Home >Industry >Manufacturing >Innovation pays off for Cummins

Mumbai: Padarwadi is a village of rice growers, located 110km from Pune in Maharashtra. A key step in processing raw rice is dehusking—for many decades an arduous task for the farmers, who, without electricity to power a dehusking machine, had to trek to another village that had power supply to perform the task.

That’s until Cummins Inc. stepped in, in 2011. Working together with the Indian Institute of Technology, Bombay, and non-profit Maharashtra Arogya Mandal, the company’s unit Cummins Power Generation developed a generator— one that runs on oil extracted from local pongamia seeds for fuel.

The generator was used to power the village’s own electric dehusker—a small innovation that has made life a lot easier for the rice farmers of Padarwadi.

“If you have to understand how Indian this company is and how specifically we tailor our products to the needs of our customers, this is it," said Anant J. Talaulicar, chairman and managing director of Cummins India Ltd.

“This is our product for the rural areas of India and I can tell you we don’t have any product like this in any other part of the world. And we developed it because we felt there is a need," Talaulicar added.

That anecdote, perhaps, explains why the maker of fuel systems and power generation equipment (among other products) has emerged as a rare example of a successful manufacturer in India, making products for both domestic and overseas markets. Many foreign manufacturers have been too daunted by India’s reputation for bureaucratic inertia, the rigidity of its labour laws and its infrastructural deficiencies to venture into the country.

As India, under Prime Minister Narenda Modi, sets out to become a manufacturing hub to create jobs by attracting foreign investors to “Come, make in India", Cummins’ experience makes for an interesting case study.

The numbers tell part of the story. In 2013, the Cummins group posted 9,834 crore in revenue. It employs more than 9,000 people.

At its 20 manufacturing facilities in the country, Cummins makes diesel engines and natural gas engines—for trucks, buses, locomotives and ships—as well as mining equipment and drilling equipment. In its power business, Cummins makes generator sets for power backup systems used by banks, restaurants and factories; in its component business the company makes turbochargers, fuel systems and filtration systems.

“Wherever there is a need to build infrastructure in India—roads, ports, airports, or backup factories with electricity—we provide our engines," said Talaulicar.

“You know India has had a deficit of electricity traditionally," says Talaulicar. “We have approximately a grid of 200 gigawatts of gird power in India that is backed up by almost 100 gigawatts of generators—almost 50% of the grid capacity is backed up by the generator sets."

There are four boxes that a company must tick to demonstrate whether it has been successful in an overseas destination. First, has the company been able to use the country as a market for its products? Second, has it been able to use the country as a production base, to manufacture for the market and the rest of the world? Third, has it been able to use it as a sourcing base? And fourth, has the company used the country as an engineering base, to design and develop products? Cummins checks all the boxes.

Take, for instance, Cummins Research and Technology India Ltd, a division set up in 2003. The unit does analysis-led design work that reduces cycle time for new product development and minimizes time involved in physical prototype testing.

While most multinational corporations get hand-me-downs in terms of technology from their parent, Cummins does a significant part of its research and development (R&D) work in India.

“Almost the tables have turned," says Talaulicar. “A number of our engineers sitting in India are helping in global development work."

In fact, Cummins is setting up an advanced technical centre in Pune that will house about 2,000 engineers and is expected to come up by September 2015.

“Only about 15% of that work will be targeted for the domestic economy. The rest will be for global purposes," said Talaulicar.

“Today we have significant engineering skills in the country and we are completely integrated into Cummins global engineering network in terms of the reporting relationships. Information system is seamless. We don’t simply take global technology and force-fit them for India. We significantly customize products and localize heavily," he says.

Localizing sourcing and making products according to the specific needs of customers is a complex business. Talaulicar though believes that it is inevitable because the nature of the Indian market is very different compared with other parts of the world. Be it in road conditions or nature of power supply or even emission norms.

When India moved from Bharat Stage II to Bharat Stage III fuel norms, several vehicle manufacturers started using electronically controlled engines.

“But Cummins saw that one could get by using a mechanical solution," said Talaulicar. “It was also a lower-cost one. So we changed the rules of the game and came out with it, which Tata Motors has used very, very successfully all through Bharat Stage III."

Kumar Kandaswami, senior director at consulting firm Deloitte Touche Tohmatsu (India) Pvt. Ltd, says that since their inception in India, some small multinational companies have tended to treat India not as a discreet market but as part of a larger continuum.

“The fact that they (Cummins) haven’t carried their global proposition to serve the Indian market, but have developed technologies and products that fit the local needs, have helped them succeed," he said. Cummins clearly is one of those firms.

It is another matter altogether that when Cummins started out in India, it was mostly a story of technology transfer. More importantly, a story of serendipity.

This was way back in 1962, at a time when few foreign companies were willing to take a punt on doing business in India. Of course, with the specific exception of the East India Company, which by then had been there, done that.

In 1960, with the idea of growing operations of Cummins outside of its home market in America, Robert Hutchsteiner, president of Cummins Inc., had embarked on a journey of over 40,000 miles— through Japan, Australia, India and the European Common Market.

In their book, The Engine That Could, authors Jeffrey L. Cruikshank and David B. Sicilia recount how Hutchsteiner had kept in touch with a classmate and friend from Massachusetts Institute of Technology. He was S.L. Kirloskar.

Back then, Kirloskar was the head of Kirloskar Oil Engines, a manufacturer of slow-speed, 2-40 HP diesel engines. In January 1960, the duo paired up and met with the then Indian minister of finance, Manubhai Shah, with the idea of setting up a jointly owned manufacturing facility.

The authors write, “Shah was receptive, in part because the timing was right. India was preparing to launch the third of its ambitious Five-year Plans. The Third Plan was scheduled to begin in 1962 and would emphasize on heavy industry. The Cummins-Kirloskar proposal would coincide neatly with this proposal."

After much discussion on the ownership structure, on 17 February 1962, Kirloskar-Cummins was incorporated with Cummins taking a 50% stake, Kirloskar 25.5% and the Indian public 24.5%. Listed on the Bombay Stock Exchange, the sale attracted demand for 55 times the number of shares available (36,750).

For decades, the operation remained a small, not very profitable, technology transfer unit. In 1987, there was a falling-out between partners. Cummins then became the controlling partner.

While Cummins has grown, doing business in India has been anything but smooth. For 2013-2014, Cummins India, the only listed entity of the group, saw its net sales drop 13.4% to 3,976.67 crore. Its net profit also declined 21.5% to 600.02 crore. For the June 2014 quarter, net sales rose 0.4% to 1,032.71 crore and net profit gained 27.6% to 211.99 crore.

The downturn in the past two years forced the company to clamp down on its investments. The strong intent demonstrated by the new government to accelerate economic revival and encourage foreign investment has, however, made it optimistic of the road ahead. Cummins’ Indian operations expect to increase their share in Cummins Inc.’s global business from 5-10% to 10--15% over the next five years.

Analysts share the optimism. The revival of infrastructure projects bodes well for Cummins, and will help the firm, which has been running at half its capacity, to improve its operating leverage, said Kunal Seth, analyst at Prabhudas Lilladher Pvt. Ltd.

Moreover, an ambitious export plan will also shield the group. “A pick-up in demand in the domestic business and robust exports will help them fire on all cylinders," said Seth.

Since the beginning of the current fiscal year, Cummins India shares have been outperforming the broader market. The stock has gained 39.67% while the BSE 100 index has risen 27.28% and the benchmark Sensex has advanced 26.31% in the same period.

“We continue to like Cummins given its technology and distribution intensive business model, strong cash generation quality. Cummins has relatively strong balance sheet and return ratios (+30%)—amongst the best in the capital goods universe. We retain positive bias with ‘accumulate rating’ and a price target of 600 per share," wrote John Perinchery, an analyst at Emkay Global Financial Services Ltd, in a recent research report on the firm.

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