Cummins: An Engine Maker Bets on Clean Air—and Wins
Drive across the Midwest, and you’ll see the same scene in town after town: shuttered factories, Main Streets full of empty storefronts, workforces hollowed out by the steep decline in the once-mighty American manufacturing sector. So you may find yourself doing a double-take when you get to Columbus, Ind., pop. 46,000, the home of Cummins (CMI), the country’s leading diesel-engine manufacturer. You’ll see a thriving downtown, weekend street fairs, and crowds flocking to trendy cafés and restaurants. With 17% of the local workforce employed directly by Cummins, Columbus is a one-business town—and business is good. The local economy is at 4.4% unemployment, compared with 5.8% for Indiana as a whole. “When I was growing up, my hometown of Anderson, an hour north of here, had 20,000 GM (GM) employees, and 30 years later it has none,” says Jason Hester, executive director of the Columbus Economic Development Board. “Right now, in this community, if you want a job, you’re hired.” For that you can thank diesel engines—bulky, unglamorous machines that may make you think of battered pickups and lumbering semis, or maybe of Europe, where diesel passenger cars are the norm. And yet in an American economy driven by tech startups and high finance, Cummins has not only survived but thrived in heavy industry. Driven by global demand for its energy-efficient, low-emission engines, the company’s sales have popped since the end of the Great Recession; revenues jumped from $10.8 billion in 2009 to $19.2 billion in 2014. It operates in 90 countries, with almost 50% of its 2014 sales coming from overseas. In the U.S. and many other markets, it’s the company to beat in diesel. Says Larry De Maria, an analyst with William Blair: “Cummins arguably makes the best engines in the world.”
Cummins and Columbus, from Past to Present: In 1958, Architectural Forum magazine hired Ezra Stoller to photograph the home of Cummins CEO J. Irwin Miller in Columbus, the company’s hometown. That encounter led to more commissions, between 1962 and 1971, for which Stoller shot pictures of Cummins’s factories and Columbus itself. Here, his vintage photos are paired with new images captured for Fortune by Ryan Donnell.
Cummins first found success riding the postwar boom; it’s one of only 57 companies that have appeared on the Fortune 500 every year since 1955. But more impressive is how the company has sustained that success in a tumultuous time for U.S. industry. When many manufacturers fled to cheaper overseas labor, Cummins took a more sophisticated tack, investing in its domestic workforce and facilities while establishing fifty-fifty joint ventures abroad. And when many automotive companies fought Washington on clean-air regulations, Cummins embraced them—and then used its mastery of clean-tech diesel to build a moat around itself. “We like things where the business is hard to do,” says Rich Freeland, Cummins’s president and chief operating officer. “Only a few people can get there, and we think we can.”
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That sort of confidence, along with a corporate culture that emphasizes investing in employees and their communities, has helped Cummins evolve into something truly unusual. It’s a multi-national, technology-driven, very contemporary company that retains some qualities of an Eisenhower-era, take-care-of-your-workers industrial giant—a business model so traditionally American that it now seems practically un-American. It’s a combination that has Cummins poised to continue capitalizing on the growing global trucking industry, and one that could keep it firing on all cylinders for many years to come.
Though you would never confuse Cummins with Apple (AAPL) or HP (HPQ), it, too, got its start in a garage. In 1919, Clessie Lyle Cummins, an auto mechanic and chauffeur in Columbus, persuaded his boss, a local banker named William G. Irwin, to invest in an exotic engine technology developed by the German engineer Rudolf Diesel.
At the time, few Americans had heard of diesel, and those who had heard of it figured the bulky design was best suited for generators and farm equipment. But Cummins saw the possibility of using it on the highway, and through the 1920s and ’30s his eponymous company churned out increasingly powerful, sophisticated engines, with the goal of serving the burgeoning commercial trucking sector.
The advent of World War II and the postwar expansion of the highway system and the interstate trucking industry created an unquenchable demand for immensely powerful engines, and diesel was unmatched in that category. Under the leadership of Irwin’s nephew, J. Irwin Miller, the company grew from $26 million in gross sales in 1944 to $1.26 billion in 1977—14-fold growth after adjusting for inflation.
If Clessie Cummins was responsible for creating the company, Miller deserves credit for making it a global powerhouse. He was an unlikely candidate for the role of industrial magnate: Born into wealth, he went to Yale and Oxford, where he played classical violin, rowed crew, and gravitated toward circles of architects and artists. Once in place at Cummins, though, Miller proved to be a natural executive. He understood the long-term potential of overseas growth, so even as Cummins made a mint on domestic trucking, it began to expand internationally. Miller opened Cummins’s first overseas factory in 1956 in Scotland; six years later he formed a fifty-fifty joint venture to build heavy-duty engines in Pune, India—decades before most American firms dared invest in that country. In 1975, Miller was one of the first American executives to visit China after President Richard Nixon normalized relations.
Miller paid equal attention to the company’s hometown. To attract top-flight engineering and management talent to rural Indiana, he had the corporate philanthropy, the Cummins Foundation, sink millions into local schools. And he offered to pay the architect’s fees for any public building project that agreed to choose from a list of firms he provided; as a result, Columbus has one of the greatest concentrations of modern architecture in the country. I.M. Pei designed the public library. Eero Saarinen did a local church. Richard Meier designed a school; Robert A.M. Stern, a hospital. “It’s a matter of enlightened self-interest,” says Hester at the local economic development board. “Cummins can attract employees who but for these amenities would not come here.”
Miller’s public activism extended beyond Columbus, as Charles Rentschler, a former Cummins executive, documents in The Cathedral Builder, a new biography of Miller. In 1960 he became the first lay president of the National Council of Churches, and he used his business and religious ties to push Midwestern congressmen to support the Civil Rights Act of 1964. He was strongly pro-union and fought against Indiana’s right-to-work law when it was first introduced. “I wouldn’t know how to run a big company without a strong union,” he told a Fortune reporter in 1957. (Even today about 40% of Cummins’s global workforce is unionized.)
Though Miller died in 2004, the company continues to reflect his philosophy of serving stakeholders beyond its shareholders—including customers, employees, and the community. In 2012, after the Columbus city council rejected a plan to provide universal curbside recycling, Cummins led a consortium of local firms to pay for the program’s capital costs, including trucks and toters, a $500,000 commitment. “I meet other mayors who say I’m lucky to be mayor of Columbus,” says Kristen Brown, a sixth-generation resident—and a daughter of a lifetime Cummins employee—who was elected in 2011. “They say, ‘I’d love to have a Cummins.’ ”
Miller’s legacy was put to the test in 1997, when the Environmental Protection Agency began investigating whether special shutoff switches in the company’s engines could be used to disable emissions controls. They could, apparently to the surprise and dismay of Cummins engineers. The next year the EPA forced Cummins and several other manufacturers to agree to reprogram the devices and sign an $83.4 million consent decree, the highest civil penalty in environmental enforcement to date. The EPA then moved forward the deadline for new, lower-emission engines from 2004 to October 2002.
Some at Cummins wondered whether a company built on dirty, heavy-duty diesel could survive the EPA’s order, says Freeland, the president and COO, who has been with the company since 1979. Cummins’s leadership considered suing, but eventually cooler heads prevailed, and rather than fight the EPA, Cummins decided to work with it. “We said we’d double down, because we thought there was a way to be different,” Freeland says. Cummins was, after all, the leader in diesel technology. If it could quickly meet the EPA’s new standards, it stood to reap enormous benefits.
Under Theodore M. Solso, who was chairman and chief executive from 2000 to 2011 and is now chairman of General Motors, Cummins set out to become the first diesel company to hit the EPA targets. “The whole industry said there was no way anyone could meet it,” Solso now recalls. But Solso made meeting the goal a centerpiece of a bigger internal revolution. In the early 2000s he implemented Six Sigma management systems and ended the wildly popular (but profit-reducing) practice of offering discounts on most sales. Above all, he poured money into research and development, traditionally a weak spot for diesel makers. From 2002 to 2007, Cummins boosted annual R&D spending by 60%, to $321 million, with almost a quarter dedicated to meeting future EPA engine standards. That emphasis yielded important new technologies, including advances in “deep spray” injection, a process that reduced engines’ emissions without sacrificing efficiency by pushing fuel farther into the cylinder.
Cummins did indeed hit the EPA’s standards first, and saw it pay off almost immediately. By 2010, Caterpillar (CAT) and Detroit Diesel, its two largest domestic rivals, had bowed out of the on-highway heavy-duty diesel market, which Cummins now dominates with a 39% share. Annual revenues have more than tripled since 2002, when that EPA deadline kicked in, and experts within and outside the company say Cummins’s early commitment to a low-emissions strategy will help it maintain its lead as regulations ratchet up over coming decades.
“The on- and off-highway emissions standards were the best thing that ever happened to Cummins,” says Mike Brezonick, editor-in-chief of Diesel Progress magazine. “They make such better engines now. It was the equivalent of the Manhattan Project.” The company also controls about 41% of the North American market for after-market components that lower emissions on other companies’ engines, a huge new source of revenue. “You hear in the news that pollution controls are hurting jobs,” says John Wall, the chief technology officer. “For us it’s the exact opposite.” Last year the components business brought in $5.1 billion, or a little over a quarter of total revenues.
Cummins continues to work closely with the EPA on the next generation of standards. Wall, coincidentally, had been meeting with agency officials the day before giving an interview to Fortune. “We’ll take [regulators] through technologies being developed, explain how long it will take to get them to market,” Wall says, hoping that the industry’s needs are on their minds when the rules are finally written. That kind of cooperation has made Cummins a poster child for emissions controls; Solso and his successor, current CEO Tom Linebarger, have both stood beside President Obama as he announced rounds of clean-air standards.
Cummins’s clean-engine investments mesh in important ways with its other major strategic initiative of the past decade and a half: its rapid growth overseas. Under Solso the company opened dozens of new foreign joint ventures and deepened its investments in East Asia and Latin America. By 2005, China and India alone were generating $1.9 billion in sales, almost 23% of Cummins’s total. Today, of its 54,600 employees, 63% work outside the U.S., up from about 50% a decade ago.
As developing nations improve their own clean-air standards, Cummins’s lead in meeting U.S. rules could leave it well positioned to take advantage. And its diversity, both in product lines and markets, has already bolstered Cummins enormously by severing it from the chains of cyclicality in the diesel-engine industry. During the downturn of the late 1990s and early 2000s, Cummins struggled and had unprofitable years, but it emerged from the Great Recession relatively unscathed, thanks to its broad exposure to the developing world.
The benefits of global breadth were on display in Cummins’s most recent quarterly earnings call. The company forecast big dropoffs in truck engine sales in China and Brazil, but it also said that U.S. demand would be more than strong enough to offset the declines, and investors shrugged off the news. Cummins stock is up 105% over the past five years, compared with 95% for the S&P 500, and it remains an analyst darling.
Cummins is far from the only U.S. manufacturer to have expanded overseas, of course. But unlike many big companies that fly solo, Cummins insists on splitting ownership fifty-fifty, and it stocks its overseas offices with local talent. Going half-and-half has allowed Cummins to get into tough markets, like China, that might resist a company that tried to force its own terms. And it means that Cummins gets a better sense of local conditions more quickly. China in particular is littered with the hulks of failed ventures by U.S. companies that didn’t understand the territory. In 2013, for example, Caterpillar, one of Cummins’s rivals, had to write down $580 million after it gobbled up a Chinese mining-equipment company, Siwei. Caterpillar said it had discovered, months after the deal closed, that Siwei’s value had been inflated by “accounting misconduct” at the Chinese company.
As it expands globally, Cummins looks to local talent to boost not just its rank and file but also its management. Its leadership development program, an 18-month executive education program, trains 15 promising employees from other countries—including China, India, and Brazil—to become leaders either in their own countries or in other regions where Cummins operates. “It’s part of our belief in building capability locally,” Freeland says. “We’re not there to extract value.”
Developing local talent is also important because of the way Cummins tackles overseas product development. Instead of taking products made for the U.S. and tweaking them (or “de-contenting” them, in industry lingo) to fit local needs, the company approaches each region as a blank slate and develops engines and other products to match it. That’s more expensive upfront, but it means a better and more profitable fit in the long run. It’s also a running source of ideas and products that might find export markets of their own. For example, Cummins’s ISF 2.8-liter engine was designed for the Chinese commercial truck market, where engines tend to be smaller and lower in power than in the U.S. and Europe. But it turns out that for the U.S. market, the ISF works perfectly in pickup trucks. Last year Nissan presented a concept version of its Frontier pickup, with a Cummins ISF 2.8, at the Chicago Auto Show.
Cummins also invests heavily in the overseas communities it enters, in projects that show how corporate citizenship and a strategy for the company’s future can complement each other. Among its initiatives: an engineering college for women in India, which now enrolls about 1,800 students, many of whom the company hopes will help it meet its goal of a 50% female workforce in that country. Efforts like these follow the example that Irwin Miller set decades ago in Indiana, Wall says: “We take this model with us all around the world.” Brezonick of Diesel Progress also sees a little bit of Columbus in the company’s global investments. “When push comes to shove,” he says, “they’re a straight-shooting Indiana company.” Albeit one with employees in Pune, Xiangyang, and São Paulo.
A version of this article appears in the June 15, 2015 issue of Fortune magazine with the headline ‘An Engine Maker’s High-Tech Makeover.’
Clarification, June 9, 2015: An earlier version of this article said that Nissan would soon offer a version of the Cummins ISF 2.8 in its Frontier pickup; Nissan used the engine in a concept version of the truck in 2014, but has opted not offer it in production versions.