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July 7, 2012

Told you so . . .

In the unfolding saga, Navistar says it is to abandon its EGR-only emissions solution to meet EPA 2010. It will adopt the same selective catalytic reduction (SCR) technology to handle NOx as its competitors. Incoming president of Truck and Engines Troy Clarke said in a July analysts’ call that the company wouldn’t be making an about-face but simply going forwards. “This announcement is not about going back, it's not about backing up, it's about going forward," Troy Clarke Navistar's president of Truck and Engine said in a brief call on the morning of July 6.

Despite wrapping it in a new tech term: In Cylinder Technology Plus, it is an about-face of the first kind, and there are so many ramifications that it’s difficult to know where to start.

From a personal standpoint, I will start with a New York analysts meeting where I was invited to speak in late 2010. There I was asked to comment on the truck engines emissions picture at that moment and the prospects for truck and engine sales. It fast became an International Engine bashing session and ultimately led to my losing my job at Heavy Duty Trucking as my remarks ticked off Navistar management so severely. They accused me of trying to manipulate Navistar stock price.

As it turns out, the company didn’t need my help. Its value, precisely because senior management blindly pursued Advanced EGR (A-EGR) as its preferred emissions solution has seen its value halved since.


And there's more woe to come I predict.

Back in December 2010 I said to anyone who would listen that the MaxxForce 13-liter was proving to be a disaster. I had earlier done a roundup for Heavy Duty Trucking Magazine in which I had requested from each engine and truck manufacturer some truck fleets I could canvas for comment on how the 2010 engines were performing (see sidebar for the emissions requirements and technologies). Navistar’s PR Manager, Steve Schrier said that the company would ‘choose to sit this one out.’

Now this was against a background of at least three years of denigrating the SCR solution by senior Navistar managers. Their position was that using the Urea reagent in the exhaust stream was placing the burden of emissions compliance on the customers because they had to add Diesel Exhaust Fluid (DEF) to an additional tank of the truck.

Not content with that, Navistar and its spokespeople embarked on a vitriolic campaign to denigrate the technology in public statements, to sue EPA at every available turn, to try to prove that SCR technology could be defeated and on and on and on.

The comment that will most likely come back to haunt Navistar, though, is that SCR was a ‘marooned technology.’ The implication was that its own A-EGR would win the day and the other manufacturers would have to follow suit; customers who had bought into SCR would be abandoned and supplies of the DEF would dry up – if even the infrastructure ever got into place, said the International detractors.

In the end, it’ll be lucky the SCR infrastructure is not only in place but proven alive and well. Navistar’s Internationals from mid-2013 will be taking every advantage of it.

The gamble
The EGR gamble was huge for Navistar. But it wasn’t the first company to make the wrong choice. Caterpillar pursued ACERT as its technology solution for EPA 2007 and couldn’t make it work satisfactorily with rising dissatisfaction from customers and failing support in the early stages of this last Great Recession. Realizing that EPA ’10 was outside the technical capabilities of ACERT, Cat backed out of truck engine production altogether before the 2010 hurdle hit. It chose to abandon its customers and their trials and tribulations with the Cat aftertreatment solution. At the time, I offered that Navistar by pursuing A-EGR was painting itself into the opposite corner of the same room. And so it proves with the announcement that the company will abandon further efforts to make the EGR technology work – even though it has as much as $700 million invested into it.

Now, though, it has to develop an SCR solution that could take more hundreds of millions to fast-track it to market.

There are some shortcuts available to the company, though. Navistar uses SCR in Latin America (so DEF is dangerous in North America and not in Latin America? Never could buy into that one . . .). Indeed, at its vast Aladdin’s Cave booth at Mid America this year it displayed a cool Mahindra cabover as “the direction of the future.” How prophetic it would turn out to be: The truck had a full SCR installation for the South American emissions environment. Many of us poured over that particular unit, opening the side-skirt door to reveal the blue-capped SCR tank – at least until someone from Navistar appeared and placed a crude self-tapping screw into the flap so it wouldn’t open any more.

The truly interesting thing with this about-face is what the market will do in response. Yes, Troy Clarke, it is not about going backwards, about face or whatever. But what about those fleets who took the marketing line and bought the 2009 and 2010 and 2011 and even 2012 trucks. Talk about ‘marooned technology’ Will those customers buy another International till Navistar has developed its SCR solution and demonstrated it will work? What will they do with their trucks in the used market? They’re marooned technology. And, oh yes, they just don’t work.

Because the fact that the engines are not working is another issue of the MaxxForce 13 and A-EGR that fleets were conned into buying.

The warranty
At my engines roundup in the middle of 2010, anecdotal evidence throughout 2011, and again at the spring 2012 Technology and Maintenance Council’s panel on 2010 engines it was very apparent that the International MaxxForce 13 has been bedeviled by problems, many centered around ‘check engine’ light issues but also around trucks that wouldn’t do the job. One fleet manager I spoke with said that he had evaluation ProStar + trucks amounting to 5% of the fleet power total, yet on any morning it accounted for 35% of the vehicles unable to meet the ready line. A tow company in the tough days of 2009 and 2010 said ‘thank goodness for Navistar’ because its best business was hooking in trucks that had died at the side of the road.

At the analysts meeting in New York, I had said that these and many other anecdotal stories were hinting that the MaxxForce 13 was just not ready for prime time at that point, and the issues would be aggravated as the engineers sought to try to get from the 0.5 g/hp-hr NOx level down to the mandated 0.2. In 2010, trucks were in operation without the EPA ’10 sticker showing compliance – the entry at the 2011 American Truck Dealer Truck of the Year contest was one! Various fractional stickers were applied, proving nothing. But even as Navistar sold trucks with ‘compliant’ engines based on the emissions credits accrued to 2010 they were proving highly unreliable in use. Those credits, by the way have, or are about to, run out. Navistar is facing a near $2,000 penalty for non-0.2 conforming engines produced. Now, Navistar’s engine guys cannot see a way to get down to the limits, adding to Navistar’s financial woes and forcing this embarrassing about-face.

Excuse me, new way forward.

According to recent reports, Navistar has been committing enormous accruals against anticipated warranty which already double this year over last. The sums will be at least as much as the development costs of A-EGR and they’re nowhere finished yet, hurting a weak financial performance as customers have increasingly abandoned the International brand.

Whether these warranties cover the guaranteed buy-backs of disastrous purchase decisions to go with Navistar heavy-duty products is not stated. But one of the major package carriers that keeps its trucks for years and years and years, has by all accounts, negotiated to have all its ProStar + trucks turned back after a year. First time ever. Another major LTL that made a decision to purchase a huge order is describing it as a ‘catastrophe’ and is seeking redress.

That, though, is only the tip of a huge iceberg of customer dissatisfaction that will have to be a severe drain on Navistar’s financial performance until it can get the ship (Titanic?) turned around.

Woe, woe, woe
Redress is one of the issues facing Navistar in the wake of the disastrous decision by chairman and CEO Dan Ustian and his senior staff to pursue A-EGR as the emissions solution at all costs. And that was against advice from the engineering side that saw some notable defections from the design staff.

Fleets that have suffered by taking advantage of the fire-sale deals from Navistar over the last couple of years must be looking to litigation to recover some of the huge losses they have seen repairing the trucks, dispatching other power to cover loads, overbuying ProStars to have reserve power. It is inconceivable that they won’t want redress. It’s not enough to turn the trucks back to Navistar. Service is what the trucking industry is all about and these unreliable products have made severe inroads in fleets’ delivery performance. But in many cases, the purchase decision to go with International has been because of the assurances and deals offered by charismatic senior sales vice president Jim Hebe.

On a personal note, I have been very disappointed by Hebe throughout the bitter and acrimonious MaxxForce/A-EGR debate. Hebe has enough truck experience to know that the ridiculous claims made in the early stages about the toxic qualities of DEF were plain fabrication; he knew full well that ProStars with the 13-liter were unreliable but still kept selling them to his long-term industry customers. But despite claims that there were some very bright engineers in Fort Wayne, the engines have never meet certification at EPA2010. (They are supposedly at 0.39 g/hp-hr for 2012) And he’s not the only one to carry blame here. Engineers that in other times I had enormous respect for had been at the Kool-Aid too.

Incidentally, many of these capable engineers have chosen to leave Navistar as the Fort Wayne operation has been run down, with the consolidation in the new corporate Ivory Tower in Lisle, Illinois. Another questionable decision . . .

And so product came to market, was strongly marketed, sold at deep discounts and ultimately disappointed customers.

If now there is an about face, how likely is it that those customers will now go buy an EGR MaxxForce 13-powered ProStar +? That means zero sales till the Navistar SCR solution is proven. This can only pour salt into the wounds of International dealers who, in the past, have been told to ‘get over it’ with issues such as the Caterpillar truck deal.

The ‘marooned technology’ of A-EGR will see truck dealer inventories marooned in the sales lots and massive order cancellations.

Navistar has one potential ace. Cummins, which was running better than 60% of International truck production prior to 2010 – and way into the year from likely stockpiled ISX 15 engines – is tipped to come to the rescue. This is despite being so royally screwed because Cummins chose the SCR route contrary to CEO Ustian’s EGR-only dictum. Word is Cummins is likely back mid-2013. That will allow customers who like the ProStar (and make no bones about it, the ProStar is a great truck) to come back to the fold. Maybe even a few will try again the 13-liter MaxxForce when it has divested itself of that ridiculously complex and maintenance-prone cooling system. But that means a year of no sales for Navistar heavies (would you buy one?) till either the Cummins option is available or till the MaxxForce SCR is proven.

Regrouping
It is obvious that Troy Clarke as the new president of the Truck and Engine company is the heir apparent. He is the only one who has had the courage to stand up in public and say “We were and are wrong.” Words that ring in my ears, as I said in that fateful analysts meeting that the scenario would play out as it has and that the only way forward is a change at the top, or a bankruptcy, or a corporate takeover. Maybe all three.

The carpet at Navistar’s corporate reception desk is worn thin from delegations from prospective Navistar purchasers coming to make their case. Currently the favorite is Volkswagen, whose positively Byzantine slew of brand names and holdings include the European MAN and Scania brands. VW has enough cash and brash that it no only wants to be the number one carmaker in the world, but the top truck guy, too, beating out fellow-German Daimler for the honor.

It could easily do it with a Navistar acquisition.

And there’s no doubt Navistar, despite this North American debacle, is a worthwhile target. Look at where Clarke has come from: the International-Mahindra joint venture in India. It is incredibly strong with seemingly great products that resonate around the rest of the world at a great price point. India, too, will become a vast domestic consumer of Mahindra heavies over the next several decades. In Latin America, Navistar has a major engine plant in MWM-International Motores. Then there is whatever emerges from the Caterpillar agreements for worldwide trucks, engines, markets and distribution. And even with the winding down of global conflict, the parts and service support for the International MRAPs in the military will continue to be good business for years.

A lucky company
Since 1980 I have been a commentator on the North American trucking scene and ever since 1982, International (Harvester) as it then was has looked to be on the verge of extinction. Yet it has always been a lucky company. Despite management decisions that at the time, and even in hindsight, were and are disastrous (and in many, many cases self-serving by management), the company has survived. I have a sneaking suspicion it will struggle through this, too.

It’s just a crying shame that so many failures, bankruptcies and shattered careers have been left in its wake.

Mine too? No. Like many others, I have learned that it’s a brave new world and sometimes change is for the better.






5 comments:

  1. You are one of the most courageous journalists I have ever had the pleasure of knowing. Excellent commentary.

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  2. Hi Steve,

    Good article. Good Read. I want to call you out on a couple remarks, though. First, I believe Navistar's Engines are developed in Melrose Park, IL. Please don't pull the good name of Fort Wayne into this issue. Second, "the winding down of global conflict"? Maybe: "the winding down of America's direct involvement of the global conflict"?

    As the spouse of a Navistar Fort Wayne severed employee, "sometimes change is for the better" is a great, positive attitude and too true!

    Regards,
    JTCL

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  3. Great story, Steve. I concur with JTCL. FW engineering was constantly embroiled in the politics of engine engineering stupidity. And, of course, FW folks got kicked in the teeth for delivering the bad news that the engines simply didn't work. Then the company decided to disembowel the only functional engineering group in the company. The place was hemhorraging talent like crazy, yet they still had to have that palace in Lisle. It is a damn shame, so much talent lost and dumb decisions made. I hope, for the sake of the good folks still employed there, that the place does not implode. That great ProStar was engineered in FW, along with many other great trucks, but FW engineers should not be blamed for the engine fiasco.

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  4. nice read. i drive a maxx 13 2010 150k miles been in the shop so many time i drive spare trucks more often then my dedicated unit. pos. ive been using a mercedes columbia beatup dog and runs circles around that maxx junk

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  5. Nice article, Steve. The trucking industry may have some ups and downs in the early 1980s but look where they are now, still keeping up.-Kieran

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