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Cummins, USA: Investing In Communities

The Indiana engine-maker believes deeply in the anachronistic idea that investing in its community is smart business. Could it be on to something?

Published: May 9, 2014 07:19:26 AM IST
Updated: Apr 30, 2014 03:24:38 PM IST
Cummins, USA: Investing In Communities
Image: Patrick Bennett / Corbis
Cummins’s long-time CEO Irwin Miller spent millions turning Columbus, Indiana into a showcase for modernist architecture

Just past the factory’s lobby, with its worn, grey chairs and a safety video droning on a flat-screen TV, through thick plastic curtains clouded by age and grime, there’s a whirr of air tools. Cummins Diesel workers are hunched around stocky engine blocks, adding crankshafts, pistons and piping. Every once in a while they look up, distracted by construction noise at the other end of the building. There, bright light bounces off brilliant white walls. Construction workers in clean orange vests and hard hats are bustling, laying new rail tracks and setting giant turntables into freshly poured concrete floors. The newest section of Cummins’s Seymour, Indiana engine plant is like another planet.

The expansion is making room for the Hedgehog: The company’s new high-horsepower engine, one of the most powerful and efficient diesel engines in the world. With a price tag of a quarter of a million dollars, it’s a behemoth—16 cylinders, 4,000hp and the size of a trailer home—but it needs to be to power the locomotives, oil rigs and mining equipment that will depend on it.

The Hedgehog is propelling a lot more than machinery, though. With its $100 million investment and 200 new jobs, Cummins CEO Tom Linebarger is making a long-term bet that he can transform Seymour where it’s difficult to find employees with high school diplomas, much less attract engineers from the nation’s best universities, in the same way it helped Columbus, Indiana, Cummins’s hometown.

While many of the schools around Seymour are struggling and literacy levels are low even among adults, Columbus is a pocket of midwestern prosperity, with the highest concentration of mechanical engineers per capita in the country (31 per 1,000) and the lowest unemployment rate in Indiana (5.2 percent). It has new preschools, a college campus offering joint degrees from three Indiana universities and a training centre for advanced manufacturing. Cummins was instrumental in all of it, creating an education partnership that has become a model for tackling the US skills gap. And it aims to have a similar impact in every one of the 190 places where it does business around the world.

None of which is new for Cummins. In the 1950s long-time chief executive J Irwin Miller embraced the postwar notion that a healthy company can’t exist without a healthy community. Miller created a stakeholder model that balanced the interests of employees, shareholders, customers, suppliers, regulators and the community in every decision. Unlike most other companies, Cummins stuck with it for the next 60 years. The result: Cummins, Columbus and Seymour are living laboratories for how business and community can work together. Attracting, retaining and cultivating scarce engineering talent is now a core business concern for many technology companies, and that anxiety is propelling the resurgence of the altruistic ‘company town’.

Quicken Loans’s billionaire-owner Dan Gilbert is buying up downtown Detroit in an effort to renovate and revitalise the bankrupt city—and attract young tech workers there. In Brooklyn, New York, IBM co-founded P-TECH, a public school aimed at turning students into IT workers. “What they’re doing is just taking an intelligent self-interest in their community rather than a selfish interest,” says Harvard Business School professor Joseph L Bower, who has studied Cummins. Linebarger agrees. “Is it self-interest? Yes,” he says. “But it’s easier to attract people to your company if you’re in an area that has good schools, a clean environment and opportunity for all.”

This idea—that the role of a corporation extends to the care of the community around it and that the company has a responsibility to help guide the community—is, of course, hardly new. With distant roots in feudal pre-industrial Europe, the ‘company town’ flowered at the turn of the 20th century as industrial titans like Henry Ford and Milton Hershey decided they not only knew what was best for employees on the factory floor but off it as well. From Hershey, Pennsylvania to Kohler, Wisconsin the company—and company town—remained the centre of life for millions of postwar American workers. “In the Fifties, corporations were supposed to take care of society. That was the managerial perspective,” says Aneel G Karnani, associate professor of strategy at the University of Michigan’s Stephen M Ross School of Business. “In the last few decades there’s been a shift to more of a shareholder perspective. Managers are agents of the shareholders. Government is supposed to take care of the rest.”

Cummins, USA: Investing In Communities
To produce one of the world’s most powerful engines, Cummins CEO Tom Linebarger wants to transform a town

Cummins has been at the centre of life in Columbus since its founding in 1919 by a mechanic named Clessie Cummins and a financier named William Glanton ‘WG’ Irwin, scion of a prominent banking family and the great-uncle of Irwin Miller. A tinkerer, Clessie Cummins was among the first to see the commercial potential of an unproved engine technology invented two decades earlier by Rudolf Diesel, and in 1929 he created America’s first diesel-powered automobile—a used Packard limo he’d adapted. Almost a century later Cummins is the world’s largest supplier of diesel engines and components to the trucking industry, with $17 billion in revenues and $1.5 billion in net income in 2013. More than half its sales are generated outside the US, especially in China and India, where it is the market leader.

Miller’s vision was hatched in the 1950s. To keep up with the baby boom Columbus figured it would have to build a new school every two years. Miller, whose company was also growing, wanted to make sure it was done right. He fretted that Cummins wouldn’t be able to attract top engineers and their families to a small town in southern Indiana if the schools were built on the cheap. He took it upon himself to guide the development needed to attract them. “Mediocrity is expensive,” he often said, according to his son, Will, president of the Wallace Foundation in New York and a member of Cummins’ board of directors.

Rather than just move the company, Miller changed the town, indulging his architectural tastes by using the company to subsidise public school construction. The Cummins Foundation would pay the design portion of each project but only if the city used world-class architects recommended by Miller. Later that was expanded to include all public buildings, including the fire station, courthouse, city hall and even the jail. Private developers followed. Today Columbus boasts more than 60 modernist buildings. Six of the buildings were designated National Historic Landmarks in 2000. Since 1957 Cummins has spent $19.2 million on architectural fees for Columbus.

Miller’s personal beliefs on social justice and service to others guided many of his business decisions. As the first lay leader of the National Council of Churches, Miller worked with Martin Luther King Jr and Andrew Young to organise the historic civil rights march on Washington in 1963. In the 1970s the company took a substantial financial hit when it pulled out of South Africa, abandoning a 20 percent market share for diesel engines because the apartheid government wouldn’t let Cummins desegregate its factories. It has offered domestic partner benefits to employees since 1999, and in the last few years the company and its executives have been lobbying to legalise gay marriage.

“Whatever you do in this world, you’ve got a responsibility and a privilege of doing it the very best way you can,” Miller, who died in 2004, said in a company film clip.

By the late 1980s, of course, the idea that the “CEO knows best” seemed anachronistic, at best. The long bull market and the emerging culture of equity-incented employees made the idea that companies are run purely for shareholders—not managers and certainly not employees—mainstream. Conventional economic wisdom remains that maximising profits is the only acceptable corporate mission. The idea of a company town with diverse stakeholders was beyond passé—it felt like a throwback to Henry Ford’s paternalism, or even to the 19th-century utopian communities of Oneida, New York and Amana, Iowa.

But Cummins stuck with it. As the company’s operations spread across the globe, so did Miller’s ideas. In India, for example, the company opened the Cummins College of Engineering for Women to train more female engineers with degrees in mechanical engineering. Of the first class of 65 graduates, 40 received job offers from Cummins. The entire institution cost less than endowing a chair at a US university and it fulfilled a critical need: A well-trained, diverse workforce.

In Columbus, the company partnered with schools, universities, city leaders, and other businesses to increase graduation rates. It convinced three local colleges to open Columbus branches and then added an Advanced Manufacturing Center of Excellence, where local schools and colleges could train students for careers in manufacturing. In 2008 Columbus’s high school graduation rate hovered around 80 percent—just above the national average of 75 percent. So Cummins co-ordinated an army of volunteers to mentor at-risk students. By 2012 the graduation rate had improved to 88 percent.

Cummins, USA: Investing In Communities
Image: David Yellin for Forbes
Chicago Mayor Rahm Emanuel

How much does all this do-gooderism cost? In 2012 Cummins invested approximately $31 million in corporate responsibility efforts, including $14 million to the Cummins Foundation, which in turn doled out $8 million in grants. While it’s impossible to precisely quantify the benefits, the costs are hardly a drag. Through most of the 2000s the company enjoyed strong growth, despite being hit hard by the recession. Sales fell almost 25 percent from 2007, to $10.8 billion, but rebounded by 2010 to $18 billion. The last three years have been softer, with sales of $17.3 billion on weak demand in key international markets.
Despite those headwinds, Cummins generated record cash flow from operations in 2013 that allowed it to continue to invest in its business and still increase the cash returned to shareholders by 34 percent in 2013. This year the company expects revenues to grow 4-8 percent, with earnings expected to grow faster due to cost controls and other initiatives. Linebarger says the company expects to return about half its cash from operations to shareholders. The stock is up 400 percent since 2009, or four times the S&P 500, to a recent $145 per share. Its market capitalisation now stands at $27 billion.

Cummins’s story of better schools, nice towns and solid profits makes it easy to forget the compelling counterargument that the best way for companies to benefit society is for companies to simply stick to their knitting: Maximising profits for their owners. “Why are you taking my money to do good things for society?” asks Karnani, who supports what Cummins does but still questions the universality of its philosophy. “A manager is in no position to make these tradeoffs on what is good for society. Companies should stick to making profits.”

Cummins managers wave off these kinds of philosophical arguments. In an era of cash-strapped governments and increasing need for well-educated workers at every level, what they’re doing is pragmatic, not just altruistic.

“We don’t think we have the perfect answer,” says Linebarger. “Nor do we sit back and think, ‘Let the government do it.’ We think companies can help. And we can help because we know what skills people are looking for… We have skills, thoughts, knowledge, energy, all things that can be positive. In partnership we can be useful. We try to find those areas where Cummins has good things to offer, and the community needs it.”

The decision to expand in Seymour wasn’t easy for Cummins. The likely choice was Pune, India, where costs are cheaper and where Cummins already has a huge manufacturing base. But for a brand-new product—especially one as sophisticated as the Hedgehog—there was a clear advantage to manufacturing it close to the engineers who designed it. Still, it was hard to justify further investment in Seymour. The existing plant had been targeted for closure at least 10 times in the past 15 years because Cummins has had a hard time finding qualified employees.

So the company decided to do what it always has done: Fix the problems. As in Columbus it teamed up with Seymour educators to begin drafting a school-improvement plan that would promote growth. Meanwhile the Lilly Endowment, a private philanthropic fund that liked what Cummins was doing in Columbus, gave $50 million to fund a broader initiative to create a “regional lifelong learning system” for a 10-county area of southeast Indiana. The goal is to assist each person in the area to move up at least one level from an education or career standpoint, particularly in the fields of manufacturing and health care.

It may not be everyone’s cup of capitalism, and it may take years to see results, but to Darren Wildman, manager of the Seymour plant, it makes perfect sense. “Higher graduation rates mean more pull for industries, more jobs, better jobs, more taxes,” he says. “And better communities.”

(This story appears in the 16 May, 2014 issue of Forbes India. To visit our Archives, click here.)

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