At the recent Danfoss Distributor Meeting in Orlando, Fluid Power World’s VP, Editorial Director, Paul J. Heney, caught up with the company’s President. They discussed the merging in of Eaton’s hydraulics business, the return of beloved fluid power industry names, how the company is changing, and more.
FPW: It’s been a bit more than a year since you finalized the Eaton acquisition. Could you give us an update on where the combined business stands today from your perspective?
EA: You’re right, it’s one year and one month approximately. August 2nd  was the magic date. We embarked on figuring out what the organization should look like — and remember, we were not allowed to speak to each other before day one, because of regulatory requirements. So, really within those five months, we set out to have a new company ready by January 1st of this year — and we succeeded. And that’s no small feat, given two large companies coming together into one.
I’m just extremely proud of the team and how that happened. As of January 1st, everybody knew who they were reporting to. And remember, we went from a regional P&L structure in Eaton to our global product line structure in Danfoss. So, it’s a big change for many Eaton team members. And we also had financial transparency as of January 1st, which is, of course, really important. So basically, we have been operating as one company since then.
However, there are some things that take longer, like the IT backbone and CRM systems. We have one ERP now in Danfoss that we’re rolling out. And Eaton will, of course, also be brought onto the same ERP system — and that takes a little bit longer. So that is a journey, but nothing that’s stopping us from doing regular work and being together as one company.
FPW: With any merger or acquisition, there’s always some growing pains, culture clashes, or something unexpected that you can’t foresee when you first come together. Were there any challenges like that? And if so, how did your team push through those and get to the other side?
EA: Culturally, I would say, even though Eaton being an industrial conglomerate listed and Danfoss being a family-owned company, actually culturally we fit extremely well together. I don’t think that was much of a surprise. I think the aspect of working within a region as opposed to globally is quite a big change for some because it means that you sometimes have conference calls at odd hours — hopefully not every day because we don’t want people to sacrifice their private time — but that’s a change. I think we realize that if you’re going to divest something, you probably don’t invest as much as you should in the years leading up to that divestiture, and that was not unexpected at all. What we’re doing now is we’re accelerating investments in the business.
I think overall, it turned out better than expected, less issues than expected. We have great wind in the sails now and lots of passion. Just quoting some of the Eaton employees that joined us, they said, “It feels like we’re finally coming home.” Because remember, Eaton acquired many different hydraulics companies and integrated them to some extent, but sometimes not so much. I met a couple of team members from the former Vickers [company] who said, “This is where we should have been all along.” Those are nice comments for us to hear — though not necessarily meaning that it was bad at Eaton.
FPW: One of the things that Eaton certainly brought to the table that was different for you was the hose business. Can you comment on how you see the future of that business growing?
EA: There were several assets that we acquired as part of this transaction and the fluid conveyance is of course one of them. You can’t build such a business from scratch. You have to acquire and there aren’t that many that are up for sale. So that was one reason. Industrial channel, same thing. Distribution network is fantastic. Great people. Great geographic locations.
But fluid conveyance for sure is one of the key assets where we now become a full liner to our partners and our customers. We have everything now except for cylinders in any off-highway machine. And fluid conveyance, we’re super excited about. We’re investing a lot, as we speak, especially in the brands. That’s important. There are many partners who are saying, “You’re not going to mess with the brands, are you?” So, we are taking a different approach than the previous owner. We’re putting the brands in the foreground and we’re saying, “By Danfoss.” So, it’s Boston by Danfoss. It’s Aeroquip by Danfoss. So those brands, we’ll nurture, and we’ll keep investing in them.
FPW: That was my next question. Can you talk about those old brand names? I saw the Vickers name here, and it was delightful, as someone who’s been in the business since the mid-90s, to see some of those names once again. What discussions internally led to that realization that you wanted to bring those back?
EA: Well, leading up to the acquisition, several of us did some exploration and asked innocent questions of partners and asking a little bit about brand strength and so on. It became very evident that in our industry, Vickers is still a strong brand and the only reason that it’s been diminished is lack of investment. So now we are investing in Vickers. We are investing in all of the fluid conveyance brands. Anecdotally, on day two of coming together as a new company, on August 3rd, I got an email from a distribution partner that started with, “My brother and I have had our fluid conveyance company since 1972. We’re a proud distributor of Aeroquip products. Please don’t do what Eaton tried and put Danfoss in the front. Nobody ever bought an Eaton Aeroquip hose. Everybody was buying an Aeroquip hose.” That just resonated very strongly with me. We confirmed that these brands are really strong. Let’s nurture them. Let’s come up with new products and innovations so that people see that they’re alive again.
FPW: Stepping back for a second, you made a comment that now you’ve got everything but cylinders. Do I hear that maybe that’s a focus for a future acquisition?
EA: I don’t know. I think it’s a typical commodity market — and we are in commodity markets, too — so never say never. But right now, we’re just enjoying the high of being together as one company here, the new Danfoss Power Solutions.
FPW: In the 1990s, there was an era of industry consolidation, especially within hydraulics, with Rexroth and Eaton and Parker scooping up smaller companies. Now, due to the marriage between electrics and hydraulics, will smaller companies not be able to compete with the kind of R&D that Danfoss and Parker and Bosch Rexroth spend? Do you see a new era of consolidation?
EA: Perhaps. But if you think about the hydraulics industry and now the electrification players that are either in the periphery or actually in the core, it’s always been a pretty well spread-out business. There are many strong, smaller hydraulic suppliers that are doing tremendously well; right now, even if we have become a little bit bigger, I think that’s not a concern. I don’t think there’s going to be a huge consolidation trend.
What we’re seeing is that in the electrification space, there aren’t that many players that are independent anymore. It’s already happened. Some got acquired by the big ones like John Deere and CAT. We acquired UQM, Visedo, and AXCO — and built our Editron business that way. So, there are some players out there that still might be for sale, but I think there are also many that are niched in a nice way that they can be great standalone companies, even if they’re a little bit smaller. Kind of like we see in traditional hydraulics. It’s the same there.
FPW: Keeping with the idea of the “big three” and the electrification of hydraulics, what do you think Danfoss’s strength is? Where are you really leading your competitors in that area?
EA: I have a lot of respect for our competition, first of all, and I think they are fantastic companies. Both Parker and Rexroth have tremendous market reach. I don’t want to come across as knocking them at all.
But I do think in terms of applications know how — and if you think of our application development centers — they are unparalleled in the industry and it’s just an engineering playground, but it is also a great place where we interact with our customers and even end users. And that gives us, I think, an edge when it comes to understanding the subsystems in a machine. Especially now if you think about electrification, a lot of the solutions that we actually offer are electrohydraulic. And that’s why we’re bullish on hydraulics.
Yesterday, I made that point that it’s the core of Danfoss and we are really bullish on hydraulics. Why? Well, even if electrification takes place, you still need hydraulics in the machine. The only thing that changes is the power source. Instead of a diesel engine, you may have a battery, but you will still need hydraulics to do work function, perhaps even propel function and so forth. The only difference is that there will be an electrically propelled machine — or instead of the power source, there will be a battery and you still have a pump. You still have hydraulics. I think the applications know-how is where it all starts for us. When I ask customers that same question, that’s typically the answer they give.
FPW: We’re two and a half years out from the start of the COVID pandemic. How do you see your supply chain issues today? Would you say they’re mostly solved? What are your remaining pain points? And over the next year or two, what should customers expect to see, as far as delivery times?
EA: We are working very hard to regionalize and localize our supply chain. We have peaks and valleys in hydraulics; the swings are pretty tremendous. And these past two years, I think, have just emphasized that what we started doing little by little, we now are doing full force localizing — because it’s not just a cost issue. Of course, we tie up cash also when we have stuff in containers on oceans. But it’s more about the availability and flexibility to support our customers. So, we are going very fast in localizing our supply chain so that we don’t ship stuff across the ocean — that’s a killer. And especially in this market dynamic that we’ve had over the past couple of years, not just a pandemic, but this enormous demand change across all industries, just made it very, very clear that regionalizing and localizing is the way to go. That’s one of our three key priorities actually as a business.
FPW: Can you talk a little bit about how important diversity initiatives are at Danfoss? And what are you doing corporately to create more diverse teams, especially in historically tougher areas to integrate, such as engineering?
EA: That’s the first of our three priorities — our people. And particularly, to further diversity, equity, and inclusion. We are doing a tremendous amount of activities now to shake up the organization a little bit, because it starts with myself. It starts with me and my leadership team. We have to walk the talk. So, no more excuses that, “Oh, we couldn’t find anything else but white males for these positions.” Well, then start again — we’re just not going to approve those positions then. But we need to have a talent funnel that mirrors the areas where we do business, and it doesn’t today. We’re working really hard on changing that and step by step.
It starts with data. For me, this has been a passion my entire career, because there’s an emotional side of it, which is fairness and equity. Why shouldn’t everybody have the same chance? In companies, it’s hard to argue anything else. But there’s also the business side of it. Diverse teams — there’s empirical evidence that diverse teams produce better results and have a much better innovation track record. We have a lot of activities going on with it right now and some really great diverse talent that is taking the lead.
Another thing that we learned from Eaton actually is Employee Resource Groups. And I myself, I am the executive sponsor for one that we call Multicultural and Nations. Because it’s not just a U.S. issue. Racism exists everywhere in the world and derogatory comments, those type of things we take very seriously at Danfoss, because it’s not really in our culture. Fairness is deeply rooted. So, we are really pushing this now. I’m happy to say that we actually are making great progress now, finally. Because we haven’t been great at it in the past, but now we’re really getting some traction.
FPW: What is Danfoss doing as far as encouraging STEM or STEAM type careers for kids to get more diverse kids into engineering? Are you doing anything in that arena?
EA: We are. Think about our affinity to universities all over the world. Ames, for instance — Iowa State University, which actually has a very diverse student body. It’s only natural that we tap into that. We also watch that we’re getting a good mix of talent that is diverse. We’re in our Danfoss Innovation Accelerator in Cambridge, Massachusetts, right on the MIT campus. I mean our team there is as diverse as it gets. So those are just a couple of examples.
But we need to be stronger also in other countries. Germany, Europe today is very diverse, but sometimes I think we’re not watching that pipeline well enough. We’re really onto that now. One of the cool things with hydraulics, is that it’s not the first on university students’ list of companies that they look at. But we try to open what I call it the Danfoss box and let them peek in. And then they see that we are really environmentally conscious, DE&I is high on our agenda, and we have great technology, software, autonomous machines, all sorts of cool stuff across all three business segments in Danfoss. It’s actually pretty easy to attract diverse talent also in engineering.
FPW: What insights do you have on the workforce issues that so many industries are running into? How are you managing through a period where there’s a lot of openings where there’s not enough applicants or quality applicants? What’s your strategy?
EA: Coming together as two companies, we look at attrition rates very carefully; we do engagement studies. The engagement studies are through the roof, which is normal when you come together; the euphoria and all that. But there’s also the, “maybe it isn’t that great,” attitude that can come at some point. If you look in our hourly ranks, there is only one way to battle that — and that is to increase salaries. And we’re doing that. Because at the end of the day, that’s what matters in our factories. When it comes to our salaried staff, it’s not just remuneration, but it’s also softer things — in Ames, we’re [studying the feasibility of] a daycare because in Iowa as a percent of median income, it’s the highest cost in the U.S. A lot of our younger families in the area are struggling with that daycare cost, and it sometimes forces somebody to stay home because they can’t afford it.
In Mexico, we’ve had a lot of things like providing healthcare, vaccinations for employees, doing raffles with strollers, things that make people see that we’re a little bit of a different company — that we take it a little bit differently being family owned, that we care much more about our people. That said though, it is a challenge in some areas. But I think the attrition rates are speaking a very clear language to us — and it’s that we are not losing employees in a big way. You have The Great Resignation going on, but we don’t see that. We don’t see that people are being disengaged and just sitting off their day. We don’t see that either. We have a lot of passion and a lot of, frankly, energy in the team members. So far, touch wood, I’d say we don’t really have a big issue.
FPW: Sticking to the U.S., what do you think government gets right and gets wrong about manufacturing? And I don’t mean a specific political party. If you could get a message through to politicians on both sides of the aisle as far as growing manufacturing smartly in the U.S., what would it be?
EA: It’s pretty simple. I think regardless of which side of the aisle you are on, just look at the metrics. I mean, if you invest in something, industry benefits. And if industry benefits, typically microeconomics shows you that the country as a whole will benefit when an industry is running well. I think the infrastructure bill that was passed — just drive on the roads here, wherever you go in the U.S. — I mean they’re not in great shape. We have bridges that are being closed because they haven’t been maintained. There’s no case for that; it has nothing to do with politics, it’s common sense. If things fall apart, you’ve got to fix them, regardless of what you think.
And the message to me is also that this is a great opportunity for the U.S. We’re not the only ones that are thinking about regionalization. Don’t blow it by discouraging companies from investing in the U.S. now. I think that would be a major mistake, because at the end of the day, if I look at labor costs in the U.S. versus certain areas in China, it’s very competitive in the U.S. I think it’s sad and bad to make it into a political issue. It should really be a common-sense issue for a country. Just look at the KPIs when you invest, and what happens.
Filed Under: Hose & Tubing, News, Pumps & Motors