Posted April 2013. Originally published in the 3.18.13 issue of FORTUNE.
Emerson electric CEO Davis Farr is betting big on a manufacturing renaissance.
By Geoff Colvin
A CEO's No. 1 job is deciding which businesses to be in, and Emerson Electric's David Farr is making changes. His view of global trends tells him to double down in businesses that help manufacturers worldwide produce their wares more efficiently and precisely, and to focus on cooling—especially for data centers, which are multiplying fast. He has ditched less promising businesses, even the company's original one, electric motors.
Farr, 58, is only the third CEO Emerson has had in the past 59 years, having succeeded the legendary Chuck Knight in 2000. Intense and voluble, Farr recently unloaded some adult language on a room of Wall Street analysts but behaved himself when he talked recently with Fortune's Geoff Colvin about why not everyone should go to college, the difficulty of redirecting a company, Chinese garbage disposers, and much else. Edited excerpts:
U.S. manufacturing is a hot topic. What are the prospects?
A: The U.S. is facing a unique opportunity to have a renaissance of manufacturing. It doesn't mean you're going to see a lot of jobs flying back here, but what you're seeing is a huge level of innovation and technology that will rebuild some of the manufacturing base that has left the country.
What's the basis of the renaissance?
One will be the influx of oil and gas. Most people don't realize that in the manufacturing world, energy is one of our highest costs. If I look at our manufacturing facilities around the world, typically energy is the No. 1 cost by far. So from the oil and gas renaissance you're going to see a lot of investments going in—very technology-based investments, typically.
For example, Sasol, a South African oil company, is looking to invest $20 billion in the U.S. because of the gas—it has unique technologies in oil and converting gas to liquids. So it's working in Louisiana to make two huge facility investments. That is the type of investment that can happen in this country right now that would create a lot of unique value, and that's the type of customer base that I'm involved in. These investments will drive exports, and they will drive higher education and jobs. Most of us in manufacturing have globalized the business, and now what we have left [in the U.S.] are the very high-end technology-based jobs.
Many people seem to have an outmoded view of what a manufacturing job or plant is today.
Yes. I grew up inside manufacturing facilities—my dad was a plant manager for Corning for many years, and back then you'd see a lot more labor. What you see today is engineering. Facilities are more technically oriented; there's more automation. This country has been going through this revolution since the mid-1980s, since the Japanese came after us. We as manufacturers have learned how to be globally competitive. And we're sitting today the best we've sat in a long, long time.
Can you find those highly skilled technology-apt workers you need?
That is the No. 1 challenge for us right now. We've got a whole thrust in this country of "Everyone goes to college." Wrong—not everyone should go to college. We need people in a facility who can weld, who can repair things. Technical schools have really dropped off, and we've been funding a lot of technical schools because that is a skill set we need. The No. 1 threat to growth and manufacturing in the U.S. is not only engineering but the technical base to run factories. You and I can't run a factory. You need the technical skills.
You've made some major strategic moves in running Emerson, and you're making more. What's the big-picture thinking behind those changes?
For a company to stay viable and relevant, you have to continuously rebuild. My predecessor ran the company for 26 years. He did it three times. I'm on my second go-round. We're going through businesses that we can continue to invest in and move the company forward, but you have to constantly look at what you have and say, "This car doesn't work anymore. We need to move on."
It is not easy. I went to the board my second year on the job and said I wanted to sell the founding business of Emerson [electric motors]. The board looked at me like I had three heads. But I said the business no longer can generate the growth or returns or cash that we need to make sure we stay competitive and viable. So we found the right buyer, a Japanese company, and moved on.
A large trend that's important to you involves data centers, these vast quiet rooms with no moving parts. Where's the opportunity for Emerson?
You have to manage the power, cooling, and reliability of the data center. And we've built a business over the past 25 years to serve this industry. The trend now is hyperscale-size data centers based on the Googles and the Facebooks, and the technology there is how to make them more energy efficient and more reliable and try to get as much inside a footprint as possible without using a lot of power and heat. And that's what we do. Simplistically, I want to see energy used, and I want heat generated, because we're going to generate that electricity, and then we're going to cool it.
"Not everyone should go to college. We need people in a facility who can weld, who can repair things."
I would think the outlook for cooling and refrigeration globally must be strong.
It's very strong, especially in emerging markets. In places like China and India over 35% of the food is wasted because it's not properly stored or cooled. So we've developed cooling and refrigeration technologies to help those countries. It's been a huge marketplace for us.
Another Emerson business is making products for homes, which gives you a great interest in the U.S. housing market. Where is it headed?
We're recovering off a very low base. We've been in housing for a long time, making things called garbage disposers. We make 6 million a year in Racine, Wis. We're now working with cities to figure out how to reduce food waste by grinding it and then processing it for energy and fertilizer. Rather than garbage going out into landfills, we're changing the grind, and we're going to send it through a processing plant.
We just made our first investment in China doing the same thing because one of their top five issues is food waste. And by the way, the grinder for China is different from the grinder you have in your house.
The food's different in China. You have rice, and you have more stringy vegetables. So the grinding mechanism is different. It's a unique technology that the average person would never think about.
You've been very critical of the U.S. business environment. How do you rate it now?
My biggest criticism has been from the standpoint of legislation and bureaucracy that create trouble for us when it comes to investing. From a business perspective, we do not work on month-to-month changes in government. If the government does a deal for 30 days, all that does is cause problems for us in deciding what we're going to do. So we're looking for other places to invest.
We've got to figure out how to cut back regulation so it's not in our way all the time, and also how to have a road map on taxation or any type of structure you want from a government. What are the rules? I want the rules laid out for five, 10, 15, 20 years. I know they have to be altered a little bit, but you've got to have a road map.
I've been very critical because I think government doesn't understand what it takes to invest, and I think we as a nation are sitting at a cusp of once again being a very strong global player. We can beat China on a global basis.
You play to your strengths—entrepreneurship, education, the natural resources we have. Our people have historically been hard working. We're smart. We want to get an education, and we're very innovative. We can rebuild that entrepreneurship spirit and continue to be one of the global economic players.
At Emerson you succeeded one of the great CEOs of American business, Chuck Knight. What's the most important thing you learned from him?
Two things. One, develop the best people around you. Never compromise with people. Two, do not be afraid of taking on challenges that you would think are far beyond what you could do. Take on that risk. Do it. Chuck threw me into a lot of positions that people would have thought I should have never been in, but I succeeded. He drove us to do things that we never thought we could do, and that's why inside me today, I think I can do anything.
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