Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 12, 1995 TAG: 9502100053
SECTION: BUSINESS PAGE: F2 EDITION: METRO
SOURCE: RONALD E. YATES CHICAGO TRIBUNE
DATELINE: COLUMBUS, IND. LENGTH: Long
Today, Arnholt, 66, an assembly line worker, is still in the plant, building engines for trucks, buses and industrial machinery.
But that's about the only thing that's remained the same at Cummins' oldest factory over the last 50 years.
``There have been big changes around here,'' said Arnholt, standing alongside the engine block assembly line. ``When I started here, we turned out 24 engine blocks a day. Now we turn out 165 a day with fewer people.
``And the quality is way, way better.''
Arnholt could also have mentioned the new automated manufacturing processes, the concept of work teams and the just-in-time inventory system that have dramatically improved quality and productivity.
It's a good thing that productivity and quality are up at Cummins because for the first time since the late 1970s demand for the company's engines is exceeding production - despite the fact that the 70-year-old, 2.3 million-square-foot Columbus, Ind., plant is running three full shifts to turn out 35,000 heavy duty, 250- to 500-horsepower engines every year.
But Arnholt isn't complaining. And neither is Cummins' new chief executive, Jim Henderson.
In fact, Henderson, a tall, affable man who has spent his entire working life at Cummins, couldn't be happier.
Henderson, who had been president of the company, took over as chief executive officer last August in a remarkable transfer of power that saw former CEO Henry B. Schacht voluntarily step aside. It was an unusual move because both men are age 59 and both have been with the company 30 years.
Although some might conclude that Schacht, now board chairman, was bumped up to make way for Henderson, insiders and analysts who know Cummins say nothing could be further from the truth. Instead, they say, it was a display of enlightened leadership.
Both men, they say, wanted to preclude a situation in which the company's two top executives retired in the same year. At the same time, Schacht says he wanted to give Henderson the opportunity to imprint his personal vision on the company.
It's not that Henderson's vision is dramatically different from Schacht's. For 15 years, Schacht as CEO and Henderson as president acted in tandem to steer Cummins through some of the roughest waters in its 76-year history.
When you look at Cummins today, you wouldn't know that. The company posted record fourth-quarter sales of $1.3 billion - a jump of 18 percent from the year-earlier quarter. Earnings were even more impressive. They were up 49 percent, from $47.1 million in the third quarter of 1993 to $70.2 million in 1994.
As analysts predicted, 1994 has turned out to be the best year ever for Cummins. Net earnings for the year were $252.9 million, or $6.11 per share, on sales of $4.7 billion. Net earnings for 1993 were $177.1 million, or $4.79 per share, on sales of $4.2 billion.
But things were a lot different a few years ago. Between 1986 and 1992, the company lost money almost every year. The exception was 1987, when it cleared $5.8 million.
The 1980s found Cummins scrambling to keep up with big changes in the global marketplace. And although Schacht and Henderson saw the writing on the wall as far back as the early '80s and moved to diversify Cummins' product line with several new medium-size engines, the company seemed helpless to stop the erosion of its bread-and-butter business - heavy-duty diesel truck engines.
The problems began in the late 1970s, when Cummins controlled about 50 percent of the North American heavy-duty truck engine market.
``We sold every engine we made,'' Henderson said. ``We added capacity to keep up. The market kept exceeding our expectations.''
It's possible Cummins grew complacent, perhaps even overconfident, say analysts. Then, in the mid-80s - despite putting millions of dollars into new technologies, expanding new markets and implementing quality initiatives and training programs - the bottom fell out.
A new line of heavy-duty engines was introduced that was riddled with defects and flaws. That allowed Cummins' biggest U.S. rival, Detroit Diesel Corp., to eat into its biggest market. By the time the hemorrhaging stopped, Detroit Diesel and other competitors had grabbed 15 percent of the heavy-duty diesel engine market from Cummins.
Then, to make matters worse, Cummins found itself competing with an old customer and partner - Japan's monolithic Komatsu Ltd., the world's second-largest manufacturer of heavy-duty construction equipment after Caterpillar Inc. of Peoria, Ill.
It was about this time that corporate raiders began circling Columbus like vultures. Schacht and Henderson decided to sell 20 percent of the company to three customers - Ford Motor Co., Tenneco Corp. and Japan's Kubota Corp. - so it would have the capital it needed to continue investing in new technologies.
Schacht drove down costs almost 23 percent by instituting corporate-wide cuts - including a 15 percent cut in his salary.
To keep Komatsu and other competitors at bay, Schacht cut prices on engines 30 percent. Although the move battered the bottom line and resulted in that red ink bath, it kept Komatsu and other rivals from eating further into Cummins' market share.
That was not the scenario Cummins had in mind when, in the early 1960s, it licensed Komatsu to build its heavy-duty diesel engines. Indeed, at the time it was like adding a fat cash cow to Cummins stable of truck, bus, industrial, military and marine engines.
``Komatsu wanted to compete with Caterpillar and they wanted to export machinery,'' Henderson said. It was a marriage made in heaven. Cummins was able to deal a heavy blow to one of its biggest competitors - Caterpillar, while using Komatsu to gain a foothold in Japan and Asia.
There was just one problem, Henderson said.
``When Japan went through its energy crisis in the early 1970s, we weren't close enough to Komatsu to see what it needed,'' Henderson said. ``We weren't as responsive as we should have been, and we didn't design the engines to perform like Komatsu wanted them to.''
With Cummins unable or unwilling to redesign its heavy-duty diesels to conform to Komatsu's new fuel and emission requirements, the Japanese company decided to start producing engines on its own.
``Overnight, Komatsu became a competitor instead of a customer,'' Henderson said.
Cummins engineers bristled. Some felt betrayed. The engines Komatsu was turning out in the 1980s looked a lot like the engines Cummins made - except for the Komatsu logo on the block.
It would have been easy to bang their fists on the boardroom table and sever the Komatsu relationship with costly patent infringement suits and complaints to the Commerce Department.
``We decided not to do that,'' Henderson said. ``We worked hard to keep the relationship going. What happened to us in the 1980s was our own fault. We took Komatsu for granted. We didn't understand their culture. We brought Komatsu engineers here in the '60s and '70s, and they spent years in our technical center learning about our engines. We, in turn, learned little from them.''
Cummins has come a long way since its early years in Japan - especially in getting closer to its customers and in understanding what they need and want.
The company has also developed new electronic technology and married it to its expanded line of diesel engines. It is technology that neither customers nor competitors can easily duplicate.
It includes a high-tech on-board computer system that monitors engine performance and maintenance, provides to a fleet manager detailed business trip information, such as pinpoint satellite-monitored positioning and fuel consumption. It even delivers different levels of power and torque depending on road and driving conditions.
By going forward with new technology instead of squabbling over past technology, Henderson and Schacht set a fresh tone for Cummins.
In addition to attracting new customers with its lineup of improved heavy-duty M11 and N14 engines and its smaller B and C series medium-duty diesel engines that are now found in Ford Motor Co. and Chrysler Corp. trucks, it regained an old customer - Komatsu.
In 1993, 30 years after their original linkup, Cummins and Komatsu entered into a new joint venture to produce the company's B Series engines in Oyama, Japan, and Komatsu's 30-liter engines in Seymour, Ind.
``I don't think Komatsu would have the incentive today to do what it did back in the early 1980s,'' Henderson said. ``We are well-positioned with our technology. We are close to our customers and we are responsive.''
But Cummins isn't resting on its technological laurels. It has entered into new joint ventures with several foreign companies to develop new engines and new markets.
One of those with Wartsila Diesel International Ltd. in Finland is a 50/50 joint venture to design, develop and manufacture two new families of heavy-duty, high-speed diesel and natural gas engines ranging from 3,600 to 6,000 horsepower.
There are others with Sweden's Saab-Scania AB to develop a new fuel system for diesel engines based partly on Cummins' high-pressure fuel-injection technology. The company is even working to incorporate new materials such as ceramics and carbon composites in its engines.
Then there is the most unlikely move of all. Cummins, America's premier diesel engine maker, has turned engineers loose to explore a technology that could someday make the company's core business obsolete: electric-powered engines.
Henderson is unruffled by the seeming sacrilege.
``If you notice, the word `diesel' doesn't appear anywhere in our name,'' he says. ``Just `engine.'''
by CNB