Eaton, Cummins Join Forces on Automated Transmissions
This story appears in the April 17 print edition of Transport Topics.
Eaton Corp. and Cummins Inc. have agreed to form a joint venture to produce automated transmissions for medium- and heavy-duty trucks, a move that would deepen the suppliers’ long-standing powertrain alliance.
Cummins and Eaton would each own 50% of the venture, to be named Eaton Cummins Automated Transmission Technologies.
Cummins will pay Eaton $600 million for its stake, while Eaton will contribute the designs for its next-generation automated heavy-duty transmission, as well as its current Procision medium- duty transmission and certain assembly assets.
The transaction is expected to close in the third quarter, pending regulatory approval.
Craig Arnold, Eaton’s chairman and CEO, said the venture will better position the company’s transmission business to help manufacturers meet tighter emission standards and achieve greater fuel economy, which will require the engine and transmission to work together in a more seamless fashion.
“Our joint venture with Cummins will leverage the technical strengths and experience of two industry leaders with long histories and deep industry expertise to provide superior automated transmission technology for our global customers,” Arnold said.
The joint venture will use the proceeds of the transaction to target growth opportunities, he added.
Cummins Chairman and CEO Tom Linebarger said his company’s venture with Eaton “will deliver the most advanced automated transmissions and develop an integrated powertrain and service network that supports our customers like never before.”
The joint venture will build on the partnership between Eaton and Cummins. The two independent suppliers have collaborated on product integration through their SmartAdvantage powertrain lineup, which pairs Cummins’ engines with Eaton’s transmissions.
The joint venture, however, will focus on more tightly integrating transmissions not only with Cummins’ engines, but also with truck makers’ vertically integrated offerings, Eaton’s Arnold said.
Most original equipment manufacturers have been heavily promoting their own proprietary engines while continuing to offer Cummins engines as a third-party option. Cummins, based in Columbus, Ind., is the only major independent supplier of heavy-duty truck engines remaining in the North American market.
Early reaction from industry analysts generally was positive.
The strategy “makes a lot of sense” for Cummins, analyst Michael Baudendistel said in a note to Stifel Nicolaus clients.
He said the joint venture is a “far better structure than the alternative some investors have speculated on in the past: the potential for Cummins to buy Eaton’s entire vehicle transmission business.”
Lawrence De Maria of William Blair Equity Research characterized the joint venture “as a step toward mitigating future vertical integration challenges.”
A closer relationship between Cummins and Eaton “should allow for a more seamless product solution to be offered and could allow for greater fuel savings,” he said.
David Leiker of Baird Equity Research agreed that the formal joining of Cummins and Eaton “likely enhances future product offerings.”
“Apart from financials, we see strong strategic merit as greater powertrain coordination enables better fuel efficiency and potential defense against OEM vertical integration,” he said.
Eaton’s Arnold said much of the trucking industry’s ongoing transition from manual transmissions to automated manuals already has taken place, but growth opportunities remain.
In addition to developing new products, the joint venture also will sell and support Eaton’s current heavy-duty automated transmissions in North America. Eaton will continue to manufacture those transmissions during the transition period.
Meanwhile, Eaton’s Vehicle Group will retain its global manual transmission and clutch businesses, as well as its current generation of medium- and heavy-duty automated transmission products outside of North America. Eaton also will retain its light-duty and agricultural transmissions aftermarket business, as well as its global automotive business. Eaton, based in Dublin, is a diversified supplier of power management products.
The joint venture’s board and management will be composed equally of Eaton and Cummins leadership.
Cummins will report the joint venture’s revenue as part of its Components business segment, while Eaton will report 50% of the venture’s earnings within its Vehicle segment.
Arnold said the joint venture is in “startup mode.” As such, Eaton said it expects no material change in operating profits for its Vehicle segment in 2017 and 2018 as a result of the venture. It expects revenues for that segment to decline about $25 million in 2017 and fall about $200 million in 2018.
