The semiconductor shortage making headlines largely because of its impact on global automakers’ production and profits is also adversely affecting off-highway equipment and diesel engine manufacturers. If the supply disruption – not just for semiconductors but other components as well – isn’t keeping executives up at night, it certainly is occupying an outsized portion of their waking hours.

“While Cummins has done a decent job, we have not gotten through it unscathed. I’m spending a pretty good chunk of my daily work now on updates with our supply chain,” Eric Neal, executive director of Cummins’ off-highway business, shared during a recent virtual press event to discuss industry challenges and trends. “It literally changes on a day-to-day basis, where we’ll be told that our supply for such and such component is out through such a period of time, then the next day we get a nice surprise. And some days we get bad surprises.”

No surprise, however, is that despite a challenging 2020 due to the COVID-19 pandemic, R&D investment has remained strong at Cummins. “Last year, we spent over $900 million just in research and development,” Neal said. “We are not taking our foot off the throttle in terms of our technical investments.”

Cummins is indicating to its shareholders that 2021 could be up 8-12%. But… “There’s a big asterisk by that – as long as we can get material to build engines,” Neal said. “We’ve got lots of demand right now that can certainly support that growth and maybe more actually.”

Many regions are driving this growth, including locations such as South America that have been down for a long time. Most of Cummins’ revenue increase in 2020 came out of China for both on-highway and off-highway. India also came on very strong. “China really was the superstar last year,” Neal said. “When every other region was in paralysis mode, China was sort of coming online before anyone else did.”

Supply chain resilience
Cummins was among a select group of companies invited to the White House in April to discuss the administration’s infrastructure plan and the global semiconductor shortage. Following the meeting attended by Cummins chairman and CEO Tom Linebarger, a company statement acknowledged that its markets’ “rapid rebound” from the pandemic-induced low point resulted in supply chain constraints, “with the most pronounced being the chip shortage.”

Continued strong demand through the first quarter of 2021 perpetuates the problem. “The demand for the off-highway business is coming in at a much stronger rate than anybody could have predicted,” Neal said. “As a result, the forecast that we get from all of our customers was off pretty drastically.”

Competition among industries – consumer electronics, aerospace, automotive, etc. – also constrains the supply chain. “A lot of the same microchips that are used in [control modules], whether it be for a pickup truck or a television or even a diesel engine, we are now competing for the same amount of capacity,” Neal said. He added that “there’s not a whole bunch of microprocessor chip manufacturers out there that meet the standards for our business. They’re very specific.”

With its global network of manufacturing plants and suppliers, Cummins has been able to shift some of its supply around “to maintain a reasonable amount of continuity – probably better than some have in the rest of the industry,” Neal said. For example, “if we have a microprocessor that we need on a Cummins engine, but there’s a transmission shortage at that OEM, we don’t want to waste that ECM or that engine that’s going to just sit stagnant in a warehouse somewhere.”

Neal noted in late March that the shortage would likely continue “for several months to come.” The lead time for microprocessors – to process and get the material through the system to build wafer boards and all the different subsystems to grade – can take up to six months, according to Neal. “That means the forecast that we put into our system six months prior, that’s the base supply that we’re dealing with now.”

While electronics have posed the main supply chain challenge, other components can be a limiting factor depending on the day, Neal shared. “Two months from now, is it going to be castings and forgings? I don’t know. It depends on how the operations within those Tier 2 and Tier 3 suppliers go. The honest answer is it’s a very uncertain dynamic and it changes literally every day.”

Neal suspects many in the industry will “replay the tapes from 2020” and reexamine their supply chains: “‘Do I have the right portfolio of suppliers? Do they have backup systems? Do we need to be dual-sourced where we can?’ Now that all comes at a cost,” he said. “There have been some awakenings [in supply chain management] in terms of the trade-off between cost and sustainability during times of pandemics or other natural disasters happening around the world.”

Emissions convergence delayed
A trend toward more “nuanced” global emissions regulations is impacting product planning and timing, according to Neal. “A few years ago, many of us in the industry were talking around this concept of ‘global emission convergence’ happening amongst us. And we thought it was going to be happening probably in the next five years,” he explained. “What we’re actually seeing now is a little bit different signal. Where we thought China Stage IV was going to be close to [EU] Stage V and [EPA] Tier 4 Final, for example, we’re now seeing a lot of nuances being added into some of the regional emissions.”

China also has delayed its emissions regulations multiple times. The latest China Stage IV date is now set for December 2022, instead of an expected 2020 implementation. “More technologies are released during that two-year delay, which means that the product plan changes in that period,” he said, noting that historically most technology and product changes occur in conjunction with an emissions change. “Those delays create this bubble of ‘Well, what new technologies are going to come within it when it actually goes in place? Do we go ahead and add more technology advancements at that time? Or do we just wait until the next emission change?’ It’s a real tough deal.”

The lofty goal of having one global emissions standard, which would provide a lot of scale for an engine manufacturer, is still alive – just delayed. “We still believe that there will be this global convergence. But we’re now thinking it’s probably closer to the 2030 timeframe,” Neal said.

Engine downsizing in the construction and agriculture markets continues to be a prominent trend. Neal gave the example of a 20-ton excavator that traditionally utilized a 6.7-L as the mainstream engine now more regularly employing a four-cylinder engine for the same application. “Vehicle efficiencies have gotten better, but from an engine perspective, we’re just getting a lot more performance and a lot more robustness out of smaller packages,” he said.

And of course, Neal broached the ever-popular topic of electrification and fuel cell power. “Unlike a traditional diesel combustion engine that has a wide range of performance and efficiency, hydrogen is a little bit more tailored to a specific output,” he said. “I think where we’ll see adoption rates happen faster with hydrogen will be where you have large-scale applications.” Rail transport is one such promising application.

It’s a similar situation with battery-electric machines – the markets that are moving the fastest “tend to be the ones that have these ecosystems where you have charging systems [at the site] and enough scale to support the investments,” Neal said. Forklifts are a great example, where electrification has been employed for decades. Other applications poised to see an uptick in adoption rates, Neal said, are port handling equipment and small construction equipment, including in the rental market.

“We are getting more requests than we know what to do with right now around exploring and partnering on these [non-diesel] prototypes and pilot installations,” Neal said. “But diesel is not going away anytime soon. And I think it’ll be around forever, but our mix will change.”