CUM, interesting article on this one here
<<DETROIT, Mich. -- On the heels of the Arvin Industries Inc. merger, automotive analysts Friday suggested Columbus, Ind.'s other corporate giant -- Cummins Engine Co. -- could wind up having to merge with a truck maker or another engine maker to weather the industry's financial storms.
Regarded as a pair of staunch corporate pillars in Columbus, Arvin and Cummins have given their hometown what communities throughout the industrial Midwest have coveted for decades: progressive corporate benefactors.
But Columbus could wind up with neither headquarters in the city if Cummins ends up in a merger situation like Arvin.
Arvin, an auto parts manufacturer, announced an alliance Thursday with Meritor Automotive Inc. The headquarters of the newly formed company, ArvinMeritor Inc., will now be located in Troy, Mich.
The same global industry pressures that led to the Arvin-Meritor linkup are bearing down on Cummins, a leading manufacturer of diesel engines founded in Columbus in the mid-1920s.
"My thought is in the long term it will probably be impossible for independent engine manufacturers to survive," said Tom Rhein, of Rhein Associates Inc., a diesel market researcher in Canton, Mich.
"I think there's consolidation pressure building on everybody in the diesel industry," said Jim Gillette, analyst for the automotive research firm IRN Inc. of Grand Rapids, Mich.
The consolidation pressures stem from an effort by global automakers to slash costs through an extraordinary string of mergers and alliances.
In the last decade alone, the number of major automakers worldwide has shrunk by half from 24 to 11. The survivors have ordered their suppliers to slash prices on auto parts every year or risk losing future orders.
With profit margins tightening, parts makers such as Arvin and Meritor are combining resources to benefit from economies of scale.
In fact, Meritor's former owner, the industrial conglomerate Rockwell International, spun off its auto parts business in 1997 precisely because of those low automotive profits.
Diesel engine markers face the same profit pressures, as well as an environmental problem peculiar to the diesel industry.
Although diesel makers have used high-technology components to clean up exhaust emissions, federal regulations on diesel emissions will tighten by 2004, forcing the companies to produce engines that run even cleaner.
Rhein, the planning and research director of General Motors Corp.'s former Detroit Diesel Allison division in the 1980s, described a scenario in which he believes these tougher emissions and noise regulations will force truck makers to buy diesel engine companies.
"Regulations are going to hold the key to the consolidation," Rhein said, explaining that the web of new environmental regulations will require the truck makers to discard the wide array of diesel, transmission and axle combinations.
Instead, truck makers will provide a few regular combinations produced in facilities over which they have complete control to assure that the products comply with federal regulations, he said. "Truck manufacturers are going to have to control every part of the truck."
Cummins currently supplies heavy-duty engines to a range of truck makers, and is major supplier of medium-duty diesels for Ford Motor Co. trucks and light-duty diesels for Dodge trucks produced by DaimlerChrysler AG.
Just who Cummins could join with is at best a guess. DaimlerChrysler appears intent on using its Mercedes diesel in heavier-duty Dodges and could someday turn to Mercedes for the light-duty engines as well. Ford just as easily could tap its European operations for light-truck diesels.
Losing Dodge and Ford business would increase pressure on Cummins to find a new source of profits or possibly look for a merger partner to share costs. Pressures are also building because sales of heavy-duty diesels are expected to drop 30 percent this year.
Heavy buying in recent years has commercial fleets well-stocked with new trucks, a condition expected to continue for a few years. Last year, diesel sales reached 310,00 units, about 60 percent over the "normal" annual sales pace.
Not everyone who keeps track of the diesel industry figures the engine makers are all destined to merge together.
"Maybe in the short-term there's anxiety about the future in places like Columbus, but in the not-too-distant future we could have good times again," insisted Thad Malesh, director of alternative vehicle systems for the research firm J.D. Power and Associates of Agoura Hills, Calif.
Malesh maintains a new wave of engine technology is about to turn the diesel into an environmentally friendly power plant that could lead to robust profits for Cummins and other diesel makers.
The superior fuel economy inherent in diesels -- they get 15 percent to 20 percent more miles to the gallon than a gasoline engine of similar power -- combined with new emission-cutting technology such as direct-injection fuel systems, could wind up making diesels the cost-effective alternative in hybrid propulsion systems early in this decade.
Ford has unveiled a hybrid-powered version of its Ford Escape sport-utility vehicle. Although most Escapes have conventional gas engines, the version shown Thursday near Detroit is powered by a gas engine and electric batteries.
The vehicle, to be ready by 2003, can operate on one powerplant or both at the same time. Malesh figures diesel could easily replace the gas engine if environmental technology keeps progressing.
"All these new technologies are going to come together in the next four or five years and make the diesel something for consumers to take a look at," Malesh said.>>
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