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Does Cummins Have The Oomph To Climb This Hill?


The Corporation

DOES CUMMINS HAVE THE OOMPH TO CLIMB THIS HILL?

Henry B. Schacht won plenty of accolades in the mid-1980s for fending off a Japanese foray into the U. S. heavy-duty truck-engine market. When rivals such as Mitsubishi Corp. and Nissan Motor Co. threatened to win over U. S. customers, the Cummins Engine Co. CEO slashed prices by a resounding 30%. He then quickly embraced such Japanese techniques as just-in-time inventory management and flexible manufacturing systems. Although Cummins lost a truckload of cash--a total of $207 million in net losses from 1988 to 1990--Schacht kept the Japanese from denting the company's commanding 50% market share.

Unfortunately, while Schacht was patrolling the borders, all was not well behind the lines. An important new launch of Cummins engines was a disappointment, the company was late to develop key products, and Cummins' trucking-industry customers went into the tank along with the economy. Then, there was a decidedly un-Japanese competitor known as Detroit Diesel Corp. The once-sputtering engine maker, formerly a unit of General Motors Corp., was being turbocharged under the leadership of auto-racing great Roger S. Penske.

Detroit Diesel has been leaving Cummins in the dust for more than two years now, thanks to its ground-breaking Series 60 electronically controlled diesel engine. Besides offering dramatically better fuel efficiency, it boasts nifty computerized features that diagnose mechanical problems and can monitor engine use--and thus track driver productivity. Detroit Diesel's market share has rocketed to roughly 22% this year, from 6.5% in 1989, while Cummins' share has slid precipitously, to 40% in 1991, from 50.3% two years ago.

ON THE ROAD. Schacht is responding to this latest jam with typical fervor. Cummins went into full production of its own line of electronic heavy-duty diesel engines in late 1990. And nowadays, you'll find the patrician 57-year-old Schacht, a Harvard MBA, out on the road pressing the flesh with truckers, something Penske has done for years. One Cummins customer, U. S. Xpress Enterprises Chairman Max Fuller, says he had never met Schacht until this year, despite a 15-year business relationship. Meanwhile, Cummins will soon announce a joint venture with Soviet truckmaker Kamaz to build engines.

Stateside, Schacht has cut mverhead with a vengeance. In late 1990, he slashed Cummins' work force by 14%, or 3,600 workers. Analysts predict the move could save up to $150 million through 1992. And he believes the company can reach the breakeven point on a quarterly basis by the end of this year.

Cummins is also downshifting to position itself in the growing, if less profitable, market for midrange diesels. These engines are typically used in recreational light trucks and smaller rigs for intra-city transport. Taken together, Schacht figures these moves will eventually get Cummins up to speed. "We'll get customers back a deal at a time," he vows.

Schacht can certainly point to some progress. Despite lower heavy-duty engine sales industrywide, the company lost only $11.8 million in the third quarter, down from $55.8 million during the year-ago period. And Cummins' new electronic engines are garnering favorable reviews. U. S. Xpress Enterprises, for one, recently switched back to Cummins from Detroit Diesel engines. Says Chairman Fuller: "They've really made big improvements."

HOT TRIO. Even so, Cummins faces a steep climb back. Competition in the heavy-duty engine market is fiercer than ever. Detroit Diesel introduced its electronic engine four years ago and has since established a solid customer base. Caterpillar Inc., with 25% of the heavy-duty market, remains a tough rival with its high-powered electronic engines. "It's the first time the industry has had three very, very good engines," says James L. Hebe, executive vice-president of truck manufacturer Freightliner Corp.

And Schacht's bid for a comeback couldn't be more ill-timed. The economic slump, the nationwide credit crunch, and uncertainty over the impact of new federal air-quality standards have all chilled demand for truck orders. As a result, engine makers will build only 90,000 engines this year, down from 165,000 in 1988. And Prudential Securities Inc. analyst Steven J. Colbert believes a big rebound isn't in store until 1993.

Cummins' tattered finances don't leave Schacht well-positioned to ride out the slump. The company's long-term debt still remains at 44% of total capital--a hefty burden for a manufacturer in a cyclical business. But Cummins can't scrimp on research and capital spending, given the heightened competition among engine makers. Those expenditures will run more than $350 million this year. And Cummins' free cash flow -- calculated as cash flow less capital expenditures--will run a negative $49 million this year, says S. G. Warburg & Co. analyst David G. Sutliff.

To conserve cash, Schacht cut Cummins' quarterly dividend to 5~ a share in May, from 55~. But if business doesn't rebound soon, analysts figure Cummins might need a cash infusion from equity investors. Schacht disagrees. He insists the $250 million in equity that Cummins raised last year from three major investors--Ford, Tenneco, and Kubota of Japan--should be sufficient. But investors are leery: Cummins' stock has lost 20% of its market value from its two-year high of 54 set in June, 1990.

As harsh as market conditions have been, Cummins has contributed to its predicament. Its image took a beating in 1988, when the company's new line of 10- and 14-liter heavy-duty engines proved to be riddled with bugs, including pistons that would crack. Customers fled to Detroit Diesel, which was waiting in the wings with its new engine.

Detroit Diesel's effusive chief made the most of the opportunity Cummins handed him. Penske, who bought a 60% stake in the company from GM in 1988 and now owns 80%, flew around the country to hawk the company's engine. He even offered to install it in customers' trucks on a trial basis. Detroit Diesel

also set up a 24-hour toll-free phone service to assist owners of its Series 60 engines. Small wonder that one of the the nation's largest long-haul carriers, Schneider National Inc., shifted from Cummins to Detroit Diesel this year.

To be sure, Schacht had his share of distractions. Cummins spent much of 1989 discouraging the unwelcome advances of Industrial Equity Pacific Ltd., a Hong Kong-based investment company controlled by New Zealand investor Sir Ronald Brierley. In the end, Schacht won by persuading Ford, Tenneco, and Kubota to buy 27% of the company.

TESTING, TESTING. And the link has been worthwhile. Ford agreed to buy Cummins' midrange diesel engines for its medium-size trucks, as did Chrysler for its Dodge pickups back in 1989. Such gains have led Cummins to predict that its midrange business will generate operating margins of 20% by 1993, up from breaking even two years ago. Midrange-engine production has exploded to about 124,000 units last year, from 1,500 units in 1983, thanks to the popularity of light passenger trucks.

But Cummins' core business is still its engines for big rigs, where gross margins run higher than the midsize variety. Schacht is counting on the new line of electronic 14-liter engines to close the technology gap with Detroit Diesel. Hoping to avoid a repeat of the embarrassing rollout of a few years back, Schacht has put the new engines through four times as many road tests as previous models. He has also assigned more engineers to the factory floor to safeguard quality.

Cummins is also taking a page from Penske's customer-service manual. When complaints began about the poor hill-climbing ability of its 10-liter engine, Cummins improved the engine's torque. And it has become more responsive: Customers note that warranty claims are now paid within 15 days, rather than 90 days.

Despite these gains, Schacht can hardly rest easy. Detroit Diesel is still revving up, and its 22% market share would probably be even higher if it had more production capacity. Last year, the company's one plant sold all of the 16,300 engines it cranked out. Detroit Diesel President Ludvik F. Koci says his company will more than double annual capacity to 43,000 units by the end of 1992. Says Koci: "We've made a commitment to continue our growth."

Cummins is confident that it will regain its 50% of the truck-engine market in less than two years. Maybe so. But it's now clear that while Cummins was fighting off an invasion from abroad, it took its eye off an equally imposing threat on the home front.Kevin Kelly in Columbus, Ind.


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