March 25, 2025 • 44 mins
North American heavy-truck and engine producers face an increasingly uncertain regulatory, trade and economic backdrop in 2025. With the EPA planning to reconsider several heavy-truck regulations, there are growing risks to expectations of higher build rates in 2H and 2026. In this Talking Transports podcast, Brett Merritt, president of Cummins’ Engine Business, joins Lee Klaskow, Bloomberg Intelligence’s senior transportation and logistics analyst, and Chris Ciolino, senior US machinery analyst, to share his insights about navigating the North American truck market during this pivotal time. Merritt also discusses alternative powertrain technologies, tariffs, order trends and how a native Hoosier ascended to lead Cummins’ Engine business.
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Episode Transcript
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Speaker 1 (00:08):
Hi everyone, this is Lee Clasgow and we're Talking Transports.
Welcome Bloomberg Intelligence Talking Transports podcast. I'm your host, Lee Clascow,
Senior Freight Transportation Logistics Analysts at Bloomberg Intelligence, Bloomberg's in
house research arm of almost five hundred analysts and strategists
around the globe. Before diving in a little public service announcement,
your support is instrumental to keep bringing great guests and
(00:29):
conversations to you, our listeners, and we need your support.
So please, if you enjoy this podcast, share it, like
it and leave a comment. Also, if you have any
idea for future episode or just want to talk transports,
please hit me up on the Bloomberg terminal, on LinkedIn,
or on Twitter at Logistics Lee. Now onto our episode today,
We're going to be doing something a little different and
(00:50):
special if you ask me. Today's episode is going to
be co hosted by my Bloomberg Intelligence colleague, Chris Chiolino,
senior US Machinery Analysts. Hi, Chris, you don't, I'm fantastic, Thanks, Lee.
Chris and I have a lot in common. Not only
are we a bi analyst, we're also atica college alums.
Go bombers, go bombers. All right, and we're delighted to
(01:10):
have Brett Merritt, President of Cummens Engine Business, which generated
over eleven point seven billion in revenue and delivered one
point three million engines to customers worldwide. The entirety of
his twenty sixth career has been in the automotive and
commercial vehicle industry, starting in the automotive emission space with
Arvin in nineteen ninety eight. Brett was promoted to his
(01:32):
current role in January twenty twenty four, following a successful
career in various management roles since joining Cummins in two
thousand and eight. He holds a bachelor's degree in biology
and Liberal Arts management from Indiana University, Go Hoosiers, and
a master's in business administration from Harvard Business School. He
serves on the board of directors for the American Transportation
(01:53):
Research Institute. Brett, Welcome to the podcast. Thanks for having us.
Speaker 2 (01:58):
Hey, Thanks Lee, I'm excited to be here, thanks to
you and Chris.
Speaker 1 (02:02):
All right, great, So, Cummins for us is somewhat of
a household name. Can you provide us with a little
background about the company.
Speaker 2 (02:10):
And the division that you lead. Sure, no, happy to
I'm glad to hear it's a household name. So Cummins
is a one hundred and six year old company, and
we are really separated in five divisions. And so we
have the engine division that's mine, which is somewhat the
oldest and kind of heart of the company. We also
have a components group, which essentially makes a variety of
(02:34):
components that we serve on our engines as well as
other engines to other oiams and engine manufacturers around the world.
Then we have a power systems business which essentially makes
very very large engines and or incorporates engines into power
generation business. And then we also have a distribution group
which either sales or helps us with sales or does
(02:57):
the service of this business all around the world. Finally,
we have Accelera, which is our zero emissions business. So
those all combine provide power to a variety of customers
in a series of markets. If you look at my
business alone, as you said, it's about a twelve billion
dollar business. We have about fourteen thousand people. We are
(03:19):
truly global, you know, we're in hundreds of countries around
the world, but we primarily operate in the large on
and off highway markets and have historically had great strength
in India, China, Brazil, growing in Europe and Japan, and
then the bread and butt of our business has been
(03:40):
the North American on highway market, which is probably what
our topic is today. And there we serve a wide
variety of customers and incredible number of applications from anything
vocational to fire trucks, to transit buses all the way
to just the Class eight truck you see going down
the road today. Gotcha.
Speaker 1 (04:00):
And for those that are interested, Cummins is a public
company trades under the ticker CMI space US on the
Bloomberg Terminal and has a forty six billion dollar market cap.
So could you just briefly tell us about where growth
is coming from within Cummings. Yeah, absolutely, So growth is
coming through really three different areas. We've had a lot
(04:22):
of growth in our power systems and distribution businesses because
of data centers.
Speaker 2 (04:26):
So data centers are growing all around the world. They
need very very large diesel and natural gas backup power.
These are ninety five Leader or sixty Leader engines, literally
the size larger than the room you're sitting in. Lee
and frankly we can't even make enough of them to
service that market for the upcoming years. Second major one
(04:48):
is content. As emissions continue to get more and more
stringent and difficult all around the world, we'll add content
to our engine systems and our components business in order
to meet those in miss needs for customers, and so
that generally has driven And then the third is we've
had a series of growth opportunities and largely that's growing
(05:09):
our market presence in a wide variety of areas. And
then I think many people know we partner quite well,
so we have multiple joint ventures all around the world,
but we're also growing with the likes of Daimler and Asuzu,
where you've seen some announcements that say they're going to
choose Cummins to make their medium duty engines as they
as they continue to pursue growth around the world. So
(05:30):
those are the three major areas of growth we've seen.
Speaker 1 (05:33):
And just generally speaking for Cummins, is the growth organic
or are you guys very much acquisitive?
Speaker 2 (05:39):
Well, it's a great it's a great question, and I
forgot the fourth area of growth, so I appreciate the prompt,
which is those three were organic, but we also have
made some acquisitions. A lot of those acquisitions are smaller
ones in the acceller business unit for where we're having
zero emissions. But the primary growth area was we did
purchase Maritor a couple of years ago. It's become a
(06:00):
part of our component's business and so that growth into
more content via the truck itself, whether it be axles
or brakes, was a large growth move for US about
two and a half years ago.
Speaker 3 (06:15):
So, speaking of emissions, we have new US EPA regulations
for heavy trucks coming in twenty twenty seven that require
reduction in Knox emissions. The expectation is that this rule
will create a pre buy as fleets seek to buy
equipment before they're required to use the new more expensive engines.
I guess, how are you guys thinking about the potential
(06:37):
magnitude and duration of this pre buy? When do you
expect the pre buy to start to start? And I
guess how confident are you that the current regulation will
proceed as is, particularly around the extended warranty component.
Speaker 2 (06:51):
Yeah, this really is the question of the day in
the on highway market. We do anticipate a pre buy
for the twenty seven Knox and green house gas emissions.
It will require additional content as well as some additional
mandatory warranty, which will essentially change pricing for the overall
(07:12):
engine system but also truck to the end consumer. And historically,
regardless of price change, there has historically been a pre
buy at an emissions change market. If that pre buy
means a larger price, we would generally say that there's
a little bit larger pre buy. So typically we're talking
(07:32):
one year, so you're thinking Jan one, twenty six. However,
given the recent demand over the past few years and
some of the industry's supply challenges, we're anticipating that that
pre buy comes into the second half of twenty five,
and so in the company's guidance, we've said that you'll
(07:52):
have a second half twenty five pre buyde really driven
off the twenty seven emissions. All of that said, as
you mentioned, what are the questions regarding emissions regulations, there's
a lot of them. You've seen the EPA have a
variety of statements. There's some open questions about Phase three rules,
(08:16):
which are further out and we could discuss a little
bit more, but openly, it is not completely certain that
the twenty seven regulation comes through exactly as we see
it today, and so that does put some unknown into
the second half pre buy, but as we say, it's
a little bit unknown. So the plan is the plan.
(08:38):
We still anticipate it today and we're progressing that way.
Speaker 3 (08:43):
So, speaking of those price increases associated with the new regulations,
you know, we've heard some pretty broad projections around pricing
for new twenty twenty seven EPA compliant trucks anywhere, you know,
from ten thousand to thirty thousand per vehicle. So how
is Cummins thinking about pricing and that incremental cost per
(09:04):
vehicle and is there any way to kind of decompose
the hardware piece versus the extended warranty component.
Speaker 2 (09:11):
Yeah, and you know, we're always I hate to be
a spoiler here, but we're always careful about how we
say this publicly. But what we would say is it
is a major stare step. You're talking major additions in
order to hit the lowest Knox level in the world
for diesel and natural gas engines at point zero three five.
(09:34):
And so those advancements, as well as hitting some of
the greenhouse gas standards, will mean major architecture changes for
any engine across the range. Obviously, the price will depend
on size of engine, So we generally serve everything from
the six seven all the way to the fifteen lider,
and so those prices will vary because the systems themselves
(09:57):
are different sizes. And I think the EPA has come
out and themselves said that they believe about sixty or
forty percent of the changes warranty and sixty percent of
the change is hardware. And I would say it's somewhere
in that ballpark. You're talking of fifty to fifty warranty,
fifty to fifty to sixty forty warranty to hardware change
(10:19):
and a major stairs up, so equivalent or larger than
the changes that you saw in twenty ten and you've
seen again in twenty seventeen or twenty one, Hey Brett.
Speaker 1 (10:31):
So for our listeners, you know, not everyone's buying trucks.
What is the average cost or your your retail price
if you will, of your most popular engines, so we
can get our arms wrapped around you know, the increases
that we're hearing about that it could be ten to
thirty thousand dollars more for these new engines.
Speaker 2 (10:53):
Yeah, the average engine across the market of these markets
full system. This is with after treatments and others, you're
going to be in the ranges of fifteen to thirty
five thousand dollars, again depending on the sizes, and so
it's you can't really buy those engines on them their own,
you're buying them within a truck. So I can't always
say what then are the costs that the truck OEMs
(11:15):
would put on top of those, but call it in
that ballpark of a range. And then you know, there's
been some public statements that pretty large increases versus those numbers.
Speaker 1 (11:26):
I don't know if you're familiar with this, but there's
talks of tariffs going on.
Speaker 2 (11:31):
I haven't heard at all.
Speaker 1 (11:32):
Yeah, yeah, well you know, no matter what industry you're
getting hit with tariffs. How will you know with the
talk of tariffs view the magnitude of the pre buy
and shape. I guess this cycle from your standpoint, And
do you think we could see more fleets to fur
purchases altogether ahead of the new regulation, because as you
(11:54):
mentioned earlier, there's some fluidity there.
Speaker 2 (11:57):
Oh it is. It is crazy. Every day is different,
and what you hear from me is uncertainty is bad.
For our industry. Most industries, uncertainty is bad, but our
industry as well. When you're thinking about emissions mandates for
the twenty seven launch, we started those development programs in
the twenty two timeframe. So we will spend well over
(12:21):
one point five billion dollars in research and engineering bringing
those engines to market. Not only that, will invest over
a billion dollars in capital in our US plants in
order to make and assemble those engines in North Carolina, Columbus, Indiana,
and Jamestown, New York. So what do tariffs do? Tariffs
(12:41):
create uncertainty, and at the end of the day, they
operate like attax on our business. We have all as
industrial companies created pretty global supply chains. However, what's important,
one hundred percent of our on highway engines for North
America are made in the United States, assembled in the
(13:02):
United States. So those three plants that I mentioned, but
you leverage some global supply chain and so we develop
those supply chain based on long term trade agreements and
so we are completely compliant with USMCA and the future
USMCA requirements. But as you start to place tariffs, we
don't have tons of flexibility where some components are manufactured. So,
(13:26):
for instance, some of our components blocks and heads would
be manufactured in Mexico, and therefore tariffs would be applied
when those components are brought in. So at the end
of the day, that will just increase the amount of
cost we have in our systems and therefore will drive
pricing into the business because it's an actual cost that
(13:50):
we couldn't avoid. We most likely couldn't avoid with a
three to four year warning. We definitely can't avoid within
a one month warning.
Speaker 1 (14:00):
And then on that do you do you know the
makeup of you know, of the components that are assembled,
what are not made in the USA? Are all the
components out made outside the United States?
Speaker 2 (14:11):
Oh no, no, no, we definitely have. We we meet
by America requirements and so we do have a large
predominant amount of our components are made in the United States.
But the end of the day, certain componentry and certain
subsystems will be made externally. Some of your electronic components,
some of your small castings and forgings. Frankly, a lot
(14:35):
of the foundry business itself is not based in the
United States any longer, and so those core componentry will
be made in some global locations, and they are a
variety of those global locations. But the uncertainty around tariffs
and which countries are applied and what is applied to
which country definitely causes uncertainty and I think has caused
(14:58):
a general pause in the end industrial markets where people
are worried about how they're allocating capital. So the more
certain we can have on those and what would be
long term trade agreements is really important for both commings
and the industry alike.
Speaker 1 (15:13):
So as crazy as it sounds, well, most people don't like,
you know, regulations. I'm assuming Cummings in your industry groups
are lobbying to keep the EPA twenty twenty seven as is.
Speaker 2 (15:28):
Yeah, what we would say is we always want tough, clear, enforceable,
and regulations that are affordable for the end truck user.
We think that those generally four things are very good
for the industry, and then we want the time in
order to hit them. So there are changes that we
(15:49):
could make to a variety of regulations. For instance, I
think we're openly advocating that we could change some of
the Phase three rules, but again, we believe they should
be tough. We believe they should be clear, and we
believe they should be enforceable with the appropriate warning, and
if so, then we will like those regulations. And just
(16:10):
for our.
Speaker 1 (16:11):
Listeners, can you tell us what when you say phase three,
you what are you talking about?
Speaker 2 (16:15):
So Phase three would be a set of greenhouse gas
regulations in the twenty thirty timeframe, and that's openly under discussion,
I think, And then the twenty seven regulation is really
around one. There's a phase two greenhouse gas regulation that
comes in at twenty twenty seven, and then there is
(16:35):
a Knox regulation that also hits at twenty seven for
a fifty state regulation. So you're gonna hear us talk
a lot about that. It's clear, it's enforceable, it's affordable,
and also we advocate for fifty state regulation. Having multiple
states with different regulation definitely causes issues for business.
Speaker 3 (16:54):
Yeah, so, I guess speaking of that, the administration also
seems to have taken steps to repute CARB waivers, which
essentially permitted CARB or the California Air Resource Board to
set stricter standards than the federal regulations. How do you
see this kind of impacting your business and really the
broader truck market overall.
Speaker 2 (17:17):
Yeah, So, again, you'll hear me kind of harp on
a couple different things. What we would want to make
sure is we do advocate for fifty state regulations. Absolutely,
we want them to be clear. Any sudden movement regarding
regulation generally causes uncertainty. So the more that we can
(17:39):
set back figure out what are those regulations and what
are those waivers, that is the important thing for us.
But openly, we're trying to educate, We're trying to advocate.
We're meeting with all regulators, OEMs and customers alike to
figure out what are the ways that we can help
provide those answers. But every time you'll hear me talk
(18:00):
about fifty state, it's clear it's affordable. Right.
Speaker 3 (18:04):
I want to circle back on some of your comments
made earlier about Cummins and partnerships. You guys have announced
a number of wins over the past several years with Hino, Zuzu, Daimler,
where the OEMs are essentially outsourcing some of their diesel
engine business too Commins. These partnerships, I think have mostly
been on the medium duty truck side. I guess are
(18:25):
you seeing any interest for these type of partnerships on
the heavy truck side, and how has the new administration's
approach around EVS impacted those conversations.
Speaker 2 (18:35):
Ah, yeah, great question. You know, we've long had this
dynamic in the industry where we sell to OEMs, all
of whom make their own diesel engines, and so we're
quite familiar with this idea, and the base idea of
why we sell to those OEMs is a variety of reasons. One,
we have some more technological breadth, so we offer more
(18:58):
engines in a wider range. Twof we could offer just
sheer scale and a particular technological area. Take natural gas engines,
where we can provide scales across a variety of OEMs. Three,
in some of our China and India joint ventures, just
the sheer need for technology that we believe commons provides.
(19:18):
But then ultimately in some of the ones you're talking about, Uh,
it's really trust. The OEMs have to pull off so
many things right now, new cabs, autonomous connectivity, as well
as all the various power needs. But what parts of
the of the truck could they trust someone else to deliver?
And that's where our large scale and medium duty engines
(19:39):
provides that opportunity. So that's been able to give us
those partnerships that you mentioned of diam Ler and Suzu
and Heo. We do anticipate that this will continue both
in off highway. We also think we'll continue in some
heavy duty areas. Where you've seen us win in heavy
duty is typically outside the United States, and we've had
a few wins in China with dong Fong and and Photon,
(20:01):
but also with our new natural gas fifteen leader natural
Gas Engine, where we believe a wide variety of OEMs
and the North American market will take this because we
can provide something to scale that many others cannot. It's
launched currently with Peter Belton Kenworth, and I think you'll
hear more OEMs bring that to market over the next
(20:21):
couple of years.
Speaker 3 (20:24):
And given this de emphasizing of pro EV policies under
the Trump administration, how has your thinking around the future
investments of internal combustion engines versus battery electric How do
you see like the ROI of those investments and has
it changed at all given the new administration's policies.
Speaker 2 (20:46):
Yeah, great question, and I'll kind of step back because
I didn't answer the end of your last question, which
was you know how do we view in the commercial
vehicle market. Evs have partarticular niches, But in order for
someone to buy an EV and commercial vehicle, you really
have to have three things. One, it has to be
(21:08):
available in the truck itself. Is it available that you
could buy that? And I'd say the OEMs and we
as EV makers have done a pretty good job with that.
Second is does it meet the total cost of ownership
model that we know works in commercial vehicle You're going
to have to do your business and make money, and
that's really where there are only a particular number of
(21:31):
applications where that meets that need, a lot of them
line haul trucking across the United States. It just doesn't
meet the TCO model. And then finally is infrastructure, And
infrastructure is a huge challenge, and so I'd say the
long pole in the tent right now is infrastructure, quickly
followed by TCO, which meant that EV was not gaining
(21:52):
huge traction in the commercial vehicle market already, and so
I don't think some of the Trump administration's policy will
change that that much other than than it's bringing it
to light. And so we think it opens up a
wider conversation to really think through and develop good regulations
regarding well to wheel emissions, and so you really need
(22:16):
to think about how are we taking advantage of zero emissions,
renewable natural gas, low carbon fuels, and a variety of
other technologies, because we believe the regulations should be technology agnostic,
not specific to one individual technology. And so some of
the regulations were really calling out ev rather than calling
(22:37):
out what is a wheel to well emissions calculation? And
so that does bring to question with incomings in many
other places, how are you how are you actively spending
in each And I think you know we've we've announced
a partnership with pacarn diaem Layer regarding bringing a battery
manufacturing to the United States. We'll continue with that. We
(23:01):
think it's the right play, we think it's a great strategy.
But we actually think some of the regulations and some
of the discussion has brought it back to what Cummins
has always been saying, which is its region specific, it's
customer specific, and its application specific. And that's how we
need to think about it. And we need to think
about it from a well to wheels perspective.
Speaker 1 (23:21):
Yeah, and so from an application standpoint, where has Cummins
had success in the EV market.
Speaker 2 (23:27):
Right now, you'd say transit bus, school bus, and then
in some areas like yard spotters, again lower volume, but
it's a good application for EV. It's not return it's
not a return to base. It is at the base.
You can figure it out. It's something where you don't
(23:47):
have to put large infrastructure spend. And then in school
bus and transit bus is really because they are return
to base. You know what the route is, you know
how to allocate your chur arging infrastructure. You're making a
set investment and then you're usually holding that investment for
a long period of time. You know, the average transit
(24:08):
bus in the United States is going to go fifteen
to twenty years, and so you can start to think
about your investment spend different. That's a much different scenario
than the example I gave earlier of line haul trucking
across both sets of mountains, team driver and doesn't ever
return to any base. That then becomes very much a
tco an infrastructure problem. And so we really need to
(24:30):
think application by application.
Speaker 1 (24:32):
Right and then you know, I know Cummins, you know,
is pretty agnostic when it comes to what the fuel
will eventually be what the alternative fuel eventually becomes. But
from your advantage point, you know what has the most
promise to reduce emission something that you know we all
would like to see.
Speaker 2 (24:51):
Yeah, it's a great question. There's a lot of advancements
in some low carbon fuels, and as much as we
can continue to think about what are the those low
carbon fuels that work, is the work ahead of our industry.
Renewable diesel is a real thing today four million gallons
plus of renewable diesel is out there. It obviously needs
(25:14):
to be more to take over the entire trucking industry.
And then the one I'll give you is renewable natural gas.
Well over ninety five percent of the natural gas in
California is actually renewable natural gas. So this is a
very good GHG fuel that if today you needed the
ports of LA to begin operating at a lower GHG footprint,
(25:40):
use today's renewable natural gas engines that are on the market.
They're already low knocks and they could meet well to
wheel emission standards that will greatly improve our overall GHG footprint.
So we would say, by the way, there is no
like we do on all technologies. There is no silver bullet.
It's going to take a myriad of these because they're
(26:01):
probably going to start in niches at the start and
then continue to progress. And we still see diesel as
the primary power of choice for the foreseeable future.
Speaker 3 (26:10):
Maybe shifting to something a little more near term. North
American Class States orders slipped a little in January and February,
but we're still running at a generally healthy rate over
the last six months. I guess how we're twenty twenty
five orders tracking relative to your expectations and are you
are you beginning to see any evidence of a pre
buy starting to trickle in?
Speaker 2 (26:32):
Yeah, great question. I think they're progressing as we somewhat
openly said. We said this year would be kind of
flat to down ten percent, and if you look at
the orders, that's generally where they're tracking, and we see
that both in public orders registrations, but also in the
engines we're building. And so what I'd say is that's
(26:54):
not a terrible market, right, depending on how you count
the market. This is two sixty to two hundred ninety
thousand vehicles. This is not nine, you know, absolute crash.
At the same time, it's not at its peak, and
that's pretty much how we called it. We're not seeing
huge areas of strength. There was some vocational strength. I
think it's a little weaker in over the road or
(27:15):
or or tractor, but we have yet to see what
would be an uptick for a pre buy.
Speaker 1 (27:24):
So you know, this is just maybe taking a couple
of steps back because you know people might not be
that familiar with Cummins engine.
Speaker 2 (27:31):
So are your customers the OEMs or.
Speaker 1 (27:33):
Do fleets come to you and say we want these
engines because we're going to buy these trucks. Who who
ultimately is your customer?
Speaker 2 (27:42):
Yeah, our customer is definitely the OEM. So how we
go to market as we sell through OEMs the likes
of pac Our, freight Liner, International, Volvo Mac, many many
OEMs actually and many that are your listeners are familiar with.
But we do have relationship with end users. So our
(28:04):
goal within users is continue to support commings in the
field because at the end of the day, we do
and actively want end users to say I want Cummins
in my freightliner, which allows that poll effect through the
OEMs themselves. And so I think we're the only branded
tier one with our own distribution and service network, and
(28:27):
so whether it be through service, whether it be through parts,
whether it be through relationship. We do actively have relationships
with many operators and fleets all around the nation, in
Canada and Mexico for that matter, which which allows that relationship.
But we're never confused. The engine is sold through the OEM.
Speaker 1 (28:48):
Gotcha. And then I guess you know we were talking
earlier because you know, supply chains are kind of close
to my heart and you mentioned, you know, you would
need more than three or four years kind of change
supply chains. Are you guys trying to I guess de
risk yourself from not only the tariffs that are happening
(29:11):
today that could last forever, or you know, future tariffs.
Speaker 2 (29:16):
Yeah, that is the question of the day. And what
I'd say is we've been an active program to dual
sourcing or try and create flexibility in supply chain for
some time, I thinkcause you know, in this kind of world,
we're as global as they come. We have very strong
businesses all around the world, and that generally means we
do have some dual sourcing. However, under the current environment,
(29:40):
it's very difficult to put a concrete plan down because
I'm not sure you or anybody else could tell me
exactly what country would have a tariff next, right, And therefore,
when people, when you think about this, if you started
a green field supply plant, you're a few years and
(30:01):
potentially billions of dollars away. And so if you're going
to place billions of dollars, where do you place them?
You sure want to know that with certainty, that's not
going to get into the same situation of what we
have today. So I think we always have some little
bit of short term options. We have flexibility on the margins,
(30:22):
but in the mass, the global supply chain has been
there for some time, and to change that does take
those I'm just guessing three to five years of major changes,
and in order to enact those changes, you need some
certainty to get there.
Speaker 3 (30:38):
And because of this tariff uncertainty, I mean, have you
seen any indication that fleets are you know, jumping in
to place orders ahead of some of these tariffs or
is it just the uncertainty just create It creates so
much uncertainty that fleets just you know, pumped the brakes.
Speaker 2 (30:53):
Yeah, that that is really good. I was with a
lot of our customers over the last two weeks asking
that exact question, and you don't really get a clear answer.
I believe those who are in the industry, who are sophisticated,
who have base buy plans, are somewhat sticking with their byplans.
This is replacement value, This is doing the right thing.
I don't think many people are putting in growth capital,
(31:17):
so they're not expanding their fleets right now. It doesn't
seem I'm sure there are some out there. It's it's
very difficult to talk about the North American market as
like one monolith. We always do, but there's so many
different sub markets that I'm undoubtedly there are places that
are making some but it just doesn't seem like many
people are doing anything that would say, hey, I'm doing
something for growth capital or as you are kind of
(31:38):
mentioning take advantage of maybe just before tariffs, do I
get a little bit better deal. It doesn't seem like
large movements. It seems a bit more steady, as you said,
from the order base and activity in the end market.
Speaker 1 (31:50):
And roughly, you know what percentage of your businesses US.
Speaker 2 (31:55):
Yeah, from a rough percentage point, we're about half United
States out of the thirty four billion and of cummings.
You know important market.
Speaker 3 (32:04):
Right, you know truck fundamentals. I guess they're still somewhat
mixed right now. Inventory levels remain quite elevated. Used equipment
values are soft, albeit improving. I guess, outside of the
tariff and trade uncertainty, what do you think are some
of the biggest risks to the truck market over these
next two years?
Speaker 2 (32:23):
Yeah? Great, great question. I was getting pretty hopeful right
at the start of the new year one. We'd all
somewhat weathered a touch of a downturn in the second
half in heavy duty truck North America. Felt like truckload
carriers and a variety of others were starting to reach
profitability or better profitability with increasing freight rates. Right, those
(32:43):
are really the couple signs that you start to see.
You see those two and use truck values starting to
come off. We say, hey, okay, inventory will start to
come down. We know how to, we know how these
cycles progress. We've been in the industry a while. Unfortunately,
it seems like some of this uncertainty has just caused
some unknown to that. So I thought some of the
fundamentals were starting to improve. But you've seen a bit
(33:04):
of a pausing of those fundamentals and at the you know,
core to you hate to put it to one value,
But until freight rates really come up and those truckload
carriers start making more money, I don't think you'll see
large large changes in the overall dynamics of the market. Yeah.
Speaker 1 (33:23):
You know, we actually just put out a note this
morning on the Bloomberg Terminal about freight rates, which we
write about pretty consistently, and the risk of our probability
of a recession is inched up to twenty five percent
according to consensus on the Bloomberg Terminal. That's up from
a low of twenty percent since the pandemic. So, you know,
(33:44):
it's it's it's pretty interesting because you know, when the
election happened, the presidential election happened, there were all these
animal spirits that low regulation, low tax is going to
be great for freight rates, freight demand, and you know,
going back in the beginning of the year, we thought
contractual rates be up by mid single digits. You know,
our expectations are probably going to be moderated given the
(34:06):
uncertainty that we're seeing in the macroeconomy and the freight economy.
So you know, that's kind of how we're looking at
things right now.
Speaker 2 (34:16):
That's that's good to hear. And interestingly, the three of
our jobs are somewhat the similar on on one area.
We questioned fleets a lot on these types of things,
so I do the same thing. And it felt like
people paused for the election, and then you were anticipating
some movement this and now that pause has just continued
with some of the uncertainty. So I hope we get
(34:36):
some clarity on some of those.
Speaker 3 (34:38):
I'd be remiss if I didn't ask about data centers
have what's what's the trajectory look like there? Are you
seeing any of that momentum start to subside? What are
you seeing from a data center customer perspective?
Speaker 2 (34:51):
Yeah, one disclaimer, I am definitely not And Jenny Bush,
who runs Who's My Peer, runs that business, she'd say
Brett is the least capable person to answer that inner
question in the world. That said, no, we don't see
any slow down. And that is one where we're seeing
a real macro trend. And as I talked about, when
you have some certainty in a macro trend, you'll see
companies invests. So we're investing we're investing in the supply chain,
(35:13):
We're investing in our assembly in order to be able
to make more and I believe we feel really good
about some of our in customer relationships there with growth
and being able to service that growth. And that's a
global growth that's just not a United States phenomenon, because
you're seeing the need for data, AI, search, all those
types of things go all around the world, and we
(35:34):
think that's pretty sustainable.
Speaker 3 (35:35):
And I guess, going back to some of these comments
earlier about EVS and this whole energy transition, I guess
where do you see the hydrogen combustion engine fitting into
the whole evolving landscape around alternative vehicles and technologies.
Speaker 2 (35:53):
Yeah, this is where I like having interviews with people
who know this industry. That's exactly these are the hitting
question if you went to my staff meeting later this week.
So we still believe in line haul trucking that hydrogen
remains a better long term solution than what EV would be.
It's just physics regarding the amount of batteries you could carry,
(36:17):
charge time, infrastructure, and a variety of other things versus
how hydrogen could be. And if you thought what would
be the earlier adopter. Between hydrogen ice versus a fuel cell,
you'd definitely say the hydrogen ice. We know how to
make it. I have them running across the street in
(36:39):
test cells. This is technology that we can figure out.
Will it be an increase in price and cost and technology, yes?
Is it something that we can bring to market. Yes.
Now the question we'll go back to a little bit
analogous to the ev discussion of is the infrastructure there,
(37:00):
is the hydrogen there, and can you afford the hydrogen?
And what I'd say is we'll need some infrastructure investment
in that, and we'll need hydrogen to go down to
this kind of four dollars a gallon. I'm just making
the number up equivalency that you see on other fuel
markets in order to really begin to gain traction. So
that's a long, long question to say, we're continuing to
(37:22):
invest in the technology. We'll have that technology ready when
we think the market is ready. That's generally our way
to enter the market, and it will utilize some of
this base platform that we've done on our helm engines.
So we've introduced what is an octane engine, which is
gasoline and a diesel architecture. We've introduced diesel, we've introduced
(37:43):
natural gas, and then we'll have hydrogen versions of our
engines as the future goes. But you're talking later in
the decade, and these are not systems that you're going
to buy in the next week or two. That said,
I did drive in a hydrogen truck hydrogen ice truck
just four weeks ago, so it's possible. Were you driving it?
(38:03):
Do you have your cdo? I was writing in it,
I can drive on test tracks, but they did not
want me to drive the hydrogen ICEE on the test track.
Speaker 4 (38:12):
So yeah, And then on the hydrogen is it more
about the price or is it more about the infrastructure
that it's going to take this to be a kind
of a long term solution for.
Speaker 2 (38:25):
Emissions, great question. I think it's and rather than or.
So there are areas that have hydrogen infrastructure, think large
industry where they're starting to power off of hydrogen some
other things. And so you'll get a point to point
a little bit. How we started in natural gas. Remember
(38:46):
in those we invested just in two different points and
then the things went point to point. Now it's becoming
more pervasive. So I think it'll start as point to
point where hydrogen investment is going in for large industry.
But then also for sure you'll you'll need the cost
of hydrogen to then go down. So if someone was
(39:06):
already running hydrogen or had renewable hydrogen at a very
good rate, you could start that at a point to
point action, but before it to become large market, you're
going to need the price of hydrogen to go down.
Speaker 3 (39:19):
And maybe just to put a finer point on the
new administration and a lot of the uncertainty around policies
moving forward, I guess outside of Phase three greenhouse gas
rules that you mentioned earlier, are there other regulations in
the trucking industry that you think are maybe at risk
under the Trump administration that that could have a meaningful
(39:41):
impact on demand moving forward?
Speaker 2 (39:43):
What else is on your radar? Yeah, I would say
the big things on our radar is this whole greenhouse
GASKNOX ruling and infrastructure and how do we get some certainty.
We hope well to wheels we help technology agnostic, Yet
something we can plan to We think some of the
modernization of the tax system would be UH. The truck
(40:05):
industry would would would benefit from UH if we can
make progress there. But we really have to figure out
some clarity regarding the tariff side of our supply chain.
Those are probably the big three we're tracking.
Speaker 1 (40:20):
So so, Brett, how did you get into the uh,
the transportation world? You know, how did how did you
how did you kind of get.
Speaker 2 (40:27):
Into the engine business? Yeah? I uh, it's a very
very long story because I was an early admit to
medical school out of Indiana University and then called my
parents and said, I'm going to get in the sexy
world of commercial vehicle rather than the medical school. But uh,
I grew up in Columbus, Indiana, where Cummins is headquartered,
(40:48):
and so I've long had some exposure to this, but
actually started Arvin, Arvin Meritor. Now we strangely enough on
Maritor and and and parts of Arvin, and so a
little bit of it maybe was just in my blood,
I guess, but it was quite happenstance, and got some
great opportunities and then have interestingly had the great opportunity
(41:08):
to live in this small town again, which I never
thought I would, but yet travel the globe and develop
these great relationships with the people in trucking.
Speaker 1 (41:18):
Guy and I and I always like to ask our
guests this next question, is there a book either on
leadership or your industry that's kind of close to home
that that you know you kind of think about often
or reflect upon.
Speaker 2 (41:33):
I I I should, I like the the books on Cummins,
but but I I hate to sell that to you.
You know. Interestingly, I don't have an awesome recommendation. So
this is probably uh not the best question because I
(41:55):
read and you'll probably cut this. I read all historical now,
so I read enough business on the day time that
I just read all history now.
Speaker 1 (42:03):
So no, I get that, is there is there a
point in history that you kind of like reading about
the most.
Speaker 2 (42:09):
World War two and then Revolutionary war area, but it's
a wide variety. Yeah. Yeah, so voracious reader in that area.
And I've almost given up my business reading. Unfortunately, I
don't blame you.
Speaker 1 (42:25):
We as analysts, we read all day and uh it's
it's tough to find time for for pleasure reading.
Speaker 2 (42:31):
That's exactly right. And I saw that question on there
and I was like, I come up with a better answer,
but I'll just be honest. So yeah, I'm I'm in
my latest World War two book right now, so well,
I don't worry.
Speaker 1 (42:44):
I want to tell you who won. Well, Brett, I
really want to thank you for your time. This is
a great discussion and really found it insightful. I actually
really liked talking to you guys because for a brief
like Lee Clasgow history, one of a I helped launch
on when I was an associate when I worked a
crudential back and I think that was like two thousand
(43:05):
and six, two thousand and.
Speaker 2 (43:06):
Seven, so a long time ago.
Speaker 1 (43:07):
So it was great to talk to somebody from comments
and learn more about your business.
Speaker 2 (43:12):
Happy to do it. I really appreciate what you do
for the industry. It's a great discussion out there. Anytime
we can help, we'd be glad to come back.
Speaker 1 (43:20):
All right, great, and we probably will. We'll go back
to that. Well maybe maybe next year we'll follow up
and see how things are going.
Speaker 2 (43:28):
Perfect, that'd be great. Yeah, let's hope it's a lot
more clear.
Speaker 1 (43:31):
Yeah, let's hope. All right, Chris, and I also want
to thank you for coming on to the Talking Transports podcast.
Speaker 2 (43:36):
It's a lot of fun. It sure was.
Speaker 1 (43:37):
Thank you Lee, and thank you Brent. All Right, great,
and I want to thank you for tuning in. If
you liked the episode, please subscribe and leave a review.
We've lined up a number of great guests for the podcast,
so please check back to here conversations with C suite executives, shippers, regulators,
and decision makers within the freight markets. Also, if you
want to learn more about the freight transportation markets, check
(43:57):
out our work on the Bloomberg Terminal, at be.
Speaker 2 (44:00):
I go and on social media. Thank you and take care.
Hi everyone, this is Lee Clasgow and we're Talking Transports.
Welcome Bloomberg Intelligence Talking Transports podcast. I'm your host, Lee Clascow,
Senior Freight Transportation Logistics Analysts at Bloomberg Intelligence, Bloomberg's in
house research arm of almost five hundred analysts and strategists
around the globe. Before diving in a little public service announcement,
your support is instrumental to keep bringing great guests and
(00:29):
conversations to you, our listeners, and we need your support.
So please, if you enjoy this podcast, share it, like
it and leave a comment. Also, if you have any
idea for future episode or just want to talk transports,
please hit me up on the Bloomberg terminal, on LinkedIn,
or on Twitter at Logistics Lee. Now onto our episode today,
We're going to be doing something a little different and
(00:50):
special if you ask me. Today's episode is going to
be co hosted by my Bloomberg Intelligence colleague, Chris Chiolino,
senior US Machinery Analysts. Hi, Chris, you don't, I'm fantastic, Thanks, Lee.
Chris and I have a lot in common. Not only
are we a bi analyst, we're also atica college alums.
Go bombers, go bombers. All right, and we're delighted to
(01:10):
have Brett Merritt, President of Cummens Engine Business, which generated
over eleven point seven billion in revenue and delivered one
point three million engines to customers worldwide. The entirety of
his twenty sixth career has been in the automotive and
commercial vehicle industry, starting in the automotive emission space with
Arvin in nineteen ninety eight. Brett was promoted to his
(01:32):
current role in January twenty twenty four, following a successful
career in various management roles since joining Cummins in two
thousand and eight. He holds a bachelor's degree in biology
and Liberal Arts management from Indiana University, Go Hoosiers, and
a master's in business administration from Harvard Business School. He
serves on the board of directors for the American Transportation
(01:53):
Research Institute. Brett, Welcome to the podcast. Thanks for having us.
Speaker 2 (01:58):
Hey, Thanks Lee, I'm excited to be here, thanks to
you and Chris.
Speaker 1 (02:02):
All right, great, So, Cummins for us is somewhat of
a household name. Can you provide us with a little
background about the company.
Speaker 2 (02:10):
And the division that you lead. Sure, no, happy to
I'm glad to hear it's a household name. So Cummins
is a one hundred and six year old company, and
we are really separated in five divisions. And so we
have the engine division that's mine, which is somewhat the
oldest and kind of heart of the company. We also
have a components group, which essentially makes a variety of
(02:34):
components that we serve on our engines as well as
other engines to other oiams and engine manufacturers around the world.
Then we have a power systems business which essentially makes
very very large engines and or incorporates engines into power
generation business. And then we also have a distribution group
which either sales or helps us with sales or does
(02:57):
the service of this business all around the world. Finally,
we have Accelera, which is our zero emissions business. So
those all combine provide power to a variety of customers
in a series of markets. If you look at my
business alone, as you said, it's about a twelve billion
dollar business. We have about fourteen thousand people. We are
(03:19):
truly global, you know, we're in hundreds of countries around
the world, but we primarily operate in the large on
and off highway markets and have historically had great strength
in India, China, Brazil, growing in Europe and Japan, and
then the bread and butt of our business has been
(03:40):
the North American on highway market, which is probably what
our topic is today. And there we serve a wide
variety of customers and incredible number of applications from anything
vocational to fire trucks, to transit buses all the way
to just the Class eight truck you see going down
the road today. Gotcha.
Speaker 1 (04:00):
And for those that are interested, Cummins is a public
company trades under the ticker CMI space US on the
Bloomberg Terminal and has a forty six billion dollar market cap.
So could you just briefly tell us about where growth
is coming from within Cummings. Yeah, absolutely, So growth is
coming through really three different areas. We've had a lot
(04:22):
of growth in our power systems and distribution businesses because
of data centers.
Speaker 2 (04:26):
So data centers are growing all around the world. They
need very very large diesel and natural gas backup power.
These are ninety five Leader or sixty Leader engines, literally
the size larger than the room you're sitting in. Lee
and frankly we can't even make enough of them to
service that market for the upcoming years. Second major one
(04:48):
is content. As emissions continue to get more and more
stringent and difficult all around the world, we'll add content
to our engine systems and our components business in order
to meet those in miss needs for customers, and so
that generally has driven And then the third is we've
had a series of growth opportunities and largely that's growing
(05:09):
our market presence in a wide variety of areas. And
then I think many people know we partner quite well,
so we have multiple joint ventures all around the world,
but we're also growing with the likes of Daimler and Asuzu,
where you've seen some announcements that say they're going to
choose Cummins to make their medium duty engines as they
as they continue to pursue growth around the world. So
(05:30):
those are the three major areas of growth we've seen.
Speaker 1 (05:33):
And just generally speaking for Cummins, is the growth organic
or are you guys very much acquisitive?
Speaker 2 (05:39):
Well, it's a great it's a great question, and I
forgot the fourth area of growth, so I appreciate the prompt,
which is those three were organic, but we also have
made some acquisitions. A lot of those acquisitions are smaller
ones in the acceller business unit for where we're having
zero emissions. But the primary growth area was we did
purchase Maritor a couple of years ago. It's become a
(06:00):
part of our component's business and so that growth into
more content via the truck itself, whether it be axles
or brakes, was a large growth move for US about
two and a half years ago.
Speaker 3 (06:15):
So, speaking of emissions, we have new US EPA regulations
for heavy trucks coming in twenty twenty seven that require
reduction in Knox emissions. The expectation is that this rule
will create a pre buy as fleets seek to buy
equipment before they're required to use the new more expensive engines.
I guess, how are you guys thinking about the potential
(06:37):
magnitude and duration of this pre buy? When do you
expect the pre buy to start to start? And I
guess how confident are you that the current regulation will
proceed as is, particularly around the extended warranty component.
Speaker 2 (06:51):
Yeah, this really is the question of the day in
the on highway market. We do anticipate a pre buy
for the twenty seven Knox and green house gas emissions.
It will require additional content as well as some additional
mandatory warranty, which will essentially change pricing for the overall
(07:12):
engine system but also truck to the end consumer. And historically,
regardless of price change, there has historically been a pre
buy at an emissions change market. If that pre buy
means a larger price, we would generally say that there's
a little bit larger pre buy. So typically we're talking
(07:32):
one year, so you're thinking Jan one, twenty six. However,
given the recent demand over the past few years and
some of the industry's supply challenges, we're anticipating that that
pre buy comes into the second half of twenty five,
and so in the company's guidance, we've said that you'll
(07:52):
have a second half twenty five pre buyde really driven
off the twenty seven emissions. All of that said, as
you mentioned, what are the questions regarding emissions regulations, there's
a lot of them. You've seen the EPA have a
variety of statements. There's some open questions about Phase three rules,
(08:16):
which are further out and we could discuss a little
bit more, but openly, it is not completely certain that
the twenty seven regulation comes through exactly as we see
it today, and so that does put some unknown into
the second half pre buy, but as we say, it's
a little bit unknown. So the plan is the plan.
(08:38):
We still anticipate it today and we're progressing that way.
Speaker 3 (08:43):
So, speaking of those price increases associated with the new regulations,
you know, we've heard some pretty broad projections around pricing
for new twenty twenty seven EPA compliant trucks anywhere, you know,
from ten thousand to thirty thousand per vehicle. So how
is Cummins thinking about pricing and that incremental cost per
(09:04):
vehicle and is there any way to kind of decompose
the hardware piece versus the extended warranty component.
Speaker 2 (09:11):
Yeah, and you know, we're always I hate to be
a spoiler here, but we're always careful about how we
say this publicly. But what we would say is it
is a major stare step. You're talking major additions in
order to hit the lowest Knox level in the world
for diesel and natural gas engines at point zero three five.
(09:34):
And so those advancements, as well as hitting some of
the greenhouse gas standards, will mean major architecture changes for
any engine across the range. Obviously, the price will depend
on size of engine, So we generally serve everything from
the six seven all the way to the fifteen lider,
and so those prices will vary because the systems themselves
(09:57):
are different sizes. And I think the EPA has come
out and themselves said that they believe about sixty or
forty percent of the changes warranty and sixty percent of
the change is hardware. And I would say it's somewhere
in that ballpark. You're talking of fifty to fifty warranty,
fifty to fifty to sixty forty warranty to hardware change
(10:19):
and a major stairs up, so equivalent or larger than
the changes that you saw in twenty ten and you've
seen again in twenty seventeen or twenty one, Hey Brett.
Speaker 1 (10:31):
So for our listeners, you know, not everyone's buying trucks.
What is the average cost or your your retail price
if you will, of your most popular engines, so we
can get our arms wrapped around you know, the increases
that we're hearing about that it could be ten to
thirty thousand dollars more for these new engines.
Speaker 2 (10:53):
Yeah, the average engine across the market of these markets
full system. This is with after treatments and others, you're
going to be in the ranges of fifteen to thirty
five thousand dollars, again depending on the sizes, and so
it's you can't really buy those engines on them their own,
you're buying them within a truck. So I can't always
say what then are the costs that the truck OEMs
(11:15):
would put on top of those, but call it in
that ballpark of a range. And then you know, there's
been some public statements that pretty large increases versus those numbers.
Speaker 1 (11:26):
I don't know if you're familiar with this, but there's
talks of tariffs going on.
Speaker 2 (11:31):
I haven't heard at all.
Speaker 1 (11:32):
Yeah, yeah, well you know, no matter what industry you're
getting hit with tariffs. How will you know with the
talk of tariffs view the magnitude of the pre buy
and shape. I guess this cycle from your standpoint, And
do you think we could see more fleets to fur
purchases altogether ahead of the new regulation, because as you
(11:54):
mentioned earlier, there's some fluidity there.
Speaker 2 (11:57):
Oh it is. It is crazy. Every day is different,
and what you hear from me is uncertainty is bad.
For our industry. Most industries, uncertainty is bad, but our
industry as well. When you're thinking about emissions mandates for
the twenty seven launch, we started those development programs in
the twenty two timeframe. So we will spend well over
(12:21):
one point five billion dollars in research and engineering bringing
those engines to market. Not only that, will invest over
a billion dollars in capital in our US plants in
order to make and assemble those engines in North Carolina, Columbus, Indiana,
and Jamestown, New York. So what do tariffs do? Tariffs
(12:41):
create uncertainty, and at the end of the day, they
operate like attax on our business. We have all as
industrial companies created pretty global supply chains. However, what's important,
one hundred percent of our on highway engines for North
America are made in the United States, assembled in the
(13:02):
United States. So those three plants that I mentioned, but
you leverage some global supply chain and so we develop
those supply chain based on long term trade agreements and
so we are completely compliant with USMCA and the future
USMCA requirements. But as you start to place tariffs, we
don't have tons of flexibility where some components are manufactured. So,
(13:26):
for instance, some of our components blocks and heads would
be manufactured in Mexico, and therefore tariffs would be applied
when those components are brought in. So at the end
of the day, that will just increase the amount of
cost we have in our systems and therefore will drive
pricing into the business because it's an actual cost that
(13:50):
we couldn't avoid. We most likely couldn't avoid with a
three to four year warning. We definitely can't avoid within
a one month warning.
Speaker 1 (14:00):
And then on that do you do you know the
makeup of you know, of the components that are assembled,
what are not made in the USA? Are all the
components out made outside the United States?
Speaker 2 (14:11):
Oh no, no, no, we definitely have. We we meet
by America requirements and so we do have a large
predominant amount of our components are made in the United States.
But the end of the day, certain componentry and certain
subsystems will be made externally. Some of your electronic components,
some of your small castings and forgings. Frankly, a lot
(14:35):
of the foundry business itself is not based in the
United States any longer, and so those core componentry will
be made in some global locations, and they are a
variety of those global locations. But the uncertainty around tariffs
and which countries are applied and what is applied to
which country definitely causes uncertainty and I think has caused
(14:58):
a general pause in the end industrial markets where people
are worried about how they're allocating capital. So the more
certain we can have on those and what would be
long term trade agreements is really important for both commings
and the industry alike.
Speaker 1 (15:13):
So as crazy as it sounds, well, most people don't like,
you know, regulations. I'm assuming Cummings in your industry groups
are lobbying to keep the EPA twenty twenty seven as is.
Speaker 2 (15:28):
Yeah, what we would say is we always want tough, clear, enforceable,
and regulations that are affordable for the end truck user.
We think that those generally four things are very good
for the industry, and then we want the time in
order to hit them. So there are changes that we
(15:49):
could make to a variety of regulations. For instance, I
think we're openly advocating that we could change some of
the Phase three rules, but again, we believe they should
be tough. We believe they should be clear, and we
believe they should be enforceable with the appropriate warning, and
if so, then we will like those regulations. And just
(16:10):
for our.
Speaker 1 (16:11):
Listeners, can you tell us what when you say phase three,
you what are you talking about?
Speaker 2 (16:15):
So Phase three would be a set of greenhouse gas
regulations in the twenty thirty timeframe, and that's openly under discussion,
I think, And then the twenty seven regulation is really
around one. There's a phase two greenhouse gas regulation that
comes in at twenty twenty seven, and then there is
(16:35):
a Knox regulation that also hits at twenty seven for
a fifty state regulation. So you're gonna hear us talk
a lot about that. It's clear, it's enforceable, it's affordable,
and also we advocate for fifty state regulation. Having multiple
states with different regulation definitely causes issues for business.
Speaker 3 (16:54):
Yeah, so, I guess speaking of that, the administration also
seems to have taken steps to repute CARB waivers, which
essentially permitted CARB or the California Air Resource Board to
set stricter standards than the federal regulations. How do you
see this kind of impacting your business and really the
broader truck market overall.
Speaker 2 (17:17):
Yeah, So, again, you'll hear me kind of harp on
a couple different things. What we would want to make
sure is we do advocate for fifty state regulations. Absolutely,
we want them to be clear. Any sudden movement regarding
regulation generally causes uncertainty. So the more that we can
(17:39):
set back figure out what are those regulations and what
are those waivers, that is the important thing for us.
But openly, we're trying to educate, We're trying to advocate.
We're meeting with all regulators, OEMs and customers alike to
figure out what are the ways that we can help
provide those answers. But every time you'll hear me talk
(18:00):
about fifty state, it's clear it's affordable. Right.
Speaker 3 (18:04):
I want to circle back on some of your comments
made earlier about Cummins and partnerships. You guys have announced
a number of wins over the past several years with Hino, Zuzu, Daimler,
where the OEMs are essentially outsourcing some of their diesel
engine business too Commins. These partnerships, I think have mostly
been on the medium duty truck side. I guess are
(18:25):
you seeing any interest for these type of partnerships on
the heavy truck side, and how has the new administration's
approach around EVS impacted those conversations.
Speaker 2 (18:35):
Ah, yeah, great question. You know, we've long had this
dynamic in the industry where we sell to OEMs, all
of whom make their own diesel engines, and so we're
quite familiar with this idea, and the base idea of
why we sell to those OEMs is a variety of reasons. One,
we have some more technological breadth, so we offer more
(18:58):
engines in a wider range. Twof we could offer just
sheer scale and a particular technological area. Take natural gas engines,
where we can provide scales across a variety of OEMs. Three,
in some of our China and India joint ventures, just
the sheer need for technology that we believe commons provides.
(19:18):
But then ultimately in some of the ones you're talking about, Uh,
it's really trust. The OEMs have to pull off so
many things right now, new cabs, autonomous connectivity, as well
as all the various power needs. But what parts of
the of the truck could they trust someone else to deliver?
And that's where our large scale and medium duty engines
(19:39):
provides that opportunity. So that's been able to give us
those partnerships that you mentioned of diam Ler and Suzu
and Heo. We do anticipate that this will continue both
in off highway. We also think we'll continue in some
heavy duty areas. Where you've seen us win in heavy
duty is typically outside the United States, and we've had
a few wins in China with dong Fong and and Photon,
(20:01):
but also with our new natural gas fifteen leader natural
Gas Engine, where we believe a wide variety of OEMs
and the North American market will take this because we
can provide something to scale that many others cannot. It's
launched currently with Peter Belton Kenworth, and I think you'll
hear more OEMs bring that to market over the next
(20:21):
couple of years.
Speaker 3 (20:24):
And given this de emphasizing of pro EV policies under
the Trump administration, how has your thinking around the future
investments of internal combustion engines versus battery electric How do
you see like the ROI of those investments and has
it changed at all given the new administration's policies.
Speaker 2 (20:46):
Yeah, great question, and I'll kind of step back because
I didn't answer the end of your last question, which
was you know how do we view in the commercial
vehicle market. Evs have partarticular niches, But in order for
someone to buy an EV and commercial vehicle, you really
have to have three things. One, it has to be
(21:08):
available in the truck itself. Is it available that you
could buy that? And I'd say the OEMs and we
as EV makers have done a pretty good job with that.
Second is does it meet the total cost of ownership
model that we know works in commercial vehicle You're going
to have to do your business and make money, and
that's really where there are only a particular number of
(21:31):
applications where that meets that need, a lot of them
line haul trucking across the United States. It just doesn't
meet the TCO model. And then finally is infrastructure, And
infrastructure is a huge challenge, and so I'd say the
long pole in the tent right now is infrastructure, quickly
followed by TCO, which meant that EV was not gaining
(21:52):
huge traction in the commercial vehicle market already, and so
I don't think some of the Trump administration's policy will
change that that much other than than it's bringing it
to light. And so we think it opens up a
wider conversation to really think through and develop good regulations
regarding well to wheel emissions, and so you really need
(22:16):
to think about how are we taking advantage of zero emissions,
renewable natural gas, low carbon fuels, and a variety of
other technologies, because we believe the regulations should be technology agnostic,
not specific to one individual technology. And so some of
the regulations were really calling out ev rather than calling
(22:37):
out what is a wheel to well emissions calculation? And
so that does bring to question with incomings in many
other places, how are you how are you actively spending
in each And I think you know we've we've announced
a partnership with pacarn diaem Layer regarding bringing a battery
manufacturing to the United States. We'll continue with that. We
(23:01):
think it's the right play, we think it's a great strategy.
But we actually think some of the regulations and some
of the discussion has brought it back to what Cummins
has always been saying, which is its region specific, it's
customer specific, and its application specific. And that's how we
need to think about it. And we need to think
about it from a well to wheels perspective.
Speaker 1 (23:21):
Yeah, and so from an application standpoint, where has Cummins
had success in the EV market.
Speaker 2 (23:27):
Right now, you'd say transit bus, school bus, and then
in some areas like yard spotters, again lower volume, but
it's a good application for EV. It's not return it's
not a return to base. It is at the base.
You can figure it out. It's something where you don't
(23:47):
have to put large infrastructure spend. And then in school
bus and transit bus is really because they are return
to base. You know what the route is, you know
how to allocate your chur arging infrastructure. You're making a
set investment and then you're usually holding that investment for
a long period of time. You know, the average transit
(24:08):
bus in the United States is going to go fifteen
to twenty years, and so you can start to think
about your investment spend different. That's a much different scenario
than the example I gave earlier of line haul trucking
across both sets of mountains, team driver and doesn't ever
return to any base. That then becomes very much a
tco an infrastructure problem. And so we really need to
(24:30):
think application by application.
Speaker 1 (24:32):
Right and then you know, I know Cummins, you know,
is pretty agnostic when it comes to what the fuel
will eventually be what the alternative fuel eventually becomes. But
from your advantage point, you know what has the most
promise to reduce emission something that you know we all
would like to see.
Speaker 2 (24:51):
Yeah, it's a great question. There's a lot of advancements
in some low carbon fuels, and as much as we
can continue to think about what are the those low
carbon fuels that work, is the work ahead of our industry.
Renewable diesel is a real thing today four million gallons
plus of renewable diesel is out there. It obviously needs
(25:14):
to be more to take over the entire trucking industry.
And then the one I'll give you is renewable natural gas.
Well over ninety five percent of the natural gas in
California is actually renewable natural gas. So this is a
very good GHG fuel that if today you needed the
ports of LA to begin operating at a lower GHG footprint,
(25:40):
use today's renewable natural gas engines that are on the market.
They're already low knocks and they could meet well to
wheel emission standards that will greatly improve our overall GHG footprint.
So we would say, by the way, there is no
like we do on all technologies. There is no silver bullet.
It's going to take a myriad of these because they're
(26:01):
probably going to start in niches at the start and
then continue to progress. And we still see diesel as
the primary power of choice for the foreseeable future.
Speaker 3 (26:10):
Maybe shifting to something a little more near term. North
American Class States orders slipped a little in January and February,
but we're still running at a generally healthy rate over
the last six months. I guess how we're twenty twenty
five orders tracking relative to your expectations and are you
are you beginning to see any evidence of a pre
buy starting to trickle in?
Speaker 2 (26:32):
Yeah, great question. I think they're progressing as we somewhat
openly said. We said this year would be kind of
flat to down ten percent, and if you look at
the orders, that's generally where they're tracking, and we see
that both in public orders registrations, but also in the
engines we're building. And so what I'd say is that's
(26:54):
not a terrible market, right, depending on how you count
the market. This is two sixty to two hundred ninety
thousand vehicles. This is not nine, you know, absolute crash.
At the same time, it's not at its peak, and
that's pretty much how we called it. We're not seeing
huge areas of strength. There was some vocational strength. I
think it's a little weaker in over the road or
(27:15):
or or tractor, but we have yet to see what
would be an uptick for a pre buy.
Speaker 1 (27:24):
So you know, this is just maybe taking a couple
of steps back because you know people might not be
that familiar with Cummins engine.
Speaker 2 (27:31):
So are your customers the OEMs or.
Speaker 1 (27:33):
Do fleets come to you and say we want these
engines because we're going to buy these trucks. Who who
ultimately is your customer?
Speaker 2 (27:42):
Yeah, our customer is definitely the OEM. So how we
go to market as we sell through OEMs the likes
of pac Our, freight Liner, International, Volvo Mac, many many
OEMs actually and many that are your listeners are familiar with.
But we do have relationship with end users. So our
(28:04):
goal within users is continue to support commings in the
field because at the end of the day, we do
and actively want end users to say I want Cummins
in my freightliner, which allows that poll effect through the
OEMs themselves. And so I think we're the only branded
tier one with our own distribution and service network, and
(28:27):
so whether it be through service, whether it be through parts,
whether it be through relationship. We do actively have relationships
with many operators and fleets all around the nation, in
Canada and Mexico for that matter, which which allows that relationship.
But we're never confused. The engine is sold through the OEM.
Speaker 1 (28:48):
Gotcha. And then I guess you know we were talking
earlier because you know, supply chains are kind of close
to my heart and you mentioned, you know, you would
need more than three or four years kind of change
supply chains. Are you guys trying to I guess de
risk yourself from not only the tariffs that are happening
(29:11):
today that could last forever, or you know, future tariffs.
Speaker 2 (29:16):
Yeah, that is the question of the day. And what
I'd say is we've been an active program to dual
sourcing or try and create flexibility in supply chain for
some time, I thinkcause you know, in this kind of world,
we're as global as they come. We have very strong
businesses all around the world, and that generally means we
do have some dual sourcing. However, under the current environment,
(29:40):
it's very difficult to put a concrete plan down because
I'm not sure you or anybody else could tell me
exactly what country would have a tariff next, right, And therefore,
when people, when you think about this, if you started
a green field supply plant, you're a few years and
(30:01):
potentially billions of dollars away. And so if you're going
to place billions of dollars, where do you place them?
You sure want to know that with certainty, that's not
going to get into the same situation of what we
have today. So I think we always have some little
bit of short term options. We have flexibility on the margins,
(30:22):
but in the mass, the global supply chain has been
there for some time, and to change that does take
those I'm just guessing three to five years of major changes,
and in order to enact those changes, you need some
certainty to get there.
Speaker 3 (30:38):
And because of this tariff uncertainty, I mean, have you
seen any indication that fleets are you know, jumping in
to place orders ahead of some of these tariffs or
is it just the uncertainty just create It creates so
much uncertainty that fleets just you know, pumped the brakes.
Speaker 2 (30:53):
Yeah, that that is really good. I was with a
lot of our customers over the last two weeks asking
that exact question, and you don't really get a clear answer.
I believe those who are in the industry, who are sophisticated,
who have base buy plans, are somewhat sticking with their byplans.
This is replacement value, This is doing the right thing.
I don't think many people are putting in growth capital,
(31:17):
so they're not expanding their fleets right now. It doesn't
seem I'm sure there are some out there. It's it's
very difficult to talk about the North American market as
like one monolith. We always do, but there's so many
different sub markets that I'm undoubtedly there are places that
are making some but it just doesn't seem like many
people are doing anything that would say, hey, I'm doing
something for growth capital or as you are kind of
(31:38):
mentioning take advantage of maybe just before tariffs, do I
get a little bit better deal. It doesn't seem like
large movements. It seems a bit more steady, as you said,
from the order base and activity in the end market.
Speaker 1 (31:50):
And roughly, you know what percentage of your businesses US.
Speaker 2 (31:55):
Yeah, from a rough percentage point, we're about half United
States out of the thirty four billion and of cummings.
You know important market.
Speaker 3 (32:04):
Right, you know truck fundamentals. I guess they're still somewhat
mixed right now. Inventory levels remain quite elevated. Used equipment
values are soft, albeit improving. I guess, outside of the
tariff and trade uncertainty, what do you think are some
of the biggest risks to the truck market over these
next two years?
Speaker 2 (32:23):
Yeah? Great, great question. I was getting pretty hopeful right
at the start of the new year one. We'd all
somewhat weathered a touch of a downturn in the second
half in heavy duty truck North America. Felt like truckload
carriers and a variety of others were starting to reach
profitability or better profitability with increasing freight rates. Right, those
(32:43):
are really the couple signs that you start to see.
You see those two and use truck values starting to
come off. We say, hey, okay, inventory will start to
come down. We know how to, we know how these
cycles progress. We've been in the industry a while. Unfortunately,
it seems like some of this uncertainty has just caused
some unknown to that. So I thought some of the
fundamentals were starting to improve. But you've seen a bit
(33:04):
of a pausing of those fundamentals and at the you know,
core to you hate to put it to one value,
But until freight rates really come up and those truckload
carriers start making more money, I don't think you'll see
large large changes in the overall dynamics of the market. Yeah.
Speaker 1 (33:23):
You know, we actually just put out a note this
morning on the Bloomberg Terminal about freight rates, which we
write about pretty consistently, and the risk of our probability
of a recession is inched up to twenty five percent
according to consensus on the Bloomberg Terminal. That's up from
a low of twenty percent since the pandemic. So, you know,
(33:44):
it's it's it's pretty interesting because you know, when the
election happened, the presidential election happened, there were all these
animal spirits that low regulation, low tax is going to
be great for freight rates, freight demand, and you know,
going back in the beginning of the year, we thought
contractual rates be up by mid single digits. You know,
our expectations are probably going to be moderated given the
(34:06):
uncertainty that we're seeing in the macroeconomy and the freight economy.
So you know, that's kind of how we're looking at
things right now.
Speaker 2 (34:16):
That's that's good to hear. And interestingly, the three of
our jobs are somewhat the similar on on one area.
We questioned fleets a lot on these types of things,
so I do the same thing. And it felt like
people paused for the election, and then you were anticipating
some movement this and now that pause has just continued
with some of the uncertainty. So I hope we get
(34:36):
some clarity on some of those.
Speaker 3 (34:38):
I'd be remiss if I didn't ask about data centers
have what's what's the trajectory look like there? Are you
seeing any of that momentum start to subside? What are
you seeing from a data center customer perspective?
Speaker 2 (34:51):
Yeah, one disclaimer, I am definitely not And Jenny Bush,
who runs Who's My Peer, runs that business, she'd say
Brett is the least capable person to answer that inner
question in the world. That said, no, we don't see
any slow down. And that is one where we're seeing
a real macro trend. And as I talked about, when
you have some certainty in a macro trend, you'll see
companies invests. So we're investing we're investing in the supply chain,
(35:13):
We're investing in our assembly in order to be able
to make more and I believe we feel really good
about some of our in customer relationships there with growth
and being able to service that growth. And that's a
global growth that's just not a United States phenomenon, because
you're seeing the need for data, AI, search, all those
types of things go all around the world, and we
(35:34):
think that's pretty sustainable.
Speaker 3 (35:35):
And I guess, going back to some of these comments
earlier about EVS and this whole energy transition, I guess
where do you see the hydrogen combustion engine fitting into
the whole evolving landscape around alternative vehicles and technologies.
Speaker 2 (35:53):
Yeah, this is where I like having interviews with people
who know this industry. That's exactly these are the hitting
question if you went to my staff meeting later this week.
So we still believe in line haul trucking that hydrogen
remains a better long term solution than what EV would be.
It's just physics regarding the amount of batteries you could carry,
(36:17):
charge time, infrastructure, and a variety of other things versus
how hydrogen could be. And if you thought what would
be the earlier adopter. Between hydrogen ice versus a fuel cell,
you'd definitely say the hydrogen ice. We know how to
make it. I have them running across the street in
(36:39):
test cells. This is technology that we can figure out.
Will it be an increase in price and cost and technology, yes?
Is it something that we can bring to market. Yes.
Now the question we'll go back to a little bit
analogous to the ev discussion of is the infrastructure there,
(37:00):
is the hydrogen there, and can you afford the hydrogen?
And what I'd say is we'll need some infrastructure investment
in that, and we'll need hydrogen to go down to
this kind of four dollars a gallon. I'm just making
the number up equivalency that you see on other fuel
markets in order to really begin to gain traction. So
that's a long, long question to say, we're continuing to
(37:22):
invest in the technology. We'll have that technology ready when
we think the market is ready. That's generally our way
to enter the market, and it will utilize some of
this base platform that we've done on our helm engines.
So we've introduced what is an octane engine, which is
gasoline and a diesel architecture. We've introduced diesel, we've introduced
(37:43):
natural gas, and then we'll have hydrogen versions of our
engines as the future goes. But you're talking later in
the decade, and these are not systems that you're going
to buy in the next week or two. That said,
I did drive in a hydrogen truck hydrogen ice truck
just four weeks ago, so it's possible. Were you driving it?
(38:03):
Do you have your cdo? I was writing in it,
I can drive on test tracks, but they did not
want me to drive the hydrogen ICEE on the test track.
Speaker 4 (38:12):
So yeah, And then on the hydrogen is it more
about the price or is it more about the infrastructure
that it's going to take this to be a kind
of a long term solution for.
Speaker 2 (38:25):
Emissions, great question. I think it's and rather than or.
So there are areas that have hydrogen infrastructure, think large
industry where they're starting to power off of hydrogen some
other things. And so you'll get a point to point
a little bit. How we started in natural gas. Remember
(38:46):
in those we invested just in two different points and
then the things went point to point. Now it's becoming
more pervasive. So I think it'll start as point to
point where hydrogen investment is going in for large industry.
But then also for sure you'll you'll need the cost
of hydrogen to then go down. So if someone was
(39:06):
already running hydrogen or had renewable hydrogen at a very
good rate, you could start that at a point to
point action, but before it to become large market, you're
going to need the price of hydrogen to go down.
Speaker 3 (39:19):
And maybe just to put a finer point on the
new administration and a lot of the uncertainty around policies
moving forward, I guess outside of Phase three greenhouse gas
rules that you mentioned earlier, are there other regulations in
the trucking industry that you think are maybe at risk
under the Trump administration that that could have a meaningful
(39:41):
impact on demand moving forward?
Speaker 2 (39:43):
What else is on your radar? Yeah, I would say
the big things on our radar is this whole greenhouse
GASKNOX ruling and infrastructure and how do we get some certainty.
We hope well to wheels we help technology agnostic, Yet
something we can plan to We think some of the
modernization of the tax system would be UH. The truck
(40:05):
industry would would would benefit from UH if we can
make progress there. But we really have to figure out
some clarity regarding the tariff side of our supply chain.
Those are probably the big three we're tracking.
Speaker 1 (40:20):
So so, Brett, how did you get into the uh,
the transportation world? You know, how did how did you
how did you kind of get.
Speaker 2 (40:27):
Into the engine business? Yeah? I uh, it's a very
very long story because I was an early admit to
medical school out of Indiana University and then called my
parents and said, I'm going to get in the sexy
world of commercial vehicle rather than the medical school. But uh,
I grew up in Columbus, Indiana, where Cummins is headquartered,
(40:48):
and so I've long had some exposure to this, but
actually started Arvin, Arvin Meritor. Now we strangely enough on
Maritor and and and parts of Arvin, and so a
little bit of it maybe was just in my blood,
I guess, but it was quite happenstance, and got some
great opportunities and then have interestingly had the great opportunity
(41:08):
to live in this small town again, which I never
thought I would, but yet travel the globe and develop
these great relationships with the people in trucking.
Speaker 1 (41:18):
Guy and I and I always like to ask our
guests this next question, is there a book either on
leadership or your industry that's kind of close to home
that that you know you kind of think about often
or reflect upon.
Speaker 2 (41:33):
I I I should, I like the the books on Cummins,
but but I I hate to sell that to you.
You know. Interestingly, I don't have an awesome recommendation. So
this is probably uh not the best question because I
(41:55):
read and you'll probably cut this. I read all historical now,
so I read enough business on the day time that
I just read all history now.
Speaker 1 (42:03):
So no, I get that, is there is there a
point in history that you kind of like reading about
the most.
Speaker 2 (42:09):
World War two and then Revolutionary war area, but it's
a wide variety. Yeah. Yeah, so voracious reader in that area.
And I've almost given up my business reading. Unfortunately, I
don't blame you.
Speaker 1 (42:25):
We as analysts, we read all day and uh it's
it's tough to find time for for pleasure reading.
Speaker 2 (42:31):
That's exactly right. And I saw that question on there
and I was like, I come up with a better answer,
but I'll just be honest. So yeah, I'm I'm in
my latest World War two book right now, so well,
I don't worry.
Speaker 1 (42:44):
I want to tell you who won. Well, Brett, I
really want to thank you for your time. This is
a great discussion and really found it insightful. I actually
really liked talking to you guys because for a brief
like Lee Clasgow history, one of a I helped launch
on when I was an associate when I worked a
crudential back and I think that was like two thousand
(43:05):
and six, two thousand and.
Speaker 2 (43:06):
Seven, so a long time ago.
Speaker 1 (43:07):
So it was great to talk to somebody from comments
and learn more about your business.
Speaker 2 (43:12):
Happy to do it. I really appreciate what you do
for the industry. It's a great discussion out there. Anytime
we can help, we'd be glad to come back.
Speaker 1 (43:20):
All right, great, and we probably will. We'll go back
to that. Well maybe maybe next year we'll follow up
and see how things are going.
Speaker 2 (43:28):
Perfect, that'd be great. Yeah, let's hope it's a lot
more clear.
Speaker 1 (43:31):
Yeah, let's hope. All right, Chris, and I also want
to thank you for coming on to the Talking Transports podcast.
Speaker 2 (43:36):
It's a lot of fun. It sure was.
Speaker 1 (43:37):
Thank you Lee, and thank you Brent. All Right, great,
and I want to thank you for tuning in. If
you liked the episode, please subscribe and leave a review.
We've lined up a number of great guests for the podcast,
so please check back to here conversations with C suite executives, shippers, regulators,
and decision makers within the freight markets. Also, if you
want to learn more about the freight transportation markets, check
(43:57):
out our work on the Bloomberg Terminal, at be.
Speaker 2 (44:00):
I go and on social media. Thank you and take care.
Host
Lee Klaskow
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