt. An edited transcript of their conversation follows: Q: Tell me about the economy. A: I've seen our order data through January -- they're actually pretty good in the U.S., up double digits. But we think the economy will slow down in the second half. The consumer is getting a little wobbly. But we could get surprised. U.S. manufacturing companies, and particularly oil and gas companies, are awash in cash. As the cash piles up, you've got to do something. You could increase your dividend payout, or you could invest in those productivity programs that you've back-burnered for the last couple of years. So the consumer might go into a little funk and the capital-goods sector might stay good. Q: How about outside the U.S.? A: We have seen a slowing, particularly in Europe. People just aren't spending money. We're heavily focused on capital goods in Europe. You combine the very strong currency in Europe with the rigidity of the workforce -- your inability to lay people off when there's a downturn -- and it's a difficult environment to invest in. We're looking at a pretty much flat year. Q: And China? A: Our growth in China has been terrific. We grew over 25% in China last year. Our sales reached $1 billion. I'd say '05 will continue to be pretty strong for us. I'd almost say we're on fire there. Q: Do you see your capital spending migrating toward China? A: Sure. We like to build factories in the market where the sales are. But we can do business in China for a fraction of the capital that we would require in the U.S. There's a terrific base of suppliers who are very competitive in China. Everywhere you go there are people who are willing to take the risk to go down the street and rent a garage and buy a screw machine and start a business. So we rely on them to invest the capital. Q: Emerson is probably a typical manufacturer when it comes to hiring. Your sales and profits are climbing, but your payrolls aren't. Do you see manufacturing ever becoming a big hiring machine again? A: Probably not, to be realistic. You've got this combination of low-value jobs going to Asia, which will continue, and productivity gains, which are so terrific. I don't think people realize how much savings you can get when you're serious about lean manufacturing. It has had a huge impact inside Emerson. Your productivity rates really go up, and I don't mean 2% or 3%. We get jumps of 5% and 6%. You get rid of a lot of unproductive people. I don't need an expeditor or a scheduler or a forklift driver in a lean factory. Q: What impact has the rising cost of raw materials had on Emerson? And how are you dealing with that? A: We had the good fortune of having long-term contracts with most of our steel suppliers, and we had hedged much of our other raw-materials needs. So when things started to run up, we had some level of protection. But at some point, contracts expire and hedges come off, and now you're exposed to market prices. In our first quarter [ended in December] and in our March quarter, our results do reflect pressure on our margins -- we had a little compression. But we should look a lot better in our second half. We've locked in new supply contracts, and we've negotiated new prices with customers. Today, we're feeling good. 
BW MALL
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