Editors Note: This article has been modified after its original publish date; an explanation of units shipped has been added to the market share discussion.
Leadership position in the engine market counts among Cummins' (NYSE:CMI) most crucial competitive strengths. It is the world's largest diesel engine manufacturer, and powers most of the trucks that run on North American roads today.
But something that Cummins said during its fourth-quarter earnings call was a revelation: It is finding it hard to improve its market share in the North American heavy-duty truck segment, thanks, ironically, to its most important customer, PACCAR (NASDAQ:PCAR).
In still waters
Cummins engines continue to dominate the North American heavy-duty truck market, with roughly 39% share. But here's what you should know: The engine maker's share has remained stuck in the 38% to 39% range for nearly four years now. Meanwhile, truck production in the U.S., especially of the critical Class 8 type, grew at least 50% over the period. This 50% growth hasn't translated to 50% unit growth at Cummins as you'd expect. Since 2010 units shipped have increased 26% at Cummins while the industry has experienced more growth.
So who stole some of that industry growth over the years?
Detroit Diesel, which produces engines for Daimler and Freightliner, had 23.6% of the HD market under its belt in 2010. Daimler's share hit 26% last year. Combined market share of Volvo's two units, Volvo Trucks and Mack Trucks, rose to 17.5% in 2013 from 15% in 2010. But the real winner in the race was PACCAR, which is also proving to be a bigger threat to Cummins now.
Cummins is having some sleepless nights
PACCAR first released it heavy-duty MX engines in North America in 2010. That year, it ended up with 2% share in the HD engine market. With the company extending its engines to a greater number of its Peterbilt and Kenworth brand trucks over the years, PACCAR's market share hit 8% last year. Of course, that's still a very small number when compared to Cummins, but things get really interesting when you realize that Cummins is publicly acknowledging PACCAR's new engines to be eating into its market share.
After ending 2012 and 2013 with 39% share in the North American HD truck market, Cummins projects it to drop a percentage point to 38% in 2014. And this is what the company had to say during its last earnings call: "as PACCAR has increased their production of the 13 liter the MX product. We'll see some of our share which was planned to go down at PACCAR."Clearly, Cummins is feeling the heat of increased competition from the same company that also currently counts as its largest customer.
So what does that mean?
Since a majority of Cummins' engines in North America go into PACCAR trucks as of now (a report from hdma.org pegged it at 60% last year), the latter's increasing foothold in the engine market could easily displace some of Cummins' business. PACCAR would naturally want to run its trucks on its own engines than buying them out from Cummins.
A couple of months after PACCAR released the MX-13 engine early last year, Cummins launched its much-hyped 12-liter ISX 12G engine built under its partnership with Westport Innovations (NASDAQ:WPRT). While the two engines run on different fuels -- the first on diesel while the second on natural gas -- they both serve the critical HD truck market in the U.S., and hence, compete with each other. In fact, PACCAR doesn't even rule out the possibility of manufacturing its own 13-liter spark-ignited engine if the ISX 12G turns a hit.
What's more, when an analyst asked PACCAR during the earnings call whether it would consider switching some of its own engines to natural gas, the answer was, "it's something that is always being evaluated." That may not sound good to Cummins' ears, considering that PACCAR currently drives a big chunk of the Cummins-Westport natural-gas engines business.
An unreliable solution
Industry experts argue that greater orders from Navistar International (NYSE:NAV), which turned to Cummins' engines in late 2012 after a failed emission technology, could help offset Cummins' market share loss to PACCAR and other engine manufacturers. That's possible, but not sustainable.
Navistar will certainly try to win back customers in the engine market. It was quick to launch its 13-liter MaxxForce engine last year, which reportedly received more than 6,000 orders within six months of launch. And given Navistar's history, where it dropped Cummins engines in 2010 right after launching its own, Cummins might as well not put too much faith on Navistar.
It isn't the end of the road for Cummins, though. The company is doing a marvelous job in the medium-duty truck segment, notching up 10 percentage points in market share last year. It expects to end 2014 with a whopping 70% share.
Nevertheless, the HD truck segment still remains Cummins' most important market, contributing nearly 26% to its engine business revenue. And nearly 60% of that comes from the North American market. So losing ground in such a key area certainly bodes ill for the company. I hope Cummins cooks up something before things start getting uglier.