New CEO Says Cummins Can Compete Despite Vertical Integration of Trucks

Tom Linebarger, who will become Cummins Inc.’s next chairman and CEO on Jan. 1, said the company is well positioned to meet the competition of North American truck makers offering “vertically integrated” packages of their own trucks and engines.

Cummins’ board appointed Linebarger, currently the company’s president and chief operating officer, to replace Tim Solso, who is retiring on Dec. 31 (7-18, p. 4).

Linebarger said Cummins has a long history of competing successfully with integrated companies.

“That struggle has been going on since before Cummins went into business,” Linebarger told Transport Topics. “Truck manufacturers were vertically integrated with gasoline-powered engines. They resisted Cummins engines, until customers demanded that they get the choice of a diesel engine.”

He said Cummins “also entered many markets overseas in which everyone was vertically integrated, and we had to offer something that added value. That is the identical issue today.”

Navistar Inc., builder of International trucks, and Paccar Inc., owner of Peterbilt Motors Co. and Kenworth Truck Co., introduced their first heavy-duty truck engines in recent years.

Daimler Trucks North America has for several years been offering engines from its Detroit Diesel subsidiary for its Freightliner and Western Star trucks.

Sweden-based Volvo AB’s two North American companies, Volvo Trucks and Mack Trucks Inc., also offer their own branded engines.

The two DTNA brands, the two Paccar brands and Volvo also offer Cummins engines as an option.

“I see this [verticalization] less as a trend and more as a pendulum that is swinging back and forth,” Linebarger said.

“The United States was once a 100% vertically integrated market, and then it swung to where it was practically 100% non-vertically integrated, and today, it’s somewhere in between.”

Linebarger said he understood why North American manufacturers are trying it again.

“I think that strategically, vehicle manufacturers want to offer their customers a differentiated solution,” Linebarger explained. “They want to make their customers believe that their products give the biggest advantage, and the engine is one of the most important ways to do that.”

He said that Cummins was trying to offer added value as well to its customers.

“I think our job is crystal clear,” Linebarger said. “It is to see that our truck customers do better business when they offer Cummins engines.”

Cummins attempts to do this by dedicating itself not only to engines, “but [also] the various subsystems, such as our own fuel injection systems and our own turbochargers,” he said. “We take all of our energy and focus solely on the entire engine system.”

Linebarger said that the company’s global market added another advantage.

“We can bring technology that we developed in one market to other markets,” he said. “If we can find a low cost solution to the China market and it works well, we can bring it back to the United States.”

Similarly, “if we find that some high U.S. technology will work in China, we can bring it there as well,” he added.

“If we don’t [offer added value], they will vertically integrate,” he said of Cummins’ customers worldwide.

Linebarger said that it was difficult for truck makers to offer “vertically integrated” trucks and engines for their entire product line.

“It’s quite interesting, watching companies do ‘backward integrating,’ when they don’t make many of them,” he said. “They may make a lot of engines in one size or two sizes, but they want to offer many different sizes of trucks that need many different engines. To really vertical integrate, in all your engine markets, doesn’t sound like a financially good idea to do.”

Linebarger said he was convinced that truck makers globally will discover that it’s “not really easy to take it vertically in one area, and then in another area.”

Most will “find that they need a partner, or more than one partner, and not just for six months, but for the long term,” Linebarger said. “We therefore have a very viable strategy.”

Linebarger described Solso as “my mentor and good friend,” who “has been a fantastic leader of Cummins . . . for taking it from relatively difficult circumstances to one that is incredibly successful.”

Solso became Cummins’ chairman and CEO in 2000.

Linebarger added that he has been “working with Tim on strategy and operations for 10 years or so now, so that the strategy that we’re implementing today is one that I helped to design. . . . Not very much will change.”