The 2010 US Diesel Engine Landscape - Paccar’s Approach Will Be Most Changed Without Cat

Implications: Paccar’s US brands of Peterbilt and Kenworth are losing their long-time Caterpillar big bore premium image-partner in 2010. Their engine strategy has been one that has included outsourced engines for Class 7-8 from Cummins and Caterpillar, along with a Paccar-branded Cummins 7 & 8 Liter engines for the midrange segment. Their 2010 strategy will include all SCR engines except for the 15 Liter Cummins, which is still planned to be EGR. This transition including their new DAF-based engine models could be the most interesting.

Analysis: Paccar’s Peterbilt and Kenworth models combined make up about make up about a quarter of the Class 8 market (equally-shared mix between truck brands). Class 7 has been more with the Cat 13 Liter but with an overall Paccar market share only in the teens. Paccar trucks are a favorite of smaller and niche operations, including weight sensitive ones. They are also purchased by major fleets as perk trucks who normally buy cheaper competitive trucks for their fleet drivers - and also sold by fleets to their independent contractors.

Cat’s past dominating market share at Peterbilt with 15 Liter engines had already disappeared with the switch by purchasers from “big nose” to more aerodynamic trucks and Cats continuing hit-and-miss ’07 engine problems. This shows number-wise in Cat’s market share drop of 85% and 60% in 2005 to estimated 35% and 25% today at Peterbilt and Kenworth respectively. The current 15 Liter Cat segment has been favored for dealer lot offerings with the Cummins 15 Liter engines going into fleet sales.

There is expected to be an uptick in Cat orders before ’07 engines are no longer available, then Cummins will be the sole 15 Liter offering until Paccar brings on their 15 and/or 16 Liter offerings. The higher output engines are also needed for DAF trucks where some perceive they are underpowered compared to competition. Paccar has also seen considerable success with the Cat 13 Liter engine, while also offering the Cummins ISM 11 Liter with limited success.

For 2010, the Paccar engines to be offered in the US will be the 9 and 13 Liter models currently being built and sold overseas and soon to be assembled in their new plant in Columbus Mississippi. Their reputation and performance is well documented and will most probably ultimately carry the premium reputation their trucks carried with the Cat engines. The residual values of Paccar trucks with Cummins engines have traditionally been notably less than with Cats. They like other truck makers see the move toward a more even mix of 13 and 15 Liter engines in the future in the Class 8 segment.

It is expected that Cummins will not offer the M11 for US EPA 2010 certification with all the 13 Liter offerings coming out from all engine folks. There may be some other strategic deals with Cummins to add to the ones today with midrange engines and having direct Cummins parts business (bypassing Cummins distributors). Nonetheless, this is an opportunity for Cummins at least for a few years. Also, Paccar has a very strong dealer network, which is the real key in introductions of new products. Don’t expect a surge of sales in 2010 - but we’ll be watching all the indicators.