Q&A With Eaton CEO Alexander Cutler

Not that long ago, a multicar pileup like the one that wrecked the American auto industry this year might have totaled Eaton Corp., too. As recently as 2003, the Cleveland-based company earned half its profits from making transmissions, brakes and other parts for cars and trucks. If you had even heard the name Eaton, it probably conjured an image of a big, greasy axle.

Not anymore. For the past decade, CEO Alexander Cutler has been on a relentless crusade to move Eaton away from its roots as an automaker and into what actually passes for sexy and cutting-edge in a nuts-and-bolts sector like manufacturing. Since he took over in 2000, he’s been on a buying spree, snapping up firms that make specialized motor controls, circuit breakers, even hydraulic power systems for fighter jets. Energy-efficient technology, international expansion—it’s all part of Cutler’s master plan. So far, it seems to be working: Car and truck sales now account for just 27 percent of the firm’s profits, and last year more than half its revenue came from overseas, up from 30 percent when Cutler took over.

“He’s rebalanced the portfolio and instilled a cultural change,” says Eli Lustgarten, a Longbow Research analyst who covers manufacturing companies. “The reality for Eaton is much better than the numbers show.”

Granted, those numbers aren’t pretty. The global economic crisis has been disastrous for even the most flexible manufacturing companies, Eaton included. Earlier this year, the company posted its first quarterly loss in nearly 20 years. Even though sales in the auto and truck divisions are a smaller part of the company, they still lost $102 million in the first half of 2009. Its stock, which fell to $30 in March, has rebounded to around $60—still down 45 percent from its precrash peak. And as well positioned as Eaton seems, the next 12 months may be crucial: While the economy and its effects on Eaton’s customers are clearly the most important variables, corporate tax changes and the rising cost of raw materials could hamper the firm’s rebound as well. No one, not even Cutler, expects to see the company grow before 2010.

An attorney’s son from Milwaukee, Cutler joined the company in 1975 and made his mark turning around an Atlanta plant ready for the scrap heap. In a wood-paneled room overlooking Lake Erie, we sat down with Cutler to talk about Eaton’s transformation, the effects of the government stimulus package and a rare positive benefit from a very bad recession.

Used to be when you thought of Eaton, you thought of an engine valve. Now it’s a circuit breaker.

There’s been a huge evolution. Seventy percent of [the company’s sales] are from our nonvehicle businesses.

You’ve focused on environmentally friendly manufacturing.

We’ve created a new type of electrical power system, backed up by batteries. It uses less energy and space. Also, we figured out how to make airplanes lighter, which means they need less fuel.

And you have the government grant—$45 million for 378 vehicles.

We already have an established hybrid power system for trucks. The grant will pay for the nation’s largest commercial hybrid deployment to date. New trucks will use up to 70 percent less fuel compared to standard vehicles.

That’s good, especially if gas hits $4 a gallon again.

With our superchargers, you can get the same power out of a V-6 engine with better fuel efficiency. The U.S. has to stop its love affair with more cylinders and look for better performance.