Cummins, Inc.: Debating a Governmental Relations Office in China (A)

Abstract

Steve Chapman surveyed the northeast part of the city from his 27th-floor office. Though the sky was cloudy, he could see for miles. Beijing was well on its way to its 2007 target of 245 “blue sky days,” part of an ambitious effort to improve air quality. As Group Vice President – Emerging Markets and Businesses for Cummins, Inc., Chapman knew that Cummins could continue its success as one of the largest producers of diesel engines for the China market only if it continued to meet China’s increasingly strict and occasionally fragmented air quality standards. He wondered if the company could participate more actively in the development of China’s regulatory policy, taking a higher profile after 20 years of a low-profile approach with the government. Cummins had come late to a lobbying office in Washington, D.C., but setting up the office in 2001 had provided a strong business asset. Perhaps it was time to establish a government relations function in China.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

Resources

Exhibit 1: Cummins Financial and Cumulative Total Return

Financial Highlights

$ in millions, except per share data

2006

2005

Change

Net sales

$11,362

$9,918

15%

Gross margin

2,595

2,186

19%

Investee equity, royalty and other income

140

131

7%

Earnings before interest and taxes (EBIT)

1,179

907

30%

Interest expense

96

109

-12%

Net earnings

715

550

30%

Net earnings per share:

    Basic

$15.02

$12.43

1%

    Diluted

14.21

11.01

9%

Dividends declared per share

1.32

1.20

10%

Balance Sheet Data

Working capital

$2,089

$1,698

Property, plant and equipment, net

1,574

1,557

Total assets

7,465

6,885

Long-term debt

647

1,213

Shareholders’ equity

2,802

1,864

Other Data

Capital expenditures

$249

$186

Depreciation and amortization

296

295

Sales by Market and Geography*

United States

50%

Europe/CIS

14%

Asia

13%

Canada

7%

Africa and Middle East

5%

Brazil and Latin America

5%

Australia/New Zealand

3%

Mexico

3%

Heavy-duty truck

18%

Power generation

17%

Components

15%

Industrial

10%

Distribution

9%

Light-duty truck and RV

7%

Medium-duty truck and bus

5%

Stationary power

18%

*Includes both engine and part sales.

Notes:

JV income is recorded as Investee Equity, Royalty and Other Income in regulatory filings.

Cash from operating activities before pension contributions is a non-GAAP measure.

EBIT is a non-GAAP measure, defined as earnings before interest expense, income taxes and minority interests.

The return on equity calculation is a non-GAAP measure as it excludes pension and other post-retirement benefit amounts in shareholders’ equity.

Cummins Cumulative Total Return

Figure

Source: Cummins 2006 Proxy Statement.

Exhibit 2: EPA Emission Standards for Heavy Duty Truck and Bus Engines

Figure

Figure

Figure

Exhibit 3: U.S. and Canada Truck Production, January 2000 – May 2003

Figure

Source: GAO, Air Pollution: EPA Could Take Additional Steps to Help Maximize the Benefits from the 2007 Diesel Emissions Standards, Report to Congressional Requesters, Report GAO-04-313, March 2004, p. 19.

Exhibit 4: Ownership of Dongfeng Cummins

Figure

Source: Cummins, Inc.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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