A diesel engine firm just bet $3.7 billion to survive Tesla’s EV dominance

February 22, 2022, 5:41 PM UTC

At risk of becoming yet another company disrupted by Tesla, diesel engine giant Cummins is prepared to bet big the U.S. commercial truck market will go electric just like cars. 

The Indiana-based manufacturer struck a deal with the board of Meritor to purchase the truck parts supplier for a total price tag of $3.7 billion, including debt. This will allow Cummins to add transmissions, brakes, and axles to its own electric motors and offer electric truck manufacturers the chance to source nearly their entire drivetrain minus the battery from one company.

Shares in Meritor surged 45% to $35.92 on Tuesday, just shy of Cummins’s $36.50 bid price, suggesting investors are not entirely factoring in the deal going through, even though it won the unanimous support from Meritor’s board. Cummins traded only moderately lower in line with the broader market.

Tom Linebarger, chairman and CEO of the diesel engine supplier, said now was the right time for a transformational acquisition that would position the company as an industry winner in the shift toward zero-emissions transport. 

“Climate change is the existential crisis of our time, and this acquisition accelerates our ability to address it. Our customers need economically viable decarbonized solutions,” he said in a statement on Tuesday. 

The U.S. is one of the few remaining markets where a truck buyer will often pick a coach-builder like Mack or Freightliner for its tractor trailer, while specifying a diesel engine from a separate manufacturer, like Cummins.

The integration of Meritor’s people, technology, and capabilities will position Cummins as one of the few companies able to provide products for both combustion engine and electric power applications.

By joining forces with Meritor, Cummins said it could accelerate the build-out of its New Power business, developing motors and axles specially designed for hybrid and electric drivetrains. The Cummins segment, while growing, still only represents less than 1% of its revenue, with the bulk of turnover from its core combustion engine and replacement parts business.

The acquisition, which should close by the end of this year, is expected to reap structural cost savings of $130 million annually.

Different customer needs

While consumers might be discouraged by the high upfront cost of purchasing an electric car, trucking companies take a holistic view on cost: They examine a variety of factors from fuel consumption and insurance to maintenance and downtime, when the vehicle isn’t able to earn them money hauling goods.

As soon as an electric truck’s total cost of ownership, or TCO, slips below that of a comparable diesel truck, customers will begin making the switch in large numbers in order to outcompete rivals. That makes the slope of the curve potentially far more steep than for cars, where less rational factors play a role in purchasing decisions.

This is where Tesla factors into the equation. With its vertically integrated business that designs, develops, manufacturers, and distributes cars, Tesla has already enjoyed enormous success supplanting traditional automakers in the passenger car market. Now it plans to do the same when it launches the Semi. 

The first few Tesla trucks have reportedly been shipped to PepsiCo, and more are expected to run off the assembly line when series production is expected to start as soon as next year.

While the Semi is one of the most delayed products frorm Tesla, having been originally scheduled for 2019, Musk has blamed problems on severe parts constraints. 

One of those shortages involved a lack of batteries. The Tesla CEO has said the Semi requires five times as many cells as a passenger car, but since it didn’t command a commensurate price, it wasn’t a priority. 

With news that Tesla manufactured the 1 millionth 4680 cell, its next-generation technology, the company is coming closer to its goal of mass production. Only after would Tesla’s Semi compete with diesel trucks, and hence with Cummins, for business.

Meritor seemed confident the deal would ensure the survival of the two combustion engine companies in future. “Our offerings will continue to play an important, strategic role as commercial vehicles transform to become electric and autonomous,” said its CEO, Chris Villavarayan, in a statement.

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