Saturday 25 January 2014

Navistar putting MWM up for sale?

According to US news agency Bloomberg, heavy duty truck maker Navistar Inc. is exploring its options for MWM, its South American truck-engine business. One option may be to sell the unit.

Last May, this newsletter posed the question: Navistar: has it too many engine plants? Clearly the issue of Navistar International’s engine overcapacity, coupled with a growing closeness to Cummins Inc., suggests the topic of conversation in Navistar’s board room has stretched beyond the fate of its three engine plants in the US.

Navistar, based in Lisle, Illinois, is understood to be working with an investment bank as it conducts a review the MWM engine unit in Brazil, MWM international Motores.

MWM, which sells truck engines mostly in Brazil, is reportedly looking to raise a valuable $500 million for the beleaguered Navistar in any sale, according to sources.

Since 2012, Navistar Inc. has been conducting a review of not only its own business but anything else outside of its core North American truck, engine and parts activities in a bid to decide whether to invest or dispose of some assets, company spokesman Jim Spangler is reported as saying to Bloomberg.

He would not comment on whether the MWM business will be sold.

Chief executive officer Troy Clarke is taking a two-line approach: focusing Navistar on its core truck making activities and cutting costs across the board. As we have noted previously, it is understood that one of his issues is deciding just how many engine plants the company can justify.

Sales at Navistar’s global operations unit, which largely consists of the MWM unit fell 16 percent to $1.74 billion in the year through October 2013, according to the company’s annual report.

The company also sold its share of an Indian joint venture to Mahindra & Mahindra, its Monaco recreational vehicle unit, and a truck plant in Garland, Texas, as part of its plan to get back to profitability, Spangler said. Navistar’s annual loss narrowed to $898 million in the year ending 31 October 2013, from more than $3 billion a year earlier, the company’s year-end report shows.

Former General Motors executive Clarke took over the reins at Navistar from former chief executive officer Daniel Ustian. Ustian was replaced in August 2012. He will be remembered most for the (wrong) strategy he adopted for Navistar in its approach to heavy duty truck engines emissions equipment. He invested heavily in EGR, believing that the selective catalytic convertor route (SCR) was not appropriate Navistar’s engines.

                                       Eating humble pie

Ustian invested millions of US dollars in an engine technology that could not meet US government emissions requirements. This left Clarke with little choice but to eat humble pie in huge chunks, and rely heavily on Cummins Inc. for technical and sales support – Cummins being one of Navistar’s competitors – for engines that could be fitted to Navistar’s trucks to get dealers’ tills ringing again.

And what of MWM? With more than four million engines produced in its 60-year history, MWM International Motores, a subsidiary of Navistar Engine Group, claims to have a complete line of the “most advanced technology engines” from 2.5 litres to 13 litres and from 50bhp to 428 bhp that meet ‘the strictest pollutant emission standards’.

MWM claims its products meet the needs of “several vehicular, agricultural and marine markets segments”.

The company has three units in Mercusur, Santo Amaro and Canoas as well as at Jesus Maria in Cordoba Argentina. Its engine design and developments centre is based in Sao Paulo with 220 engineers responsible for the engine platform development in the country.

MWM claims to export to over 30 countries in South America, North America, Central America, Europe, Asia, Africa and Oceania. It also claims Ford Motor Company, General Motors, International, JCB, MAN Latin America and Volvo among its customers as well as Volkswagen.

In South America, MWM International Motores claims a 30 per cent market share. It boasts that “joint ventures have led to greater Navistar growth in other continents, especially in Europe”. Navistar has owned the MWM operation only since 2005, when it acquired it from the German diesel maker KHD. 

Navistar meanwhile notes that its engines are used in trucks, pickups, vans and sports utility vehicles (SUVs). Navistar also produces diesel engines for commercial and passenger vessels, agricultural machinery, construction vehicles, and a number of other off-road vehicles and equipment.

Navistar Engine Group claims to hold 42 per cent market share of medium-duty diesel engines and 64 per cent market share of school bus engines in North America.

From a fiscal view point, in the year ending 31 October 2013 Navistar’s North American Truck operations lost $903 million compared with $736 million in the same period of 2012. The North American parts business in contrast turned in a profit of $476 million compared with $343 million in 2012. This highlights once again the old adage that its ‘parts that make profits’.

The company’s Global operations, which include MWM presumably, lost only $6 million compared with $168 million the year previous.

All of which left Navistar with an improved net loss of $898 million compared with a loss of $3.01 billion in 2012. This suggests Clarke’s medicine is working.

Significantly, Navistar’s financial report for the year stated: “The year-over-year improvement included the impact of increased margins, primarily related to the company's South American engine business as well as benefits realized from prior year structural cost reduction actions.”

So the South American business must be improving.

And, as to the links with Cummins, Clarke noted: “Traditionally, our first quarter represents the low period of the year as volumes are lower due to Thanksgiving and winter breaks down-times, which is compounded this year by significantly lower military sales and the late-in-the-quarter ramp-up of our Cummins ISB engine offering in our medium-duty trucks and buses. However, we anticipate stronger year-on-year performance starting in the second quarter driven by higher volumes in trucks, parts and our global operations and slightly improved pricing, coupled with on-going structural and material cost improvements."

The questions are: Who wants to buy a South American engine business with some products which may not be exactly state-of-the-art? And what is the exact level of MWM’s profitability?

And, if Navistar cannot sell MWM: What would it take in time, effort and financial input to increase its profitability sufficiently to make it attractive to a buyer?

So who might wish to acquire MWM? VW could be one potential buyer of MWM, being an important supplier of engines for Brazilian-built VW trucks –

The 9.3-litre NGD 370 engine shown on that website is described as an “in-house” Volkswagen AG engine, but it has been produced by MWM since 2007 and could be an update on the 9.3-litre Navistar MaxxForce 9.

The tall-cabbed Brazilian VW Constellation truck is offered with either MWM or Cummins ISB/ISC engines of similar power.  Cummins could therefore be another potential company to acquire MWM.

Meanwhile, it should be remembered that some two years ago, after it gained full control of German heavy truck maker MAN, VW put the South American truck operation under the auspices of MAN, leaving open the distinct possibility of MAN 6.9-litre, 10.5-litre or even 12.4-litre engines being fitted into Constellation trucks. 

Stretching the logic somewhat further, Navistar – in order to raise more cash – could sell its Huntsville, Alabama, plant to VW-MAN. The Huntsville plant builds both the MaxxForce 11 and MaxxForce 13 engines. 

Seemingly at minimal cost, it would need few modifications to revert the MaxxForce 11 and MaxxForce 13 specifications back to their original MAN specifications.  VW-MAN Brazil could then have in-house engines available without the units having to be shipped long distances from Nuremburg. The MaxxForce?MAN engines have CGI cylinder blocks.

On the one hand, Cummins would perhaps be ambivalent about that – potentially losing some VW-MAN business in South America. On the other hand, it could strengthen its opportunities of becoming the supplier of more (if not all) engines for Navistar’s class 8 chassis in the US.                                                  

Additonal reporting by Alan Bunting.

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