By Boris Ladwig, The Republic
bladwig@therepublic.com
Second of three parts
Cummins Inc.'s recent successes are enabling the company to invest in projects it expects to produce significant revenues.
Chairman and Chief Executive Officer Tim Solso said Friday that it is conceivable Cummins could be a $20 billion company - more than three times as big as in 2002.
Much of the projected growth will come from new or yet-to-be-released products.
The light-duty diesel project that has been announced for Columbus Engine Plant will generate sales in a market that so far has no Cummins presence.
Solso said the company projects to build about 150,000 engines at CEP, though if the product takes off, it could be twice that. Coupled with 350,000 engines to be built annually in a deal with Foton in China, by 2012 "you could be talking about half a half a million engines a year that we don't make today," Solso said.
In other words, by 2012, the company expects to make about twice as many engines as the 850,000 it sold last year.
The Power Generation segment has a similar example for growth. The PG group has a roughly 85 percent market share in generator sets for RVs.
"In order for them to grow their business, they needed to get into (other) markets and so they've done several studies about how they can grow their business," Solso said.
The group introduced smaller generators sets people can use in their garage shops or in remote homes prone to power loss from storms. The units were introduced six months ago and are sold through Cummins distributors and large retailers such as Costco. Cummins projects to sell about 50,000 this year.
Growth strategy
"One of the things the company has gotten better at ... is being able to stand back and look at what's going on around us and think strategically about where future opportunities might be and then figure out what do we have to do to position ourselves to take advantage," said Joe Loughrey, president and chief operating officer.
That approach yielded, among other projects, the light-duty diesel project, the Foton joint venture and the auxiliary power generation unit.
"There's also a lot more discipline in terms of what we do and what we don't do," said Solso.
Groups cannot launch a project on their own. They go through a review process that includes presenting market studies and explaining the project's financial viability and technology before they can obtain approval.
"As a result of having a process to do a better job of strategic thinking and a better process to evalu- ate each of the opportunities, we have more opportunities ahead of us for growth right now than I think we've ever had," Loughrey said.
Solso said he believes the company can reach the $20 billion in annual sales without acquisitions.
Cummins' opportunities "are either growth from existing businesses or adjacent businesses."
For example, the company knew years ago that emissions standards would require new solutions. Cummins developed products for its engines - but also is selling products to other companies.
The light-duty diesel project also is as an example of such organic growth. The company leveraged its heavy-duty and medium-duty engine expertise and its relationship with DaimlerChrysler, which will be the light-duty project's first customer.
Mergers/acquisitions
"Big acquisitions, that's not part of our strategy," Solso said. "We do not have, in my judgment, a history of doing acquisitions well."
However, joint ventures present a "much more effective way for Cummins to operate than going off and buying something and trying to assimilate it."
JVs require less capital because a partner shares costs and they combine expertise from two partners, Solso said.
He pointed to the XPI, a next-generation fuel system Cummins developed with Scania. The companies announced in late 2005 that they planned to invest $31 million in the Columbus Fuel Systems Plant and create 65 jobs.
Enlisting Scania's financial and technical contribution, without which Cummins could not have launched that product, Solso said, is "much smarter than going off and buying a fuel systems company."
Loughrey said a joint venture also mitigates risks because the JV partner typically also serves as a customer.
The Scania JV started introducing the XPI system on 8-and 9-liter engines in the fourth quarter, and expects to expand it to larger Cummins and Scania engines.
Solso said the investment community gets "infatuated" with mergers and acquisitions and does not understand joint ventures and the skill sets required to make JVs work.
"That's why I don't think Cummins has been given enough credit for our investments in China and India."
A recent report from Bear Stearns, for example, hinted that Fiat subsidiary Iveco might try to enter the North American market by acquiring Cummins.
"We don't view ourselves as an acquisition target," Solso said, "and my own view is that that's highly remote."