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WIKI ANALYSIS
Cummins (NYSE: CMI) manufactures diesel and natural gas engines, electric power generation systems, and engine-related components. Slightly more than half of Cummins revenues are from its markets outside the US, including India, China, Europe, Middle East, and Australia, and the company's international presence has helped to offset the slowdown in US sales. However, the global economic downturn has had negative impacts on the company as net revenue decreased by 25% in 2009. The company earned $10.8 billion in revenue and $428 million in net income in 2009.[1]
Since most of Cummins' engines are used in trucks, it has been hurt by high gas prices and the decline in demand for larger vehicles, especially in North America. Cummins supplies Dodge Ram truck engines for Chrysler, the company's largest customer, which accounts for 8% of Cummins' consolidated sales. The company's six largest customers (Chrysler, PACCAR, Volvo Trucks North America, International Truck and Engine, Daimler Trucks and Ford) account for almost one-third of the company's sales. [2] Cummins sells engine systems to other Original Equipment Manufacturers (OEMs), but also often competes with them. Major competitors include Caterpillar Inc., Detriot Diesel and Navistar International Corporation.
Company Overview
Business Segments[3]
Engine Segment (49% of sales, 34% of net income)
Cummins' Engine Segment manufactures diesel and natural gas engines. Cummins brands and sells supply parts, re-manufactured parts, and services through its distribution channels. This segment competes mainly with OEMs and independent engine manufacturers.
- Heavy-Duty Trucks include diesel engines, including ISM, ISX and Signature 620 heavy-duty truck series. Cummins has 38% of the market share in heavy-duty truck engines in North America, and was the market leader in Mexico and South Africa. PACCAR is Cummins' largest customer, accounting for approximately 5% of consolidated net sales. Cummins is also the sole supplier of Volvo Trucks North America .
- Medium-Duty Trucks manufacture diesel engines for medium-duty and inter-city trucks. Cummins' market share for medium-duty truck engines in North America is at 37%. The company is the largest provider of natural gas and hybrid buses in the US and is also the exclusive supplier of medium-duty engines for PACCAR and Ford Brazil.
- The Light-Duty Automotive and RV sub-segment is the exclusive provider of diesel engines for Chrysler's Dodge Ram pick-up trucks and supplied over 142,000 engines to Chrysler. Cummins holds approximately 70% market share of high-class motorhomes.
- The Industrial sub-segment provides engines to several markets, including construction, agricultural, mining, rail, and marine application markets.
Power Generation Segment (19% of sales, 22% of net income)
Cummins' Power Generation Segment is a fully-integrated provider of power generation systems, power engine components and services -- designing and manufacturing most of the components used in these systems. This segment caters to customers requiring standby power (for uninterrupted power supply), distributed generation power (less reliable power infrastructure typically for developing countries) and auxiliary power for mobile applications (as a second power source after drive power). It's largest geographic markets outside of North America are the UK, India, Europe and the Middle East. MAK Americas Inc, a Caterpillar subsidiary, is Cummins' biggest competitor.
Components Segment (18% of sales, 13% of net income)
The Components Segment primarily provides engine-system components, including filtration and emissions solutions, fuel systems, controls, and air handling systems. This segment is also the largest worldwide supplier of turbochargers for commercial applications.
Distribution Segment (14% of sales, 31% of net income)
Cummins' Distribution Segment distributes the company's line of engine and power systems, components and services. It includes 15 company-owned and 17 joint-venture distributors in about 300 locations in over 70 countries. However, Cummins' network - including locations and dealers that the company has no direct control over - is more widespread. Their products are marketed by 5,200 dealers and 500 co-owned and independent distributors in 190 countries. Half of the Distribution Segment's revenues come from engine and power generation equipment, while parts and service repairs comprise the rest. Among Cummins' key markets are India, China, Japan, Australia, Europe and the Middle East.
Business Growth
FY 2009 (ended December 31, 2009)[1]
- Net sales decreased 25% to $10.8 billion. The company attributes the decrease in sales to lower demand from the global economic downturn. Revenue decreased double digits in all of the company's segments, with three being greater than a 25% decline.
- Net income fell 43% to $428 million.
Trends and Forces
Laws regarding engine emissions are becoming more stringent
Cummins keeps up with increasingly strict environmental laws by providing environmental-friendly and technologically advanced engine systems.[4] The company has more advanced technology compared to competitors, allowing it to maintain its market position in some engine markets and gain market share in others. In particular, Cummins was able to meet EPA's 2007 on-highway heavy duty requirements, and announced during the year that its technology approach will comply even with 2010 standards.[5]
Having met US environmental regulation provides Cummins with the experience to comply with increasingly strict laws in other countries such as Europe and Japan. International diversification also allows the company to compensate for losses in North American sales because of strict emission standards.
High fuel prices have significantly lowered demand for trucks in North America
Cummins performance depends largely on the fluctuating economic conditions in its various markets. Its consumer-driven markets, such as the light-duty automotive and RV market, are particularly more subject to risk. Since the start of the economic downturn, gas prices and the housing slump in the US have caused a steep decline in North American demand for pick-ups.
Cummins has countered this risk by diversifying its markets internationally. Aside from increasing market penetration, the company's joint ventures and alliances have reduced the risk of declining sales in North America. Among its joint-ventures are with Dongfeng Motor Company in China, the largest medium-duty truck manufacturer in the country, and with Tata Motors, the largest automotive company in India.
There is a small but growing shift from gasoline to diesel
Diesel, a close substitute for gasoline, is an emerging vehicle fuel source in North America. [6] Twenty years ago, diesel performance, emissions and noise were unacceptable; however, government regulation and consumers demanded fuel efficiency, leading a shift to the use of diesel engines. According to UBS, diesel consumption by passenger cars should increase 11 percent a year until 2015. As a diesel-based engine company, Cummins has seen revenue increases as a result of this increased demand. According to Cummins, demand for high-class motorhomes using diesel is about half.
Competition
Cummins' products compete with other OEMs on the basis of price, performance, fuel economy, speed of delivery, and customer support.
- Caterpillar Inc. is a manufacturer of heavy-duty vehicles and engine systems for building construction and mining. Although Cummins and Caterpillar compete in most business segments, their largest operating segments differ. 57% of Caterpillar's revenues are from machinery (including heavy-duty, forestry, paving and mining equipment) and 31% are from engine systems. On the other hand, 52% of Cummins revenues come from manufacturing engine systems.
- Detroit Diesel Corporation, a subsidiary of Daimler Trucks North America is a manufacturer of diesel engines for on-highway heavy-duty and medium-duty trucks. Similar to Cummins, Detroit Diesel is involved with the design, manufacturing and marketing of its engines. Although Cummins and Detroit Diesel compete in some markets, Cummins is also an engine system supplier for a few Detroit Diesel products. Detroit Diesel offers Cummins heavy- and medium-duty engines in its vehicle range. This establishes Cummins as a vendor engine partner for Detroit Diesel.
- Navistar International Corporation manufactures and distributes medium- and heavy-duty trucks (primarily in North America and Mexico), diesel engines, and sells parts and services for its products.
- Clarcor is a direct competitor in the heavy duty, original equipment manufacturer filtration sector.
References
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