Taming the Dragons - Cummins in China

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Cummins: Licensing to Joint Venture
Risks in Licensing
To enter and explore the Chinese market, Cummins Inc. adopted a licensing strategic alliance in the early 1980s. It signed two license agreements initially; firstly with CQAEP and the other with DFM. There were various risks involved in using licensing, as control over the technology is weakened. There was also a problem in adequately protecting the licensed technology from unauthorised use by other parties. This led to rise in competition. Cummins Inc. was not able to penetrate the Chinese market with its new and advanced technological products as the licensees did not keep up with the technical improvements elsewhere in the world. This exposed Cummins Inc. to various reputational risks as well. Risks in Joint Venture

In the early 90’s, Cummins Inc. took advantage of the changing Chinese business environment and converted its two licenses to 50-50 joint ventures with CCEC and DFM. This gave Cummins Inc. the advantage to use its new and developed technologies giving it more competitive advantage in the market, and also helped minimize its cash investments. Financial risks – Long term relationship requires trust & commitment During the approval process when Cummins Inc. had to face a lot of financial risks. Firstly, they had to absorb all the assets of the Chongqing Company including the personnel which significantly increased the amount of cash required for 50% ownership of the company. It had to bear the financial burdens like bad debts and accounts receivables because of non commitment of CCEC. Secondly, due to the poor performance of the CCEC as valued by the six sigma-type performance evaluation, the Chongqing government was forced to transfer the CNHTC equity into the municipal government which left Cummins with no effective Chinese partner. Managerial Risks and Conflict of Interests – Understanding & sustainability for growth Cummins Inc. also faced managerial problems such as issues related...
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