Navistar's Spiral of Despair

Commercial Motor
August 7, 2012

Navistar's EPA 10 strategy - and the company itself - is now, we believe, in a state of terminal chaos.


For a while now, we have been questioning Navistar's claims withreference to its adoption of an EGR-only route to compliance with the2010 legislation, due to be implemented as of January 1st next year.The sheer degree of vitriol that it has introduced to the debatesuggests that a deep nervousness exists within Warrenville: why elsewould suggestions be made that drivers need to wear breathing apparatusto recharge a DEF/AdBlue tank, or that the Urea solution is in some wayhighly flammable? For reference, here we provide a linkto a Material Data Safety Sheet issued by a UK supplier, which makes nomention of respirators or fire risk, and, for those who would arguethat the UK is in any way lax in its approach to safety within theworkplace, another link hereto the current Health & Safety Executive road transport checklist.In sum, if UK legislation says that AdBlue is OK, it's probably prettybenign.

Leaving Navistar's peculiarly disingenuous approach to safety claims onone side for a moment, that which has served to completely torpedo thestrategy is the announcement from MAN a few days ago that EGR is - withthe exception of the UK market - yesterday's news. This press releasewas published on the German manufacturer's website last week, and,translated, it reads thus:

MAN Nutzfahrzeuge on course for the latest Euro 6 technologies

MAN targets development capacity and investment at the latestenvironmental standards / No additional Euro 5 variants for heavy trucks

In the current sales crisis MAN Nutzfahrzeuge is putting itselfconsistently on course for the future Euro 6 emission step with thelatest technologies. In this way the company aims to gear itsdevelopment capacity and its investments fully towards preparing itsengines and vehicles for the market of the future. "In view of thecurrent market situation on the one hand and the fact that Euro 6commercial vehicles are soon to be launched on the other, we can meetcustomer expectations to the highest degree in the MAN TGX and TGS withour reliable and economical MAN AdBlue® solution. Instead ofintroducing additional Euro 5 variants based on EGR technology on tothe market for these truck ranges, we are concentrating fully on thefuture and the latest technology," explained Bernd Maierhofer, DirectorEngineering & Portfolio Management at the MAN Nutzfahrzeuge Group.
He went on to say that this decision is the logical continuation ofMAN's strategy on emissions: relief for the environment in the longterm coupled with maximum transport efficiency. "We have developed ourMAN PURE DIESEL® technology up to series-production maturity for allvehicles and are offering it in the TGL and TGM truck ranges and allbuses", added Mr. Maierhofer. This environment-friendly technology isalso the basis for MAN's Euro 6 engines to come.
 
Back at the IAA Commercial Vehicles 2008 in Hanover MAN Nutzfahrzeugepresented its new Euro 5 and EEV engines with MAN PURE DIESEL®technology for the light, medium-weight and heavy trucks from the MANTGL, TGM, TGS and TGX ranges and for MAN and NEOPLAN buses. The newEuro 5 engines with MAN PURE DIESEL® technology from the D08 CommonRail, D20 CR and D26 CR engine series feature enticingly low fuelconsumption rates, simple handling and maximum space for installationson the frame (in trucks), whist at the same time complying with thestrictest European limits on exhaust gases.
 
The market launch of these Euro 5/EEV engines with MAN PURE DIESEL®technology in the TGL and TGM truck ranges and in MAN and NEOPLAN busesstarted on schedule at the beginning of this year. For the TGX and TGS,which have already complied with the Euro 5 standard using SCRtechnology since 2006, no additional Euro 5 variants based on EGR willnow be introduced in large numbers from series production. Beside this,EEV variants will be available for the two heavy truck ranges, TGX andTGS, before the end of 2009. The D20 and D26 CR engines to be used forthis will feature the proven MAN AdBlue® technology, which isdistinguished by its high reliability, low fuel and AdBlue® consumptionand design-related advantages such as heated integral urea tanks andcompact silencer dimensions.

To us, this sounds very much like MAN is now eschewing EGR - with theexception of the UK market, and even there only up to 440 bhp - and is,instead, embracing SCR quite openly. The fact that the majority of MANengines sold for HD applications within Europe have in fact been of anSCR type for some time now probably need not detain us here, but whatwill be noteworthy is quite how Navistar copes with this volte face;its suggestion that European OEMs are moving towards EGR for Euro V - acareful use of words that bears very little by way of close examination- is now demonstrably as well as factually incorrect, and we'd opinethat the company is faced with an insurmountable problem.

Navistar rolled the dice back in 2007, declared early on an EGRstrategy, and hoped for the best in terms of banking credits from itsLD engine business. This was predicated primarily on its business withFord, which tanked. Whereas it hoped to bank sufficient credits to seeit over the 2010 hurdle, and give it breathing space in terms of analternative technology coming on stream, we cannot see how this can nowbe seen to be the case. Indeed, its noteworthy that Cummins, which, wesuspect, was following a similar credit accrual policy through itsDodge business - which actually increased during the same period -decided that the risk was too great and grabbed a hold of SCR about ayear ago. If CMI couldn't work the credits trick with a growingbusiness, then we have to assume that Navistar must have a problem withfalling volumes.

This puts Navistar in an awkward place. On the one hand, it has anengine that is fit for purpose only as long as its credits last out.Even here, we have to assume that MAN's decision to reduce itsdependence upon EGR at Euro V (effectively EPA 07) must suggest asignificant performance failing, and so those same credits are going tobe eaten up fast. Once they run out, Navistar will be faced withwinding Maxxforce up to 0.2 Nox - at which point, we suspect that thereduced power output will produce an engine that experiences difficultyin getting out of its own way - or opting instead for the Cummins unit,c/w SCR which, according to Navistar, is the devil's own route tocompliance. From what we can gather, the best that Navistar can hopefor is to sell a lot of trucks prior to 1st January 2010, and then veryfew afterwards. As strategies go, this one blows: either no trucks, abad truck or one that uses technology that has been described almost aslife-threatening by the same company that seems likely to end uprelying upon it.

As with MAN in Europe, it's difficult to see quite how Navistar can getout of this - entirely self-dug - hole. Of course, it will point to itsgrowing military business, but even here, one is given to wonder if USmilitary spending is likely to continue at the same level witnessedover the past few years. Given the upwards trajectory of US publicdebt, it would seem unlikely.

Navistar has set a course towards self destruction, and we regard it asnot a case of if, but of when the house of cards comes crashing down.Prior to the Scania debacle, we would have assumed that MAN would havestepped in, and, prior to Marchionne's big dreams, we would haveregarded Fiat Powertrain and Iveco as likely saviours, but both are nowout of the picture, and, in the case of the former, any coherentanalysis of a combined Navistar MAN would include the words two wrongsdo not make a right.

And so it is to Caterpillar that we look, and CAT, indeed, seems tohave played a masterful hand here. Its own failing HD business is nolonger an embarrassment, because it no longer exists, but, through itsNavistar deal, it retains a toehold within the truck business. We suggested similar around a year or so back, and, quitewhether or not CAT chooses to strengthen its position within Navistarbefore a Chapter 11 filing or after the same remains to be seen, but wesee few other options. Is talk of Chapter 11 premature? Navistar rolled the dice, gambled big and will, weare certain, lose huge. That's never a good thing. The choice will come down to a pearl handledrevolver on the terrace, or life as a CAT subsidiary. Not a difficultdecision, we'd reckon.




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