A century ago in a former warehouse in Columbus, Indiana, Clessie Cummins and William Irwin proved diesel power far exceeded its floundering early 20th century reputation.
With just four workers in 1919, Cummins launched what 100 years later would be a global behemoth of more than 62,000 employees engaged in electrification, hydrogen fuel cells, power generation, data centers and, of course, diesel.
In those early days, Clessie used long-distance drives on diesel power as proof points of the oil-based fuel’s dependability. A Cummins diesel-powered racer finished 13th of 33 cars in the 1931 Indianapolis 500. Later the same year, with the race car on board, a truck with a Cummins Model U engine drove from New York City to Los Angeles in just 97 hours.
Cummins marked its official centennial in February. During a celebration at its Columbus headquarters in June, Clessie’s 56-year-old grandson Matt arrived in Columbus in his 1999 Dodge Ram Quad Cab with a 5.9-liter Cummins diesel. He drove from his home in Portland, Oregon, with the odometer surpassing 300,000 miles during the trip.
The journey was “kind of in line with some of the things that my grandfather had done with cross-country trips to show the dependability of his engines and their fuel mileage,” Matt Cummins said.
As the milestone year winds down. Cummins (NYSE: CMI) is adjusting to an all-too-familiar scenario: a downturn in the trucking industry it primarily serves.
“I stopped counting because it’s embarrassing how many I’ve been through,” CEO Tom Linebarger told analysts at Cummins Investor Day at the New York Stock Exchange on Nov. 21.
Cummins will lay off 2,000 non-production employees around the world in the first quarter of 2020, part of $250 million to $300 million in structural cost reductions. Investments in future technologies are safe. Acquisitions and partnerships will continue to fuel company growth.
“We know what we want to invest in. We know with who and where. And we believe as the downturn deepens, people’s willingness to partner with Cummins will grow. That’s what’s happened in every other downturn,” Linebarger said. “We have those great capabilities built over 100 years that are very difficult to copy.”
The trucking sector recession’s impact on the supply chain was apparent in Cummins’ third-quarter earnings. North America revenue fell 6%. International revenue fell 25%. Lower truck production in North America, India, Brazil and Europe and a decline in North America construction and global mining markets cut overall sales 3% to $5.77 billion.
“Next year is going to be a tough year,” Cummins Chief Financial Officer Mark Smith told analysts, projecting fourth-quarter revenue would be down about 13% based on October results. Guided by history, Cummins expects four to six down quarters in the U.S. along with slowing economies in China, India and Europe.
“That’s what’s ahead of us,” Linebarger added. “It’s not our favorite time, but the fact is it’s where we do better than other people.”
Cummins sells engines, components or both to 16 of the 20 largest truck companies in the world, accounting for 22% of the market.
As those companies decide whether or not to develop future powertrains to meet increasingly stringent emissions regulations, Cummins is ready with complete engines or components to augment truck maker designs.
In the United States alone, tougher greenhouse gas rules in 2021, 2024 and 2027 are driving new technology investments. China, India, Russia and Mexico all face tougher regulations that will drive more emissions-reducing content.
Cummins projects a $600 million opportunity to sell emissions-related equipment in China and India by 2022, where off-highway and power generation are expected “to move quickly to more and more emissions content,” Cummins President Tony Satterthwaite told analysts.
“It will take awhile for this to play out because each hurdle is different,” Linebarger said. “But suffice it to say that this represents a significant market share opportunity for Cummins.”
As the trucking industry eyes an electric future, Cummins is acquiring businesses and forming partnerships to ease the inevitable but gradual transition. It continues to grow diesel share in a flat market by leveraging products like its X12 engine developed in China.
Mating the six-cylinder X12 with the Endurant 12-speed overdrive automated manual transmission developed by its 50-50 joint venture with Eaton Corp. (NYSE: ETN) helped generate $550 million in revenue in 2019. Beginning in January 2020, the Endurant will be available for pickup and delivery, certain construction, refuse, and agriculture applications.
Companies that offer multiple technologies avoid betting too much on one solution, Linebarger said.
“You have a venture-capital (VC) funded company that’s a single technology provider. It’s going to be a tough road,” Linebarger said. “But if you’re selling diesel and natural gas [engines], you’re growing share, you will make it all the way through.”
Being first in a given technology isn’t necessary, he said.
“We don’t have to be ready with the product 10 years before the market is there,” Linebarger said. “We can be ready when the customer wants to put a real product in.”
For example, Cummins showed its Aeos battery electric-powered Class 7 urban hauler in 2017. The semi-tractor named for a flying horse of Greek mythology marked Cummins’ place for regional and drayage trucking expected to be the first broad commercial use of battery-electric technology.
“We don’t have to pretend batteries are the best solution for everything because they’re not,” Linebarger said. “We can make more improvements in the diesel engines we sell than Tesla can make in the battery systems they sell because we sell more and they’re used more.”
At the North American Commercial Vehicle show in October, Cummins showed a Class 8 hydrogen-powered fuel cell truck, not because long-haul fuel cell trucking is imminent but because Cummins wanted to signal its readiness to be a player when the time comes.
Commuter trains in Europe may be an earlier application for fuel cells than trucks. Fuel cell-powered trains by French rail equipment maker Alstom are already in use in Germany and testing is planned for the Netherlands.
“We have orders for 40 of these,” made by recently acquired Hydrogenics, Linebarger said. “This a new and exciting opportunity, brand new growth.”
Batteries and fuel cells will account for $500 million of investment in Cummins’ New Power segment recently renamed from the Electrified Power Business unit. A new battery system for pickup and delivery vehicles; powertrains for mini-excavators; and stationary and mobile fuel cell systems all are on the way.
Solid-oxide fuel cells that convert chemical energy of a fuel and oxidant directly into electrical energy will power data centers. Then there’s one of the world’s largest hydrogen generators using renewable energy and a Hydrogenics electrolyzer that separates water into hydrogen and oxygen. Cummins purchased Hydrogenics for $290 million in September.
“The thing we will not do during a downturn is cut our investments in the key technologies that are going to help us win in the future,” Linebarger said.
Cummins produced 3.9 million engines in North America and 10 million globally over the past two dozen years. That creates a big market for aftermarket parts, which accounts for about 30% of Cummins’ total revenue.
The complexity of newer engines, turbocharging and diesel aftertreatment adds opportunities. Original equipment engines made up 60% of Cummins’ business three decades ago; today it is less than 20%, Satterthwaite said.
“The tail on the aftermarket is quite long,” he added. “We still have engines that were built in the 1980s that we are making good aftermarket money on today.”
Cummins is using local production to reduce about a third of the $150 million impact from tariffs on Chinese imports imposed by President Donald Trump. Cummins assembled 460,000 engines in the U.S. in 2018. Of those, 92% were sold to U.S. customers and 81% of the parts content came from North America. In China, Cummins buys 95% of parts and components locally.
“What we’ve been doing was trying to make sure we are as naturally hedged as we can be from where we build and where we sell,” Satterthwaite said.
Managing the business for the future is paying off. Cummins has 21% fewer outstanding shares than it did in 2008 because of repurchases. The average share price then was $122 compared to the low $180s today. A 21% compound annual growth rate puts Cummins in the top 10% of all S&P 500 companies.
“By the end of this year, we will have returned close to $12 billion to shareholders over the last 10 years, and we’ve done that while we continue to invest in our core business and these new technologies,” Linebarger said.
Clessie Cummins could point to that as another example of dependability.