In an age of just-in-time delivery, it's probably not the best place to put an engine plant. Until recently, reaching the Dongfeng Cummins Engine Co. Ltd. complex from Wuhan, the nearest city with daily flights from Beijing, required a 5 1/2-hour drive on a two-lane highway winding through the hills of rural Hubei Province to the dusty industrial city of Xiangfan. Even today, heaps of freshly picked watermelons lie along the road into town in the summer. For plant manager Jerry Gantt, 57, Xiangfan's only African American and a former offensive lineman for the Buffalo Bills football team, the five-year assignment has meant many tough adjustments to culture, business practices, and diet. "It's been a challenge," says Gantt, a 15-year Cummins Inc. (CMI) veteran. His happiest day, he jokes, was when the first McDonald's (MCD) restaurant opened in Xiangfan two years ago.
Cummins Inc. didn't have a choice where to locate the diesel-engine plant when it opened in 1995 -- two decades after then-Chairman J. Irwin Miller was one of the first U.S. executives to visit Beijing. That was the decision of the Chinese government and Cummins' 50-50 partner Dongfeng Motor Co., a state-owned maker of cars and trucks. But like many multinationals that decided to get into China early, Cummins has learned to play the cards it was dealt. That's been true in India, too. The Columbus (Ind.) company opened its first diesel engine venture in India in 1962. But for three decades sales were limited by bureaucratic controls on everything from pricing to product lines.
Yet their persistence has paid off. China and India now account for $1.9 billion of Cummins' $8.4 billion in annual sales -- and are expected to reach $5 billion by 2010. Dongfeng is now Cummins' No. 2 customer, after DaimlerChrysler (DCX), and has proved to be a valuable partner. The Xiangfan factory, profitable from the outset, churns out 120,000 truck engines a year. It has boosted output fourfold since 2001 while trimming the workforce by 10%, to 1,900. Meanwhile, Indian partner Tata Motors Ltd. is Cummins' No. 3 global customer, and a Cummins engineering center in Pune is becoming vital in designing engines, power generators, and components. Cummins is also winning orders in promising niches. For example, it is fitting thousands of buses in Beijing and New Delhi with hybrid engines that burn liquefied-natural gas. In both nations, Cummins is expanding aggressively in every line of business. "Both China and India are probably the largest growth opportunities for Cummins," says Chief Executive Officer Theodore M. Solso.
Cummins needs the lift. In North America its potential market for big truck engines is shrinking as customers such as DaimlerChrysler, Volvo (F), and Navistar (NAV) shift orders to their own affiliates. In 16 months, Cummins will confront a new challenge when new U.S. emission standards kick in, which could raise costs. This makes expansion in China and India "particularly important," says Citigroup (C)analyst David M. Raso.
Cummins has succeeded in nations renowned for being tough for foreign investors. It has pushed to localize manufacturing. By nurturing solid partnerships, it has minimized capital costs and gained a marketing edge. It has put a high priority on training and empowering local managers. Seven of Cummins' top 10 China managers are mainlanders. Top expatriates stay for long stints rather than use posts as two-year stepping stones. Cummins also has moved 100 Asian managers and their families to Columbus, where they are climbing the corporate ladder.
Beyond that, Cummins plays India and China differently, highlighting the two economies' diverging structures and strengths. Some major contrasts:
When Cummins entered India in 1962, it formed a venture to make heavy engines and power generators in Pune in which it owned 50%. India's Kirloskar family owned 25%, and the rest floated on the Bombay Stock Exchange. When the Kirloskars sold much of their stake in the mid-'90s, more liberal investment rules allowed Cummins to boost its share to 51% in what now is called Cummins India Ltd. That gave Cummins clear management control and more flexibility to invest in new opportunities. It operates a fleet of rental trucks and a truck-stop chain, and sets up and helps run power plants. It also does back-office accounting, human-resource, and info-tech support work for Cummins worldwide. It even owns a $50 million company providing IT services to clients like Unilever and BNP Paribas.
Otherwise, Cummins is sticking with its original partners. It still shares ownership of another Indian venture formed in 1996 to make lighter truck engines with Tata Motors, India's premier maker of cars and trucks. And in China, it says it is committed to keeping its 50% stake with Dongfeng. Cummins' Fleetgard Division also has a 50-50 venture with Dongfeng in Shanghai making fuel and air filters. Plus, Cummins has a new joint venture with Shaanxi Automobile Group to make engines for heavy-duty trucks. The eagerness to share ownership is unusual. Many multinationals that Beijing pushed into marriages with state companies in the '80s and '90s have since maneuvered for full control. "Most foreign companies think it's a mistake" not to have clear control of their Chinese operations, says Steven M. Chapman, who ran Cummins' China operations for six years before recently assuming his new U.S. post as group vice-president for emerging markets. "But I really insist we be able to trust each other as absolute peers." Chapman, a Mandarin speaker, negotiated Cummins' first deal to assemble engines under license in 1985 and has worked with five Dongfeng chairmen.
There is an obvious reason to stay with Dongfeng. As China's top truckmaker, it buys 70% of the plant's engines. Dongfeng also has the funds for rapid expansion. In three years, sales at the Xiangfen venture have zoomed from $63 million to $554 million, yielding $89 million in operating earnings for Cummins. Another big expansion is in the works.
In a nation where relationships are paramount, an ally like Dongfeng can be invaluable. Over the years, Cummins executives say they've developed deep connections at many levels in the company. "Our partner is very good at working through the red tape and speeding up approvals, which helps us ramp up quickly," says Cummins East Asia Managing Director John Watkins.
Dongfeng's business acumen also helps. Cummins sells an array of engines and parts to local vehicle and equipment makers. Its toughest competitors are mainland manufacturers that are improving quality and service -- and undercut Cummins by up to 40%. Fleetgard competes against 1,600 other makers of filters in China. "We have the products and the technology, but we need a partner to get access to the market," says Ivan Lok, manager of the fast-expanding Fleetgard plant in Shanghai. Cummins has 100% control of its network of 200 distributors and service centers, however.
In China, Cummins is about to open its first development center, also a 50-50 tie-up with Dongfeng. It will focus mainly on custom-designing engines for China. There also is talk of developing emerging markets.
In India, the two-year-old Cummins Research & Technology India center in Pune is playing an important role in helping the company slash development costs and time in its bid to best such arch-rivals as Caterpillar Inc. (CAT) in building a new generation of diesel engines. Cummins is tapping India's immense pool of skilled, low-cost engineers. Pune is a software and auto hotbed, where pristine industrial parks abut narrow streets jammed with cars, cattle, and rickety three-wheel taxis.
The center's 100 engineers specialize in 3-D computer modeling and simulated testing of engines and components. They collaborate with R&D teams in each of Cummins' 20 other development centers worldwide. "We're involved in just about everything Cummins is doing," says John O'Halloran, a 12-year Cummins veteran dispatched in June, 2003, to build and staff the center. In one area, a computational fluid dynamics team led by Ritesh Dungarwal, 26, an aerospace engineering graduate from the Indian Institute of Technology Bombay, simulates the combustion process inside a virtual prototype of a future engine. By mapping the movement of each fuel particle after it is ignited, they learn the size of droplets, how many are burned up, and how many are kicked out in the exhaust. Such data help determine fuel efficiency and emissions. At other pods, staff test engine components to see how they hold up to stress and whether fuel and air flow past at optimal levels. They tweak designs, and U.S. engineers review the work overnight.
Cummins engineers in the West do similar work, of course. But because such labor is so expensive, "we had to be very selective in the past," says O'Halloran. "You can come up with hundreds of things to simulate in a computer. But we were constrained by the number of engineers, so you had to decide which tasks were most critical." Now, hundreds of parts can be modeled, tested, and perfected. That should translate into higher performance, lighter engines, and lower costs. Another benefit is that Cummins now builds half as many physical prototypes as it used to, thus cutting development time by up to two-thirds. Pune "eventually will play a significant role in developing major engine platforms," he says.
Given America's lopsided trade deficit with China, you would assume Cummins uses it as a major export base. Just the opposite. Cummins ships up to $400 million worth of engines from the U.S. to China a year -- four times more than it imports. China's booming market absorbs all of the engines it makes there.
India, however, is a great base for exports. The Pune factory ships one-third of its generators to the U.S., Britain, China, South Africa, and other nations. It also exports engines for everything from mining equipment to marine frigates. Why use India, with its clogged roads and seaports, rather than China's superefficient industrial zones? For one, Cummins and its partners have been designing products for the price-conscious Indian market for years, providing an edge in developing nations. And while China is unbeatable in mass-volume manufacturing, India is well-suited for low-volume production of complex industrial goods. "In any component, subsystem, or piece of machinery that requires a high engineering content, India has the advantage," says Cummins India Chairman Anant Talaulicar.
Investing in local manufacturing. Grooming managers for the long term. Exporting when it makes sense, and tapping local engineering brainpower. Many multinationals are now emulating these strategies in China and India. Cummins figured it out well before the competition.
Corrections and Clarifications
While Cummins Inc. financial statements report $8.4 billion in consolidated revenue in 2004, the number is $10.7 billion when unconsolidated revenue from joint ventures is included. Also, the 2004 operating earnings of Cummins' joint venture with Dongfeng Motor in China was $86 million (not $89 million), and we should have clarified that Cummins' share was $43 million.
By Pete Engardio and Michael Arndt