Magazine

Generating Power For Cummins


By Brian Hindo Sales of Cummins Inc.'s signature product—diesel engines for heavy-duty trucks—are down about 40% this year. Yet even as its core market has plunged, Cummins (CMI) shares have returned 98% since January, third-best among all companies in the Standard & Poor's 500-stock index.

What gives? While engine demand fell as big-rig fleets stockpiled older engine models in advance of tighter emissions standards, Cummins was enjoying a booming—if less renowned—business in power generation. Sales of the company's power generators, from portables that can serve an RV to house-size machines that back up factories, have more than tripled in the past four years. Indeed, over the past decade, the company has built virtually from scratch what's expected to be a $3 billion business line in 2007, which would represent about 20% of Cummins' total sales.

For the power generation segment, sales grew 21% last year, and are expected to surge at least an additional 25% this year. In the U.S., businesses are increasingly willing to view a Cummins standby generator as a six-figure insurance policy against power disruption. But the real tailwind comes from the massive infrastructure development seen increasingly in emerging markets. The global appetite for power is growing—far faster than the amount of juice that can be spit out by local, often rickety, electrical grids. "No one is spending money on [the grid], not even in the U.S.," says David Raso, a Citigroup analyst.

REVERSAL OF FORTUNE

Just four years ago, power generation was the only one of Cummins' four business segments to lose money, falling $19 million in the hole on sales of $1.3 billion. It had benefited from the buildout of telecom networks during the tech sector's boom years, but when those companies fell into a slump, "we took a huge dive," says Tom Linebarger, then the company's chief financial officer, who moved in 2003 to head the fledgling business.

A companywide belt-tightening, including a Six Sigma push and layoffs, drove costs down. Linebarger reorganized the division around product lines, rather than territories. That, he says, allowed Cummins to pounce on emerging markets, such as the Middle East and Brazil, which had received little attention before. Its generators have powered gold mining in the Saudi desert, where the grid doesn't reach; have provided more-reliable power to a pasta-making company in Colombia; and will back up Abu Dhabi's soon-to-be-opened Sheikh Zayed Mosque. The mosque, one of the world's biggest, covers about 5.4 acres.

Now, Cummins plays a strong No. 2 to the global market leader, archrival Caterpillar Inc. (CAT), which (CAT) Citigroup (C) estimates will do about $4.4 billion in power generation sales of its own this year. But the emergence of power generation is proportionally more important to Cummins, which is about a quarter of Caterpillar's size by market value and lacks the bigger company's diversity. Indeed, as the truck engine crunch loomed last winter, Linebarger told his managers in a meeting, "Hey, this is our year." In fact, Cummins managers dubbed the effort "Breaking the Back," as if to shatter once and for all the company's singular association with big-rig engines. "There's a legacy there that's hard to shake," says Linebarger. "We wanted to prove that in a year where truck engines are down, the new Cummins can do really well."

Of course, the company will still feel cyclical pressures. To mitigate a potential pinch, Cummins is branching out into new product lines, such as small home generators for sale at Costco (COST). But the big opportunity lies abroad. The power generation unit already gets 65% of its revenue from outside the U.S., compared with 50% for Cummins overall. Linebarger runs several plants in China and India and has begun exporting cheaply from those bases. So he is relatively untroubled about the threat of a lower-cost competitor striking while the market is hot. "We will be one of those Chinese manufacturers," he says.

Hindo is BusinessWeek's Corporate Strategies editor in New York


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus