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How's business in Brazil? Cummins' slow growth in global market has local impact, but drop likely temporary

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Cummins Corporate Office Building in downtown Columbus, Indiana.  Cummins, Inc. announced a slump in sales October 31, 2012.  (Joe Harpring | The Republic)
Cummins Corporate Office Building in downtown Columbus, Indiana. Cummins, Inc. announced a slump in sales October 31, 2012. (Joe Harpring | The Republic)

When Cummins Inc. announced this year that it would earn $1 billion less than previously expected, slower growth in Brazil played a significant role. Bigger, in fact, than China.

In the past year, sales in Mexico/Latin America accounted for about 11 percent of the company’s sales, ranking third after the U.S. (46 percent) and Europe/Middle East (17 percent). Last year, Brazil generated revenues for Cummins of nearly $1.3 billion — more than India ($859 million). Sales in Brazil have increased 115 percent in the last two years, compared to 43 percent in the U.S. and 45 percent in India.

And of the $1 billion reduction in expected sales this year ($17 billion rather than $18 billion), Brazil accounted for $130 million, or 13 percent.

In its third-quarter report, filed Oct. 31 with the Securities and Exchange Commission, Cummins said sales in its biggest segment, the engine business, fell 14 percent in part because of lower demand in Brazil.

International medium-duty truck shipments declined 18 percent primarily because of developments in Brazil:

New emissions requirements in Brazil resulted in a spike in sales before the requirements took effect this year — and a decline in sales afterward.

One of the company’s customers replaced its 6.7-liter midrange engine with a proprietary engine.

Nonetheless, a local investment analyst and Cummins investor said the company remains poised to take advantage of opportunities around the world, including Brazil.

Cummins is “taking market share from competitors around the world” and the customer who dropped the 6.7-liter engine is continuing to use other Cummins products, said Craig Kessler, president and chief investment officer of Columbus-based Kessler Investment Group, via email.

Cummins said its operations “are also affected by currency, political, economic and regulatory matters, including adoption and enforcement of environmental and emission standards” and that certain countries, including Brazil, “carry high levels of these risks.”

Nonetheless, Cummins also said that its geographic diversity has “helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country.”

And Brazil, with about 200 million inhabitants, is the world’s fifth-largest country.

Kessler said Brazil’s economy, despite a slowdown, remains robust and has a lot of upside potential in the next few years.

“They have the World Cup and Summer Olympics coming to their country (in 2014 and 2016) ... which is a testament to their economic strength and global presence,” he said.

Cummins has done a good job of “skating to where the puck is” when it comes to targeting foreign markets,” Kessler said.

The third-quarter report included another statement that portends well of Cummins’ future, according to Mark Foster, chief investment officer of Columbus-based Kirr, Marbach & Co.:

Despite flat sales, Cummins has increased spending on research, development and engineering by $49 million through the first nine months of the year. The higher expenditures were caused primarily by salaries for employees who continue to develop “new products to meet future emission standards around the world and improvements in fuel economy performance.”

“One of the things that has been a real positive for Cummins over the past decade has been their research effort,” Foster said via email. “Cutting that on a near-term slowdown could have very negative long-term effects.”

Kessler said that in a weak economy, financially strong companies often recruit high-quality employees who have lost their jobs to “reinvigorate in advance of the next economic upswing. Part of that entails stretching the boundaries of their research and development capabilities.”

Foster concluded: “Unless there is a repeat of 2008 (we don’t think so), it makes sense to keep the R&D moving forward. That should pay off down the road with new products (and) better emissions technology.”

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