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China's stimulus package powers Cummins

By Thomas Lee (China Daily)
Updated: 2009-08-17 08:04

A worker examines a power generator made by Cummins at its plant in Fridley, Minnesota. Components made at this plant are sent to China where Chinese companies assemble and distribute power generators to customers such as hospitals, data centers and universities. [China Daily]

The lights are staying on at Minneapolis-based Cummins Power Generation, thanks to the government's stimulus package - the Chinese government's, that is.

Last month, while Cummins' second-quarter sales of portable power generators fell 35 percent to $610 million, sales in China fell by almost half that rate as plans to lavish money on construction projects help to cushion the profits of one of Cummins' fastest growing businesses.

"We are definitely seeing some benefits" from the stimulus, said Steve Chapman, Cummins' group vice-president for emerging markets and businesses.

As China's economy steams ahead, Cummins is poised to serve the country's considerable need for portable electricity. As a result, the company will open a new manufacturing plant in Wuhan this month, and is beefing up its sales force.

Cummins Power Generation is a unit of publicly traded Cummins Inc, which is mostly known for its diesel engines - particularly in China where an engine is often referred to as a "Cummins".

But power generation "has definitely become increasingly important" to the company, said Stephen Volkmann, an analyst with Jefferies & Co in New York. "Longer term, there is a lot of need for power in the world. There's no doubt this is a good long-term growth business."

The power generation unit has seen compounded annual growth in revenue of 15 percent over the last five years, compared to 12 percent for the company as a whole. Last year, the business accounted for 20 percent of Cummins' $14.3 billion in sales.

A lot of that growth can be attributed to China. In 2008, Chinese sales totaled $783 million, a 30 percent jump from the previous year and more than twice as much as in 2006. The Power Generation unit accounted for 31 percent of overall China sales. Of the $228 million in global joint venture power generation sales last year, 84 percent, or $191.52 million, originated from China.

Cummins executives are working on a two-pronged strategy to move the business away from the volatility of the mass consumer market, and to focus on selling more sophisticated, higher-end systems to businesses.

Normally, Cummins generator sales soar when demand for electricity outstrips supply, such as during a natural disaster or a public health emergency such as the SARS virus outbreak in 2003. That business, though, ebbs and flows and executives prefer greater stability in sales and profits.

So instead of simply selling generators for homes and boats, Cummins is looking to provide backup and standby power to businesses with delicate power needs such as data centers, hospitals, universities, factories and telecom companies. Standby power is low level electricity that devices such as computers need to consume even when the device is not in obvious use.

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"Electrical power has become ubiquitous, and people are less willing to live without it," said Tony Satterthwaite, president of Cummins Power Generation. "We want to move from power being a living necessity to a business necessity."

The challenge for Cummins, according to analysts and executives, is that customers in emerging economies such as China and India still prefer lower cost, basic generators. Cummins must convince customers to pay for sophisticated devices that command premium prices and higher profit margins, Chapman said.

"In China and India, they still prefer the low end stuff, where the technology requirements are not demanding," Chapman said. "We do better with the more demanding requirements. We have to develop the (sales) people necessary to sell the benefits" of Cummins technology.

Cummins estimates the global market for "value added" generators and services like transfer switches, system designs, and installation and engineering to be $44 billion, compared to just $8.6 billion for components. Cummins mostly sells components to Chinese companies, who then assemble and distribute the finished generators.

Analysts say Cummins is well positioned to reap the benefits of its investments in the Chinese market once the global economy fully recovers.

"That emerging economies such as China, India, and Brazil will need more power is a theme that has been going on forever," said Roger Sit, chief investment officer for Sit Investment Associates, which owns 60,000 Cummins shares. "But now (Cummins) is demonstrating that (those predictions are) coming to fruition."