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Caterpillar, Navistar both benefit from deal

June 12, 2008
Caterpillar’s long-rumored exit from the on-highway truck engine business not only positions the company to take advantage of a rapidly expanding international market for its heavy equipment, but also holds significant benefits for its new partner, Navistar International, according to industry analysts

Caterpillar’s long-rumored exit from the on-highway truck engine business not only positions the company to take advantage of a rapidly expanding international market for its heavy equipment, but also holds significant benefits for its new partner, Navistar International, according to industry analysts.

"The way I read this, there will be no more on-highway engines from Caterpillar,” Eric Starks, president of FTR Associates, told FleetOwner. “They are getting out of the business. It looks like to me that they will work with Navistar on a range of things, everything but on-highway product. Which is not a surprise, because Navistar already has an on-highway product lined up, the MaxxForce, through its partnership with MAN [Nutzfahrzeuge AG]. They don't need a Cat for on-highway."

"I'm not shocked by this -- most telling about this isn't that they are forming a partnership with Navistar, but getting out of the on-highway market,” Starks added. “That's the bigger deal here. On-highway is such a small, almost niche market for Caterpillar compared to its other engine businesses. Not a primary market for them. We've been waiting some time now for an announcement from Cat on how they were going to comply with 2010 emissions and the longer we waited, the less surprised we were going to be that they might get out."

“The writing is on wall for independent engine suppliers,” said George Taylor, director of global on-highway for Caterpillar, during a conference call announcing the agreement. “Everyone is hoping the [Class 8] market gets back to 250,000 units soon. But when you look at industry that runs 240,000 to 250,000 annually and has capacity of up to 500,000 units, it’s difficult to participate as an independent engine supplier.”

“North America is only 22% of the heavy-duty truck market,” Taylor added. “As we go forward with Navistar, we can realistically pursue the 1.7 million trucks sold globally.”

Caterpillar said that the company will continue to offer heavy-duty diesel through OEMs through 2009.

“I think, like anything else, everything depends on execution,” Chris Brady, president of Commercial Motor Vehicle Consulting (CMVC), told FleetOwner. But strategically, there are possibilities for growth for both companies. Navistar will use Caterpillar’s worldwide distribution network to expand globally. Setting up their own dealer network would be very expensive, and it will help Navistar financially because they now have a partner.”

Mark Stasell, vp & gm of diversified operations for Navistar, said that the partnership will help grow full-line truck manufacturing capability outside of North America, getting a fast start with the Caterpillar network for global distribution of Navistar trucks. He added that Navistar can also enhance 2010 severe-service truck efforts with a ‘premium’ Caterpillar offering.

Navistar said that the agreement would have no impact on Navistar’s relationship with MAN to develop MaxxForce Big Bore diesels. Caterpillar has no relationship with MAN.

While the partners made it clear that Caterpillar would be exiting the on-highway heavy-duty engine business in 2010, plans for their two medium-duty lines appear to still be under discussion. Caterpillar may remain an independent dealer of engines, or it may become exclusive to Navistar trucks, but in either case they will share technology and resources to develop future MD platforms jointly.

“[The MOU] gives Caterpillar the ability to refocus efforts into off-highway and international markets, which makes sense because it frees capital and talent,” Martin Labbe, president of Martin Labbe Associates, told FleetOwner. “Given the current exchange rate and the rest of the world needing infrastructure, Cat is in excellent position in that market.”

“It makes sense for Caterpillar to go into heavy-duty construction vehicles,” Labbe added. “There is a significant amount of construction coming, and if you’re a construction equipment manager, you like to see common components and service across everything in your fleet.”

“Navistar is poised to have significant increase in medium-duty business through the combination of two products,” Labbe said. “I expect them to merge [medium-duty engine offerings] into a single standard engine that meets 2010 standards.”

"The announcement is not unexpected and is [in line with] the natural evolution of the industry" as witnessed by many other such agreements, Robin Easton, treasurer of Paccar, parent company of both Kenworth and Peterbilt, told FleetOwner.

As for any impact on Kenworth and Peterbilt, Easton said, "Caterpillar is now in a minority position [here] as we also offer Cummins engines and by 2010 will have our own award-winning engine line available in North America.

"We have a great partner in Cummins," he added. "And we have not said what the capacity will be for our Paccar engine plant in Columbus, MS. But we expect no [capacity] issues meeting demand for Cummins or Paccar engines [come 2010]."

According to Phil Christman, vp & gm , severe service vehicle center for Navistar, the severe service truck will use components of existing products—the 5000 or 7000 Series—but the Caterpillar product will be distinct, with purpose-built trucks leveraging Caterpillar technologies wherever possible.

Navistar said the only over 485-hp diesel currently offered in International trucks is the Cummins ISX (15L), and the offering will continue as the contract was recently renewed. However, the two new partners expect to work together on development of a 15L Caterpillar product for the Cat-branded severe-service truck.

View Fleet Owner's full coverage of the Caterpillar, Navistar partnership.

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