Cummins Engine Company, Inc. Business Information, Profile, and History
Columbus, Indiana 47202-3005
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History of Cummins Engine Company, Inc.
No one makes more large diesel engines than Cummins Engine Company, Inc. The company's other products--filtration and exhaust systems, natural gas engines, engine components, and electronic systems--have come to provide most of the company's profits, however, as the truck engine market has shrunk. In addition to trucks, Cummins diesel engines are used for drilling rigs, boats, industrial locomotives, compressors, pumps, logging equipment, construction equipment, agricultural equipment, municipal and school buses, and a variety of other applications.
The company's founder and the man who adapted Rudolf Diesel's engine design for mobile use was Clessie L. Cummins, the chauffeur of a 1909 Packard touring car owned by Will G. Irwin, a wealthy industrialist and philanthropist in Columbus, Indiana. Cummins was regarded by Irwin as indispensable, since he was the only man who could keep the Packard in running condition. When shortly before World War I, Cummins demanded a pay hike to $85 a month, Irwin threatened to fire him. The two men reached a compromise, however. Cummins would accept a salary reduction if the family garage were equipped with tools so that he could do engine repair work. In 1917, Cummins began making wagon hubcaps for the U.S. Army, while reading news about Germany's diesel-powered U-boats. Most diesel engines at that time were large and smoky, and entirely impractical for any kind of transportation.
Cummins started working full-time on diesels in 1919 when he heard that Sears, Roebuck & Co., would buy three-horsepower farm diesels made on a European patent. He persuaded Irwin to negotiate a contract with Sears and established Cummins Engine Company, Inc. The beginning was inauspicious; Sears said the engines were defective, and Irwin had to financially rescue his chauffeur. Neither Irwin nor Cummins was quitting, however. Irwin gave Cummins $10,000 to correct the initial defect and, eventually, poured more than $2.5 million into the company.
The problem with diesel engines at that time was that engineers kept adding devices to them to give them more power. Cummins accepted only one common premise, that of 'combustion ignition,' or fuel oil in the cylinder bursting into flames to provide power, and systematically disposed of any other 'add on' parts. He initially reduced engine horsepower, but ultimately got his diesel to run faster than other models. For ten years his experimental engines ripped the bottoms out of fishing boats or tore themselves to remnants, but Cummins still would not quit. His breakthrough was what he called 'the Sneezer,' a device that discharged every last particle of fuel oil into the cylinder to ensure that no oil was released as smoke. He also created a fuel injector experts described as 'simpler than a fountain pen.'
With his diesel at last perfected, he installed it in a Packard and drove the 792 miles from Columbus to New York City on $1.88 worth of heating oil without refueling. He then exhibited the car in the 1930 New York Automobile Show. When skeptics suggested that he had used more fuel than he admitted, Cummins proved them wrong by driving across the country on $9.36 worth of fuel. He also entered a Duesenberg race car at the Indianapolis Motor Speedway and finished 13th while establishing a record speed for a diesel-powered car of 80.389 mph.
Cummins's fuel pump and injector were now regarded as the best in the industry, but truck manufacturers refused to use them and continued to manufacture gasoline engines, while trying to design their own diesel engines. Irwin came to Cummins's rescue by having the engines of delivery trucks used by his grocery chain of Purity Stores in California replaced by Cummins diesel engines. The truckers liked these new engines, which were powerful, fuel-efficient, and reliable. As these truckers recommended the engine to their colleagues, the business began to flourish.
First Profit in 1937
Irwin's grandnephew, J. Irwin Miller, a young man with a pronounced taste for Greek and Latin but no business training, was appointed as head of the company. Miller was an unlikely manager: he had stuttered as a child, was something of an outcast at school, and knew nothing about engines. He had been expecting to inherit some facet of the family business, however, and applied himself rigorously.
Miller replaced the chauffeur's hand tools with production equipment and constructed a full-scale plant. He then helped employees organize the Diesel Workers Union, and he solicited business during the Great Depression by pointing out to cash-starved truckers that they would save money if they bought only those trucks that offered Cummins engines as options. Miller referred to this strategy--going to the users and not the suppliers&mdash a 'back-door approach.' Fortunately for the young company, the trucking business prospered in the 1930s because of improved roads and demand for point-to-point deliveries. Diesel engines for large trucks that needed maximum fuel efficiency were increasingly in demand. In 1937 the young company turned its first profit. Selling engines to competitors was an uncertain way of doing business, but it worked and remained, however unorthodox, the Cummins approach. Miller, who was admired as a scholar and philanthropist, and who served as the first lay president of the National Council of Churches, later acknowledged, 'We're in the business of selling engines to engine makers, which is surely not the smartest way to make a living.'
The company was not just unorthodox in its marketing approach. It contributed 5 percent of its pretax profits each year to a number of charitable and social service projects. Years later, Cummins became one of the first companies in its industry to hire blacks for other than janitorial jobs. Miller helped beautify the company's hometown, Columbus, Indiana, with the creation of a unique endowment that paid the architect's fees for many public buildings. The fund helped draw some of the country's finest architects to the Midwest town. In 1992, the Business Enterprise Trust recognized Miller's magnanimity and philanthropy when it awarded him its Lifetime Achievement Award. Miller's sense of justice and scholarly background helped him at times decide against prevailing business trends as well. For example, when asked why Cummins was resisting pressure to diversify, Miller told Forbes, 'This may be counter to trends, but we believe that by diversifying you are liable to lose confidence in the value of a good product.'
The company doubled its sales in five years and continued to double sales every five years into the 1960s. Sales in 1946 hit $20 million; a decade later they reached more than $100 million. Cummins's best-selling engine was a 2,590-pound diesel for trucks of 13 tons or more. To maintain the high demand for Cummins engines, the company had to stay ahead of the competition, which soon included Mack Trucks, Caterpillar, and GM's Detroit Diesel. In 1952 the company unveiled a turbo-diesel, which used exhaust gases to turn a gas turbine supercharger. The device increased the horsepower of each Cummins engine by 50 percent without raising fuel consumption. That year Cummins demonstrated the engine at the Indianapolis Motor Speedway, where it malfunctioned. Miller was nonplussed. 'We have progressed from failure to failure,' he said, confidently predicting that the turbo-diesel would soon be perfected and marketed, which it was.
Cummins stayed way ahead of its competition in the 1950s by securing up to 60 percent of the heavy-duty truck market in North America. Its in-line six-cylinder engines were renowned for their power and longevity. Cummins distributors, who handled nothing but Cummins engines and parts, were regarded as highly reputable because of their expertise with the single product line. Although it faced competition from Caterpillar and Euclid, Cummins also began selling engines for off-road construction. 'We'll build the roads and then we'll run on them,' said Miller.
Downhill in the 1960s
The heavy truck market appeared to be saturated by 1960, however. To expand into alternative markets Cummins crafted a new line of V-6 and V-8 engines, based on an 'oversquare' gasoline engine design. Since the diameter of the cylinder in oversquare engines is greater than the piston stroke, the engines produce more power at high speeds. Diesel engines had been long-stroke, but Cummins's engineers found the right combination of fuel and air to inject into the combustion chamber and make their engines workable.
The new engines, the Vim (a V-6 model with 200 horsepower), the Vine (a V-8 with 265 horsepower), and the Val (a V-6 with 120 horsepower), represented Cummins's first attempt at penetrating the lighter truck market. At that time, 44 percent of trucks 13 tons and over had diesel engines, but fewer than 1 percent of the trucks from eight to 13 tons were diesel-powered. With heavier trucks representing just 6 percent of the market, and the lighter trucks 22 percent, management concluded that manufacturing smaller engines would raise revenues. Nevertheless, the lighter truck market proved difficult to enter. Gas was cheap and diesel engines, which at that time cost $1,000 to $4,000 more than gasoline engines, were seen as economical only if the vehicles were driven approximately 4,000 hours per year.
In the early 1960s Cummins began a slow decline. Sales and profits fluctuated. A new line of engines with more than 300 horsepower, introduced by the company in 1962, failed to gain a dominant market share for more than two years. Management was criticized for being behind in both product development and market share.
Part of the problem was Cummins's policy of diversification. Beginning in the late 1950s Cummins started acquiring an interest in companies that produced diesel-related products. By the late 1960s it had become genuinely diversified, purchasing a ski manufacturer, a bank, and even an Irish cattle-feeding outfit. Management had decided to make these acquisitions due to the slow growth of the diesel market. Whereas Cummins's sales averaged 15 percent annual growth, the diesel market was projected to expand at half that rate. A number of new diesel competitors, such as GMC Division and Perkins, compounded the problem.
By 1967 Cummins's share of the crucial heavy-truck market had slipped to less than 45 percent. Earnings were off 78 percent. A strong truck market helped sales rebound in 1968, reaching a record of $365 million. Vigorous sales continued over the next few years, but earnings were erratic. Miller's hand-picked young successor, Henry Schacht, who joined the company after graduating from Harvard Business School and assumed the presidency just two years later, blamed surprisingly strong demand for the thin margins. Instead of preparing for an increased truck demand, Cummins had diverted resources to its nondiesel holdings. To catch up to the competition, Cummins operated its factories 24 hours a day, seven days a week, and paid a large amount in overtime wages. A two-month-long strike only exacerbated the company's difficulties.
'We clearly left the door open to competitors,' Schacht told Forbes. Demand exceeded supply, and customers went elsewhere. There was criticism that Cummins met the demands of only its biggest customers and that smaller consumers were forced to buy from the competition. Cummins's share of the large truck market reached a low point of less than 40 percent in the early 1970s. The company elected to sell its other holdings and concentrate on meeting the unexpectedly high diesel demand.
The main challenge was to devise a marketing strategy for engines that remained about 5 percent more expensive than that of the competition. The company refused to downgrade its product line. Management believed that the most significant problem for truckers who drove their vehicles 240,000 miles and more a year was downtime. Consequently, the company's response to its slipping market share was to make its engines more powerful, which in turn made them more reliable. In this way Cummins held on to its largest customers. Furthermore, the company expanded its overseas operations. It had a worldwide network of 3,000 service outlets and a computerized analysis of 50,000 miles of major highways, allowing it to match the best engine to the customer's requirements. Its reputation helped it gain access to new markets. By the mid-1970s, 25 percent of the company's revenues came from overseas, and additional profits were being made in the agriculture, construction, and marine enterprises for which Cummins was designing extra-large engines of 1,200 horsepower.
Then Cummins made an apparent mistake and introduced a line of 450-horsepower engines. This was 50 percent more power than a truck needed to haul a loaded rig at 65 mph on a level highway. Cummins was marketing power in its engines, but the problem was the new 55 mph speed limit. The company confronted this issue with an advertising campaign that stressed 'reserve power.' According to the ads, the new engines could easily maintain 55 mph even on uphill grades, so truckers could travel at the maximum allowable speed. Furthermore, constant speed and less shifting would actually increase fuel efficiency.
The new engines did not sell very well at first, as the truck market in 1975 slumped 40 percent. The following year, however, the market rebounded, and Cummins took the lion's share. Sales reached $1 billion and earnings were $59 million. Cummins benefited from the erratic enforcement of the 55 mph speed limit. Furthermore, the company outperformed its competitors by introducing a turbo-charged, slower-running version of its large-block engine, offering 5 percent better economy.
Nonetheless, management was increasingly concerned about the volatile truck market. While automating company plants in order to stay competitive within the truck engine industry, Cummins increased its profit from nonhighway engines until they accounted for nearly 25 percent of revenues. This stabilized the company, for the demand for agricultural and construction equipment ran in cycles that were unrelated to the demand for truck engines. Cummins also established plants in Scotland and England to penetrate the European market while avoiding European tariffs. It faced new rivals, such as Renault in France and Iveco in Italy, which placed only their own engines in trucks they were manufacturing. But Cummins, which had faced a similar obstacle in the 1930s, was undeterred. New laws allowing trucks of up to 38,000 pounds on European highways, in addition to the escalating costs of fuel, convinced Cummins management that Europe was the new market for Cummins's diesel engines. For Cummins, the European market grew slowly but steadily.
Leaner in the 1980s
In the meantime, Cummins faced a Japanese incursion on the domestic market. These new competitors sought to establish a foothold in the United States by offering their diesel engines at 10 percent to 40 percent below Cummins's prices. Cummins met the challenge with its own price cuts, a strategy that helped prevent the new rivals from capturing a significant share of the market. To maintain profitability, Cummins's CEO, Schacht, instituted a program of austerity and restructuring. From 1979 to 1986, the company cut employment by 22 percent, set up flexible production methods that reduced inventory, increased productivity, and launched outsourcing programs. In addition, although the company lost millions in the early 1980s, Schacht committed about $200 million annually to capital investments and improvements, maintaining Cummins's dividend.
In 1986 the company entered a period of continuous, comprehensive restructuring that embraced every aspect of the business. The adoption of an employee training and empowerment program known as JDIT-Kaizen helped transform the corporate culture. The acronym JDIT stood for the well-known catch phrase 'just do it.' Kaizen was one of a number of Japanese management techniques that were in vogue at the time. It encouraged creativity at all levels, with the ultimate goal of continuous, gradual improvement. This management strategy may have helped ease labor relations at Cummins, which earlier had moved production to nonunion factories in the southern United States to avoid labor disputes. (In 1993, in fact, the independent Diesel Workers Union--representing workers at four Indiana plants--gave Cummins an overwhelming vote of confidence when it ratified an extraordinary 11-year contract.) Furthermore, a consolidation trimmed operations in the United Kingdom and shuttered two U.S. plants, reducing floor space for worldwide engine manufacturing and distribution by 19 percent.
Notwithstanding these efforts, Schacht and Cummins also made some significant missteps during the last half of the 1980s. Some industry observers criticized the company's downsizing efforts when a resurgence in demand compelled the company to pay overtime rates to keep up. In response to ever more stringent emission control regulations, the company hurried to beat its competitors in bringing a compliant engine to market. Although the new model met U.S. EPA standards, tests conducted after the engine's launch revealed significant shortcomings. At the same time, rival Detroit Diesel Inc. introduced an electronic engine that drew customers away in droves. Cummins's share declined steadily throughout the late 1980s and early 1990s, from more than 60 percent in 1984, to 55 percent in 1988, 50.3 percent in 1989, and 40 percent in 1991, its lowest level in two decades. During this same period, the company lost more than $300 million and recorded only one year of meager profitability.
In 1990, Schacht convinced Ford Motor Co., Tenneco Inc., and Kubota Ltd. to invest a combined total of $250 million in a 27 percent stake in Cummins. The CEO used the infusion of capital to pay down debt and expand European operations. When sales of long-haul trucks bounced back in the early 1990s, Cummins's long years of preparation paid off. In 1993, the company enjoyed its first annual profit since 1987. In 1994, after seeing the company through one of its most difficult periods, Schacht announced that he was stepping down as CEO. That year--Cummins's 75th in business--the company achieved record sales of $4.74 billion and, perhaps more important, record profits of $252.9 million. James A. Henderson succeeded Schacht as CEO, and Theodore M. Solso became president and chief operating officer. They inherited a company well-positioned to capture significant shares of the vital Japanese and European markets. Henderson became chairman and Solso became president in 1995.
Retooling in 1995
About a decade after Japanese diesels began pouring into the United States, Cummins announced a number of joint ventures with foreign manufacturers in Japan, Finland, and India. Increasing construction abroad was expected to create more demand for the company's engines and generators.
The company's plant at home, in Columbus, Indiana, was making 160 engines a day. Less than 0.5 of these per hundred were found in need of repair; workers were progressing toward a goal of measuring quality in repairs per million.
Cummins invested heavily in research during good times and bad. Its R & D budget of 5 percent of annual sales was twice that of competitors. A $20 million, 50,000-square-foot engine testing facility was completed in 1996.
The company developed SmartPower in 1995. This used a computer embedded in the engine to capture 160 types of performance data, with another 100 customized performance features. The first Interact System engines using SmartPower were released in April 1997. Cummins was committed to extending this program to all of its electronic engine models by 2000. By 1999, the company had invested $1 billion in the program. At the same time, it was participating in a collaborative effort to develop a standard for the transmission of engine data over the Internet.
Unfortunately, the first of these engines manufactured suffered reliability problems, costing the manufacturer millions in warranty costs. The Asian financial crisis also hit Cummins hard, causing orders in that region to drop 50 percent between 1997 and 1998. A downturn in the domestic farm machinery market added to the damage.
In October 1998, the seven largest makers of heavy diesel engines, including Cummins, agreed to pay the Environmental Protection Agency (EPA) $1 billion to settle a suit claiming the group used computerized timing devices to evade emissions tests. Cummins's share price fell as its troubles compounded, leading to takeover rumors.
Forbes reported that 1998 was the truck industry's best year to date. Even so, Cummins lost $21 million on sales of $6.3 billion. The magazine found that the massive Interact System investment was necessary, however, and many of the company's troubles were unavoidable. To combat the losses, CEO James Henderson aimed to raise the company's gross margin to 25 percent and reduce engineering and overhead slightly to 16 percent of sales to achieve an operating margin of 9 percent by 2001.
A growing market was a requisite for these targets. Unfortunately, truck engine sales declined precipitously after peaking at 305,000 in 1999. Cummins's engine shipments for the heavy-duty truck market fell by more than 50 percent in 2000. By this time, the company had closed three plants and cut 1,100 jobs. Henderson retired at the end of 1999 at the age of 65. His chief operating officer and president, Theodore 'Tim' Solso, succeeded him as CEO.
In the summer of 2000, Barron's noted, Cummins shares were worth what they had been in 1972. The North American diesel engine market was in a slump, and the company's market share had fallen from 60 percent in the 1980s to less than 30 percent, thanks in part to Caterpillar, Inc. Nevertheless, Cummins was considerably more diversified than it had been, with power generation and filtration divisions supplying most of its profits. In 1996, Cummins had restructured its business units according to its primary markets: auto, industrial, power generation, and filtration. At the end of 2000, Cummins announced plans to cut 350 jobs from its diesel engine unit while 'fundamentally rethinking' its role in the market. Another loss of 100 jobs soon followed, bringing the total number to 900 for the year.
In early 2001, Cummins signed a more exclusive agreement with Paccar Inc., the Bellevue, Washington-based manufacturer of Peterbilt and Kenworth trucks. Solso told the Wall Street Journal that the company would exit the North American truck engine business if that type of relationship did not work. Once the company's sole raison d'etre, this sector accounted for only 16 percent of revenues in 2000.
Principal Subsidiaries: Cummins Brasil Ltda.; Cummins Engine Company PTY (Australia); Cummins India Ltd.; Cummins Korea, Ltd.; Cummins Mexicana, S.A. de C.V. (Mexico); Cummins Natural Gas Engines, Inc.; Cummins Power Generation, Inc.; Cummins Power Generation Limited (U.K.); Fleetguard, Inc.; Holset Engineering Company Limited (U.K.); Kuss Corporation; Newage International Limited (U.K.); Onan Corporation; Power Systems India Ltd.; Separation Technologies; Swagman International PTY Ltd. (Australia); Universal Silencer.
Principal Operating Units: Engine; Power Generation; Filtration and Other.
Principal Competitors: Caterpillar Inc.; Detroit Diesel Corporation; Mack Trucks, Inc.
- 1919: Chauffeur Clessie Cummins starts early diesel company with employer's support.
- 1930: Cummins exhibits a successful diesel automobile engine.
- 1937: Company posts first profit.
- 1952: Turbo-diesel is unveiled.
- 1975: Line of 450-horsepower engines is introduced.
- 1990: Ford, Tenneco, and Kubota buy a 27 percent holding.
- 1993: Cummins sees first profit since 1987.
- 1995: Company begins developing the Interact System engine family.
- 1998: Cummins loses $21 million in truck industry's best year yet.
- 2001: Long-term agreement with Paccar (Peterbilt, Kenworth) is signed.
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