Friday, 23 September 2016
Navistar: Time to step up to the plate and deliver
Is it just conceivable, when the dust of document signing has settled and top-level Volkswagen Truck & Bus Group (T&B Group) engineers and managers sit round the table with their counterparts at Navistar International Corporation that the conversation will move to the detail of not only customising the MAN engines that Navistar builds under license, but manufacturing other VW group diesel engines in North America.
For, in exchange for an infusion of $256 million for a 16.6 minority minority stake, VW T&B Group will have two seats on the board.
The deal comes two years after Volkswagen gained full control of Swedish truck supplier Scania and combined it with the German truck maker MAN and other parts of its business to create its truck and bus unit, which primarily sells vehicles in Europe and South America.
The latest deal gives VW an entrée into the potentially important North American truck and bus market where Daf (through Paccar Inc.), Daimler AG (Freightliner) and Volvo Corporation already enjoy a foothold.
The two seats VW gains on Navistar's board will be important – even crucial. On the one hand, VW wants increase its heavy commercial vehicle footprint in North America, the one major region where it has no dominance. And, as the text of the joint communique makes clear, the ' deal' with Navistar centres on powertrain. So the two new board members will want to see fruition in this area particularly.
On the other hand, the VW board members will be keen to see that the work of Navistar chief executive Troy Clarke is not wasted, but continues and bears fruit as he turns the behemoth into a profitable enterprise able to achieve a return on the German company’s investment. A buoyed up Navistar is what the VW board members will wish to see (and been told to obtain). A healthier Navistar means increased engine sales and thus greater return on the capital invested.
Other factors in the equation of VW’s most investment are: a need to ensure Navistar is not the subject of a hostile takeover, possibly by Cummins Inc.; also, VW board members will want to keep a wary eye on fellow shareholder, activist investor Carl C. Icahn who has a similar shareholding to VW.
As Navistar’s Troy Clarke said: "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.
A bigger picture
But the deal is part of a bigger picture; a game plan. Under the umbrella of Volkswagen Truck & Bus, boss Andreas Renschler has been leading the process of bundling together the medium- and heavy-duty truck and bus units of Volkswagen AG to form a robust commercial vehicles group to rival Daimler.
The German company's strategy includes plans to expand into new regions. Within the next decade, Volkswagen Truck & Bus Group aims to become a worldwide leading commercial vehicles group in terms of profitability, innovations for its customers and global presence, according to Renschler. This must include a wish to see Navistar increase its market share.
Added to this is another possible factor. It should not be forgotten that, having taken a 16.6 per cent stake (a stake making the German automaker one of the biggest shareholders of Navistar, along with Carl C. Icahn), VW AG will surely want to increase this stake to 25 per cent to tighten its grip on the destiny of this at-present beleaguered company. Such a stake would strengthen VW’s leverage over Icahn.
Bumping up Navistar's market share of truck and bus sales through greater manufacturing sophistication and engineering competence in the powertrain department has important implications.
It includes for example preparing the ground for the next stage of US emissions legislation so that when the time ones, the company (Navistar) is well prepared for anything that is thrown at it. Volkswagen and Troy Clarke together have no wish to suffer a repeat of the utter humiliation caused by former Navistar boss Daniel Ustian over his intransigence regarding the issue of EGR (exhaust gas recirculation) and the resulting display of corporate incompetence.
Increasing Navistar’s market share is but one requirement of VW’s T&B Group. More fundamental is the wish to introduce Group engines more deeply into Navistar’s vehicle line-up. Such a strategy would move the Navistar-VW 'joint venture' to the next important stage of development.
Navistar has under-utilised engine capacity even though it has shuttered its Indianapolis, Indiana engine plant and foundry. And nothing would make greater logic than for VW to 're-engineer' Navistar’s diesel engine range to the point the Lisle, Illinois-based company is entirely self-sufficient, and does not have to offer customers the option of expensive, bought-in Cummins engines. In other words, VW would like to see complete vertical integration where possible.
The work could start presumably with the N11 and N13 engines that Navistar makes under license from MAN, part of VW T&B Group. These were the MAN D20 and D26 engines respectively. It cannot sit comfortably in the minds of top VW and MAN engineers that Navistar sidled up to Cummins in a bid to solve its EGR problems when MAN had already solved the problem so neatly, efficiently and economically.
Even today, that decision must fester in the minds of German engineers – that their technology was by-passed in favour of Navistar’s knowhow which, in the event was found wanting. How could anyone bypass German know-how in favour of US preference?
So top of the list of 'jobs to do' could be to unscramble the deal with Cummins and effectively start again to re- engineer these two diesels with their compacted graphite iron cylinder (CGI) blocks and heads.
Navistar's International Truck and Engine Corporation did follow MAN’s lead in this one respect: they too chose Brazilian foundry Tupy S.A. to supply the compacted graphite iron engine blocks and heads for two large-bore diesel engine products, the MaxxForce 11 and MaxxForce 13 – now dubbed N11 and N13. The components are cast at Tupy's foundry at Mau, in Sao Paulo.
Tupy uses SinterCast’s process control technology for CGI casting, a product of Sweden's SinterCast AB. The plant already produced heavy-duty diesel engines with CGI for the German truck group MAN AG.
List of ‘jobs to do’
Next on the list of ‘jobs to do’ could be the N9 and N10 engines. Cummins likewise had a hand in re-engineering these engines to embrace its SCR after-treatment technology as it did with the N11 and N13 engines.
These two engines have a long history, having started life as the DT466 which has migrated in size from 7.6 litres, through 8.7 litres to the present-day 9.3 litres. Probably the best that VW can do is unbundle the Cummins SCR package and replace it with the MAN-derived after-treatment solution.
Of course, Scania does have an engine in this range - the five-cylinder 9.3-litre DC09 which could replace the venerable DT466. To do so would require considerable investment to lay down a production line and arrange component sourcing. But this is a possibility for the future.
A supply chain stretching from Sweden to North America might be acceptable for penny-piece numbers but not for the higher volumes required in International trucks and IC Bus products using that size of engine.
Perhaps more pressing, and possibly easier to execute would be the step to introduce MAN's 15.2-litre D3876 unit introduced in 2014. This engine offers outputs of up to 640 bhp and would make an ideal substitutej for the Cummins ISX15 (or X15 as it is now called). This engine is currently the sole option in the highest-powered Class 8 International trucks.
The D3876 this year won Italian Diesel magazine’s ‘Diesel of the year award’ and, like MAN’s D20 and D26 in-line six-cylinder engines uses CGI cylinder blocks and heads. The new engine complies US emissions standard Tier 4 final through its EGR and SCR systems.
Initially these engines would have to come from Germany and while more expensive on the one hand their introduction would increase VW's local content. Given the volumes, the engines could be made also in one of Navistar’s Huntsville, Alabama plants. And ‘bumping up’ engine manufacture in Navistar’s US locations would help to bring down unit costs.
So there is much for the new ‘team’ to digest and implement in the coming months if the needs of both Volkswagen AG and Navistar International Corporation are to be met.