In what appears to be a Chinese technology game rigged for American companies to lose, Cummins’ top executive said the Columbus-based diesel engine maker and global power company can win even on an unfair playing field.

Cummins Chairman and CEO Tom Linebarger was one of four panelists Thursday at the Business Roundtable CEO Innovation Summit in Washington D.C., talking about competition and collaboration with China for leadership in innovation.

Also on the panel were Gary Locke, former U.S. ambassador to China, Secretary of Commerce and governor of Washington; U.S. Sen. Mark R. Warner (D-Va.) and Dean Garfield, president and CEO of ITI.

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Among panelists, Linebarger was the major player representing U.S. businesses making significant inroads into investment in the China engine market, something Linebarger said started a long time ago — the early 1980s.

“We weren’t always so successful there. We had a lot to do to get off the ground,” Linebarger said of Cummins’ early efforts to find a way to sell diesel engines in one of the world’s largest countries.

China deals

By the early 1990s, Cummins had a joint venture partner in China, and in the 2000s Cummins’ efforts in China began to take off, he said in a telephone interview following the presentation.

The secret was that Cummins had developed the technology to produce efficient diesel engines with low emissions, and could work in joint ventures to produce them or their components, and the Chinese were interested in the company doing that. Reducing pollution was a goal in China and the volume of sales there has proved vital to Cummins’ continuing success, he said.

Linebarger noted that of the 1.3 million engines Cummins sells globally in a year, 500,000 are going to China, a figure that generated a “wow” from several of the panelists on stage.

More than 5,000 Cummins’ jobs in the United States were created from the company’s investments in China, Linebarger said.

“China is a serious benefit to our corporation. It saved us from potentially going out of business at one point,” he said.

In the early 2000s, Cummins was reeling from a recession, a cyclical truck market and falling market share, which had gone down to 25 to 30 percent, Linebarger said. By having the ability to export and sell engines to the Chinese market, it brought more sales volume, steadied earnings and became a key factor in keeping the company going, he said.

While Cummins’ success was noted during the panel presentation, other panelists were decidedly more pessimistic about where a potential trade war with China might take the United States, and decried as the continuing intellectual property theft of American technology and the barriers in place against American companies finding their way into China’s economy.

{&subleft}China’s leap

Locke answered a question about China’s strategy to increase its technology capabilities and competitiveness by saying the country’s economic ascendency from an farming economy to a global economic leader had been remarkable.

Saying China has gone from a $2 trillion to a $15 trillion economy in a relatively short period of time, Locke attributed that jump to the ability to steal American intellectual property without impunity — much of it through demanding that American companies have Chinese joint venture partners, which is not always in a U.S. company’s best interest, Locke said.

“I fear some of these companies are sharing information and the heart and soul of their operations with the Chinese government,” Locke said.

That is particularly dangerous when considering that many tech innovations in the area of artificial intelligence, quantum computing and other high-tech research are rapidly approaching the possibility of passing the U.S., Locke said.

While the American government is still buying 20th century items for its military, future wars won’t be about guns or tanks, but instead about cyber technology and misinformation, Warner said.

“China is investing in a host of AI (artificial intelligence) areas, not simply to be equal with the West, but to lead by 2025,” Warner said.

{&subleft}Joint ventures

Cummins is using the ability to create the joint ventures in China and the opening of its market to Cummins products to flow money back into the century-old company to increase research and development in all the work the company does, including embarking into the electrical engine market, Linebarger said.

In 2014, new heavy-duty Aumon trucks powered with Cummins ISG engines were unveiled in a ceremony in China at the joint-venture Beijing Foton Cummins Engine Factory. The factory produces the new generation of environmentally friendly, heavy-duty engines that were researched and developed in Columbus.

“Most of our companies have to do it through a joint venture (with a Chinese company) and there are a bunch of requirements, and that’s not fair,” Linebarger said. “It’s not a level playing field. And that should be changed.”

However, Linebarger said Cummins has figured out a way to succeed by using the money generated out of China for employment in the U.S., improving innovation and research domestically and strengthening the overall company globally.

Linebarger attributed Cummins’ success to trying to find a “win-win” instead of going with an idea that China is a singular entity conspiring to take over the world.

“They want to bring prosperity, a different approach, and what Cummins brought them is technology and products to modernize their trucking industry, with more efficient emissions,” Linebarger said.

“We didn’t try to take everything or chase out the Chinese competitors. We have two joint ventures in trucks and one in construction equipment,” he said. “We succeed and they succeed. They feel like it’s a win-win.”

Linebarger said this is not easy. There are times the joint-venture companies make requests that Cummins doesn’t want to grant, and there are complicated moments.

“You need to look for win-win,” Linebarger said of those situations.

“With Cummins values, and the Midwest culture, we don’t have to know all the answers. It’s an asset,” he said. “We are willing to listen.”

Linebarger said the best approach is for U.S. officials to select their top-priority trade issues, figure out what would constitute a “win” on those fronts, and negotiate with the Chinese accordingly.

That method would produce better results than the “carpet-bombing” approach of imposing escalating rounds of tariffs, Linebarger said.

{&subleft}Tariff impact

Cummins, which has done business in China since the 1970s, today counts the country among its largest markets. And the company is feeling the sting of the ongoing U.S./China trade war.

“We expect $80 million of tariffs and related costs in 2018, and we forecast in 2019 that the full impact will be something like $250 million,” Linebarger told the Indianapolis Business Journal in a telephone interview following the panel discussion.

That 2019 figure is up from the $200 million estimate Cummins provided in August.

Those figures include the tariffs themselves, associated higher materials costs and the cost of making supply-chain changes to mitigate tariff impact.

Garfield said future challenges for the U.S. competing in the global economy is to find a way to put pressure on China to create a more open, reciprocal economy.

Locke agreed, saying so many aspects of the Chinese economy are off limits to any foreign investment.

Locke advocated that Western countries should join together to impose similar requirements on Chinese companies in America and force them to live up to commitments made when China was allowed to join the World Trade Organization.

Panelists also expressed concern about the looming trade war with China, which is currently on a 90-day hold while President Donald Trump negotiates with China over the trade imbalance, a move which has caused the American stock market to move dramatically over the past few days.

Stocks opened sharply lower on Thursday after a senior Chinese technology executive was arrested in Canada, detained on suspicion of trying to evade U.S. limits on trade with Iran.

Linebarger described the situation as volatile, but that China appears to want to engage in a process to define a deal to help their economy. With the arrest of the Chinese technology executive, the stakes are appearing to become more serious.

“All these other things, the tweets, the arrest, are making it more volatile,” Linebarger said. “I’m cautiously optimistic, but very cautious. Both parties need this to go forward for their own domestic agenda and find a way to work together.”

There will be a large economic cost to both countries if that doesn’t happen, he said.

“We have two competing different systems with two sets of rules,” Linebarger said of American companies attempting to gain a foothold in China. “We need to show up and figure out how to be competitive. It’s the biggest market in the world by far.”

One of the secrets to success in the Chinese market is to realize that competing with the country in the field of electrical engine technology doesn’t have to mean a win for China, the Cummins’ leader said.

In September, Cummins announced it had signed a memorandum of understanding with KAMAZ for the development of electrified power solutions for a new product line of KAMAZ battery-powered vehicles.

KAMAZ, a Russian brand of trucks and engines, is actively developing a new electrified portfolio of battery-powered trucks and buses, and Cummins continues to expand its powertrain portfolio by developing fully electric or hybrid power systems for commercial applications.

Next year in the U.S., Cummins will roll out its first all-electric powertrain — a product suitable for short-range commercial vehicles such as municipal buses.

But, Linebarger told the Indianapolis Business Journal, Cummins doesn’t yet know when it will introduce electric powertrains in China.

“We really just don’t have a way to compete as long as large subsidies are available to local companies and not to us,” he said.

All things considered, Linebarger told the panel audience, Cummins believes it’s important to do business in China, even with the current restrictions.

Subsidies in China for the technology mean that nine out of every 10 electrical vehicles are sold in China, Linebarger said. But the rest of the world isn’t really competing with that, because those vehicles are being produced to fill the subsidy requirements of the Chinese government.

“They (the vehicles) are made to meet the subsidy,” Linebarger said of the production numbers. “Not that they aren’t learning things. But they don’t feel the knife of market-driven competition,” he said.

The Chinese have a lot of government requirements and investment rules that make no sense, Linebarger said, unlike an environment of effectiveness and efficiency that Linebarger leads in the U.S.

“When we have to sell, we have to win,” Linebarger told the panel of competing in a global market. “We’re lean and mean and tough, and we will beat them.”

[sc:pullout-title pullout-title=”The Business Roundtable” ][sc:pullout-text-begin]

The Business Roundtable is an association of chief executive officers of America’s leading companies working to promote a thriving U.S. economy and expanded opportunity for all Americans through sound public policy.

To learn more about the organization, visit businessroundtable.org.

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Cummins Inc.

Products: Designs, manufactures, sells and services diesel and alternative-fuel engines and electrical generator sets, and related components and technology.

Headquarters: Columbus, Indiana

Founded: 1919, by mechanic Clessie Cummins and banker William G. Irwin

2017 revenue: $20.4 billion

2017 profit: $1 billion

Employees: 58,600 worldwide, 10,000 of whom work in Indiana

Source: IBJ research

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Cummins Inc. announced on June 14, 2017 it intended to introduce fully electric powertrains in 2019. Since then, the company has worked to prepare itself for this new business segment.

Milestones include:

Aug 29, 2017: Unveils a demo of a fully electrified heavy-duty truck at its Columbus headquarters. The truck, called Aeos, can go 100 miles on a single charge.

Oct. 10, 2017: Announces a partnership with California-based bus manufacturer Gillig LLC, which will be the first company to produce buses using Cummins’ electric powertrains.

Oct. 16, 2017: Acquires Oregon-based Brammo Inc., a maker of electric motors and batteries.

Jan. 31: Acquires England-based Johnson Matthey Battery Systems, the automotive battery systems division of Johnson Matthey PIc.

Feb. 7: Announces that its electrification business will become the company’s fifth reporting segment.

July 2: Acquires California-based Efficient Drivetrains Inc., which offers electric and hybrid powertrains, prototyping and other services.

Sept. 19: Debuts a fully electric Cummins-powered truck by Dutch truck maker DAF Trucks N.V. DAF plans to begin field-testing these vehicles in 2019.

Oct. 29: Releases a prototype of a fully electric mini excavator in partnership with Hyundai Construction Equipment.

Source: Cummins, IBJ research

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“China is a serious benefit to our corporation. It saved us from potentially going out of business at one point.”

— Tom Linebarger, Cummins chairman and CEO

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