Tuesday 6 September 2016

Clarke confirms Navistar/VW tie-up

Navistar International Corporation has confirmed a wide-ranging strategic alliance with Volkswagen Truck & Bus that brings in $256 million.
This includes an equity investment in Navistar by Volkswagen Truck & Bus and framework agreements for strategic technology and supply collaboration and a procurement joint venture.
No specific mention is made of diesel engines and transmissions (MAN is just beginning to share Scania gearboxes) but component sharing is certain to be high on the agenda with Navistar relying heavily on its new German partner (although Navistar and MAN already have an engine agreement).
Volkswagen Truck & Bus will acquire 16.2 million newly issued shares in Navistar, representing 16.6 per cent of post-transaction undiluted common stock (or 19.9 per cent of pre-transaction outstanding common stock).
It will pay $15.76 per share or a 25 per cent premium over Navistar's 90-day volume weighted average price as of 31 August, 2016, or 12 per cent over Navistar's closing price on 2 September, 2016. Navistar will receive $256 million from the equity investment to be used for general corporate purposes.
The agreements expected to be entered into will enable Navistar to offer customers expanded access to “leading-edge products and services” through collaboration on technology and the licensing and supply of Volkswagen Truck & Bus's products and components, while “better optimizing its product development spend”.
                                    Clarke strikes a good deal
Navistar says the alliance will strengthen its liquidity position – something that will make Troy Clarke, Navistar president and chief executive, smile. In fact, he can congratulate himself on completing a good deal.
It is up to Navistar to make sure the deal does not come unstuck as did its deal with Ford Motor Company over the quality of its (Navistar’s) Power Stroke engines.
The procurement joint venture is expected to leverage the purchasing power of Volkswagen Truck & Bus's three major truck brands, Scania, MAN and Volkswagen Caminhões e Ônibus, in addition to Navistar's own International and IC Bus brands, providing Navistar with enhanced global scale.
Navistar expects significant synergies from both the strategic technology collaboration and the procurement joint venture.
The Lisle, Illinois company expects the alliance to be accretive beginning in the first year, and for cumulative synergies for Navistar to ramp up to at least $500 million over the first five years.
By year five, it expects the alliance will generate annual synergies of at least $200 million for Navistar. This annual run rate is expected to grow materially thereafter as the companies continue to introduce technologies from the collaboration.
"We are very pleased to partner with a global leader who shares our view of the world, in an alliance that will deliver multiple benefits and is consistent with our open-integration strategy," said Clarke.
Note Clarke’s use of the words “very pleased”. As it is, Navistar has been building under licence MAN's (d20 and D26) 10.5-litre and 12.4-litre diesel engines - both with compacted graphite iron (CGI) cylinder blocks. So Navistar and MAN engineers already knnow each other well, although there have been rumours that the reklationship has not been too harmonious. That will surely have to change, and no doubt Clarke will have some role to play in this.
                         Benefitting the purchasing operations
"Starting in the near term, this alliance will benefit our purchasing operations through global scope and scale. Over the longer term, it is intended to expand the technology options we are able to offer our customers by leveraging the best of both companies and enabling Navistar to deliver enhanced uptime. Volkswagen Truck & Bus's equity investment will strengthen our liquidity position and expand our financial flexibility, while aligning us with a valuable strategic partner."
"Closer collaboration among our existing brands was a top priority for our commercial vehicles business and we are well on track in this context," said Andreas Renschler, chief executive officer of Volkswagen Truck & Bus and member of the Board of Management of Volkswagen AG responsible for commercial vehicles.
"We are now taking the next step on our way to becoming a Global Champion in the commercial vehicles industry. The strategic alliance with Navistar is an important milestone and will be very beneficial for both sides."
Navistar will remain a leading, independent truck, bus and engine company, focused on providing best-in-class products and related services to its customers globally and delivering value for its shareholders.
"We expect this alliance will create significant global scale, yielding considerable cost savings for both companies," said Walter Borst, executive vice president and chief financial officer, Navistar. "We believe working collaboratively, the two companies can optimize the capital and engineering expenditures associated with next-generation truck and bus engine development, while providing both Navistar and Volkswagen Truck & Bus with opportunities for substantial procurement savings. This alliance marks another step in Navistar's journey to be a stronger, more profitable company."
To underscore the long-term nature of the alliance, Volkswagen Truck & Bus has agreed to hold these shares for a minimum of three years. Reflective of its shareholding post-transaction, Volkswagen Truck & Bus will have the right to appoint two directors to Navistar's board of directors.
                                               Technology sharing
The procurement joint venture will help source parts for both companies, providing Navistar and Volkswagen Truck & Bus with greater scale and competitiveness. It will also provide additional opportunities for Navistar suppliers to gain access to potential global sourcing opportunities, and create improved pricing for end-customers.
The strategic technology and supply partnership builds on Navistar's open integration strategy of partnering with the best global companies in the industry to integrate cutting-edge technology.
It is expected the partnership will focus on powertrain technology solutions, as well as explore collaboration in all aspects of commercial vehicle development, including advanced driver assistance systems, connected vehicle solutions, platooning and autonomous technologies, electric vehicles, and cab and chassis components.
It will be very interesting to see what happens in terms of diesel engines for Class 8 trucks. All the Class 8 truck builders in North America offer the option of the Cummins ISX15 or as it is now called the ISX, a 15-litre engine. And, for patriotic reasons if nothing else, truck operators may feel inclined to continue down this road.
However, with Volkswagen on board, and MAN in particular, Navistar will be able to offer (and could be under some pressure from Volkswagen's top management to do so) the German company's D3876 15.2 litre engine offering similar performance to that of the Cummins 15.2-litre engine. Navistar's salesmen will be able to point to the other two MAN engines the Lisle company employs as an inducement for them using the new 15.2-litre engine. Added to which, once it has been homologated, the MAN engine could be cheaper than the premium Cummins  ISX. 
The Navistar salesmen will be able to point to MAN's 15.2-litre, with a peak output of 640 bhp, having a CGI block and head, as well as other attrubutes such as top-down cooling, domed valves, steel pistons, and EGR, SCR and CRT closed particulate filter.
All of which could have an impact on Cummins' engine sales as the ISX is used in a large percentage of International's Class 8 trucks. In the limit, this could represent a significant slice of lost business for Cummins.
It is conceivable that executives in the front office of Cummins Inc in Columbus, Indiana will not be smiling at all at these latest devlopments.
This enhanced collaboration will certainly enable the new alliance to share the overall costs associated with future vehicle development, according to Navistar. And it should bring added business for MAN and Scania!
Navistar products will benefit from Volkswagen Truck & Bus components and technology through licensing and supply agreements entered into pursuant to the framework agreement for strategic technology and supply collaboration, which longer term will generate increased parts sales.
                                        Sales turnover of trucks
During the first six months of 2016, MAN Truck & Bus sold 39,700 units (+4 per cent compared with the prior-year period) and Scania 40,310 units (+9 per cent).
Developments in South America continued to be a challenge. MAN Latin America sold 10,130 vehicles from the brands Volkswagen Caminhões e Ônibus and MAN, down 19 per cent as against the first six months of 2015. All brands of Volkswagen Truck & Bus GmbH increased their unit sales in the second quarter as against the previous quarter; the Group posted an overall increase of 14 per cent.
In the first six months, Volkswagen Truck & Bus recorded an increase in sales of 4 per cent giving sales of 82,070 trucks. Market development continued to vary region by region: the Western European markets showed a positive development with a sales increase of 15 per cent, including France, Italy, and the UK, all of which stepped up their game.
Unit sales in Central and Eastern Europe also saw a significant increase in unit sales. The persistently difficult economic and political situation prompted a decrease in unit sales in Russia.
In Brazil, truck sales declined by 19 per cent in the first six months, due to the continued difficult macroeconomic environment and more difficult financing conditions.
Volkswagen Truck & Bus sold 7,570 units in the first six months in the bus business, down 6 per cent as against the previous year.
Looking at Volkswagen's commercial vehicle business as a whole, in 2015, Volkswagen Commercial Vehicles enjoyed sales of €10.34 billion, while Scania’s sales came to €10.48 billion. MAN turned in €13.7 billion to give a total for the German vehicle builder’s commercial vehicle business of €34.52 billion.
                       Three times greater than Navistar

In contrast, Navistar International Corporation achieved sales of US$10.14 billion in 2015. Using a conversion ratio of 1.1€ per US$, this would give Navistar a sales turnover of €11.54 billion. 
This would suggest that Volkswagen’s commercial vehicle business is roughly three times greater than the size of Navistar.
Meanwhile, according to ACT Research, based in Columbus, Indiana, VW’s part-acquisition has come at a good time. In August, a preliminary 14,200 new Class 8 vehicle orders were booked. Note that these numbers are preliminary. Final August numbers will be published later. Preliminary numbers for Classes 5-7 are not yet available.

“After a weak June and a dismal July, Class 8 orders rebounded in August to 14,200 units, or nearly 16,000 units on a seasonally adjusted basis,” claimed Kenny Vieth, ACT’s president. “While rising 37 per cent from July, August demand failed to meet the year-ago order volume for an eighteenth consecutive month, falling 29 per cent from August 2015.”
Meanwhile, if Troy Clarke is rubbing his hands in glee, so too will be those in the front office in Wolfsburg. If all goes well, this deal will really open the door for Valkswagen's entry into the North American market.

1 comment:

Alan Bunting said...

Cummins must be deeply disturbed by the VW-Navistar tie-up announcement. It specifically mentions powertrain collaboration, which can only mean the die is cast for MAN - or, less likely, Scania - engines to be offered in Navistar's class 8 International trucks. Already of course, since 2004, the American company has been producing MAN-designed diesels under licence, at one of its Huntsville, Alabama, plants.
That joint venture has not run particularly smoothly. Navistar went its own way in upgrading those engines (10.5 and 12.4 in-line sixes) to meet EPA 2007 and, subsequently, EPA 2010 emissions legislation. Most notably, under the obstinate leadership of former CEO Dan Ustian, the company insisted on remaining with EGR (exhaust gas recirculation) only, with no deNOx aftertreatment, on the grounds that North American truckers would have no truck (!) with having regularly to check and replenish a further liquid consumable, namely liquid urea (dubbed AdBlue in Europe and Diesel Exhaust Fluid in the USA).
Understandably, Navistar's 'EGR only' policy mirrored MAN's in meeting Euro 4 (EPA 2004 equivalent). But, in striving to meet EPA 2007 and 2010 rules, it tied itself in technological knots, trying to avoid following all its competitors, by adding urea-fed SCR (selective catalytic reduction) aftertreatment. It came up with a bewilderingly complex multiple turbocharger and EGR-cooler installation.
But it was all to no avail. EPA certification remained elusive. And to add insult to injury, massive engine reliability problems arose, with thousands of truck users taking legal action against Navistar.
Only with an eventual SCR package, engineered not with MAN's but, deeply ironically, with Cummins help, did those German-originated engines get EPA certified.
The 'new deal' between Navistar and VW – principally, we can safely assume on the powertrain side, with MAN – looks set, at the very least, to re-establish that 2004 joint-venture on to an even keel. But, from every possible angle, it looks bad for Cummins, whose SCR package on the 10.5 and 12.4 litre units could well be supplanted by the European installations on the MAN diesels built in Nuremburg.
Even more threateningly for Cummins is the possibility that Navistar's line-up of 'in house' (MAN derived) engines will be augmented by the German manufacturer's bigger and newer 15.2 litre unit introduced in 2014.
It would become an obvious substitute for the Cummins ISX15 (recently re-dubbed simply the X15), which is currently the sole option in the highest-powered class 8 Internationals.