Cummins PESTEL Analysis Russia Ukraine War

PESTEL Analysis of Cummins in light of Russia Ukraine War

Cummins business operations are impacted by Russia Ukraine war and it has to adapt to the changes in the business environment in the industry. Some of the PESTEL Analysis factors that are impacting the Cummins business environment are –
War in Russia and Ukraine, loss of market opportunities in Russia & Ukraine, diversification of supply chain because of both Covid and Russia Ukraine war , crypto currency frauds and crash , increasing wages and risks of stagflation , end of an era of easy liquidity, increasing food and fertilizer prices , rising housing debt and increasing mortgage rates, high government debts , increasing defence spending , increasing interest rates , slowing growth rates across the world , and financial collapse in emerging markets
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Increasing cost of climate change and natural disasters [Environmental Factors]

– The increasing intensity of hurricanes into United States, extreme heat season in Canada and Europe, floods in Pakistan, and extreme winter temperatures in United States suggest that the governments have to deal with increasing costs of climate change both in terms of infrastructure damage and rising energy costs to manage the extreme weather.

Increasing cost of fertilizers [Social & Economic Factors]

– According to World Bank, fertilizers prices are likely to remain high given that Russia and Belarus are two of the biggest suppliers of fertilizers to the emerging markets – Russia and Belarus accounts for 40% of total global MOP exports, a key ingredient for Brazilian and Argentine farmers. Secondly because of the rising gas prices there are significant cut backs in the production of ammonia in Europe. Russia accounts for 16% of global urea exports.

Slowing Growth Rate [Political & Economic Factors]

– As the Fed has decided to do whatever it takes to bring down the inflation to 2%, it will result in high interest rates and slowing growth rates across the world. Cummins needs to build resilience to survive in the slowing economy. It can do so by focusing on fast developing emerging economies, building product offerings that can cater to lower spending rates of the consumers in the industry.

Increase in commodities prices [Political & Economic Factors]

– As Russia is one of the biggest suppliers of commodities in the world, the sanctions on Russia by United States and European Union has led to the increase in cost of commodities across the world. Cummins needs to keep a close eye on the commodities prices to have a sustainable business model.

High probability of Recession in United States [Economic Factors]

– As Federal Reserve intends to bring the inflation back to 2%, it will require interest rates above 6%. The high interest rates and monetary tightening will result in United States going into recession. Cummins has to prepare its business model to be recession resilient. It has to bring down the costs, focus only on lucrative customer segments, and build a diversified revenue stream in the industry.

Extremely high government debt [Political & Economic Factors]

– The debt levels in both the developed countries and emerging markets have increased because of the COVID spending and strengthening dollar. This has put financial health of numerous countries in danger. In October 2022, we saw a run on GBP when government declared tax cuts. Similarly the Debt to GDP ratio in most developed countries is above 80%, which is not sustainable in the long run.

Increasing Debt on Credit Cards in United States [Social & Economic Factors]

– Another distress sign in the US economy in 2023 is the rising debt on credit cards in United States. Cummins will be seriously impacted by this trend because most of the purchases of its products in the industry are done on credit. 67% of the retired Americans have already unpaid credit card debt. If the financial markets crash then retired Americans will face challenges to meet their expenses from the retirement savings.

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Increasing defence budgets [Political & Economic Factors]

– The war between Russia and Ukraine has put an end to an era where governments can put defence resources into healthcare and education. Now as governments across Western Europe and North America focus on putting minimum 2% of the GDP on defence spending, we will witness a reduction of spending in healthcare and education. It will also lead to less money for foreign aid and donations to build in infrastructure in developing world. This can result in not only fewer resources for health agencies and education departments, but also can increase immigration to the Western European countries and United States.

Increasing cost of doing business [Economic Factors]

– As the growing considerations are on diversifying supply chain away from China, geographical diversification, friendshoring – building manufacturing and other supply chain in friendly countries, it will increase the cost of doing business not only for transnational companies but also on the local companies. Businesses have to make higher inventory provision, tolerate greater inefficiencies, and ensure high due diligence in source of material and its usage.

Over Reliance on Supply Chain based out of China [Economic Factors]

– Covid exposed companies to the scenario where the whole supply chain can be disrupted if one country is shut down. Now companies are trying to diversify the supply chains geographically. This will result in not only increase in costs but also prevalent operations strategy of “Just in Time”. Politicians especially in United States and UK are putting pressure on companies to locate supply chain in liberal democracies and friendly countries.

Bursting of Crypto Bubble [Economic Factors]

– Cheap money and government lockdowns led to the speculation and bubble in Crypto currency segment. The crash has wiped out savings of millions of people across the world. Secondly it has burned the young investors for a decade.

Emergence of AI and other automation technologies [Technology Factors]

– ChatGPT has brought new excitement to the field of Artificial Intelligence and automation. Even though the technology right now is in nascent stage, it has potential to disrupt the economic system in the coming decade. The Chinese government has even banned the use of ChatGPT in the country.

High Inflation Rate across the Western World [ Economic Factor ]

– United States and other western countries are witnessing inflation above 7-8% in 2022 and it has not come down significantly enough to allow central banks to reduce the interest rates. The high inflation is because of multiple reasons such as – commodities shortages because of war between Russia and Ukraine, COVID stimulus that slushed huge amount of liquidity in the system, and China’s zero Covid policy and supply chain disruptions.

Emergence of Two Different Global Orders [ Political Factor]

– The war between Russia and Ukraine is fast resulting into emergence of two rivalling groups in the international orders. Ukraine is backed by the western countries and Russia is backed by the world’s second biggest economy China. This can result into not only geo-strategic competition but also economic rivalries based on the political leanings.

Check out the SWOT analysis of Cummins

Technology war / Chips war [Technology Factors]

– CHIPS and Science Act passed in 2022 has not only aimed to encourage more CHIP investment in United States but also preventing companies to manufacture and ship high end chips to China that could be used in military hardware. This only marks the beginning of technology restrictions and economic competition. It also makes tech companies vulnerable to not only direct sanctions but also to secondary sanctions by United States.

Increasing Housing Payments [Social & Economic Factors]

– Over the last one year the mortgage payments have increased almost 60%. The mortgage payment now accounts for almost 33% of the average US homeowner income. The 33% share is far higher than the long term average of around 24% and just below the all time high of 34% in 2006. The trend suggests that a lot of households will be either struggle to make their payments or drastically cut down on the spending, or both. It points towards a looming housing market crash and recession.

Lockdowns in China [Political & Economic Factors]

– The continuous zero lockdown policy in China not only disrupted the global supply chains but also reduced the demand for players such as Apple. Apple has decided to reduce the production of iPhones in 2023 not only because of supply chain disruptions in China but also because it expects lower demand from China and other major economies.

Rising Interest Rates in United States and other Developed Economies [Economic Factors]

– – As the inflation rate is above 8% in the most of developed world, central banks are actively cutting rates to control the inflation. Cummins should strive to cut costs by streamlining operations and workforce, reduce dependence on customers’s discretionary spending.

Food Crisis [Social & Economic Factors]

– Ukraine and Russian war is impacting the global food market in two ways – first Russia, Belarus, and Ukraine are few of the biggest fertilizer suppliers in the world, secondly Russia and Ukraine accounts for nearly 25% of the global wheat exports. The reduction on both fertilizer and wheat exports can lead to increase in food crisis in not only least developing countries in Africa but also in wealthy countries in Middle East such as Saudi Arabia, Qatar, UAE and Egypt.

Cummins SWOT Analysis, SWOT Matrix, Weighted SWOT Case Study Solution & Analysis

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Books and References

Paul Ingram and Yoojin Choi (2022) "What does company really stands for?", Harvard Business Review , 92
Martin Reeves and Annelies O'Dea (2022) "6 Factors Driving Changes to Today's Corporate Strategies", Harvard Business Review , 92
Ian Bremmer (2005) "Managing Risk in an Unstable World", Harvard Business Review , 92
Ahir Gopaldas and Anton Siebert (2022) "What You’re Getting Wrong About Customer Journeys", Harvard Business Review , 92
Linda A. Hill, Emily Tedards, and Taran Swan (2021) "Drive Innovation with Better Decision-Making", Harvard Business Review 86
Dyer, J. H., & Hatch, N. (2004). Using Supplier Networks to Learn Faster. Sloan Management Review, 45(3), 57–63
Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120
Dyer, J. H., Kale, P., & Singh, H. (2004, July–August). When to ally and when to acquire. Harvard Business Review, 109–115

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