Cummins Inc. (CMI) Management Presents at Raymond James Associates 42nd Annual Institutional Investors Conference- Transcript

Cummins Inc. ( (NYSE:CMI) Raymond James Associates 42nd Annual Institutional Investors Conference March 1, 2021 3:50 PM ET

Company Participants

Srikanth Padmanabhan - Engineering Head

Jack Kienzler - Investor Relations

Conference Call Participants

Felix Boeschen - Raymond James

Felix Boeschen

Great. So let's go ahead and get started with the next presentation. So for those they don't know me, my name is Felix Boeschen. I cover some of the truck equipment and specialty vehicle names here at Raymond James.

This afternoon, I should say we're very excited to have Cummins with us. With us, we have Srikanth, who leads the engine business, the flagship business of Cummins. We also have Jack Kienzler on the Investor Relations side with us today.

But before we kick it off, I did want to just give a quick reminder to everybody, we want us to be as interactive as possible. So feel free to use the Q&A function on zoom, I think it should be in the left upper right hand corner and we can we can weave those into the conversation today. But with that, maybe I thought I'd go ahead and hand it over to you Srikanth, maybe for a little bit of an update on comments.

Remember, this is a little bit more of a generalist conference. So if you could just help us set the stage a little bit background and comments some of the key end markets you touch and maybe what you're seeing in the current environment, and we can kind of take it more interactive from there.

Srikanth Padmanabhan

Thank you, Felix. And thanks, everybody, for joining us today. Just by way of background, let me tell you about myself. I've been with the company for 30 years, and I've spent three of the four business segments that we operate in. But before I get to myself, let me tell you, Cummins is an industrial company that just celebrated its 100^th anniversary in 2019 February. It started in 1919, in Columbus, Indiana. And we've now expanded and we are all over the world with over 20,000 employees and revenues of about $24 billion in 2019 that we have. And we participate in a wide variety of markets in the truck and bus in a large way. But we also participate in quite a bit of industrial markets as well as whether it is mining, construction, ag and a few other oil and gas and other markets as well. We also have quite a bit of after-sales and market presence, who our distribution network that is predominantly wholly owned and a little bit of that is independent distributorships.

But we ask ourselves what is Cummins as a company from a marketing model? We would say it is a Tier 1 OEM supplier plus an independent aftermarket. An independent aftermarket is typically a company like Bridgestone Firestone, that they sell tires to a wide variety of network. A Tier 1 OEM supplier would be Intel supplying chips to your PCs, who the PC maker makes them the closest to us that you are an independent Tier 1 OEM supplier and an independent aftermarket is Bosch.

If you think of us, we would be that component provider and also has an independent aftermarket Bosch would be the company that could come to you. We're located around the world. And we have big presence in North America, in China, and in India, and in Brazil. And we opened up in all these places far before globalization was a big thing. In India, we opened up in 1961. In China, we opened up in 1936. And in Brazil, we opened up in 1972, so a huge, huge presence. And I've spent my time in three other business segments like I was talking about in Columbus, Indiana, in Tennessee, in Mexico, as well as in England and then back over in Columbus right now.

Felix if you may give me two more minutes, if I could just talk a little bit about setting the scene for what it is before we get into the questions. If you ask me 20 years ago, if I'd sat in this room and talk to you about what are the secular trends if we are having a tough time, I'd have said it's globalization, its emissions, its infrastructure and lack and availability of power. We converted those tailwinds effectively and us to grow from almost $13 billion company in 2010 to $24 billion Company at the end of the decade, earnings per share at about $5 at the time to $15 at the end of the decade, and EBITDA dollars from $2 billion to $3.7 billion.

Fast forward 20 years that I'm sitting with you right now. And if you ask me, what are the tailwinds that are behind us right now. It could be captured those tailwinds if we had a similar growth platform, idea it would be yes, this is what we call as case on activity, automation, shared subscription services. And we could substitute for either electrification or zero emission.

And what is happening as most of our OEMs are starting to see that they have to spend money on this and all these four things. And if they have to spend, they need to spend about 3% to 5% of their sales on these things. And so as they are starting to think about an influence product changes and other things, they're saying, could we partner with somebody that could actually help us in this journey. Then they are turning over to Cummins and this is why the recent announcements that you've seen one with the [ZuZu] and the one that we announced last week on Daimler is starting to pay-off the way that we have been talking about it for the last couple of years.

The second point that I would make is that this change to zero emissions or road to zero is not a light switch event. It's going to take about 30 to 40 years before it all happens where in the world is a decarbonized world. And as you've seen, Xi Jinping from China has said that as a country, they want to change by 2060, there is a new net zero paper for Americans to change to 2050, let's say it has to be net zero, we have to spend $2.5 billion today and another $10 trillion every decade between now and 2050 for us to get to this net zero Americas. Which means that our curtail is long, we're able to capture with market share advances, we can actually get the benefit out of it as opposed to it being a light switch event.

And the last point that I would make is that for us to be a credible player, because of the fact that today's diesel powertrain are about $40,000 if you were. Responding fuel cell electric powertrain today is $350,000. But we need to start investing today in battery electrical fuel cell electric that are doing. But equally, we want to be able to move from this diesel, natural gas to low carbon fuels to hybrid which is used to mild hybrid and strong hybrid, then into range and external electric vehicle before it gets a battery electric vehicle. And that journey is what we are going to be able to talk to you today about to say why this is compelling enough. And you can actually even share invest in the right technologies, invest only in new power technologies. And we provide a roadmap to zero emissions together and that being said, Felix over to you.

Felix Boeschen

Yes, so maybe I'll take it from there. First of all, thanks. Thanks for that bit of intro. I think you kind of hit maybe all of my key topics already in your intro. So maybe I'll just start with something you mentioned. But obviously, as we think about the backdrop here over the next 3, 5, 10, 15 even 20 years, the OEs are faced with harder and harder decisions to make where their R&D dollars are going, as we think about electrifying powertrains. But also there's still a very large part of diesel obviously, in the market today. And so I thought maybe to start-off, we could talk about your big announcement from last week. And that is obviously the announcement with Daimler on the medium duty engine partnership. So first of all, could you maybe unpack that partnership a little bit for us what it entails exactly and then the timeline of it over the next coming years?

Srikanth Padmanabhan

Yes, Daimler and Cummins has been a partner for a number of years. 80 years is what we have a partnership with. We started with Freightliner in the U.S. for a long, long period of time if you've been delivering [Indiscernible]. And we've been delivering products both in the heavy duty world as well as in the medium duty world. This partnership of MOU, the Memorandum of Understanding that we announced last Monday was primarily about the medium duty cooperation around the world. It means that for future medium duty engines that they've been producing now, they would stop their investments on R&D and as well as more time on their production. They would move over to engines both from a design perspective that we would provide as well as the production that would happen.

Where it would start first would be as U.S. moves to our 2024 and into 2026. That's when it will happen in North America because already they buy from us there is no much vehicle integration that we need to do it's almost like a drop in the -- that we do and that's what would happen in that timeframe.

Equally they produce today in Europe and that's about 10,000 units or so that will happen in North America. In Europe, this would be where they produced it engines in Mannheim, which is just about 30 minutes outside of Frankfurt. And they produce their medium duty engines, heavy duty engines, they do machining and they do foundry as well. And what we would do is they would open up a line there in one of their existing factory locations in that side. And we will produce our medium duty engines, it's about seven [Indiscernible]. This would be roughly about 30,000 to 35,000 units.

They also ship their medium duty engines to Japan which is 2,000 units that we would probably do that to continue that for their Japan needs. And then overtime, in Brazil and in India as they need as emissions change, they would need products that that need to be serviced both for Brazil and in India as well. India has about 30,000 units that we would have in Brazil would be 45,000 units that we would have about have. And that's how it's going to play out over the next several years Felix in terms of what this partnership will do. This is not limited just to that we are having conversations about other things, whether it's components that need to go or whether it is other kinds of engines that would be there as well as other new power technologies as well that we will partner with and so we are super, super excited about this particular partnership. Not only has it had the longevity but we hope that the whole world are those who have that longevity.

Felix Boeschen

Okay, so that was super helpful. I just want to make sure I caught all those numbers because you guys threw some or you threw some pretty interesting stuff out there. I caught 10,000 North America about 30 to 35 Europe and other 30. India, I think the piece I'm missing is Brazil. I'm curious how you how you gauge maybe the total incremental opportunity on the medium duty side?

Srikanth Padmanabhan

About 40,000 to 50,000 units is here Brazil is. And the way to figure that out is that how do they happen in terms because that Brazil is, for them they've been in the market for a long, long period of time. And so we need to figure out the right cost structure that can help them as well as help us as well. And we have been there for a long period of time as well.

Felix Boeschen

Okay, and then obviously this announcement is the second one is, you mentioned in your opening remarks. I'm curious if we bring the conversation maybe a little bit to a higher level, I think this is something you all talked about at your 2019 Analyst Day a little bit. And it's really this idea is that if you look at the top 20 OEs in the world truck OEs, I should say, I believe your market share at the time was around 16%. And you feel as though as again these OEs have all these different choices to make on R&D spend that that number should go up over time. So I guess a two part question on my end here. A, can you give us an update maybe where that market share stands today?

And then B, you as the head of the engine business, curious if you could update us on how those conversations have tracked over at least the last two to three years? It clearly seems like Daimler is a big shoe to drop. Does it feel like this could be a catalyst for more to follow suit on that any sort of incremental color would be super helpful?

Srikanth Padmanabhan

Yes, I think so. I think of this announcement similar to when General Electric made the announcement in 2000 saying that they are going to outsource IT. They said 70% of that will be outsourced, so that 70% will be offshore and only about 30% of that will remain onshore. And I remember sitting in Cummins at the time. And our CEO at that time [Indiscernible] say if GE can outsource IT, why can't Cummins outsource IT, which is a much smaller company, if you will and we don't have scale. We should not be in the business of doing some of these things. But there is going to be some leftovers there where people are going to say in the medium duty space Felix, Hammond’s producers last year about three quarter of million units or so.

Also second is Daimler which produces about 100,000 units. They don't have necessarily they feel like this is an appropriate thing to do. The rest of the players at all far less in terms of the number of units that they do not have scale, but yet they hold on to it. It's because of the fact that their heart is in it as opposed to the head, right? It's because it's very hard when started. This is where Rudolf diesel started with MA and Oxberg just to [Indiscernible]. And those kinds of things, even including the Japanese OEMs when you think of them, it is almost there. How do you call it pride if you will, that we got to own department.

And my hope is that this will start shifting and same thing happens in India and China. I go to India, I go to China quite regularly before of the pandemic and you see that there is still hike for the last one-tenth of 1% on fuel economy because that they feel that that’s what makes the difference for them, right. And as electrification, as conductivity, as automation happens in the research dollars are few and research engineers are few, when they start to realize that this can happen, maybe we should also be thinking about so that point what we will see.

As for the conversations that you said five years ago, you can ask me how many of my counterparts that are not doing these divisions, I'd say a few. Today on a regular basis, I probably talk to my counterpart of much more often. And it is both in the on highway space, as well as in the off highway space. And that's the interesting thing that we don't necessarily talk much about that we had -- construction many of these players actually lack scale, but they've been in it because historically, they've been in it. And now they're starting to think, what should I go and do. And now they are starting to think about smart machining, precision Ag, those are the things that I need to be worrying about not necessarily all the powertrain stuff that I need to be worrying on the vehicle itself. And so how we progress and how we can do, I'm starting to see far more opportunities [Indiscernible]. And the reason is because emissions regulations are changing. And they need to make these decisions now for 2025 to 2027. And if they don’t then they are going on with the status quo, which is very difficult.

Felix Boeschen

Right. And I do want to talk about emission standards with you a little bit later on, I think as it relates to your components business also. But maybe as we maybe wrap up this conversation a little bit. So this was obviously a big deal on medium duty side. And as you mentioned, you guys are already the 800 pound gorilla in that market. I think you could make an argument medium duty moves quicker on electrification. So maybe there were increased incentives to think about a third-party solutions provider. Curious of maybe you could talk to us about what you're seeing on the heavy duty side. And how those conversations along the same lines increasingly stretched R&D budgets are trending for you?

Srikanth Padmanabhan

Yes, in the heavy duty space, Felix, I don't think of it as a homogenous market like medium duty, in this three markets, I would say that is a baby-eight as we say in the U.S. market, which was predominantly a 10 liter market. And then there is a mid bore heavy duty and a big bore heavy duty that is there. My sense that is first that is likely to happen is in the baby-eight which is the 10, 11 liters space, where we make as to probably about 150,000 units if we make between North America and China, this is where we are the biggest players and the closest second would not make more than 20,000 units, right.

And so as you start thinking about it they don't have scale necessarily, this is where it [Indiscernible] and several other applications are there. And then they need to go and invest for the 2025, 2027 emissions regulations, which will start happening for us right now, I would say in that space of the heavy duty market.

The second point on the mid bore, this is where most of our vertically integrated players have scaled. And so they would like to hold on to that as long as they can. While on the big bore space, there are probably only one or two of us that can actually compete in this marketplace. And the volume growth that we will have in that marketplace is going to come from China, wherever we already have one of the products and we are the leader in that product and sell, 40 leader and now 50 leader.

My sense is as it goes to China, it'll be where that will happen on the big bore side of it. And then on the mid bore time will tell that our maybe a 10 liter product with electric hybrid would actually do what the mid bore will do or whether it will be the mid bore plus hybrid what they make big bore, which I don't know exactly honestly. And time will tell you in the next 7, 8, 10 years as to how that shapes up. Because of the part stream revenue that is quite high in that people want to hold on to it. And I understand what they would want to do. But a common portfolio with one of these big players want to make difference in there.

Felix Boeschen

Okay that's super helpful. We could talk about this I think for a lot longer but in the interest of time, maybe we'll switch over to some other current events. I did want to quickly touch on before we get I think to a supply chain update that might be on top of everybody's minds. But I was kind of hoping you could talk to us a little bit what you're seeing on the North American truckload markets.

Heavy duty side specifically, it seems like those orders have been really strong. Again, it seems like in the near-term build rates are almost more impacted by supply chains than demand. But given that you do lead the engine business curious what you're hearing from customers there, how they are thinking about may be already securing build slots for the rest of the year. What’s kind of your expectations for the rest of the year on the heavy duty side in North America?

Srikanth Padmanabhan

Yes. And I tell you what though, much of it is very similar to what each of us are facing. When COVID hit all of us were figuring out what do we need to do? Where we all get our hand sanitizers, ready to go get more paper rolls and all that stuff that we did. And then for the next six weeks or so we basically hunkered down and inside of our houses and everything came to a grinding halt. And when that did, pretty much for many small suppliers stayed out of cash. Many big players including us decided that we need to conserve cash make sure inventory is right and others, even shipped and containers basically said that they will rest themselves for a while before they come back up. Little did we realize that the good side of the economy would be continued to be good as opposed to the service side of the economy.

Most of us were not going to restaurants and other places. But what were we doing, we were click baiting every place that is there to shop because you said my chair is not comfortable. My bed is not comfortable. I need a new, whatever table that you needed to. And you started seeing the good side of the economy go which meant that historically in such downturn freight rates still depressed for quite a while. The freight rates actually got better, refrigerated vehicles and others started going up because the food services that needed to be and you started seeing demand, which meant that these guys were actually more profitable trucking than they ever, ever before.

And as you know, trucking is like this, that they are like a herd, where when somebody does something everybody else follows through, which is what happened at the top three or five players, where they said that we are going to go and start buying stuff because we are worried that we will not be able to keep up with demand. You need to have all the freight rates that we have and profitability that you make. Both things put together somebody else asked me earlier this morning as to how do you see this downturn upturn versus the previous one?

I'd say the last downturn [Indiscernible] the downturn and the economic downturn and subsequent upturn happened 18 months from 2009 November whereas now it's happening in seven to nine months. Which means essentially, we just caught flat footed, we're not able to meet and our suppliers are not able to meet the demand. And added to this is the semiconductor issue that we are having with this cost is enormous pain both on the auto side. And it is starting to hit us on the commercial vehicles stuff as well. Because anymore, it's not a manual transmission, it's an automated transmission, which means that an engine needs an ECM, infotainment needs chips, you name it the truck now needs five or six chips that are required for running the entire vehicle, which used to be 10 years ago, probably one or two that used to be there. This is also causing additional problems.

So I think of it as problems related to semiconductors in big forgings and big casting related problems, mould supplier problems that are not able to ramp up fast enough. And then there are these players that are in Mexico, India and other places we have COVID is still raging quite a bit. But sometimes ups and some other things are causing problems for people to come back up all put together, it's a perfect storm. We have too much demand that we can’t meet and there is not enough supply that we have to flushen up, which means my view is that this demand cycle could actually be extended a little longer, because people are already booked out for the end of the year. All of our own clients are saying that they have completely sold out for the year. And tomorrow we'll get the February orders. My sense is it's going to be pretty high as well. And if that is the case, you're now talking in Q1 of next year for orders that are being placed right now to be resolved, right, which is good. But the good problem to have, but it's going to be a little longer than the cycle.

Felix Boeschen

Well, I was going to say I mean, I think if I asked you this question nine months ago or so I think you'd be glad to have the problems that you are having right now. But, that was some helpful color. And you already started going into this. I mean obviously, it seems the truckload markets on fire demand is high. People are ordering trucks. Now you have the added layer that hey, build slots are getting ramped, I got to order more trucks. So I have it in 2022. But the supply chain is here front and center now has a problem. I'm curious if you could update us on that.

So you pointed to about I think 60 basis points of a headwind that you guys are facing from the cost side. That was on your earnings call. I think we're now a month after, how is the situation progressed since then? We've heard obviously to your point on the on the chip shortages that's been in the news, but curious if you can address those what you're seeing incrementally better or worse the same since then.

Srikanth Padmanabhan

Yes., it just feels like it's a whack-a-mole, right? Every day that we think of there is a problem that we have solved and something else turns up. And we are tracking about 37 supply issues right now. And we call it class 5 and class 4 severe tracking. And these are suppliers that might be in India, that might be in China, that might be in Mexico, that might be the U.S. themselves that we have grown, which means that when they are not able to supply premium freight goes up. That's one thing.

The second thing is we hurry up and wait. We do what we need to do today. And then we don't have a part. So we are having more overtime and more inefficiencies, so shop more that causes accepted well. And then, because of this just general lack of productivity that happens is the entire supply chain causes a lot of inefficiencies that are there.

The other thing that's happening as well exists that commodity costs are going up, steel costs are going up. And some of the other places where we passed through this, if we do what only costs are low, we tend to gain the benefit. If costs go high, we tend to actually lag behind in collecting both from our customers because they have already long-term agreements. And then in some places where we actually had we had palladium and we had copper, we had platinum [Indiscernible] we had, which allows us no matter what the commodity costs go up and down if this would be okay. some of it we pass through, some of it we can’t pass through there until that's the other places where the supply chain inspections causes and the commodity cost increases cost has been in the near-term for us. So far, we've not had lost sales, but because of the fact that it's not just us. As long as I'm not the slowest rabbit in the forest, all I want to be is one step faster than the slowest rabbit in the forest, right so that’s now we be –

Felix Boeschen

So far, so good on that.

Srikanth Padmanabhan

So far, it's just up though in this is non-stop. I just get tired people are -- to the maximum we’ve been working like this for the last 12 months and it's going to be another 18 months and the entire supply chain is just exhausted.

Felix Boeschen

Well, maybe we could talk about maybe some more secular trends you guys are seeing maybe shift toward that a little bit. You kind of framed this in your opening remarks. But obviously emissions are big secular tailwind. I'm going to say to Cummins. And there's two in the near-term that specifically come to mind. And that's China and India. I'm curious obviously, China was a point of I don't want to call it consternation but maybe debate on your last earnings call. I'm curious if you could tee up for us what you're seeing on the demand side there. It seemed like the year was still off super, super strong. I mean, it was coming off a record 2020. But you guys had maybe a little bit more of a cautious outlook on the second half. Anything else you can share from us? As it relates to the Chinese demand right now? How does that sort of tracking?

Srikanth Padmanabhan

Yes, I wish on the betting man on China right? Every time I've said something I've been wrong, if you had passed --

Felix Boeschen

We will keep that in mind, we will keep that in mind, we'll keep that in mind.

Srikanth Padmanabhan

This January last year, on 24, Wuhan shut down. Till March 15, Wuhan was shut down. And if you set up the time for after two months of shutdown, in 10 months, we produce 1.7 million heavy duty medium duty trucks. I couldn't have imagined that. The fact that we are saying that this year, it's going to be 20% down, 30% down to 1.3 million or so seems reasonable from our advantage point as to where we sit that this cannot go on. Excavator market, that's just hierarchy.

So what I don't know is where are these products going? What are the airports that are being built that go nowhere? What are the runways that are being built that are going nowhere? What are the roads that are being built that are going nowhere? Even though people told us there are three tracks were being scrapped, this was the reason why there were so much demand for the new trucks that out there. Weight load limits that were put in, which allowed us to do, it was blue plate demands that were put on the place. And that's why we are having duty demand go up. All these put together, it also changed for us because they are going from NS 5 to NS 6 on emissions in the middle of the year. And when they go to NS 6, this helps us on our component business because we're after treatment business, turbocharger business, fuel systems business these all add incremental revenue for us both there as well as in India as well that we would have that stuff.

And then the other thing that's happening is automated manual transmission has gone up as well. As the adoption rates go up. We will start seeing more and more of our EP Cummins JV to start increasing production of their products that would get paired up with our heavy duty engines as well. So on the one hand, demand is robust for the first three months I don't know how long this could last and that the shortages in chips and other things that are having. Well, we have some sort of a letdown starting late Q2, because they understood changes, and as well as the supply chain constraints, that that could be actually some sort of a slowdown. That's kind of how I'm thinking about it. But I could be wrong with you be six months from now, you might come back and say, What the heck did you say [Indiscernible].

Felix Boeschen

Yes, we’ll hold you accountable to that. But, while I did want to speak about because the emission solutions business, and you kind of just alluded to it, you obviously have two emission changes one in China and one in India. I think previously, you all had cited that as about a $600 million opportunity at least over the next one, two, three years. I'm curious if you could update us on that opportunity stack? How much was already maybe realized last year? And then to what degree should we expect that to ramp this year and maybe into next year? If that line of questioning makes sense?

Srikanth Padmanabhan

Yes. And one of the things in India, for example, you've said $300 million, if you would do 2020, already got about one-third of that.

Felix Boeschen

Okay.

Srikanth Padmanabhan

And so the rest of those, we will at least get another one-third this year. And the rest could be because how strong the market every year is, because India has been just really [Indiscernible] as you all know, as to how they've been in the market would -- the peak was 40,000 units if they do that this coming fiscal year for them, which is April 1 to next March, probably are going to be slightly less, which means depending on what the market recovery could be is where the other one-third could come up pretty quickly, I would say in terms of that. China on the other hand --

Felix Boeschen

And that’s on the India side, just to be clear.

Srikanth Padmanabhan

India side, yes.

Felix Boeschen

Yes, okay.

Srikanth Padmanabhan

China, on the other hand, start implementing fully six, five, this summer, so it is still going to be a gradual ramp up, there is some conversation that's going on about this blue plate, which is on the light duty side, which they have forcing them to say anything less than 4.5 ton cannot have engine that is greater than 2.5 liter. So there is some confusion that's going on that might change the light duty side of the business to change in the next few months out of few things to the end of the year. But NS6 will be broadly implemented in July timeframe, Felix. That's when we would start seeing some of that demand partly because of the fact that there is pre-buy, there'll be a fall-off. And then after that, it'll will pick up may be later 10 or 20 years.

Felix Boeschen

Okay, but so it sounds like there's only been a small amount of that 600 million maybe realized already. And you're probably realizing more and ‘21 and ‘22 could be the real years as some of the Chinese regulations layered of that?

Srikanth Padmanabhan

Yes, because in China, we've done of the 600, we would say about 200 million may have recognized in 2020. And then we might expect additional 250 in 2021, and the rest of the panel 150 in 2022 or depending on how the market is backup.

Felix Boeschen

Okay, that's super helpful. And then we have maybe eight minutes or so left. And one thing I did want to do was touch on new power and just obviously, as we think about alternative powertrains and just adoption, I was really hoping we could learn a little bit from your perspective as you are probably one of the more customer facing executives as part of the team. I'm curious if you could maybe update us we hear a lot about hydrogen investments from you guys. We hear a lot about just battery electric vehicles, hydrogen fuel cell vehicles, can you level set for us? How are your key customers may be thinking about electrification, we've obviously seen ESG in the news a lot more, it's become much more prevalent in the investing world. But when you go and talk to some of your key A, customers and then B, OEs, I mean how are they approaching this transition?

Srikanth Padmanabhan

Yes, I'm glad you said that. Two kinds of customers that I go talk to you right on the one side of it that I talked to [Indiscernible] these are the players like back are [Indiscernible] they still think of these things as what does it help do some pilots in the press? But equally, they're thinking about how do I get into limited production and when should I get into action? And what are the kinds of things that we -- but most of them are and what I would call as product CD technology evaluation. If they don't get into stable design until probably three years from now, which means these OEs want to try different people to see who can work, who's not and all of that. But what they always you know, as Cummins has always said, they've been there for 100 years and they'll be hopefully, there'll be connection with -- which means that they can go to us when they decide about stable design.

So they will try out three or four people they will actually divide them the best. And then like an accordion, they will come back to say here is the two suppliers that we would go after. On the other side of the [Indiscernible] and most people, what they are doing is who could I partner with, it would actually give me a truck that I could fly out so that I could see the total cost of ownership as to how they work, whether it is in buses that we do, whether it is in battery electric or in fuel cell electric, because they just want to see how the cost dynamics work. That's where those guys are most interested in?

And can I actually do in my yard 100 bucks, 35 buses and they come over overnight? Can I actually charge them? What are the issues that I would have? And what would I get to and how it is going to be working on an infrastructure standpoint that they would do? And then they are thinking if it breaks down? Who can take care of it? And can you actually do take care of wherever you are? Are you capable of doing that?

These are the kinds of questions that I get when I go to them. And then there are these third players that we call us National FedEx, UBS, Wal-Mart, Amazon, these are players that have 10,000 trucks amongst them. And they could make a decision today to say, in these trucks [Indiscernible] post office you name and these are players that would say, I want to try this for 100 vehicles because I got a good enough maintenance team. And I want to try this because I know where this is going eventually. And I need to do from ESG. These are the kinds of things that I want to go and do. So and we partner with all three of them. Yes, partner with FedEx, UBS all kinds of folks who partner with [Indiscernible]. We also partnered with OEMs, if you think about it in terms of how these fit into their product portfolio, product plan, so it eventually fits there. So right, it's interesting, depending on who --

Felix Boeschen

Yes, and so it doesn't feel I guess my question is, does it feel that some of the end market customers if we talk about, you talked about some of the night swifts, those guys of the world? I mean, do you see there being a discrepancy and timeline Almost I mean, how do you think about adoption? And then my hunch is this, and please correct me if I'm wrong, but we're obviously talking about the shift toward electrification. But it'll be measured in decades, most likely. And so in the interim is that where you're really focused, I'm just trying to understand the bigger pieces here, because on one hand, you have the new entrants coming in, you have maybe a different timeline from the actual operators who have to make the decision to actually be viable from a TCL perspective.

But then you will maybe get a little bit of the best of both worlds where you -- would you have new power capabilities, but you can continue to serve the diesel side. So if you could maybe just expand and flush that out a little bit for me. And then the core crux of my question was, do you see any discrepancy there between the owners of the trucks and then what maybe the OEs and component suppliers are all working toward?

Srikanth Padmanabhan

Yes, that's a lot of questions.

Felix Boeschen

Yes, sorry, I know, that was a lot. You just stimulated my mind here for a second.

Srikanth Padmanabhan

I tell you that a few things that I want to say. The transition to zero emissions is going to take some time, particularly in the commercial vehicle space, primarily because energy density matters, size matters and volume matters. And that plus costs like today a diesel powertrain is $40,000. If fuel cell electric powertrain, correspondingly is $350,000. And if you ask these end user players, if you gave it free, I'll take it. But if you asked him to pay $350,000, for one of these trucks, they're going to say no way, I'm going to pay for. School buses are classic example where there is actual money because of the [Indiscernible] that people are getting that they are using to go put it up for them. When you say it's 330,000 per battery electric school bus, they're going to say, I'm not going to pay for this if I have to pay it on my own. But they will probably 5, 10 and 15 maybe, but when it comes to 1,000s of these, it's going to be difficult.

I forget which study that did it but heavy duty by 2030 there would be 2% of people said. That said, are there going to be markets that would go into battery electric like the company delivery or there's going to be something in LA or there is going to be something in certain particular markets, for sure it's going to be in California regulations and others are going to force some of these things to actually happen as well. Our review is anything that can go electric will go electric.

The question is can I add on electric stuff to the base diesel engine, if they have B Series engine is 260 kilowatt, if I could start adding a 30 kilowatt 50 kilowatt 80 kilowatt and 100 kilowatt that’s when the cost parity is going to come up to say, if you have to add 100 kilowatt of battery if you can that cost of the space diesel engine plus powertrain is going to be equivalent to as cost come down on the fuel cell electric then it might got to be more, right that’s how it’s going to be.

The end users today, if you ask them to pay that much, they're not going to pay, they are going to figure out every which way to extend their existing lifecycle of the truck so that they don't need to go and buy it at that pace unless somebody is going to give them an incentive to make that happen.

Now, the other point Felix that you mentioned, I think decarbonization of the grid is far more important and will take far longer time than the decarbonization of the tank will be in the vehicle. When you think about well to wheel, decarbonization of the grid is what is going to cost us trillions of dollars and lots of jobs that are going to be created and last. Then if they are ready, the transportation industry will be ready quicker than the grid industry will be. And that's why I think this is a cycle of 30 years to 40 years rather than a cycle of 10 years in my mind. This is why the long tail works in our favor and as we increase market share, as we produce insane amounts of cash and give it to Tom to go invest in new power, then virtuous cycle comes together in my opinion.

Question-and-Answer Session

Q - Felix Boeschen

Very helpful. Well, if I'm not mistaken, I think that already takes us off on 40 minutes. I feel like we could have talked for a lot longer. But I do really appreciate both of you joining us for -- I think your first ever Raymond James Institutional Investors Conference. So, thank you for that. And I think we'll wrap up here.

Srikanth Padmanabhan

And I appreciate you guys listening to me and hopefully if you have questions, always send me my email or to Jack and we will definitely come and talk to you guys individually. I'm super excited about this road to zero in transportation and mobility changes that are happening here for that. Thank you.

Felix Boeschen

Thank you.