Cummins Engine Company Profiting From Regulations

Cummins Inc., the U.S. manufacturer of engines for trucks, buses and off-road machinery, is thriving in good measure because of tough, new government regulations around the world. In the last few years, the $18 billion-a-year-in-sales company has become the go-to partner for overseas vehicle manufacturers in Asia and Latin America looking to avoid years of costly engineering work to bring their own engines into compliance with the new standards. Demand for more efficient engines is aiding Cummins.

There is a very strong push for better environmental regulations by governments in almost every country. America has technologies that can help those countries meet emissions regulations with a relatively low impact to their economies. Cummins' willingness to customize its engines and other components for specific regions—a strategy the Columbus, Ind., company calls fit-for-market—has allowed it to penetrate foreign markets faster and more thoroughly than other U.S.-based manufacturers.

About 35% of Cummins sales last year came from fast-growing markets, such China, India and Brazil, up from 27% in 2007. Cummins' all-in approach to emerging markets exposes the company to inevitable second-guessing as sizzling economies in China and Brazil weaken lately.  Emerging markets are going to grow at somewhere between two and three times what the U.S. and Europe are going to grow at over the next 10 years.

Cummins' revenue from its engine-and-component content on heavy-duty trucks in North America has doubled in the last 10 years to $30,000 a truck. That figure is almost certain to increase as U.S. truck makers comply with new regulations starting in 2014 to lower carbon dioxide emissions and an improve fuel mileage. Moreover, manufacturers of new commercial trucks in China, India and Brazil face ever-increasing restrictions on nitrogen oxide, a component of ozone-depleting greenhouse gas that Cummins already has reduced to ultra-low levels on its U.S. engines. Cummins already accounts for nearly half the engine market for light and medium-duty trucks in Brazil and 35% of the engine market for construction machinery. (WSJ, 5/1/2012)