One of the fascinating things about quarterly earnings reports from global public companies is the discussion with analysts that follows. Often new, many times heretofore unreported news or clarifications, comes out.
Such was the case with Cummins Inc.’s recent financial report. Mike Brezonick looks at the additional information on its much-speculated-upon deal with Isuzu, as well as an interesting tidbit about a pre-buy in China.
More on Isuzu
Since last fall, when Cummins and Japan’s Isuzu Motors Limited first announced their plans to “jointly evaluate opportunities to deliver globally competitive products,” and earlier this summer, when the two companies announced a formal partnership agreement, there has been one overriding question about the whole deal.
What does it really mean?
Solid, definitive answers have been hard to come by. But Cummins Chairman and CEO Tom Linebarger shed a little light on what the end goal is in response to a question posed by a financial analyst during a second quarter earnings conference call.
Though he said it was still early in the venture, Linebarger said Cummins was “really pleased with our conversations.”
“It’s (Isuzu) a terrific company,” Linebarger said. “I mean it’s not a company that we had done a lot of business with until we started having conversations with them. But although we’ve always been impressed with them from afar, we kind of feel like at least in the off-highway market where we see each other, they’re the one, the engine that we think is actually competitive to ours, and we think highly of them.
“So anyway, we’ve had terrific conversations, but we are early days as to kind of what the market share opportunity (is). But here’s how we’re thinking about it together – it’s that the two companies are both spending a lot of investment into the various technologies that will occupy the commercial-industrial equipment space. So think about not only diesel, but natural gas and hybrid and electrification and fuel cells and start to think about what that means.
“Then they also have a truck business which also has to do autonomous safety, other integration on their vehicle. So they’re thinking about all the investments they need to make in that, all the investments they need to make in powertrain coming up and thinking that tips us over, a company our size. But they need to be leading, there’s no room for laggards, there is not going to be any second place. They’re the strongest truck company in Japan, they have a terrific market share in Southeast Asia and they’re the second-largest diesel engine maker with us.
“So, what we’re going to try to do is figure out how we can make sense and rationalize these investments in these various technologies, and it’s my sense that they would like to figure out a way to do that, so that Cummins can do a lot of the investments in the powertrain, and they can focus more investment on the truck.
“And if they can do that in a way that allows them to ensure supply, make sure they’re leading, utilize the technology and assets they have, I think that’s going to be a solution that they like. But there’s a lot of conversations about to have about how you do that.
“The reason we think this is really a great opportunity for both companies is if we can figure this out, I think a lot of other OEMs around the world would like to figure out something similar. All of us are stuck with the same problem of a lot of investment in new technology for essentially the same markets and essentially the same size, which looks like an equation that again, tips most of us over unless we can figure out some solutions to either add content and or find new ways to rationalize investment.
“So I think it’s a really important set of work that we’re doing that could be indicative of how some of the other industry discussions go.”
A China Pre-Buy?
For all the differences between the Chinese and North American engine, equipment and vehicle markets – language, financial structures, business philosophies and traditions, operating and maintenance practices, etc., etc. – it’s clear there are still some areas where a customer is a customer that reacts in pretty much the same way anywhere in any market.
Want proof? There was reportedly a pre-buy in China among heavy-duty truck customers to beat the China National 6 (NS6) engine emissions standards that began their phase-in in July.
Cummins Chairman and CEO Tom Linebarger noted the pre-buy during the company’s recent conference call with financial analysts after Cummins released its second-quarter results.
“Industry demand from medium- and heavy-duty trucks in China decreased by 9% compared to a year ago, even though the market was positively impacted by a pre-buy of natural gas engines ahead of the move to NS6 standards in July. We estimate that the impact of this pre-buy was approximately 20,000 units, increasing market size by 5% in the quarter, our market share improved to 12.8% this quarter from 10.9% a year ago, as we increased our share at full-time.”
So while they may live under a totalitarian regime and embrace communistic economic thought, buyers of trucks in China apparently are willing to game the emissions regulatory system the same way as their North American trucking brethren. Albeit with natural gas engines, which, though ACT Research recently reported a 43% year-to-date gain in natural gas truck sales through the first five months of 2019, still remain a tiny fraction of overall medium- and heavy-duty truck sales in North America.