How Cummins is beating vertical integration

Now that every truck maker has its own captive engine, how does an independent engine company like Cummins survive?

Tom Linebarger, Cummins president and chief operating officer, addressed that question during a press event Tuesday before the Mid-America Trucking Show in Louisville, Ky. He noted that several years ago, some people in the industry were wondering how Cummins would survive vertical integration.

"That's an issue we face strategically and that we think very seriously about - and we haven't done that badly," Linebarger said. Not only is Cummins surviving vertical integration, he said, it is in a stronger position than we were six or seven years ago when people started asking the question.

In fact, for 2011, Cummins is predicting it will set new sales records at about $16 billion.

Cummins has done that with a simple - but not easy - strategy, Linebarger said.

Part of that is technological leadership. "If it's really hard to make and hard to get it right, that's what we're going to do," he said. In order to compete with captive engine departments, he said, "we have to have the best technology and products to offer. Not the same, not equal; we have to be better." Cummins makes key technical subsystems, not only for its own engines, but for others, including aftertreatment, turbochargers and filtration.

Cummins' global business not only gives it volume and scale, and the ability to find the best quality parts at the best price, but also gives them the ability to innovate by looking at things in a lot of different ways, LInebarger said.

For instance, Cummins is working on developing selective catalytic reduction for the Chinese market. It will probably not be as stringent as U.S. standards, but it will have to cost only half as much. That, he said, might give engineers a whole new innovation in how to do SCR systems.

And, he said, technological leadership means integrating with customers better, so the end user gets a better experience of the truck and the power together. If you just look at a line drawing of an SCR engine and squint a little, Linebarger said, they all kind of look the same. "They have the same gizmos on them; in fact we sell some of them," he said. It's how they integrate that's important.

Cummins also is working very closely with its truck maker partners, Linebarger explained. "We have to be line an internal engine division, since that's what they're going to compare it to," he said. "We have to think about how they can make more money with our product, not just how we can make more money with our product." And that means sharing some technology, not keeping it all to themselves, he said.

Linebarger also said Cummins' focus on engines is an advantage. "We're engine and component people, not equipment people," he said. "We're deep in the market and we understand power and engines better than anyone else."