Cummins readies for 2002 emissions deadline

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LOUSIVILLE, Ky. — Cummins says it is ready for the October 1 Environmental Protection Agency (EPA) deadlines on reduced emissions.

To that end, it expects certification of its ISX 02 engine with exhaust gas recirculation very soon.

The first limited production of the ISX 02 engines are awaiting shipment to Navistar International as soon as Cummins gets certification.

“Cummins will be ready for Oct 1. Our programs are on schedule. Very soon, our ISX will be the first certified engine at October 02 standards. Cummins is not only committed to staying in the heavy truck engine business, let me assert now, we intend to be the undisputed leader in heavy duty engines, and will do so profitably,” said Joe Loughrey, Executive Vice President and President of Engine Business for Cummins Inc. in a press conference at Cummins headquarters in Columbus, Indiana March 18 and 19.

Cummins’ ISX certification will also include approval of the engine’s AECDs or auxiliary emissions control devices, which the company must disclose for the certification process.

According to Tina Vujovich, VP, Environmental Policy and Product Strategy for Cummins, EPA approvals are expected as early as March 29.

Most heavy-duty diesel engines, in order to meet the October deadlines for lower nitrous oxide emissions as set by the U.S. Environmental Protection Agency, will be incorporating the use of cooled exhaust gas recirculation. This technology, while expected to reduce the amount of nitrous oxides produced from combustion, will however have some severe effects on engine wear.

“Like it or not, the demand for clean air is here to stay. Bu this plays to what we do best. Since the late 80’s, the heavy duty truck emissions standards have been changing at a pretty rapid rate. This requires significant additional investments in people and capital, ” says Loughrey.

Since 1974, says Loughrey, nitrous oxide (NOx) levels have been reduced by 73 percent.

The 2002 standards for North American heavy-duty engines represent an additional 50 percent reduction in NOx. By 2007 these levels will decrease by another 98 percent, and achieve a 99 percent reduction in particulate matter from unregulated levels. These standards are placing increasing pressure on engine and lube manufacturers and OEMs to satisfy the requirements of government and end-users.

“The consent decree signed in 1998 with EPA and the Dept of Justice via the heavy-duty engine manufacturers pulled ahead by 15 months an already tough standard. It meant in our case we had to cancel or delay other programs to meet the commitment, which we will do on time. None of this has been free, and frankly the industry, including Cummins, has done a poor job recovering the value of the investments we have made in improving fuel economy, maintenance intervals, durability and reliability, while also achieving the standards,” he says.

Between now and October, though, Cummins expects to certify its ISX 02, ISM 02, and B series engines.

“Our C and L series engines will continue to run in today’s form, using the ‘durable credits’ we’ve earned until late 2003 when we will then go to an engine that satisfies the requirements of the (EPA, Department of Justice) consent decree,” says Loughrey.

He also identified four major challenges that Cummins’ engine businesses is facing, along with emissions requirements.

“It should be no great surprise. Cummins isn’t and hasn’t been making money on heavy-duty engines. As you well know, the North American heavy-duty truck market is highly cyclical and the overproduction of trucks in 1999 and early 2000 really further compounded the industry’s problems, resulting in large new and used truck inventory, and the collapse of residual truck values. Highly cyclical markets, not just this one, make it extremely difficult to invest appropriately in capacity, and to generate the level of return needed to stay in business in good times and bad. The current business model, in our mind, simply doesn’t work,” said Loughrey.

And, he said, while Cummins had forecasted and prepared for the market downturn, they did not foresee the timing of so many markets declining at the same time.

“If you have any doubts about the severity of the downturn, from 2000 to 2001 in Cummins’ case, our engine sales went from $4.1 billion dollars in 2000 to $3.1 billion in 2001, a one billion dollar drop in one year,” he says.

This has led to implementing cash management, and through Six Sigma, Cummins has lowered costs, generated cash, paid down debt and improved quality, said Loughrey.

“While we believe the fall is over after this quarter, we expect 2002 to look very much like 2001 in terms of sales. We know how to manage in bad times. Cummins will emerge a stronger company once things turn the other way,” he says.

Another major challenge facing Cummins, and other engine companies, is OEM consolidation.

“This causes us to ask ourselves, ‘Who will our customers be in the future and what do we have to do differently? The OEM consolidation, which has been long-contemplated for the heavy-duty trucks, rapidly accelerated after the DaimlerChrysler merger in 1998. DaimlerChrysler owns Freightliner and Mercedes Benz, and while a competitor in some markets, they’re also our largest customer. Despite having an internal engine option, we succesfully won a long-term agreement to supply the Dodge Ram truck exclusively through the 2007 model year,” said Loughrey.

To meet the challenges ahead, says Loughrey, Cummins is changing the business model and heavy duty truck in order to achieve profitability. Elements to this change include entering into a series of long-term agreements with several OEMs.

“These are not just buy-sell agreements. They describe a new way of working, with a focus on the future, and cooperating and building even better trust. We now price to our OEMs and have stopped discounting to our end-users and dealers. We are attacking the overhead and redundant costs driven by the old way of doing business. And we will introduce a new line of on-highway products that best meet customer requirements at the new emissions levels. The rules are clear: we will be ready. We have chosen to certify our ISX engine earlier than usual to help assure our customers we will be ready, despite claims otherwise. The next six months will be spent in manufacturing validation with our OEMs and ensuring our products meet the standards of reliability and fuel economy,” said Loughrey.

Now the task at hand will involve convincing OEMs that the product is ready for 10/02 and working with them to convince the end user. Loughrey also said Cummins is currently in conversation with the OEMs on pricing.

“We should see pricing nailed down at the beginning of next quarter,” he says.

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