What would you do if macro issues challenged the long-term viability of your core business? Cummins, a leader in diesel engines, currently faces this situation with the increasing pressures of climate change. Much of Cummins’ 6.3 billion dollars in diesel engine sales is at risk in the coming years as countries continue to tighten emissions regulations and begin to announce future bans on diesel engines.(1)(2) To protect their position as a leading provider of power generation for both personal and industrial vehicles, Cummins has begun to develop an array of electric power solutions for the bus and heavy-duty truck market.(1) To successfully develop and deliver industry leading electric power solutions for the transportation industry, they are faced with the challenge to develop a new network of battery suppliers and OEM partners.
One of the major challenges facing Cummins has been to quickly build up its technological expertise whether that is through supplier partnerships, internal development or through acquisitions. To provide for its initial ambitions of providing electric power for buses and class 7 trucks Cummins has formed supplier partnerships for its battery cells. (3) Longer term, Cummins has begun to implement a vertical integration strategy to address shortcomings in their lithium-ion battery technology. In October 2017 Cummins announced the acquisition of Brammo, a leader in the development of battery packs for mobile and stationary battery applications. (4). As Brammo integrates with Cummins I would expect Cummins to use an increasing number of their own batteries in their products.
In addition to developing and integrating their upstream supply chain, Cummins has begun to develop partnerships with OEM’s for the distribution of these new products. In October 2017 Cummins announced an Electrified Power Partnership with GILLIG LLC, the leading bus manufacturer in the United States, to provide electric power for a new fully electric bus with a 200-mile operating range. (5)
Moving forward, if Cummins desires to be the leading electric power provider in the transportation market it will need to continue to improve its battery supply technology either internally, externally, or through further vertical integration as their current technologies are inadequate for the full heavy-duty truck market. Their current battery offering in their newly announced AEOS class 7 concept heavy-duty truck has a range of only 100 miles. (3). The power and capacity of the batteries in the AEOS are inadequate for use in the larger Class 8 market. Class 8 trucks are used for inter-city transportation and carry heavier loads up to 1400 miles per fill up with their current diesel engines (6). Research experts expect that the power density of batteries will increase five times in the coming years and be produced at one fifth the cost. (7) Cummins will need to keep a close eye on the battery industry as a variety of competing firms research and develop many competing technologies such as lithium-ion, lithium-sulfur, and solid-state batteries. (8) If at any point they identify a company with a superior product to their own lithium-ion batteries they should seek to acquire them as they did with Brammo.
In addition to developing their internal and external supply of batteries, Cummins will need to continue to develop their network of OEM’s for these new electrical power technologies. Currently, the core customers for Cummins’ diesel engine lines are OEM’s PACCAR, Daimler and Navistar (1). As electric trucks begin to take the road around the world, Cummins will need to create partnerships with these companies as they have for their current diesel engine business. However, this will be no small feat as there are already several competitors entering the electric trucking industry. For instance, current customer, Daimler, has already announced its class 7 truck the Urban E-Truck and Tesla is expected to announce its version of an electric class 7 truck later this week. (9)(10) The high level of initial competition makes it imperative for Cummins to move quickly in forging partnerships and to stay at the leading edge of new technologies.
Cummins has started the process of adapting to a changing transportation market but there is a long road still ahead of them and a great deal of uncertainty. If you were Cummins, what would you choose as the best path forward for its electric power solutions business; internal technology development, supplier partnerships or acquisitions?
(1) Cummins, 2016 Annual Report, p. 40, http://investor.cummins.com/phoenix.zhtml?c=112916&p=irol-reportsannual, accessed November 2017.
(2) Alanna Petroff, “These countries want to ban gas and diesel cars,” CNN Money, September 11, 2017, http://money.cnn.com/2017/09/11/autos/countries-banning-diesel-gas-cars/index.html, accessed November 2017.
(3) Joann Muller, “Cummins Beats Tesla To The Punch, Unveiling Heavy Duty Electric Truck”, Forbes, August 29, 2017, https://www.forbes.com/sites/joannmuller/2017/08/29/take-that-tesla-diesel-engine-giant-cummins-unveils-heavy-duty-truck-powered-by-electricity/, accessed November 2017.
(4) Cummins, “Cummins Announces Acquisition of Energy Storage Technology,” https://cumminsengines.com/cummins-announces-acquisition-of-energy-stora, accessed November 2017.
(5) Cummins, :GILLIG And Cummins Announce Electrified Power Partnership at APTA,” http://investor.cummins.com/phoenix.zhtml?c=112916&p=irol-newsArticle&ID=2305348, accessed November 2017.
(6) Aric Jenkins, “Will Anybody Actually Use Tesla’s Electric Semi Truck?”, Fotune, April 14, 2017, http://web.b.ebscohost.com.ezp-prod1.hul.harvard.edu/ehost/detail/detail?vid=27&sid=d8380401-6dd6-4ff4-9176-b1b48f35d1f9%40sessionmgr104&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#AN=122515217&db=bth, accessed November 2017.
(7) “The race to move beyond lithium-ion”, The Economist, November 24th, 2016, https://www-economist-com.ezp-prod1.hul.harvard.edu/news/special-report/21710631-next-generation-batteries-needs-be-three-times-cheaper-race-move-beyond, accessed November 2017.
(8) Jack Karsten and Darrell M. West, “Five emerging battery technologies for electric vehicles,” Brookings, September 15th, 2015, https://www.brookings.edu/blog/techtank/2015/09/15/five-emerging-battery-technologies-for-electric-vehicles/, accessed November 2017
(9) Cummins, 2016 Annual Report, p. 6, http://investor.cummins.com/phoenix.zhtml?c=112916&p=irol-reportsannual, accessed November 2017.
(10) Daniel Muoio, “Mercedes-Benz will test its all-electric truck on German roads this year – here’s everything you need to know,” Business Insider, February 16, 2017, http://www.businessinsider.com/mercedes-electric-truck-photos-2017-2/#meet-the-urban-etruck-a-fully-electric-truck-designed-specifically-for-city-driving-that-has-a-range-of-124-miles-1, accessed November 2017.
(11) Robert Ferris, “Musk cites Puerto Rico efforts in delay for Tesla semi reveal,” CNBC, October 6th, 2017, https://www.cnbc.com/2017/10/06/musk-cites-puerto-rico-efforts-in-delay-for-tesla-semi-reveal.html, accessed November 2017.