- Declining heavy-duty truck production in China, Europe, India and North America led Cummins to forecast an 8% to 12% drop in revenue in 2020 over last year executives said on an earnings call Tuesday. CEO Tom Linebarger said he expects heavy-duty truck production for North America to be down 40% in 2020 year-over-year.
- The industrial and commercial engine-maker has been predicting the slump for nearly a year, orchestrating 2,000 layoffs in the fourth quarter of 2019 along with other cost-cutting measures. The staff cuts were mostly complete by the end of January, said Linebarger.
- In another anticipatory move, Linebarger said the OEM brought down inventory by $400 million in the second half of 2019. The total economizing effort will save the company between $250 and $300 million in costs this year.
Market trends are not in Cummins' favor. Truck buyers and fleet builders are treading cautiously with expectations that trucking rates will be down and capacity loose for the first half of 2020.
In addition to the "wait and see" economic environment, freight markets regularly cycle up and down with supply and demand like any commodity, and the OEMs who feed them see the tail whip of that cycle.
"The process for this goes something like: Rising freight absorbs capacity, spot rates improve, contract rates recover, orders accelerate and backlog growth ensues, and then with comfort in new demand levels, supply chain[s] are ramped. That connect-the-dots process will unlikely be finished in time to materially improve activity into 2021," said Kenny Vieth of ACT Research in a December research note.
Cummins' forecast for engine orders is not just a product of trucking market trends, but the current inventory status of its customers. Carriers are "awash in excess equipment, most of which was added by private fleets," according to ACT.
An added wrinkle is the coronavirus outbreak, which is complicating Cummins' manufacturing in China. Demand may be lowered, but the firm is working now to balance what inventory it should get out of the country in order to supply global clients without knowing how long the quarantine of Wuhan will last. The crisis has already gone beyond Cummins' forecast.
Since the Lunar New Year holiday ended very recently, the OEM is still working out which parts of its operation are functional and which may be shutdown for an extended period. However, this wildcard is likely to change the math for Cummins and other OEMs the longer it persists.