When Cummins Inc. Chairman and CEO Tom Linebarger speaks to those attending today’s annual shareholder’s meeting, it will be with a sense of accomplishment and pride, but also purpose and urgency.
The company is in the midst of celebrating its 100th anniversary, and is coming off a year in which it achieved record revenues of $23.8 billion and a first quarter in which it achieved a record $1 billion in earnings before interest, taxes, depreciation and amortization (EBITDA).
But the demand for new products by customers, ramping up a new Electrified Power business segment and navigating trade and tariff hurdles present abundant challenges for the future, Linebarger said during an interview with The Republic on Monday in Indianapolis at the company’s distribution headquarters.
“The 100th anniversary is a big deal. Not many companies make it to 100,” Linebarger said.
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Cummins did that by capitalizing on new diesel engine technology when the company was formed, and adapting to customers’ needs over the decades, he said.
“To live another 100 years is going to be even more challenging than the last 100 were, because things are changing so quickly,” he said.
Cummins is constantly evaluating its strategies and making changes to its capabilities, the chairman and CEO said, which is reflected in its anniversary theme of “Challenge the impossible.”
Meeting demand
“The company, when we’re firing on all cylinders, is very, very strong. What that has allowed us to do is invest in a range of technologies,” Linebarger said. “Our new product introduction effort is now a relentless global machine. We are launching new products in markets and applications around the world all the time. …We have a new product like every single quarter,” Linebarger said.
That pace is to keep up with an every-changing technology and emissions regulations landscape, and the relentless demand from customers, he said.
Cummins is in a ramp-up process with its Electrified Power business segment, which officially started at the beginning of 2017 and will see the launch of commercial products during the last quarter of this year.
“The reason we did that is we felt some number of our applications that we serve with diesel today will be served by electric powertrains in the future,” Linebarger said.
Building up the business segment involves a $500 million investment over three to five years, some of which has involved acquiring companies that possess the technology and skills with electrification, batteries and hybrids that are needed. The other aspects have been launching new Cummins-designed and manufactured products, Linebarger explained.
“We’re excited about it. It’s a big investment but it’s a big opportunity,” the chairman and CEO said.
The company’s first electrified product to launch will be an electrified powertrain in GILLIG zero-emissions transit buses.
“These bus applications (are) what we figured up was first in the batting order. Our view of the most attractive application today for electrified power is in city buses,” Linebarger said.
City buses operate in stop-and-go traffic, but the electrified powertrain is quiet, offers a smooth startup and regenerative braking and the range needed for the battery is short, he explained.
Electrified powertrains in shorter-range pickup and delivery vehicles will be among the next products to launch in the near future, Linebarger said.
Sales are expected to be slow at first, the chairman and CEO said, because customers want to get used to the new electric technology, see how they like it and evaluate how it fits with their needs to determine how much to order from Cummins.
Because electrification isn’t an immediate process and transition for customers, the diesel engine will have a life for quite a while, he said.
“We think diesel has a long future. It’s still a very competitive technology, and every year we make significant advancements in diesel. We make it cheaper, we make it better, we make it more fuel efficient. That just makes it harder to beat the diesel,” Linebarger said.
Still, developing products don’t arrive without hiccups.
Cummins has incurred millions of dollars in costs related to product issues over the last couple years, and the company is currently working with the Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) regarding certification for engines in the 2019 Ram 2500 and 2500 trucks.
Engine systems have grown increasingly complicated with the controls and technology, and involve millions of pieces of information, and the ability to test everything in time before a product launch has diminished, Linebarger said.
“There’s too much to test. It’s too complicated of a system to test every element of it and all the interaction effects. We have to do a lot more simulation, more work to find the problems than you can run in a test cell,” he said.
But, Cummins has a lot of technology that enables it to monitor how engines are performing in the field, which allows the company to receive early feedback on what’s happening with an engine and spot any issues that need troubleshooting, Linebarger said. More analysis and simulation capability have been added each year, he said.
“My view as the CEO, to build a sustainable future for the next 100 years, we will have to be a leader in the ability to deal with complex systems, complex controls. That is the wave of the future. Analysis and information are going to the currency, not testing of hardware,” Linebarger said.
International challenges
China, Canada and Mexico are three important countries for Cummins in its operations because they are key markets for sales and company operations. But, tariffs and trade tensions with all three have negatively impacted Cummins, Linebarger said.
Cummins made 1.5 million engines last year, of which nearly 40 percent (about 600,000) were made in China. And, almost all of the engines made in China are sold in China, the chairman and CEO said.
“It’s a big market,” he said.
Cummins currently is in the process of getting engines ready to meet new sets of stricter emissions standards in China within the next 12 to 18 months. Linebarger said he thinks the company is positioned well to succeed, and noted that it has gained market share in the past when new emissions standards have been enacted.
Right now, though, that success is being negatively impacted by tariffs imposed by the U.S. on Chinese goods. Linebarger said the company estimated an impact this year of $150 million because of tariffs, but said that number was before President Trump increased tariffs on $200 billion worth of Chinese goods after trade negotiations recently fell apart between the countries.
Tariffs aimed at China, Mexico and Canada on steel and aluminum have contributed to an increase in the cost of materials Cummins uses in its products, Linebarger said. Ultimately, U.S. companies and consumers pay the tariffs, he added.
“The impact has been more negative than the tax reform was positive. We pay more tax now, counting tariffs, than we did before the tax reform act,” Linebarger said, referencing tax legislation passed under President Trump’s administration.
However, the chairman and CEO said he’s optimistic a deal can be reached.
“I still believe both countries know that it’s in their best interest to find a way through these trade tensions,” he said.
Also of importance to Cummins, Linebarger said, is the United States-Mexico-Canada Agreement, sometimes referred to as the “new NAFTA.” The renegotiated free trade agreement was signed by Trump and the other leaders in November, but still needs to be ratified by each country’s legislature.
A vote on the agreement has been expected in Congress, but has been on hold.
Most of the parts that go into most of Cummins engines sold in North America are purchased in the U.S., Canada and Mexico. Canada and Mexico are the trading partners for Cummins, Linebarger said.
Cummins ships engines from Jamestown, New York, to Mexico, and almost all the heavy-duty engines and mid-range engines Cummins sells in Mexico are made in the U.S, he added.
“That’s a great deal for our company, for our employees. It’s driven a lot of growth,” Linebarger said.
The United States-Mexico-Canada Agreement allows free-trade region to continue, and includes things that are important for a modern economy, such as information technology, e-commerce and the labor environment, he said.
“It is an agreement that I think could help the U.S. economy and companies like Cummins,” he said.
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What: Cummins Inc.’s annual shareholders meeting
When: 11 a.m. today
Where: Columbus Engine Plant, 500 Central Ave., Columbus
Why: To update shareholders on what the company accomplished in 2018, discuss what it is working on now and attend to action items listed on the meeting’s agenda
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“The 100th anniversary is a big deal. Not many companies make it to 100.”
— Tom Linebarger, Cummins chairman and CEO
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