Founded in 1919 as Cummins Engine Company, Cummins Inc. began as an American company in Columbus, Indiana. At this time, we became one of the first diesel engine manufacturers in the United States and captured first-mover advantages as a result. Cummins stock (CMI) was first publicly traded in April of 1919. Today, we are a global leader in designing, manufacturing, and distributing service diesel and natural gas engines and related components. We own approximately 600 wholly-owned subsidiaries and over 7,400 dealers in more than 190 countries and territories worldwide. Due to our company’s success, we have appeared on the Fortune 500 list every year since 1955.
Our products are sold to original equipment manufacturers (OEMs), distributors, and other customers around the world. To better satisfy the requirements of our customers, we have established operating segments throughout the globe and adopted a localization strategy. For example, manufacturing facilities for heavy duty and natural gas engines are located near our heavy duty customers, such as North America, Latin America, and Australia. Operating segments for our medium-duty truck and bus customers are established in markets including China, Europe, and India, where the use of vocational trucks and transit buses are dominant. Key customers for our heavy and medium-duty automotive engines include PACCAR Inc., Daimler Trucks North America, and Navistar International Corporation. Our industrial engines are sold to well-known manufacturers such as Hyundai, Komatsu, and Hitachi. Fiat Chrysler Automobiles and Nissan are our principle customers for light-duty engines.
Our competitive advantage is found in the attributes of both our products and services, including performance, speed of delivery, customer support, quality, and price. Competition in the international setting varies country to country, with local manufacturers being our primary competition within each geographic market. In the North American market, our main competitors include Caterpillar Inc., Hino Power, and Ford Motors. Primary competitors in international markets include: Volvo, a multinational manufacturing company founded in Sweden; Weichai Power Co. Ltd, a state-owned enterprise located in China; and Fiat Power Systems, an Italian manufacturer for industrial vehicles. Many of our customers such as PACCAR, Navistar, and Daimler are OEMs that have the ability to manufacture their own engines. As a result, our truck manufacturing customers may choose to discontinue outsourcing and decide to manufacture their engines in-house. This may result in additional competitors in the international scene.
Our joint ventures are generally distribution and manufacturing entities. They are intended to increase our market penetration in foreign countries, reduce spending, streamline supply chain management, and develop innovative technologies. Some of our largest manufacturing joint ventures are located in China, with our largest percentage of income coming from Beijing Foton Cummins Engine Co, Ltd. We tend to establish operations in countries where free market economies will protect our intellectual property, as well as encourage innovation. To establish an effective supply chain system, our wholly-owned and join operated distribution centers are located in key geographic markets, such as North America, Europe, China, India, and South America. By having distribution centers in these markets, we are able to maintain control of the distribution and customer service aspects of our products. Our distribution centers provide products and services to approximately 450 locations and more than 80 distributors. Our supply chain also focuses on maintaining an innovative and competent supplier base. We use a rigorous process that focuses on long-term growth when deciding whether to make or buy certain materials and services. To maximize customer value, we generally choose to manufacture primary components under our trademarks and patents, such as engines, turbo chargers, and fuel systems.
In 2016, about 20 percent of the direct materials used in manufacturing were single sourced. Delays in supplier deliveries therefore affect operations, and impair our ability for timely delivery to customers. In order to minimize supply shortages from single-source suppliers, we are increasing the use of dual and parallel sources. William Edwards Deming advocated forming relationships with a few suppliers, insisting in his Fourteen Points that the use of one supplier minimizes total costs. Although this is an effective model for Japanese firms, our profits are sensitive to the performance of our suppliers. As a result, we are attempting to use multiple sources that will maintain quality levels for our customers and mitigate the threat of supply chain issues. Since 2000, we have implemented the use of Six Sigma to further reduce costs and achieve economies of scale.
Being a global company, we continue to invest annually in research and development programs. These programs focus on creating technological advances for product improvement and extensions, as well as cost reductions. This is due to growing consumer demand and a steadily increasing competitive force. In 2016, research and development expenditures accounted for $616 million. Approximately 13 percent of these expenses were related to compliance with emission standards set forth by the U.S. Environmental Protection Agency (EPA). Due the nature of our products, we must adhere to strict regulations that govern emission and noise levels. As a result, we are required to disclose our emission control systems to environmental protection agencies worldwide. Compliance to these regulations is required to maintain a leadership position in highly regulated markets. In 2013, on-highway Nox and PM emission standards were implemented in the European Union (EU). To adhere to these highly stringent heavy-duty emission standards, we used research and development to enhance our technologies in catalytic reductions and gas recirculation. This allowed for our new engines to be more clean and fuel efficient compared to our previous models.
International markets in Japan, India, and China, are enhancing emission standards. However, the nature and timing of government implementation and enforcement are unpredictable. This may result in the manufacturing or modification of products to adhere to emission standards being unnecessary or required later than expected. Cost over-runs in research and production, as well as increasing time to market, diminishes our competitive advantage. This is critical in cases where local competitors have more knowledge regarding the political economy of the emerging market. The expected return on capital and investments in manufacturing compliant products may also diminish our first-mover advantages in developing areas. As the new CEO, I recommend partnering with local research and development agencies in each market where emission standards have not yet been implemented. With the use of local knowledge and professional consulting services, we will reduce the risk of investing in products that will not require the same emission standards as in the United States.
About 46 percent of net sales in 2016 were from customers outside of the U.S. Consequently, our company is subject to the political, economic, and legal risks of doing business in foreign countries. The most dominant risks include: enforcement of agreement and collecting receivables through foreign legal systems; impositions of tariffs, exchange controls, and trade protection; and changes in economic and political conditions in emerging markets. These risks must be anticipated and effectively managed to minimize the effect on our multinational operations. Transactions are also dominated by multiple currencies and create foreign currency exchange rate risk. Our financial statements are recorded in U.S. dollars, and changes in foreign currency exchange rates between the dollar and other currencies have an impact on operational results. Due to the increa
sing strength of the U.S. dollar against other currencies, our financial statements are volatile.
My recommendation is to engage in foreign exchange rate contracts, where Cummins and another party agree to exchange currency and execute deals at some specific time in the future. We can also use currency swaps, where we simultaneously purchase and sell a given amount of foreign exchange for two different value dates. Foreign exchange exposure may also be minimized through leading and lagging payables and receivables. With a lead strategy, foreign currency receivables are collected when the foreign currency depreciates and payables are paid before a foreign currency is excepted to appreciate. A lag strategy involves delaying the collection of receivables when currency is expected to appreciate, and delaying payables when currency depreciates. Lead and lag strategies may only be used in markets where local governments do not limit their use to protect weakening currencies.
Businesses like Cummins are cyclical in nature. In 2016, our North American markets experienced significant downturn due to falling demand in heavy-duty engines. Daimler Trucks estimates that the heavy-duty truck segment will decrease by 15 percent in the near future. I want to implement a strategy to address these sustained slowdowns, as they have a material effect on our revenues and financial performance. To offset losses in North America, we need to concentrate resources in China, India, and Africa. In 2010, the Asian Pacific region became the world’s largest market for diesel engines due to an increase in demand for off-highway equipment in China and India. In addition, demand for diesel engines in Africa has been expected to expand by more than 7 percent each year since 2015. To address the increased demand in these regions, further manufacturing facilities need to be created, as will an increase in investments. These high growth markets serve as an alternative to the limited demand in North America.
Our strategic principles include being a low cost producer, expanding into related markets, and forming joint ventures to achieve global growth and cost reductions. Success in these areas will come from our ability to anticipate and mitigate risks. We have successfully expanded our company globally while engaging in ethical business practices and corporate social responsibility programs. Our growing market share compared to several competitors demonstrates the effectiveness of our global strategy. With these recommendations, I believe Cummins has the potential to continue as a global power leader for numerous years to come.