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Modern Tale of Old-Fashioned Business Values

In a family’s commitment to Cummins Engine Co. last week there’s a good story about American business, and a lesson or two about investment, too.

J. Irwin Miller, the 80-year-old retired chairman of Cummins, and his sister Clementine--descendants of William G. Irwin, the banker who first financed the 70-year-old Columbus, Ind., company--paid $72 million to buy Cummins stock worth $67 million at market price to remove a takeover threat.

In doing so, they bought American history along with an increase in ownership--to more than 10%, from roughly 5%.

Cummins is the company that first put a diesel engine into an automobile and made the trucking industry economically possible by providing a cheaper alternative to gasoline. As the late Clessie Lyle Cummins tells it in his book “My Days with the Diesel,” his engine company was slated for extinction in December, 1929. It had been making engines for luxury yachts, and the stock market crash had sunk the business. Banker Irwin, who was president of Columbus’ Irwin-Union Trust Co., had told Cummins that the company had to close.

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But Cummins, a tinkerer with little formal education who had worked as a chauffeur for the Irwin family, had the idea of using diesels for automobiles. So he bought a used Packard and replaced its gasoline engine with a diesel. Then he took banker Irwin for a drive on the streets of Columbus, a town of 35,000 south of Indianapolis.

The engine worked, and talk of closing the company ended. Instead, Cummins took his car to the 1930 Automobile Show in New York, and later installed his engine in an 8-ton truck and drove from New York to Los Angeles on $11.38 worth of fuel.

The company grew to become today’s $3.3-billion (sales) supplier of engines to roughly one of every two trucks on the highway.

Work Still to Do

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But Cummins has had to fight for its leadership in this decade. Profits have been skimpy or non-existent most years, as Cummins slashed engine prices 30% to beat back a challenge from Japan’s Komatsu and Nissan in 1984, and fought off Caterpillar and other U.S. competitors to hold its 54% share of the North American market.

Chairman Henry Schacht, 54, who succeeded Irwin Miller in 1973, has spent $2.3 billion since 1980 on research, new products and plant modernization. As a result, Cummins has almost doubled its sales and kept costs in check.

But there’s work still to be done. Engine makers have to meet tighter pollution standards in 1991, and again in 1994. That will take investment, but by spending now, Cummins and other U.S. companies will have the engines needed by an environmentally conscious world.

Still, after years of waiting for a payoff, some investors are impatient. They complain that “with truck buying turning down, the outlook for earnings (and the stock price) isn’t strong,” says analyst Larry Hollis of Milwaukee’s Robert W. Baird & Co. brokerage.

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Yet Cummins was the stock that Hanson PLC, a British company that buys and sells industrial firms, bought into last December. Hanson denied takeover plans, but Miller and Schacht feared mischief.

Hanson is not the kind of company that spends money on plant and research the way Cummins does. More attuned to reaping than to planting, it has shown good profits with acquired companies by skimping on investment.

Indeed, if Cummins had held back on investment the way Hanson does, it might have reported far higher profits in the 1980s. But it might also have lost out to competitors foreign and domestic.

Irwin Miller--the grand-nephew of W. G. Irwin, a hard-bitten banker who once told Clessie Cummins, “I’m putting money in the company, you’re only putting in effort"--no doubt knew Hanson’s tricks and mistrusted their consequences. So he bought out Hanson.

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And made a smart investment. Because the next rise in the economy will be led by companies that serve industrial America--like Cummins and Caterpillar and Ingersoll Rand. Analyst David Sutliff, of the investment bank S. G. Warburg, says Cummins is “likely to make a lot of money in the 1990s.”

That would be a nice reward for the Miller family. But then, its fortune has been made all along by a commitment to American know-how. Maybe Wall Street could learn something in Columbus.


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