Q&A with Hugh Foden, Cummins Engines
Hugh Foden is Executive Director, Engine Business at Cummins Engines - the world's largest independent diesel engine maker which historically has been focused on the heavy commercial vehicle sector but which is increasingly moving into lighter weight diesels. In his role he is responsible for sales and marketing, customer support across a territory that includes Europe, the Middle East, Africa and the CIS. A recent focus has been developing new business in Eastern Europe and the CIS. Dave Leggett interviewed him.
DL: How's business right now and what's occupying most of your time?
HF: Business is good. We had a really strong 2006, like everybody else and we're trying to sustain that performance into 2007. Short-term the hurdle for Europe is the pre-buy sector for Euro 4 which is going to dampen demand for the first two quarters, but we think we'll come out of that third quarter, maybe even a little earlier.
What's occupying a lot of my time is finding new profitable business. We're busy doing that in places like CIS and Eastern Europe.
DL: And profit margins are good throughout the business?
HF: We are in the good times at present but this business is very cyclical. So we have to do well during these times, because the leaner times are usually around the corner.
DL: When do you see a downturn coming?
HF: Part of the reason why things have been so strong in recent years is that we have had strength in North America, strength in Asia and reasonably decent markets in Europe. I think that while things have come off a little in North America, Asia is still strong for us and Europe is looking like it will get a little stronger, so I think we are in what some people might call a bit of a 'super-cycle' in terms of the economics. I don't see anything too dramatic ahead and the economics looks quite strong going forward.
DL: In terms of Cummins' commercial vehicles business, what do you see as the main challenges right now?
We view heavy duty as 15 tonnes Gross Vehicle Weight and above and the rest as below 15 tonnes - for us those are two very distinct markets. Our problem above 15 tonnes is that potential customers are highly vertically integrated and have become more so. Quite frankly, our opportunities in Western Europe above 15 tonnes are not that great, that's just reality. We used to have a very strong heavy duty truck market when certain manufacturers bought engines, but the structure of the business has changed and that business doesn't exist anymore.
So, in terms of heavy duty growth (over 15 tonnes) we are looking more to emerging markets - Eastern Europe, Turkey, CIS.
DL: And commercial vehicle manufacturers in emerging markets are happy to buy-in engines?
HF: They are at this point. They haven't consolidated the way they have in Western Europe. Some are not vertically integrated and buy-in engines. They are also looking increasingly to export, so they need better engines that meet Euro 4 and they can't get by with some of the engines they have been buying locally. There are some opportunities there.
Our real challenge below 15 tonnes, where we have very strong business - strong customers in DAF, ADL on the bus side, and BMC. More recently, we have taken on Nissan and its subsidiary NMISA in Spain and we'll be supplying them with smaller ISBe product as well
There are more opportunities below 15 tonnes for Cummins. The production site at Darlington - where lighter engines are made - is running at full capacity, up at around 300 engines a day.
We've got lots of interesting and exciting challenges below 15 tonnes, but above 15 tonnes we're having to go east.
But just to put the heavy duty over 15 tonnes business in global context, Cummins' business is very strong. If we look outside of the territory I am responsible for, it's been very strong in the US where the Class 8 market has been very good and there are plenty of opportunities in Asia, especially China, where we have signed various joint ventures recently.
It's more of a European phenomenon where the customers all make their own heavy duty engines and it's a tough market for us.
DL: Is the US Class 8 market coming off the boil - I know that market sees big swings?
HF: Oh yes, it was very strong last year, but it is already coming off now because new EPA emissions rules came in on 1 January 2007 and there was a huge pre-buy ahead of that last year. The numbers being talked about in terms of the expected decline to the market this year are 40-50%, so it's a huge downturn but everybody has been expecting it and planning for it. It's a little like what happened in UK with Euro 4 which came in on October 1. The big question is when the market will rebound and by how much.
DL: What parts of the business are growing particularly strongly - what would you highlight?
HF: Well, what I call our mid-range truck - our 4- and 6-litre business is definitely going very strongly because our customers are doing well. DAF are doing well, so we do well and the same goes for BMC, ADL - and now we have this new Nissan account. So there's been really significant growth below 15 tonnes - what I call mid-range.
That business was up 10% in volume in 2006 over the previous year.
DL: How well are your main European customers - Paccar (DAF) and BMC of Turkey doing and are you looking to do more business in Europe?
HF: These guys both had a fabulous year in 2006 as did our other major European customer ADL (which makes buses).
We unveiled the NMISA (Nissan Motor Iberica) account at the Hanover Show late last year and we are working on other OEMs at the mid-range end. We expect to have other OEMs - decent sized ones, not the huge ones - but we are focussing increasingly on the east, Eastern Europe and CIS. There are other accounts out there, but it's not going to be with the likes of Mercedes-Benz, Scania or Volvo. They are just too integrated. We've had to go further a-field, but there's interesting business out there.
DL: Just on BMC of Turkey, what's driving their business - buoyant domestic demand?
HF: Yes, they are doing well domestically and the Turkish economy is quite solid but they are also exporting more. BMC is striking out into parts of Europe, Africa the Middle East, and that's new business for them and for us as well. This is buses and trucks.
DL: What are the most important emerging markets for Cummins?
HF: We have been focussing on the so-called BRIC - Brazil, Russia, India and China - economies for a lot longer than many others in our industry so we have an awful lot going on in those four places, lots of joint ventures in China, lots in India - we announced one in Russia with Kamaz not so long ago. And we've been in Brazil a while.
To come back to the area I am directly responsible for, Turkey is a particularly interesting one. Not only is it a good market in itself, but also a lot of people are moving into Turkey to build trucks and buses. There are also local manufacturers in Turkey looking to export. There's a lot of action there.
DL: Is the Beijing-Foton partnership to develop and manufacture light duty diesel engines for light commercial vehicle applications proceeding according to plan?
HF: Yes, it is. It's still relatively new with the JV agreement signed in the second half of last year. We've many people going over there, being seconded, going over there full-time. It's an '08 launch for the 3.8-litre and '09 launch for the 2.8-litre. It's exciting.
Obviously, we're shooting for Euro 4 certification on these engines.
DL: Just bound for the Chinese market?
HF: No, not just - we are looking elsewhere as well. There will definitely be exports and I'm out talking to customers about those engines. There's plenty of interest and some lively discussions going on.
DL: You see light duty as major growth opportunity for Cummins?
HF: Yes, another part of light duty I should mention is that we have announced that we will be building a V8 engine for light duty automotive - as well as the Chinese made 2.8 and 3.8. Now I can't tell you the displacement of the V8, but what we have said is that we will be building a V8 in North America, in Columbus, Indiana - where we are headquartered and where we used to build heavy duty product, but that activity was relocated.
We do have one major customer for that product and it's going to go into pick-up trucks and things like that. We already supply diesel engines to the Dodge Ram pick-up [was a 5.9-litre, recently switched to a 6.7-litre] and that's been very successful. We're just heading further down. The V8 is lower displacement than the Dodge Ram, but that's all I can say.
We think - with the focus on prices and emissions - there's a fabulous opportunity for light duty diesels in North America in pick-ups and the like and we're investing in that.
DL: What about alternative fuels?
HF: For the bus market, I think hybrids [diesel-electric] are catching the imagination. CNG is still popular, but it is competing head-on with hybrids now and there are huge grants in the US for hybrids, which helps hugely with the capital cost. There are fuel-cell buses out there and there will certainly be many more.
Hybrids are beginning to look appealing in Europe too. But I think there is room in the market for CNG also.
As emission levels get tighter, the advantage of one form of engine over another - in terms of emissions performance - becomes relatively less. They'll all be at super-low levels and then it becomes a lifetime total cost game. The alternative technologies will, ultimately, have to fight it out in economic terms. At the moment you can differentiate on emissions terms - some are better than others - but emissions are converging to a point where all technologies are going to be very clean and then it will more come down to straight economics.
DL: How do you see the international commercial vehicle industry developing over the next ten years or so?
HF: We're going to see more of the same, in terms of what's been happening. There will be more consolidation. Key component suppliers - like us on engines - will effectively become the in-house partner for the OEM, with a very close relationship.
In terms of costs, we'll see more product coming out of cheaper manufacturing locations. We're already seeing buses come out of emerging markets like India and China. I would imagine that we will see trucks come out of those markets for the developed world as well.
In terms of the commercial vehicle sector, OEMs and suppliers alike are all in China, not only to access the Chinese market, but also to access the opportunity to drive cost out of their product and source from that market. Most of what we make in China now is gobbled up by rampant Chinese demand but it won't be too long before we start exporting out of China and it would not surprise me to see our truck and bus customers in China doing so too - in addition to the local Chinese guys.
DL: Do you think the European truck makers will stay highly vertically integrated or outsource major components the way the industry in the US has?
HF: Yes, they will stay highly vertically integrated. They are tied to that way of operating. In fact, the US truck making model is now following the European model. In the US, on the heavy duty Class 8 side, only Paccar doesn't have its own engines, but they do have smaller (DAF origin) engines that they will shortly be manufacturing in the US.
On the US side, the truck OEMs all make engines - some of them have a complete range already, but some have gaps in their range - like Paccar for example. Paccar will hopefully continue to need us lower down and higher up, but they have their own in the middle.
We can find gaps where it makes more economic sense for us to supply engines - as in the case of the engines for the Dodge Ram.
The interesting thing is, we've never been more successful at Cummins than we are today - our 2006 results were the best ever. And we've made a very successful business in filling engine range gaps. The OEMs are vertically integrated, but they do have gaps and there's an opportunity for people like us to sell lots of engines.
DL: And there are enough gaps, in enough manufacturers, to give you the volumes to keep you in business…
HF: Exactly. Another way of looking at it is that all of our biggest customers make engines, lots of them. But they all need us because they can't make all their engines.
DL: With a name like Foden (once a small independent UK-based truck maker, now part of Paccar), some would say that you were destined for a career with some connection to heavy commercial vehicles, but if you lived in a parallel universe and had gone into a completely different career, what do you think it might have been?
HF: I think I would have been a football team manager or a climber. I'd love to have managed a sports team or climbed a lot of high mountains. I do a lot of walking but I would have liked to climb some peaks. As for the football I'm a fervent Manchester United fan, but I'd be happy to manage a lesser team - my second team is Crewe Alexandra and I'd have been happy with them.
Hugh Foden is currently the Executive Director for Engine Business throughout Europe, Middle East, Africa and CIS and is based in Daventry, UK . Joining Cummins in 1980, after graduating from Keele University and Cranfield Business School, Hugh has worked for Cummins for 26 years in a number of European and International roles. His previous two assignments were as Area Director of South East Asia, based in Singapore before moving to Canada to take on the role of President of Cummins Westport.