Swot

COMPANY PROFILE

Cummins Inc.

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TABLE OF CONTENTS

Company Overview..............................................................................................3

Key Facts...............................................................................................................3

SWOT Analysis.....................................................................................................4

Cummins Inc. Page 2© MarketLine

Cummins Inc.TABLE OF CONTENTS

COMPANY OVERVIEW

Cummins Inc. (Cummins or “the company”) is engaged in the manufacturing of diesel and naturalgas engines as well as engine-related component products. The company operates in more than190 countries and territories. It is headquartered in Columbus, Indiana and employed 43,900 peopleas on December 31, 2011.

The company recorded revenues of $18,048 million in the financial year ended December 2011(FY2011), an increase of 36.5% over FY2010. The operating profit of the company was $2,681million in FY2011, an increase of 67.4% over FY2010. The net profit was $1,848 million in FY2011,an increase of 77.7% over FY2010.

KEY FACTS

Cummins Inc.Head Office500 Jackson StreetColumbusIndiana 47202 3005USA

1 812 377 5000Phone

1 812 377 3334Fax

http://www.cummins.comWeb Address

18,048.0Revenue / turnover(USD Mn)

DecemberFinancial Year End

43,900Employees

CMINew York Ticker


Cummins Inc.Company Overview

SWOT ANALYSIS

Cummins is engaged in the manufacturing of diesel and natural gas engines as well as engine-relatedcomponent products. The company has entered into a number of joint venture agreements andalliances with business partners around the world. Strategic joint venture agreements and alliancesenable Cummins to penetrate into new markets, develop new products, and generate manufacturingand operational efficiencies However, intense competition across all the business segments of thecompany could force it to reduce prices, which may in turn impact the bargaining power and strainits margins.

WeaknessesStrengths

Heavy dependence on few suppliersStrategic joint ventures and alliancesSignificant reliance on income frominvestees which are not under thecompany’s control

Comprehensive products and servicesStrong research and developmentcapabilities

Unfunded pension obligationsRobust customer base

ThreatsOpportunities

Intense competitionGrowing global demand for diesel enginesGovernment regulationsPositive outlook of the global truck marketVariability in material and commodity costsStrong growth for global automobiles

industryAcquisition of SCR doser assets from HiliteInternational

Strengths

Strategic joint ventures and alliances

Cummins has entered into a number of joint venture agreements and alliances with business partnersaround the world. The company's joint ventures are either distribution or manufacturing entities. Italso owns a controlling interest in a non-wholly-owned manufacturing subsidiary. The company'sdistribution channel in North America includes 12 partially owned distributors. Cummins' equityinterests in these non-consolidated entities range from 30% to 50%. While each distributor is aseparate legal entity, the business of each is the same as that of its wholly-owned distributors basedin other parts of the world. For instance, Komatsu Cummins Chile distributes products and servicesto customers and end-users in the Chilean market. The company's licensing agreements withindependent and partially-owned distributors generally have a three-year term and are restricted tospecified territories. Manufacturing joint ventures are generally formed with customers and allow the


Cummins Inc.SWOT Analysis

company to increase its market penetration in geographic regions, reduce capital spending, streamlineits supply chain management, and develop technologies.

Cummins' largest manufacturing joint ventures are based in China.The company's key joint venturesin China include: Chongqing Cummins Engine, which manufactures several models of heavy-dutyand high-horsepower diesel engines; and Dongfeng Cummins Engine, which produces Cummins'four to 13-liter mechanical engines, full-electronic diesel engines, and natural gas engines. Otherjoint ventures in different geographic regions of the company include Valvoline Cummins in the US,Cummins Westport in Canada, Shanghai Fleetguard Filter in China, Tata Cummins in India, CumminsMerCruiser Diesel Marine in the US, and Beijing Foton Cummins Engine in China.

Strategic joint venture agreements and alliances enable Cummins to penetrate into new markets,develop new products, and generate manufacturing and operational efficiencies.

Comprehensive products and services

Cummins offers a wide range of products and services to its customers. The company operatesthrough four business segments: engine, distribution, components and power generation. Thesesegments are organized according to the products and markets each segment serves and allowsmanagement to focus its efforts on providing enhanced service to a wide range of customers. Theengine segment produces engines and parts for sale to customers in on-highway and variousindustrial markets. The engines are used in trucks of all sizes, buses, and recreational vehicles, aswell as various industrial applications including construction, mining, agriculture, marine, oil and gas,rail, and military.

The components segment sells filtration products, exhaust aftertreatment systems, turbochargers,and fuel systems.The distribution segment includes wholly-owned and partially-owned distributorshipsengaged in wholesaling engines, generator sets, and service parts, as well as performing serviceand repair activities on its products and maintaining relationships with various OEMs throughout theworld. Similarly, the power generation segment is an integrated provider of power systems whichsells engines, generator sets and alternators.

Comprehensive products and services reduce Cummins business risks and provide cross sellingopportunities. In addition, it enables the company to tap opportunities in new as well as existingmarkets.

Strong research and development capabilities

Cummins has been associated with technological innovations since inception. Cummins createdthe US' first diesel powered car in 1929-30. Cummins is one of the leading companies in the worldin developing technologies to reduce diesel engine emissions.The company is one of the first dieselengine manufacturers to have an engine certified by the Environmental Protection Agency (EPA)as being in compliance with the current EPA standards.



The research and development (R&D) program is focused on product improvements, innovations,and cost reductions for its customers. Cummins invested $621 million in R&D in FY2011. OverallR&D investment as a percentage of sales stood at 3.4% in FY2011. For FY2011, FY2010 andFY2009, approximately $1 million, $38 million and $151 million or less than 1%, 9% and 42%respectively, of the company’s R&D expenditures were directly related to compliance with 2010Environmental Protection Agency (EPA) emission standards. For FY2011 and FY2010, approximately$104 million and $36 million or 17% and 9%, of Cummins’ R&D expenditures were directly relatedto compliance with 2013 EPA emission standards. In addition, the company increased its research,development and engineering expenses as it continued to invest in future critical technologies andproducts. The company also plans to continue to make investments to improve its currenttechnologies, continue to meet the future emission requirements around the world and improve fueleconomy.

Cummins plans to offer a complete lineup of on-highway engines to meet the near-zero emissionsstandards. Mid-range and heavy-duty engines for EPA 2010 require nitrogen oxide (NOx)aftertreatment. NOx reduction is achieved by an integrated technology solution comprised of theXPI high pressure common rail fuel system, selective catalytic reduction technology (SCR),next-generation cooled exhaust gas recirculation (EGR), advanced electronic controls, proven airhandling, and the Cummins particulate filter. The EPA and CARB have certified that the company'sengines meet the 2011 emission requirements.

Strong R&D capabilities allow Cummins to attain competitive advantage over its peers, maintaintechnological edge over its competitors, and to stay ahead of industry trends. In addition, it allowsthe company to differentiate its products from those of its competitors.

Robust customer base

The company has a strong customer base. It caters to thousands of customers around the worldand has developed long-standing business relationships with many of them. For instance, Cumminshas been an engine supplier to PACCAR for over 67 years. PACCAR is Cummins’ largest customeraccounting for approximately 12% of the company’s consolidated net sales in FY2011, comparedto approximately 7% in FY2010 and 9% in FY2009.The company has long-term supply agreementswith PACCAR for its heavy-duty ISX 15 liter and ISX 11.9 liter engines and the ISL 9 liter mid-rangeengine.

In addition to its agreement with PACCAR, Cummins has long-term heavy-duty engine supplyagreements with Volvo Trucks North America and long-term mid-range supply agreements withDaimler Trucks North America, Ford and MAN. Moreover, it also has an agreement with Chryslerfor supplying the engine for its Ram trucks. In off-highway markets, Cummins has various engineand component supply agreements ranging across its midrange and high-horsepower businesseswith Komatsu, as well as various joint ventures and other license agreements in the company’sengine, component and distribution segments. Collectively, the company’s net sales to these sevencustomers, including PACCAR, was approximately 31% of its consolidated net sales in FY2011,compared to approximately 25% in FY2010 and 23% in FY2009.



Long term agreements with diverse customer base reduce business risks of the company by ensuringconsistent flow of business thus stabilizing the company’s revenue base.

Weaknesses

Heavy dependence on few suppliers

The company is engaged in long term contracts with few suppliers for obtaining raw materials andmanufactured components. Around 60% to 70% of the company's total types of parts in its productdesigns were sourced from a single supplier in FY2011. Sometimes, the company faces delay inprocuring the raw materials from its supplier as a result of a number of factors affecting the supplierssuch as capacity constraints, labor disputes, impaired financial condition of a particular supplier,suppliers' allocations to other purchasers, and weather emergencies. Any delay in receiving suppliescould impair the ability of the company to deliver products to its customers and accordingly it couldhave a material adverse effect on its business and operations.

Significant reliance on income from investees which are not under the company’s control

Cummins’ net income includes significant equity, royalty and interest income from investees thatthe company does not directly control. For FY2011, the company recognized $416 million of equity,royalty and interest income from investees, compared to $351 million in FY2010. The majority ofCummins’ equity, royalty and interest income from investees is derived from its 12 unconsolidatedNorth American distributors and from two joint ventures in China, Dongfeng Cummins EngineCompany (DCEC) and Chongqing Cummins Engine Company (CCEC). It has 50% equity ownershipinterests in DCEC and CCEC.

As a result, although a significant percentage of the company’s net income is derived from theseunconsolidated entities, it does not unilaterally control their management or operations, which putsa substantial portion of Cummins’ net income at risk from the actions or inactions of these otherentities. A significant reduction in the level of contribution by these entities to the company’s netincome would likely have a material adverse impact on Cummins’ results of operations.

Unfunded pension obligations

Cummins has significant unfunded pension obligations. The company provides retirement benefitsfor most of their employees, either directly or by contributing to independently administered funds.In FY2011, the company's pension obligations stood at $2,243 million as compared to the plannedassets of $2,091 million resulting into an unfunded status of $152 million. In addition, the companyexpects to contribute $130 million of cash to its global pension plans in 2012. Volatility in financialmarkets (equity and debt) led to decline in pension fund asset values. Going forward, pension fundassets are likely to be impacted to a greater extent than pension fund liabilities, leading to furtherincrease in unfunded pension obligations. Unfunded pension obligations will force the company to



make regular cash contributions to bridge the gap between pension assets and liabilities, pressurizingthe liquidity position of the company.

Opportunities

Growing global demand for diesel engines

Demand for diesel engines and related products are forecast to rise in the future. The factorsinfluencing the demand for diesel engines include rebounding consumer confidence and looseningcredit standards as well as increasing gasoline prices.These factors will encourage truck fleet ownersand managers to purchase new vehicles, virtually all of which are outfitted with diesels. Accordingto the industry experts, the global demand for diesel engines is projected to grow 6.7% yearly to2015 to $197.5 billion.

The Asia Pacific region was the world's largest market for diesel engines in 2010 by a wide margin.China and India will be the primary drivers for growth in this region through 2015, as expandingoutput of motor vehicles and off-highway equipment combine with higher levels of fixed investmentto stimulate significant increases in diesel engine demand.The sales of diesel engines in Asia Pacificregion are expected to grow approximately 7.7% per year through 2015, with China alone accountingfor one-third of the rise in global demand between 2010 and 2015. The medium and heavy vehiclediesel engine segment is also expected to experience the greatest gains in this regional market indollar terms, accounting for 53% of total sales in 2015.

Demand for diesel engines in the Africa and Mideast region is also expected to expand 7.7% peryear through 2015, fueled by rising output of medium and heavy vehicles and off-highway equipment,in addition to climbing fixed investment. The Eastern Europe and Central and South America dieselengine markets will also grow at healthy rates from 2010 to 2015, supported by growth in motorvehicle production, fixed investment, and agricultural, construction, and mining machinery output.In addition, demand for diesel engines in North America and Western Europe is also expected togrow with renewed strength following a period of weakness, bolstered by rebounds in production ofmotor vehicles and off-highway equipment.

Cummins designs, manufactures, distributes, and services a wide range of diesel engines andmarkets them around the world. Therefore, growing diesel engine market represents an opportunityfor Cummins to capitalize on this market and to expand its revenues and profits.

Positive outlook of the global truck market

The global trucks market entered a period of sharp decline from 2008 to 2009 before recoveringwith strong, double digit growth in 2010. The market is expected to maintain positive but fluctuatinglevels of growth from 2011 through to the end of the forecast period in 2015. According to MarketLine(a unit of Informa plc), the global truck market is expected to record volumes of approximately 20million units in 2012, an increase of 9.7% from 2011. Product sales will be driven by a pickup in the



production of light, medium and heavy trucks and buses. In addition, MarketLine estimates themarket to steadily accelerate to record 26.1 million units in 2015, an increase of 30.5% from 2012.

Cummins produces a wide range of engines to heavy duty, medium duty, and light duty trucksworldwide. Therefore, growth in the global truck market provides an opportunity for the company toboost its top line.

Strong growth for global automobiles industry

The global automotive industry was deeply impacted by the economic slowdown in 2009 with problemssuch as production overcapacity, high inventory, and low profitability, in the past few years. However,the industry is expected to recover in the coming years, posting strong growth thereafter. Improvementin credit availability and increase in consumer confidence, catalyzed by the government stimuluspackages around the world and growing demand in Brazil, Russia, India, and China, and otheremerging economies will help aid the recovery of global automotive market.

According to MarketLine (a unit of Informa plc), the global automobiles industry is expected to recorda total volume of 120.9 million units in 2012, an increase of 7% compared to 2011. MarketLineestimates that the industry's volume is expected to rise to 146.9 million units by the end of 2015,representing an increase of 21.5% from 2012. A growing automobile market is likely to drive demandfor Cummins' products. The company is well positioned to tap the opportunities arising from thesegrowing automotive markets.

Acquisition of SCR doser assets from Hilite International

Cummins is planning to enhance its technology capabilities through acquisitions. In this context, thecompany acquired the assets associated with the emissions control products of Hilite International,in July 2012. The Hilite assets are now part of Cummins Emission Solution (CES), positioning thecompany to serve all major market applications with a Cummins doser. The selective catalyticreduction dosing (SCR dosing) system developed by Hilite will complement existing Cumminsaftertreatment technology and represents a significant growth opportunity for Cummins.

This acquisition puts Cummins in a strong position to meet the needs of current customers and growinto new markets, especially as an increasing number of regions around the world adopt tougheremission standards. Acquisition of Hilite’s technology complements Cummins’ internal developmentefforts and the combined product portfolio would significantly enhance Cummins' overall aftertreatmentcomponents growth strategy. This could help Cummins to cater its aftermarket customers moreefficiently.

Threats

Intense competition



The markets in which Cummins operate are highly competitive. The company competes worldwidewith a number of other manufacturers and distributors that produce and sell similar products. Itsproducts primarily compete on the basis of price, performance, fuel economy, speed of delivery,quality, customer support and price. In the markets served by Cummins engine segment, it competeswith independent engine manufacturers as well as OEMs who manufacture engines for their ownproducts. Its primary competitors in North America are International Truck and Engine Corporation(Engine Division), Detroit Diesel Corporation, Caterpillar and Volvo Powertrain. Other enginemanufacturers in international markets include Weichai Power, MAN Nutzfahrzeuge, Fiat PowerSystems, GE Jenbacher, Tognum, Volvo, Yanmar, GuangxiYuchai Group and Deutz.

The power generation segment of Cummins competes with a variety of engine manufacturers andgenerator set assemblers across the world. Caterpillar, Tognum, and Mitsubishi Heavy Industriesremain its primary competitors. It also competes with FG Wilson (Caterpillar group), Kohler, Generac,and numerous regional generator set assemblers including Emerson Electric, Marathon Electric andMeccalte, among others. The company's components segment competes with other manufacturersof filtration, exhaust and fuel systems and turbochargers. Primary competitors of components segmentinclude Donaldson, Clarcor, Mann+Hummel Group, Honeywell International, Borg-Warner, RobertBosch, Tenneco, Eberspacher Holding and Denso. The company's distributors compete withdistributors or dealers that offer similar products.

Intense competition across all the business divisions of the company could force it to reduce prices,which may in turn affect the bargaining power and strain its margins.

Government regulations

The company's engines are subject to extensive statutory and regulatory requirements governingemissions and noise. These include standards imposed by the EPA, the European Union, stateregulatory agencies, such as the California Air Resources Board (CARB), and other regulatoryagencies around the world. Cummins has made, and will be required to continue to make, significantcapital and research expenditures to comply with these regulatory standards. Developing enginesto meet changing government regulatory requirements, with different implementation timelines andemissions requirements, makes developing engines efficiently for multiple markets complicated andcould result in substantial additional costs that may be difficult to recover in certain markets.

In some cases, Cummins may be required to develop new products to comply with new regulations,particularly those relating to air emissions. For instance, the company was required to develop newengines to comply with stringent emissions standards in the US by January 1, 2010. The companywas able to meet this and previous deadlines but its ability to comply with other existing and futureregulatory standards, will be essential for it to maintain its position in the engine markets. Further,the successful development and introduction of new and enhanced products in order to comply withnew regulatory requirements are subject to other risks, such as delays in product development, costover-runs, and unanticipated technical and manufacturing difficulties.

Variability in material and commodity costs



Cummins uses various materials in its manufacturing activities including steel, copper, aluminum,platinum and palladium. The prices of these raw materials have been volatile in recent years. Forinstance, the global composite carbon steel price in April 2012 was $802 per ton, as compared to aprice of $778 per ton in December 2011. Similarly, the price of copper stood at approximately $7,500per ton at the end of August 2012 as compared to approximately $6,800 per ton a year ago.

Higher material and commodity costs around the world may offset the company’s efforts to reduceits cost structure by increasing the purchasing costs. An increase in the price of the key raw materialshas a direct impact on the operating costs of Tenneco. Hence a consistent increase in the rawmaterial price in the future would have an adverse influence on Cummins’ profitability.



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