Summary
The proposed US Environmental Protection Agency (EPA) rule limiting the number of pre-2010 Cummins engines that Navistar can stockpile has many asking what it means. From our perspective, it means problems for Navistar and Cummins. From a customer perspective with Navistar, there are the advanced-EGR questions, a 13 v. 15-Liter decision and then product performance. Then there is the question of what is next.
Analysis
Earlier this week, Navistar CEO Dan Ustian was trying to fend off concerns about them not having enough 15-Liter engines to bridge the gap until they have their Maxxforce 15 (Caterpillar-based) engine available. The plan was to stockpile enough pre-2010 Cummins and Caterpillar 15-Liter engines to cover the appx. one-year time period. Cummins is SCR-only and Caterpillar does not offer any 2010 versions.
In looking at Wards Communications numbers, Cummins supplies 85% of the engines in Navistar’s Class 8 trucks - which is mostly a 15-Liter market. Other smaller displacement engines up to now have been from Navistar, Cummins and Caterpillar. Per Dan Ustian, 60% of their current heavy-duty trucks have 15-Liter engines. Navistar has been aggressive in trying to move customers down in size from a 15-Liter engine.
One can be confused with the definition of the truck classes, especially when the manufacturers define them differently. Most of us call the heavy-duty sector Class 6, 7 & 8. Again looking at Wards’ US Sales numbers for the first half of ’09, Navistar sold 12,832 Class 8 trucks for a 29.53% market share, 7,128 Class 7 trucks for a 37.04% market share and 5,237 Class 6 trucks for a 49.07%. Class 6 & 7 buyers are not 15-Liter buyers (few exceptions), so the comment on them buying the smaller Maxxforce engines is valid.
With respect to the 15-Liter stockpile question, it’s more about orders and the number in the pipeline. Engine emissions follow the engine build date - more specifically when the crankshaft is laid at the engine assembly plant. The engines must be finished assembled, shipped to truck builders, warehoused until the truck is built, built into the truck, delivered to the dealer and then put into service. This lag is easily a month, but can be several months. The 2007 engines were finally showing up in numbers well into the second quarter - and there were still engines on the shelf at truck builders mid-year. Of course, we were buying trucks like drunken sailors. Another part of the flow lag has to do with orders. If the trucks are ordered, there is a loophole of sorts where they can have the engines stockpiled once there are orders. There are other similar idiosyncrasies.
Another look at the math tells us that half of Navistar’s Class 6-7-8 mix is Class 8. We know that Classes 6 & 7 numbers won’t change much because they are already mostly smaller displacement customers. It’s the Class 8 market share that will take the hit pre-2010 engines run out. If they last 6-months, that means that there are 13,000 engines that will be at risk - most needing to be “sold” on buying a smaller bore engine.
But then it comes to those darn customers. Navistar has a grabbed Class 8 truck market-share with the Cummins-powered Prostar. It’s a winner. Customers won’t automatically and instantly “like” the 13-Liter over a 15-Liter one the Prostar - especially if they can get a 15-Liter in another brand. Then when you look at the comparative power and fuel mileage as reported by fleets running the MaxxForce 13 against Daimler’s DD15 and Cummins ISX, the Navistar engine is not showing tangible performance benefits.
If one talks to dealers, customer and financiers, it’s naive to think that Navistar will not lose a notable amount of market share because of EGR and especially if the can’t meet 15-Liter demand. It’s not good news for Cummins either, as most Navistar buyers will move to Freightliners’ with Detroit Diesel DD15 engines.
In looking at Wards Communications numbers, Cummins supplies 85% of the engines in Navistar’s Class 8 trucks - which is mostly a 15-Liter market. Other smaller displacement engines up to now have been from Navistar, Cummins and Caterpillar. Per Dan Ustian, 60% of their current heavy-duty trucks have 15-Liter engines. Navistar has been aggressive in trying to move customers down in size from a 15-Liter engine.
One can be confused with the definition of the truck classes, especially when the manufacturers define them differently. Most of us call the heavy-duty sector Class 6, 7 & 8. Again looking at Wards’ US Sales numbers for the first half of ’09, Navistar sold 12,832 Class 8 trucks for a 29.53% market share, 7,128 Class 7 trucks for a 37.04% market share and 5,237 Class 6 trucks for a 49.07%. Class 6 & 7 buyers are not 15-Liter buyers (few exceptions), so the comment on them buying the smaller Maxxforce engines is valid.
With respect to the 15-Liter stockpile question, it’s more about orders and the number in the pipeline. Engine emissions follow the engine build date - more specifically when the crankshaft is laid at the engine assembly plant. The engines must be finished assembled, shipped to truck builders, warehoused until the truck is built, built into the truck, delivered to the dealer and then put into service. This lag is easily a month, but can be several months. The 2007 engines were finally showing up in numbers well into the second quarter - and there were still engines on the shelf at truck builders mid-year. Of course, we were buying trucks like drunken sailors. Another part of the flow lag has to do with orders. If the trucks are ordered, there is a loophole of sorts where they can have the engines stockpiled once there are orders. There are other similar idiosyncrasies.
Another look at the math tells us that half of Navistar’s Class 6-7-8 mix is Class 8. We know that Classes 6 & 7 numbers won’t change much because they are already mostly smaller displacement customers. It’s the Class 8 market share that will take the hit pre-2010 engines run out. If they last 6-months, that means that there are 13,000 engines that will be at risk - most needing to be “sold” on buying a smaller bore engine.
But then it comes to those darn customers. Navistar has a grabbed Class 8 truck market-share with the Cummins-powered Prostar. It’s a winner. Customers won’t automatically and instantly “like” the 13-Liter over a 15-Liter one the Prostar - especially if they can get a 15-Liter in another brand. Then when you look at the comparative power and fuel mileage as reported by fleets running the MaxxForce 13 against Daimler’s DD15 and Cummins ISX, the Navistar engine is not showing tangible performance benefits.
If one talks to dealers, customer and financiers, it’s naive to think that Navistar will not lose a notable amount of market share because of EGR and especially if the can’t meet 15-Liter demand. It’s not good news for Cummins either, as most Navistar buyers will move to Freightliners’ with Detroit Diesel DD15 engines.
Jay Thompson consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
