Big Manufacturers Find New Demand in Equipping AI Data Centers

U.S. manufacturing is booming thanks to AI data centers, and industrial companies such as Caterpillar CAT 0.23%increase; up pointing triangle, Eaton ETN -0.40%decrease; down pointing triangle and Ford Motor F 3.46%increase; up pointing triangle are pivoting their business to seize the moment.

Manufacturing last month rose to its highest level since 2022, when the recovery from the Covid-19 pandemic fueled a factory-production frenzy. Today, data centers and a handful of AI-related industries are driving the manufacturing sector, and companies in that sector are investing hundreds of millions of dollars to expand their lineups to capitalize on the opportunity.

Power-hungry data-center developers have turned Caterpillar’s once-prosaic business of electricity generators into the equipment maker’s leading source of profit. The company is investing $725 million to expand generator production at an Indiana plant.

Caterpillar converted another plant in Kansas to produce turbine engines popular with data centers. The company is also resuming production of 10-megawatt generators that were last made in 2022.

“If we can get more units out, they’re asking us to give them more,” Caterpillar Chief Executive Joe Creed said of data centers during the company’s second-quarter earnings call with analysts.

Engine maker Cummins CMI -0.06%decrease; down pointing triangle is also leaning in to its existing generator business. The company is investing $450 million to increase generator production, following a $200 million investment in expanding production completed last year. Cummins expects its data-center-related sales to rise by 80% to $9 billion in 2030 from 2026.

Cummins’s generators are now mostly used for standby power in data centers. Data centers’ voracious power consumption is pushing developers toward on-site power generation and storage. Cummins this spring said it plans to offer new larger generators starting in 2028 that can be grouped at data centers as a primary power source. The generator’s 130-liter engine—roughly 65 times the average size of a U.S. car engine—will be powered by natural gas and produce four megawatts of electricity.

At the same time, economists warn that aggressive spending on data-center construction and equipment increases the risk that the build-out and the costs will overshoot the demand for data-center capacity.

For now, many companies are moving forward carefully. Jenny Bush, president of Cummins’s power-systems business, said the Indiana-based company is expanding production in smaller increments and limiting plant expenses.

“Everybody is naturally worried about when the build-out gets completed,” she said. “We’ve been trying to utilize as much of what we already have before we build anything new.”

Ford Motor is looking to data centers to repurpose excess production capacity for electric vehicle batteries. The automaker’s new Ford Energy subsidiary expects to spend $2 billion redirecting batteries to electricity storage at data centers and other large industrial users of power. Demand for electric vehicles is in a slump, leaving automakers with the need for fewer batteries than originally anticipated. Ford’s interest in energy storage comes as its auto business is smaller than it was a decade ago.

Manufacturing in support of the data-center business is helping to offset market conditions that are holding back other industrial sectors. Inflation, high interest rates and rising material costs are slowing down construction, auto sales and demand for consumer durable goods.

Rising demand for steel and aluminum and a 50% tariff on imported metal have handed domestic producers unprecedented pricing power this past year. Tariffs have pushed U.S. prices for steel and aluminum to among the highest in the world.

Higher prices for Caterpillar’s equipment and generators aren’t holding back sales. The company said price increases contributed nearly $600 million to its second-quarter operating profit, which was 50% higher than a year earlier. The Texas-based company earlier this month reported a record $20.5 billion in quarterly revenue.

Caterpillar shares are up about 50% since the start of the year. Its backlog of generator orders from data centers stretches as far out as 2030, Caterpillar said.

“No one is slowing down at the moment,” Creed said.

Eaton, a century-old manufacturer of circuit breakers, switchgear and other electrical equipment, has spent $13 billion on acquisitions since 2025, including businesses that have expanded its data-center operations. Data centers and distributed IT accounted for 21% of the company’s sales last year, up from 14% at the end of 2023. Eaton’s second-quarter sales overall rose 21% from a year earlier.

“What we have ahead of us in terms of demand is still incredible,” Chief Executive Paulo Ruiz said late last month.

The Institute for Supply Management’s purchasing index, a broad gauge of manufacturing activity, has been above the threshold for manufacturing-sector expansion for seven straight months.

But high costs are starting to take a toll on some industries. The ISM reported that 20% of the manufacturing GDP last month had an index reading that signaled contraction, up from 5% in June.

The group said the chemical industry accounted for most of the contraction, attributing the weakness to the rising price of oil, which many companies use as their primary feedstock for chemicals.

Cost pressures and oversupply risks exist for data centers, said Willy Shih, a management practice professor at Harvard University. Evolving technology could make future data centers smaller, cheaper and less power-hungry. He said the current build-out reminds him of the dot-com era of the late 1990s, when huge investments were made in building fiber optic networks that remained unused for 20 years.

“The inevitable correction to this is that buyers will find a cheaper way and companies that put on too much capacity end up with a boom-and-bust cycle,” Shih said.