Forward-Looking Strategy Will Pay Off Under New Regulation

Q: How did Cummins’ growth strategies play out in 2018 and how attractive has your technology been in the Mexican market?

A: Of the overall 40,000 vehicles we could target in all segments, we expect to reach 14,000 by the end of the year, which would give us a 36 percent market share. We have enjoyed positive results since 2017 and while competition is fiercer in segments like heavy-duty, in others we are gaining ground.

We already have a share of 60 percent in the heavy-duty market but our competitors are implementing very aggressive strategies. Still, of the 16,000 vehicles in this segment, we expect to reach 9,000. Kenworth and International have played key roles in our development strategy as our main promoters in this segment. Our technology has yielded such good results that even Daimler released some of its models with the Cummins X15 engine with Euro IV technology.

In the medium-duty segment, we will close the year with a 24 percent market share, after having implemented a successful collaboration with Kenworth and International. By 2019, we expect an even bigger business opportunity with Navistar because of the changes in engine technology. Overall, we expect a higher presence in medium-duty while we work to retain our market share in the heavy-duty segment.

In the light segment, where there are potential 3,500 vehicles, we will close 2018 with a 24 percent market share. Our main promoters in this segment are MAN, International and Foton.

The big win for the company, however, was in the bus sector where we closed the year with a 20 percent market share. This market is extremely competitive and our main driver for growth was our relationship with DINA, as well as International.

Q: What benefits can Cummins’ technology provide to clients in terms of savings?

A: Our Euro IV technology demands a higher initial investment of approximately 7 percent of the total cost of the truck. As a result, our strategy was to focus on the total cost of ownership of the vehicle and the benefits our technology could provide to the client over the long run. Our tests show Cummins’ technology can increase fuel efficiency by 4-5 percent, depending on the cargo and the routes taken by the vehicle. Our engines also prolong the time the truck can go without maintenance, thanks to our calibration algorithms that adjust the system depending on the truck’s load conditions.

In 2018, 40 percent of all our engines sold in the heavy-duty segment had Euro IV technology, which was a significant increase compared to 2017 when our mix of Euro with Selective Catalytic Reduction Technology (SCR) was only 19 percent against EPA with Exhaust Gas Recirculation (EGR) engines.

Clients using our Euro IV technology in their latest vehicles have experienced the benefits of SCR, which will be a key element in the implementation of Euro V technology that will be mandatory in new vehicles starting July 1st, 2019. Our technology has been a key element in our relationship with OEMs.

Q: How will Cummins handle the transition toward Euro V following the implementation of NOM-044?

A: Our technology does not need to change in terms of hardware. We only need to do a small calibration to our engines to comply with Euro V standards. We had already worked to convince clients to move to Euro IV since Euro V would use the same hardware with a small calibration in the Engine Control Module (ECM). Therefore, those clients that already made an additional investment in our technology have already started to homologate their technology toward the new standards outlined in NOM-044.

Once we move to Euro VI, we will have to make some changes and add more elements to the system due to the level of compliance we will face. The advantage, however, is that we developed our engines to require modifications only from the outside. The move toward Euro VI will only need added accessories and not a modification of the engine itself.

Q: How is the company’s strategy evolving in terms of investment to grow its operations?

A: Mexico is a key market for Cummins. Even though the country might sometimes be seen as the US’ backyard, it is already a strategic logistics partner for North America and a strong investment destination. Cummins has invested close to US$8 million in a research and development center in Mexico and the results have been so beneficial that we are now expanding our operations even further, with an additional US$3 million investment. Our focus will be on additive manufacturing and other technologies that can support engine remanufacturing.

At the same time, we are planning to take advantage of the free-trade zone the new government is projecting for the northern border. We invested US$19 million buying the facility we were leasing in Ciudad Juarez for our fuel-systems operations and Cummins’ emissions business. We have been in this strategic location for 10 years. The company is even considering incrementing the investment in 2019 to build a warehouse that can support our operation.

Our investments have also been oriented to talent development and human capital development strategies. This topic is highly relevant, particularly in the Bajio region where there is an immense demand for capable talent. We are focusing on creating stronger attraction and retention strategies that can appeal to younger generations. We are investing US$7 million in a new master site in San Luis Potosi with new amenities and services that boost loyalty and a healthy working environment for our employees.

Q: How ready is the company to comply with the new local content requirements established by USMCA?

A: We have already analyzed every product we manufacture and our results show that on average, we comply with the new standards. There are components that surpass the established regional content requirement and others that have yet to reach it. The agreement is expected to be enforced by 2020, which gives us enough time to implement a strategy to make sure all our components comply with new rules.

These changes will bring new opportunities for Mexico. The country can no longer rely solely on low cost labor to be competitive and USMCA will push us to generate new technology and have leading supplier development centers to strengthen the local supply chain.

Q: How is Cummins preparing for the transition toward electrification and how will that impact your operations as a leader in diesel-engine technology?

A: At a corporate level, we are investing heavily in electrification and we even created a new business unit called Electric Power Business. We are acquiring companies focused on high and low-voltage energy storage and entering joint ventures with manufacturers of in-wheel motors and other types of generators. We are even analyzing potential integration with chassis component manufacturers to raise the competitiveness of our operations.

Electrification may be on our radar already but that does not mean we have stopped investing in diesel or natural gas technologies. Some of our competitors have already ditched diesel in favor of electrified powertrains and that gives us the opportunity to remain leaders in this segment for as long as the technology is available in the market. Realistically speaking, although there are countries like Brazil and Chile where electrification is growing, in Mexico, we still do not see the right legal and infrastructure conditions for this technology. We see electrification really disrupting the market in the next 10-15 years. It is a long time but we are already starting to invest in our future and learn about what other countries are doing.