Cummins falters as overseas markets slide

Pressure is growing on sales executives at Cummins Inc. to find new customers for the ISV5.0 V8 diesel engine in the wake of the company’s latest sales dip.

Cummins faces not only a decline in emerging markets such as China and Brazil, but there is the on-going trend within the likes of Daimler’s Freightliner, Paccar and Volvo to step up levels of vertical integration.

The more these companies integrate their powertrain activities the more life becomes more difficult for Cummins.

Added to which, although the Columbus, Indiana company found new business for its heavy-duty truck diesel engines at beleaguered Navistar International, the mere fact that Navistar is itself under pressure to increase its performance, so there is a knock-on effect for Cummins.

One hope for Cummins is that Navistar quits the diesel engine business altogether, leaving the gates wide open.

That may take a while to happen under the leadership of Navistar chief executive officer Troy Clarke. But it still remains as a possibility.

Meanwhile, Cummins desperately needs new customers besides Nissan and Toyota for its ISV5.0 turbocharged diesel engine with its compacted graphite iron (CGI) vee cylinder block.

These two customers alone do not provide the necessary volumes to fully justify Cummins’ investment in the programme, even though there was initial assistance from the US Department of Energy.

Senior Cummins would like to see the number of customers for the engine doubled. Added to which, foundry men too would like to see a further boost in CGI vee block production with Tupy in Brazil being the world’s largest producer of these highly specialised engine blocks that allow increased output and/or reduced engine weight.

                          The problem for Cummins

The problem is reflected in sales for the past year. Last week, Cummins Inc. posted a lower-than-expected quarterly profit and unveiled plans to lay off up to 2,000 people as global economic weakness took its toll on the company’s international sales. Consequently, shares of the company fell more than eight per cent.

The job cuts will affect nearly 4 per cent of Cummins workforce of about 54,000. The cuts will be implemented before the end of 2015 and deliver savings in year 2016 of between $160 million to $200 million.

Cummins executives expect full-year sales to be between “flat and to down two per cent”, compared with its previous forecast of a rise of between two and four per cent.

Cummins chief executive officer Tom Linebarger pointed the finger at industry orders in Brazil and China which were at “multiyear lows, with no sign that these markets will rebound soon”.

"Given the uncertainty in the global economy, we expect challenging conditions to persist for some time," Linebarger said.

The company said it would decide “in the coming weeks or months” whether further restructuring will be necessary.

Accordingly, Cummins reported a third-quarter net profit of $380 million, down more than 10 per cent from $423 million a year earlier.

Revenue fell almost six per cent to $4.62 billion from $4.89 billion. US financial analysts had expected $4.91 billion.

Cummins reported North American sales up four per cent, but international sales slashed 18 per cent.

Sales of engines for heavy-duty trucks in North America, however, were down nine per cent, and Cummins trimmed its forecast for overall market size in 2015 by 4,000 units to 286,000.

The heavy-duty truck business had previously remained resilient even though international sales faltered.

Cummins is a bell-weather for the US diesel engine industry and while a two per cent dip in sales is not a catastrophe, it could be a pointer to the future. It is unlikely that Cummins will disappear, but there are tough times ahead for the diesel engine maker. Company executives in Columbus will be keenly watching for any further moves in vertical integration, both at home and abroad.