OUTSOURCING: PAIN AND PROFIT
Global economy strains loyalty in company town
Cummins Inc. has long driven the economy of Columbus, Ind., but it says shifting work abroad, to India and China, is necessary to survive

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By Michael Oneal
Tribune staff reporter
Published April 4, 2004

COLUMBUS, Ind. -- This company town, an hour south of Indianapolis, has never shied from the future.

At its heart, a rectangular bell tower rises high above the grid of tidy streets as if to remind the surrounding corn country that progress is just as important as tradition.

It is one of two stark shapes that make up the First Christian Church, which anchors one of the country's most important collections of modernist architecture.

But as Cummins Inc., the town's biggest employer, responds to the historic shifts rocking the global economy, Columbus, Ind. is discovering that embracing progress can be a messy business.

Cummins, which makes diesel engines and generators, has joined countless other companies across America in radically transforming itself. It has idled thousands of employees and shifted work to Mexico, China and India.

On Friday, the Labor Department reported that the nation's heated economic recovery may finally be bringing the job market back to life. But huge gains in productivity at firms like Cummins mean they still aren't hiring with the vigor of past recoveries.

Many of the jobs lost over the last several years are gone for good. And that has already taken its toll on towns like Columbus. After years of more gradual cuts, the loss of lucrative white- and blue-collar work is diluting a once-thriving middle class. A growing gap between haves and have-nots is creating social strife and bitterness. Even many of the employed are working frantically or jumping on the retraining treadmill to help save their jobs.

It's the same dilemma that has inflamed strident, election-year debate about job loss and outsourcing. But what's happening at Cummins shows the issue is less black and white than the blaring headlines would suggest.

In Columbus, a tightly knit community of about 39,000, the story of globalization is not a tale of "Benedict Arnold CEOs" or macroeconomic theory. It's the story of how an intimate relationship between company and town can clash with the relentless march of technology in a world with shrinking borders.

Columbus has adjusted to the new reality and remains a healthy, prosperous town. But the paternalism that once sustained it is no match for the incessant demands for cost-cutting at Cummins. Markets like China and India present rich new opportunities. To ignore them likely would put the company, and all its jobs, at risk.

"An employee in India is just as important as an employee in New York, as an employee in China, as an employee in Brazil," says Cummins Chairman and Chief Executive Tim Solso. "That's a maturation for this company. If you believe that if you don't take these actions you won't survive, then you take them. But you take them with as much dignity and respect as possible for the workforce and communities where you operate."

Not surprisingly, sentiments like those have been a hard sell for Solso, 57. That much was clear just before Christmas last year when he paid a visit to the Cummins Office Committee Union to discuss the decisions that have shaken the company.

Having ascended to the top spot in 2000, Solso has "suffered the [community's] slings and arrows" ever since, says Jean Blackwell, the company's chief financial officer. The office union, which has borne the brunt of Cummins' white-collar outsourcing, has been a special source of tension.

As the meeting heated up, says Patrick Black, the union's chief area representative, Black raised his hand and said, "My grandfather retired with 38 years at Cummins. My uncle had 28 years." He went on to lament that the layoffs and outsourcing threatened a way of life that had existed in Columbus for years.

When Black was done, Solso leaned forward on his elbows and cut to the chase.

"I hear from a lot of my people that I hate the union," Black recalls Solso saying. "But that's just not true. I've extended an olive branch before and it wasn't accepted. There are things that I can control and things that I can't. I have to focus on what I can control. I've got a business to run."

Solso confirms this account.

Legacy of social responsibility

The notion of generation after generation working at Cummins is a sacred one in Columbus. It originated with J. Irwin Miller, whose family used a banking fortune to help launch the company in 1919.

Cummins began as the dream of Clessie Cummins, who took the engine technology invented by Germany's Rudolph Diesel and adapted it for trucks. As America's network of highways exploded after World War II, so did the Cummins Engine Co.

Miller, now 94, ran the company during those go-go years and became an iconic figure in Columbus. A staunch Republican and admired businessman, he also was the first layman president of the National Council of Churches and a vocal champion of civil rights and diversity.

Working with Robert Kennedy he supported efforts to desegregate the South and, later, rejected a potential Cummins joint venture in South Africa. Beginning in 1954, the Cummins Engine Foundation began donating 1 percent to 5 percent of pre-tax profits to community organizations. According to a 1997 book about the company's history, Miller also insisted on benefits programs for employees.

"We don't have to worry about being accused of `coddling' a turret lathe--or even a good hog which we are fattening for market," he once wrote in a memo to his top managers. "But [businessmen] are normally afraid of `coddling' an employee. ... So far, I think good hogs have received rather better treatment than good people."

Miller's dedication to the community is legendary. He began the company's program of encouraging church groups, school boards and other civic organizations to hire famous architects to design the town's public spaces. Cummins paid the architects' fees but left the choice of architects and designs to the local groups.

He also stepped up to defend the town's interests against Wall Street's more banal side in 1989 when his family fended off a takeover bid from Britain's Hanson PLC, one of the era's most notorious corporate raiders. In a move hailed nationally as a triumph of principle over greed, Miller and his sister Clementine ended the threat by paying $72 million, or $5 million above the market price, to buy Hanson's nearly 10 percent stake in the company.

When Tim Solso took over in 2000, this is the lofty vision of corporate responsibility he inherited. He became the third in a string of tall, fit men with Harvard MBAs to run the company since Miller retired as chairman in 1977. Having spent his entire career at Cummins, he is steeped in its culture. He still makes the pilgrimage to Miller's landmark modernist home along Washington Street in Columbus to have lunch or coffee and talk about issues facing the firm.

But in difficult times like these, it isn't easy to follow a legend.

Solso's predecessors, Henry Schacht and James Henderson, were almost as active as Miller in community life. The current chairman, by his own admission, "is a more private person."

Irwin Miller "was just an incredible guy," Solso says. "Henry Schacht and Jim Henderson were of the same mold. I'm not as visible as they were. But that doesn't mean I'm any less committed to the community."

Black of the Office Committee Union gripes that "[Solso] is an East Coast, bottom-line type of guy. [Miller, Schacht and Henderson] were engine guys."

But the truth is the new chairman runs the company during a very different moment in history. With global competition and Wall Street scrutiny at an all-time high, the new generation of executives has a different set of challenges and operates within a different timeframe.

Big losses come quickly

For Cummins, the competitive ground shifted soon after Solso took over and the economy began its collapse into recession. As demand from truckmakers weakened, Cummins endured a 70 percent drop in heavy-duty engine sales in the space of a year. Sept. 11 hobbled the company's generator unit and in 2001, Cummins spurted $103 million in red ink.

To avoid disaster, Solso told his lieutenants to accelerate a restructuring program already under way. By early last year, he had cut 17 percent of the company's workforce and had closed or consolidated 14 plants. The good news was that a factory in nearby Walesboro, Ind., continued to benefit from a lucrative contract to supply engines for the Dodge Ram pickup.

But work from the Columbus Engine Plant, which lies in the center of town, had to be moved to Jamestown, N.Y., where Cummins has a newer, more efficient factory.

Solso knew this decision alone would brand him a traitor to Miller's legacy. But after a visit with the former chairman to secure his blessing, Solso moved ahead anyway.

"It was awful," Solso says. "That plant had been here 80 years and I had lived here 30 years. There were all kinds of questions about Cummins' commitment to Columbus and Tim Solso's commitment on a personal basis. But that was a decision that saved the company $20 million a year. It had to be made."

These days, the fastest growing markets for Cummins engines aren't in the U.S., but in China and India, where the startling pace of economic development means rich and expanding opportunity. Almost half of the firm's $6.3 billion in revenue and all of its $50 million in profits came from overseas last year.

Pressures grow, margins dwindle

At home, a mature market for heavy-duty truck engines means success boils down to one thing: who has the best technology at the lowest cost. For the last decade, global truck manufacturers like Volvo and DaimlerChrysler have been consolidating into massive companies that can, and do, squeeze Cummins for every last penny.

The Environmental Protection Agency, meanwhile, has instituted strict new standards that have required drastic reductions in diesel engine emissions. The result: Cummins has been thrust into an expensive race for compliance with its archrival, Peoria-based Caterpillar Inc.

These twin but opposing demands for cost-cutting and innovation create extraordinary pressures. And with Wall Street's persistent demands for short-term results, there isn't much breathing room.

"The way it works is they're gonna get their cost reductions and we have to get ours," Solso says. "It's a natural knock on effect. If our existing supply base doesn't have the margins to give us price reductions we either lose our margins or we have to go someplace else. That means offshore."

What Solso realized was that the health of the enterprise had to take priority over the company's loyalty to Columbus. If the company founders, it won't do anybody much good. Health depends on many constituents: Wall Street, which provides it money to operate; employees overseas, who represent 43 percent of the company's workforce; and customers, who demand low costs.

"Cummins in the past has focused so much on taking care of its people that it has not focused on some of the other stakeholders," says Blackwell, the chief financial officer. "I think we got a little out of balance."

In this respect, Solso has become a numbers guy. But he thinks that is essential to making the right choices. If you are sure that a decision is based on hard analysis of what's best for the most people, then you can make it with confidence. Cutting jobs is "a very stressful and painful thing to do," he says. "It makes you think very hard about how you make the next round of decisions."

To make choices less emotional and more analytical, Solso has instituted the kind of data-driven, performance-oriented approach to business made famous by Jack Welch, the former chairman of General Electric Co.

The Welch system breaks a company's myriad tasks down into measurable bits and forces managers to use the data to ask how they can do more with less. Coupled with advances in technology and the availability of cheap, high-quality resources in other parts of the world, it inevitably means eliminating many jobs in the U.S. and shifting some work abroad.

Even before the recent crisis, Cummins had been working hard to find cheaper suppliers of engine components. In the wake of the downturn, the company formalized that process by setting up new buying offices in Shanghai, Prague, Czechoslovakia, and Pune, India, to ferret out new sources of everything from fasteners to oil coolers. Each office must spend $200 million overseas this year.

The effort has uncovered many high-quality suppliers Cummins never knew existed, and it has saved $450 million over the last five years.

But it also means Cummins has abandoned suppliers in this country. Until 1997, for instance, a big Columbus company called Golden Casting Corp. forged the company's heavy-duty engine blocks and cylinder heads. Then Italy's Fiat launched a higher-quality alternative in Mexico and promised Cummins drastically lower prices. Over a period of years, Cummins transferred more work to Mexico and Golden atrophied. In the 1990s, more than 600 people worked at Golden. But last September, the foundry shut its doors for good.

Larry Critzer, Golden's former vice president of manufacturing, says Fiat's Mexican foundry was selling parts for 30 percent less than Golden's costs. The Columbus company struggled to catch up by adding automation equipment and squeezing its own suppliers. It also persuaded its union to cut 10 percent in wages and 15 percent in health benefits.

"But even with that we couldn't make it," Critzer says. "We couldn't even touch 'em on price."

Drive for savings often trims jobs

Like dozens of companies across the country, Cummins also relies on a data-driven process called Six Sigma to root out the most productive ways to do everything from assembling engines to designing those engines in the first place. Six Sigma, which has saved Cummins $484 million since 2000, isn't intended to trim employment. But in the end, it often does.

A good example is a recent project designed to boost the capacity of a line producing "plungers," the parts that push diesel fuel into the piston chamber of a heavy-duty engine. The line was making 491 pieces per shift; managers wanted 1,000.

After analyzing the process, technicians modified one machine and bought new hardware for another. Now the line produces 914 parts per shift. That means Cummins doesn't have to add employees as business bounces back.

Improvements like that have gone on all over the company during the long, dry spell. Streamlining the company's computer applications means much of it is now being administered in India. Functions like billing and accounts payable have been consolidated and standardized across the company. The next step, says Blackwell, is to evaluate if many of these functions can be done more efficiently offshore.

But while the metric-driven environment improves profits, it also creates anxiety. Stan Woszczynski, plant manager at Walesboro, says everyone is constantly under pressure to cut costs. If they don't, the company has made it plain it would move the business someplace else.

The same holds true in the office. Managers regularly rank employees on performance. The top 10 percent are ranked No. 1, the middle 80 percent No. 2 and the bottom 10 percent No. 3. This last group is eligible for cuts whenever more are necessary.

"I think it just makes people feel bad," says one manager.

Outsourcing to India also figures into Cummins' drive to beat Caterpillar to the punch in meeting the huge coming cuts in EPA emissions standards. To help get there faster, Cummins is using low-cost Indian engineers to write software for the electronics that control its engines.

It has also set up a technology center in India to help accelerate its efforts to design and test engines on the computer. The process, called analysis-led design, can save millions of dollars and months of time by eliminating the need for prototypes, says John Wall, chief technology officer.

Cummins cut 20 percent of its technical center payroll during the downturn but recently has been hiring engineers back to help meet the Caterpillar challenge. Highly educated and highly paid, many are also veterans of the global economy.

Aleksey Yezerets, a Ukrainian engineer with a doctorate in chemical engineering, works 60 hours a week bent over a tangle of gas tubes and honeycombed ceramics. He's ferreting out better materials for catalytic converters that can help Cummins cut engine emissions.

"Meeting those requirements is extremely challenging," Yezerets says. "And `extremely' is not an exaggeration in this case. It's almost more than we can handle."

Yezerets, 32, moved to Columbus with his wife four years ago after working in an exhaust lab at Northwestern University. He is in high demand, given the shortage of engineers with his sort of expertise. Other companies call frequently, "but I'm not into hopping. We've built something here and I want to see it through," he says.

Cost-cutting and the threat of more outsourcing create plenty of anxiety in the organization, but having worked in Russia's cash-strapped labs, Yezerets says he's used to uncertainty.

"I'm very well aware of what's happening with the company. You should be blind not to see that cost-cutting measures might affect you. I may not like it, but that's an irrelevant discussion. We have to do it."

Foreign firms bring stability

A casual visitor to Columbus would have little idea that the town is going through such changes. Its restaurants are busy. Trophy houses keep going up on the town's West Side. Given the job losses, that's more than a little remarkable.

Besides the loss of Golden Casting last year, Columbus has suffered other big blows. Arvin Industries, another major employer, merged with Meritor Automotive in 2002 and moved its headquarters to Michigan. Other local companies have cut back. All told, 4,423 area jobs have evaporated since 1999, the equivalent of 11 percent of the town's population. The cuts have ranged from low-level production workers to executives.

Oddly enough, though, globalization can also explain the town's continued good health.

In the mid-1980s, when the nation's manufacturing employment began to decline, executives from Cummins and Arvin helped form the Columbus Economic Development Board. Its mission: to find other employment sources. And find them it did.

Since 1985, a former Cummins executive named Brooke Tuttle has managed to lure 51 new companies to Columbus, many of them from Japan. Toyota Industrial Equipment Manufacturing Inc. has a forklift plant here. Enkei America Inc. makes alloy wheels. NTN Driveshaft Inc. manufactures continuous velocity joints and plans to hire up to 500 people by 2006 as its business grows.

Over the years, the new companies have invested $2 billion in the local economy. More important, they have gradually added 10,000 jobs to offset the losses from other companies. That has held the county's unemployment rate to around 4 percent, below state and national levels.

"If we hadn't had those jobs, it would have been a disaster," says Tuttle. "It ain't been pretty and it hasn't been easy, but we're pretty proud of that."

But even with the new jobs, Bartholomew County employment has been shrinking in recent years as hiring at the new companies slowed and layoffs at Cummins and others accelerated. In 1999, Columbus-area companies employed 43,625 people. By last year, that number had dwindled to 39,202.

The quality of those jobs is shifting with the arrival of big-box retailers like Wal-Mart and Target. From early 2001 to early 2003, the number of low-paying retail jobs grew from 9 percent to 9.6 percent of the total. Higher-paying manufacturing jobs shrank from 40.3 percent to 36 percent.

The end result of all these changes is that average wages have shrunk over the years and families are making less. Median household income in the county rose from $40,196 in 1990 to $44,181 in 2001. But that was likely due to rising incomes on the top end and more dual income families on the bottom. Median income peaked in 1995 at $46,401 and has been sliding since then as jobs and salaries leave town.

Career track full of ups and downs

Some employees like Scott Sims are on a treadmill, working and then being laid off.

At 39, Sims stands 6 foot 7 and weighs almost 400 pounds. He made his living fixing cars until the early 1990s, when his brother Randy persuaded him to apply for a job at the Cummins Technical Center machining lab.

Sims knew his way around a machining center, but he didn't have the math skills required to work at Cummins. He didn't even have enough math to get into technical school.

To make up the difference, Sims worked with a tutor and spent a couple of years taking algebra and calculus at the joint campus of Indiana University and Purdue University in Columbus. But when he hired on at Cummins he had never had so much fun. Working in the tech center meant he was on call for designers when they needed an exotic part for a prototype.

"They would bring me a blueprint and say, `Can you make it?'" Sims recalls. "I would say, `Hell I don't know, but I'll sure try.'"

In 2000, however, his boss told him the job was being outsourced to a local machine shop. Fortunately, Cummins found another job for him as a "technical support specialist." But his pay dropped from $21.50 an hour to $17.20 and his job consisted of moving engines into and out of test cells. The worst part was working nights for two years and seeing his two children only on weekends.

Sims eventually landed a position as an apprentice in the technical center and is earning $18.40 an hour--a good wage for Columbus. But his nights are now spent going to school again, as required by the apprenticeship program. Most of the classes are paid for by Cummins, but since Sims had to review some courses, he ended up paying $1,120 himself.

These days, Sims' wife has a good job at the local hospital and they got a decent tax refund. But he borrowed $15,000 from his retirement plan and $18,000 from the bank to build a back yard machine shop just in case he has to make it on his own.

"What we decided is that we'll build our own safety net," Sims says. "For five years it's been one step forward and two steps back."

Others not so fortunate

While Sims has endured plenty of hassles, he is still doing all right. Others, like Karl Nading, 55, haven't been so fortunate.

Until last September, Nading was pouring molten iron into molds at Golden Casting to make Cummins engine blocks. He had lost his wife to pneumonia five months earlier and was caring for three children plus his 17-year-old daughter's baby girl.

He started at Golden 20 years ago hauling sand and scrap iron out of the foundry's basement. His wages peaked near $20 an hour in the 1990s. He was making $12.50 when the doors closed.

Now the family lives on food stamps and three aid checks a month totaling $900.

During the day he drops his granddaughter at a day-care center set up by the high school to help the growing number of unwed mothers among its students. For solace, Nading has become a regular churchgoer. He is also active in Alcoholics Anonymous, and has been sober for 21 years.

"I don't have time to drink to tell you the truth," he says.

Still, Nading is upbeat. He misses his wife terribly and, of course, worries about the kids. "Sometimes I feel like I'll just give up," he says. "But if I stay busy, it's not too bad."

Nading is a regular at a church-based aid society called Love Chapel. He picks up canned fruits and vegetables, bread and diapers for the baby there, and his children participate in the school's hot meals program.

Increasingly Love Chapel is being called on for assistance. Last year it helped almost 2,600 households, an 18 percent increase from 2002. Requests for food rose 7 percent, but requests for help with rent, utilities and other financial matters jumped 64 percent.

Elizabeth Kestler, who runs Love Chapel, notes that 60 percent of those families had a wage earner at home. And the average wage for those requesting financial aid has gone up, a signal that even people with reasonable jobs are in trouble.

Larry Perkinson, student assistance director at the Bartholomew County School Corp., has seen similar trends. Between October 2000 and February 2004, he says, the percentage of students requesting free and reduced-price lunches grew from 27 percent to 34 percent. Ten years ago it was 20 percent. Participation in a program that helps children get school books jumped 10 percent.

"There's been a tremendous change," says Ruth Anne Rape, the director of the Columbus Housing Authority's Family Self Sufficiency unit. "Columbus was always seen as an affluent community. You just didn't have a growing number of families living on the edge."

Solutions emerge from struggles

Tim Solso is troubled by the changes he's seen around town. "There's a tension in the community that's greater than it was before," he says.

That tension could be seen a couple of years ago when a group called the Taxpayer's Association helped defeat a $150 million bond issue to build new schools that had been backed by Cummins and others.

With the middle class under siege, "the extremes create a greater debate because there's nothing in the middle to temper it," Solso says.

Doug Otto, the head of the local United Way, adds that the nation's epidemic of layoffs and corporate scandals has broken people's faith in leadership.

"We got rid of loyalty," Otto says. "There's almost a backlash that says we don't have to pay attention to these guys anymore. I think the change we've seen is the tip of the iceberg."

It's also true, however, that Columbus is adjusting to its new reality. The Japanese companies have stepped up to help support community groups like the Columbus Indiana Philharmonic. Love Chapel is never without enthusiastic donors. Even some of the companies most displaced by Cummins streamlining have found new ways to thrive.

A good example is the experience of David Barker, chief executive of Columbus-based SIHO Insurance Services. He got a jolt when he lost Cummins' business in 2000 after the enginemaker consolidated its insurance nationally with Blue Cross Blue Shield.

Barker was shocked at first but says an early warning from Solso made all the difference. He laid off 47 people but used the time to reorganize his business. Working with the local hospital and physicians, he made coverage more affordable for small to midsize businesses that were being squeezed by big insurers. Today, SIHO has 700 of these smaller clients and Barker employs 147 people, 63 percent more than before the change.

Economists call that process creative destruction and for America, it has become the economic challenge of the early 21st Century. Some companies, like Golden Casting, will go out of business. Others, like SIHO, will find a new way to compete.

According to the 1997 corporate history, Irwin Miller saw that this sort of change was inevitable more than a decade ago, when globalization was still mostly a theory.

"We don't really know what the 21st Century is going to be like, except that it's going to be very different from the past," Miller said. "The experience we have is the experience of a world disappeared. It's gone. It's not coming back. And that means we have to look forward."

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Coming Monday

How Cummins and other U.S. companies are helping a city called Pune, India, blossom into a technology boomtown.

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