Interview - CNH's Jim McCullough
By Chris Sleight10 November 2010
Although Jim McCullough is known in the industry as a 'Case man' - he joined the company in 1989 as a regional sales manager - an internal reorganisation by parent company CNH last April saw him take on responsibility for all of the company's construction equipment operations. This includes the New Holland brand and also Kobelco excavators outside Asia, the Japanese manufacturer being New Holland's excavator partner.
Like all manufacturers in the equipment industry, CNH has been working hard to meet the requirements of the Stage IIIB (Europe) and Interim Tier 4 (US) engine emission requirements that will come into force for different engine power bands at the start of 2011, 2012 and 2013. It is something the equipment industry has been preparing for over several years, but the question of whether end users are aware of the change, and the higher cost of machines is a difficult one.
"I think enough has been said. People don't necessarily understand the technology change, but they understand it will cost more and they're willing to pay for it. It's already happened in the on-road truck market, and if you look at the number of people moving to hybrid automobiles and so on, there is a significant part of the population that is in tune with these issues," said Mr McCullough.
He continued, "From a commercial stand point, coming in on a recovery, what is the customer perception on the value? I don't have the answer to that. We don't know what the final cost implications are going to be yet, but there will be higher costs."
And it is not just the views of the machine's first owner that is a concern, as Mr McCullough explained, "A machine sometimes has three owners - the first for 5000 hours, the second for 10000, and after that we lose track of it. So ultimately the comment on the quality of any one machine comes from several owners. I don't know the answer to those long-term questions."
Mr McCullough's mention of hybrid on-road vehicles is an interesting one. Like many other construction equipment manufacturers, CNH has shown prototype hybrid machines at various trade shows over the last four years. However, it is only Komatsu to date that has put a machine into series production.
CNH, like most others has not gone beyond the prototype stage, and this is understandable given the huge fall seen in the global construction equipment business over the last 18 months. But beyond issues of demand and the cost of tooling-up for manufacture, Mr McCullough sees other deeper questions with the technology.
"From a contractor's standpoint, I think they're waiting to see what technology becomes a standard. I think a percentage of the market will go in that direction, but I think it will depend on their experiences with their hybrid automobiles.
"I also don't think we're done yet in terms of science. If you look at the power source we use, its still a 1920s to 1930s metal block. How much technology can you put on that, and how much energy can you pull out of that?
"So I think there could be some very exciting times ahead. As a simple example, there are mining shovels today that are electrically powered, that work fine. If you go back to the 1960s and 1970s, Poclain was using a lot of electric motors. So I think there is a lot of technology that could be used. The question then is how you package it on the machine. A lot of our business is governed by road restrictions and how easy it is to move these things around," he said.
In the more immediate future however, Mr McCullough sees the global equipment market improving.
"It's split by region, the strongest being Asia Pacific and Latin America, then from an optimism point of view I'd say north America. Then there's a slow crawling recovery in Western Europe. The really good news is that you can see the impact of stimulus packages in places like China, where business is up something like +77%. They almost have too much going on, because we know what the end of that roller coaster ride looks like, and it makes me nervous that they've maybe over stimulated," he said.
Indeed, the strength of the recovery in key developing markets has seen CNH take some interesting steps, as Mr McCullough explained, "In Brazil we've just re-opened one of our factories that we closed in 2000 because we didn't need that much capacity. Brazil has serious projects all the way to 2016 as a result of different things."
But the recovery is not without its difficulties, and the lack of credit remains a barrier in the wider region. "The biggest problem in Latin America region is financing. Part of the issue is that captive finance companies like ours have 'x' amount of money to lend, and we try to put it where the least amount of risk is. However, we think there are bigger business opportunities there (in Latin America), but the question is who is going to finance it? The other guys you see in those markets have come back, but slowly, and like us are putting money where the risk is least," said Mr McCullough.
"In North America there is a good sense of optimism. Contractors have better work levels. There is more competition for the work and on a decent sized job you may see nine or ten contractors bidding for it, which I'm sure is putting pressure on margins.
"I don't think it's had an impact on expansion of labour or machinery yet. The contractors had a lot of machinery, and I think we'll see rental come back first in that market, then rent to sell, then it will normalise. So against the volumes we saw in 2007 it's still not healthy, but it's better than last year."
The downturn hit all manufacturers in the industry hard, but according to Mr McCullough, CNH is now coming out of these difficult times, and it may have learnt some useful lessons in the process.
"As far as our company is concerned, the plants are all running and we're healthier. Part of the reason we're healthier is that in the -50% downturn we took out -75% of the production to take the slack out of the chain. In all parts of CNH last year, we took out -50% to -60% of our inventory and -50% to -60% of the dealer inventory.
"I'm trying to be an apostle for a new type of supply chain discipline. Now we've taken it down, we can see we can live on three months' supply - except occasionally when you have to wait for excavators from Japan and so on. The trick is to get the dealers to turn this inventory quicker, and then backfill it from more flexible factories. That's what we'd like to do on the distribution side as an over-arching strategy, so our dealers are not spending lots of money on interest debt.
"We've tried having pools of equipment, which has worked OK on some products. It's not so easy to do with the bigger machines, because there are lots of different applications and you end up spending a lot of money to swap configurations or change booms or whatever."
One of the things equipment manufacturers like CNH have strived for over the years is to produce a 'global model' that could be sold in any part of the world, give or take a few options and alterations for local applications, laws and working practices.
That is looking more and more unlikely because of the escalation of engine emissions legislation in the US and Europe. This makes machines for these regions more advanced and expensive than is ideal for emerging markets. Another problem is fuel quality - Stage IIIB engines require very low sulphur fuel, which is not widely available in the developing world.
So for the meantime at least, the idea of a global machine seems remote, as Mr McCullough confirmed. "Philosophically that's where we'd like to go, but realistically it's more difficult because of the engine scenario. But when we were down in Brazil to open the plant president Lula said 'I'm going there' with low sulphur fuel. It won't happen tomorrow, but Brazil would like to be an environmental leader," he said.
Talking to Mr McCullough, you don't so much come away with a sense of his definite vision for the future, but more of a stream of ideas of what the future might hold. Engine emissions and developing at least a partial alternative to the diesel engine are a focus for CNH as they are for all manufacturers, and here the company has an advantage by being majority-owned by the Fiat Group.
As Mr McCullough alluded several times, the construction equipment sector usually takes its lead from on-road vehicle manufacturers, which have more resources to develop technologies and also tend to be hit by new legislation before the off-highway sector is. So be it electric construction machines, hybrids or even hydrogen-powered machines, the truck sector will probably provide the pointers.