Case Study

Cummins in China

Thursday, March 31, 2016

Abstract

Throughout the world, Cummins Inc. meant diesels. The company designed, manufactured, distributed, and serviced diesel and natural gas engines, for transportation, construction, and power generation. In addition to the engines, it manufactured components, including filters, turbochargers, and aftertreatment, used with its own engines and with the systems of other manufacturers. The components and engines were all designed to increase power, improve efficiency, and reduce pollution from diesel engines of all sizes.

From its origins in a small Indiana town 100 years earlier, Cummins had prided itself on value-driven ethical standards. It operated worldwide under a formal Mission Statement: "We will demand that everything we do leads to a cleaner, healthier and safer environment." The mission statement had led to a detailed corporate Code of Conduct, and Supplier Code of Conduct, all based on the company’s Vision Statement: "Making people's lives better by unleashing the power of Cummins."

Cummins had driven its success on its ability to deliver engines and component systems that met increasingly strict emissions standards. Through extensive research and development it created diesels that complied to evolving standards, ranging engines for pickup trucks to the largest earth movers. Rather than spend research dollars, many other manufacturers had bowed out of the diesel market, leaving Cummins with a major market opportunity. Given its heavy R&D expense, Cummins had to find ways to spread the development costs over more units, leading it to expansion into global markets.

Cummins had found a business advantage in its early entry into China – first meeting China’s need for high quality diesel engines for trucking and off-road construction and later developing cleaner engines to address new emissions regulations that addressed China's critical problem with air pollution. Steve Chapman, Cummins Group Vice President - China and Russia, had established 50-50 joint ventures with vehicle manufacturers in China. As China experiences rapid industrial and urban growth in the late 20th and early 21st centuries, concerns for critical air pollution made vehicle emissions became a major concern, particularly in the largest cities.

Cummins had combined its global expertise with solutions developed in China for the China market. But the introduction of each new level of emissions standards came with regulatory uncertainty. To meet the needs of the China market, engines had to be less expensive and more fuel efficient than engines developed to meet similar standards in North America and the U.S. Even more challenging, the uncertainty around implementation of each new round of emissions standards made it difficult for Cummins to plan its manufacturing and meet its Mission Statement.

Chapman wondered if the company should change the way it handled government relations. Cummins’s approach in China had similarities to its approach in the United States before setting up the Washington office – Cummins engineers met informally with Chinese government experts to discuss regulations that would both help the environment and be feasible to implement. But implementation of China’s emission regulations had caused complications that suggested a broader approach to government regulations might be in order.

The questions facing Chapman came down to the company’s core values: How could Cummins’ stance as a leader in meeting air quality standards mesh with the complex realities of Chinese regulation? How could Cummins strengthen its relationship with the Chinese government and strengthen its position in the market? How could Cummins play a positive role as China addressed its environmental issues? What was the appropriate definition for strategy and functional excellence in governmental relations? Were there lessons in the U.S. model that could apply to China? Were approaches developed for China applicable to other developing countries?