Fuel and Cummins Inc. and Manufacturing & Technology

Cummins cleans up with diesel

August 20, 2007

Less than a decade ago, diesel engines were viewed as loud pollution machines punching holes in the ozone. Now their cleaner, quieter cousins are powering a resurgent Cummins Inc.

The Columbus-based diesel-engine maker is riding the revamped engines to record sales and is about to become a major player in the potentially huge consumer market. It's a stunning turnaround for a company that six years ago was mired in financial losses from a business many thought would never rebound.

Cummins endured a $103 million loss in 2001 as the company founded in 1919 laid off hundreds of employees.

In those days, Cummins employees admit, Environmental Protection Agency regulations were seen as an albatross dragging the manufacturer to the ground.

Today, diesel's image is drastically changing, and Cummins engines are on the verge of propelling a variety of passenger vehicles.

In 2009, Chrysler Corp. plans to roll out a light-duty pickup with a Cummins diesel. A sports utility vehicle and minivan powered by Cummins diesel are soon to follow, industry experts said. And there's speculation that Cummins is negotiating to put its engine into a massproduced passenger car, which could send its revenue into a new stratosphere.

Already, 85 percent of Dodge Ram pickup trucks come with Cummins diesel engines.

As Cummins has become a leader in low-emission diesel engines that meet and exceed federal regulations, revenue has grown from $568.1 million in 2001 to a record $11.4 billion in 2006. The company's $715 million profit this year makes the 2001 loss a distant memory.

During the last four years, Cummins' stock has more than quadrupled, topping out near $130 a share before dipping slightly in recent weeks.

Despite analysts' predictions that new 2007 EPA emissions regulations would hurt Cummins this year, the company steams on.

"Cummins has had a good story to tell these last few years, and Wall Street rewarded them for that," said Mark Foster, an analyst covering Cummins for Kirr Marbach & Co. in Columbus. "But almost universally, the Street projected they'd take a hit this year. Those projections proved wrong."

EPA regs: no burden anymore

Cummins' intense focus on research and development turned the once-foreboding EPA regulations into a competitive advantage, as the manufacturer has frequently beaten its competitors to market with technological advancements, said Jay Gore, director of Purdue University's Energy Center at Discovery Park.

For the first half of 2007, Cummins' sales were up 11.6 percent and its profits rose 11 percent over the same period a year ago.

Making Cummins' 2007 performance even more impressive, Foster said, is that it comes in a year when the heavy-duty diesel-engine market--Cummins' old-school bread and butter--is down 40 percent.

If Cummins meets its 2007 projections, it would mark the fourth consecutive year of record sales and profits. Cummins is already predicting growing sales in 2008 and 2009.

Engine sales--accounting for 53 percent of revenue--is the biggest driver motoring Cummins from 296th to 221st on Forbes Magazine Fortune 500 list. But Cummins' power generation, components and distribution sectors are also growing.

"Cummins has become a leader in diesel due to some smart foresight, and wise investments into future development of the technology," Gore said.

Cummins put sizable investment into manufacturing the 350-horsepower engines for the Dodge Ram pickup. About 170,000 will be made at the Walesboro plant just south of Columbus this year. That's up from 120,000 in 2003 despite a drop in pickup trucks sold nationwide. Dodge is now the company's single biggest client.

Not only are Cummins' engines for the Dodge Ram meeting 2007 EPA regulations, they are already meeting 2010 regulations. Cummins is the only engine maker to do so.

Consumer appeal

Cummins has been able to meet increasingly strict EPA regulations while making the engine more appealing to truck buyers, Gore said.

"The one thing we keep in mind is that the EPA has never bought a single engine from Cummins," said John Wall, Cummins vice president and chief technology officer. "At the same time we're meeting these regulations, we have to deliver customer value, and we've done that in terms of fuel efficiency and improved pulling power, not to mention the engine is 50-percent quieter."

The seeds of Cummins' resurgence were planted at the same time it was downsizing its work force, moving jobs out of Indiana and leaning more heavily on non-unionized workers.

Now, Cummins is adding jobs--at least 800--to help meet the demand for diesel engines in not only heavy-duty Rams, but also medium- and light-duty vehicles. Cummins employs 34,600 people worldwide, 5,900 in Indiana.

Cummins plans to make the smaller engines at Plant 1 in downtown Columbus.

"This is important stuff," said Cummins spokesman Mark Land. "We have significant growth plans and light-duty trucks is a big part of that."

Though Cummins has made no announcement about putting its engine in passenger cars, auto experts said there are rumblings within the industry. Already, Cummins has close ties to automakers such as Volvo, and the domestic and foreign markets for diesel-powered cars are growing dramatically.

Already, the fuel efficiencies of diesel engines--they are 20 percent to 30 percent more efficient than traditional gasoline engines--have driven them into Europe in big numbers. Slightly more than 50 percent of registered automobiles there are diesel.

And since they are more fuel-efficient with no more emissions these days than a gasoline engine, Land said diesels are seen as eco-friendly.

"The words diesel and environmentally friendly are not words you would have seen associated with one another just 10 years ago," Gore said.

Overcoming negative image

While just 3.2 percent of passenger vehicles registered in the United States are diesels, the growth here is notable. The number of registered U.S. diesel-powered passenger vehicles has grown from 301,000 in 2001 to more than 585,000 in 2006, according to the U.S. Department of Transportation.

"As [Americans] realize this is not the diesel ushered in prematurely during the 1980s, that this is a much cleaner, more-efficient and quieter engine, those numbers are bound to go up," Gore said.

General Motors Corp. introduced diesel engines in North American passenger vehicles a quarter of a century ago. But those vehicles were known for sluggish acceleration, leaving black exhaust in their wake, and even stains on garage floors, rumbling like a locomotive and freezing up when temperatures sunk below freezing.

"All of those issues have been addressed; now it's just a matter of dealing with public perception," Gore said.

Cummins isn't the only central Indiana operation to prosper due to diesel's changing fortunes. Warrenville, Ill.-based International Truck & Engine makes 110,000 diesel engines annually at a 700-employee operation it has on Indianapolis' east side.

The Brookville Road IT&E facility makes Power Stroke engines exclusively for Ford Motor Co., the longtime leader in pickup truck sales.

Though work-force numbers have fluctuated in the last decade, IT&E officials are optimistic that a recent $300 million upgrade will propel the plant into the new age of diesel.

"With the engine we're making in 2007, the reduction of particulate emissions is down 90 percent and nitrous oxide is down 50 percent and our fuel efficiency is up," said Patrick Charbonneau, IT&E vice president of government relations.

Hybrid engines are a threat to diesel's growth, but Gore thinks the technologies can work together.

"I'm certain Cummins has been studying the possibilities of hybridization for some time," Gore said.

Cummins has several hybrid vehicles in testing or on the road, Land said, including some IndyGo buses.

Wherever the technology goes, Cummins is showing no signs of slowing down. The engine maker has more than $2 billion earmarked for capital projects aimed at expanding capacity in the next five years.

One of the major hurdles to growing sales, Cummins officials admit, remains erasing the image of an old-world, black-smoke-belching technology.

Most consumer-oriented marketing will be left up to automakers.

"We're active within trade groups, government agencies and environmental groups touting the virtues of diesel," Cummins' Land said. "The marketing for a product like ours is different. It's not like we're making toothpaste or iPods."

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