Navistar devises plan to counter losing EGR gamble

| August 23, 2012

Navistar says it is hitting the “reset” button.

After years spent developing and marketing its own engine platform, a series of negative turns this year resulted in an about-face on Navistar’s engine technology and a nosedive in its stock price. Now, executives say, they are charging ahead with a new engine strategy and a plan to restore customers’ and investors’ confidence in Navistar’s products and to return the company to profitability.

“We really feel like our competitors are telling our story instead of us, and we want to change that,” said Jack Allen, North American Truck Group President for Navistar, during a meeting at Navistar’s headquarters in Lisle, Ill., with editors from Randall-Reilly Publishing Co., publisher of Overdrive

Allen says the controversial push to meet 2010 emissions standards using an exhaust gas recirculation-only engine, as opposed to one using selective catalytic reduction, was rooted in the pride Navistar takes in understanding its customers. “More than 9,000 fleets went out of business during the economic crash, while government regulations such as HOS, CSA as well as rising fuel prices have created big challenges for them,” he explained. “We really thought an engine without SCR would be a big help to them.”

Every other diesel engine manufacturer ruled out an EGR-only engine as impractical for meeting 2010 standards set by the U.S. Environmental Protection Agency. But Allen said Navistar felt their engineers could develop one, which would give the company a huge advantage for years.

“So we started early back in 2000 building engines that allowed us to stockpile credits because we knew we’d have a race against time on our hands to get to the EPA’s 2010 NOX requirement of .2 grams before those credits expired,” Allen explained. “And it really surprised us how loud our competition screamed about our efforts. They were scared to death.”

In the end, “Our EPA credits ran out before we could get the technology perfected,” he said. “The angst in the marketplace was starting to become overwhelming. So we’re going to move forward.”

As previously announced, that means offering the Cummins ISX15 in ProStar+ tractors beginning in January, with an EPA-certified MaxxForce 13 (with ICT+ exhaust after-treatment, Navistar’s SCR technology) appearing in March. Until then, the company will continue to sell EGR-only MaxxForce 13 engines and pay an EPA non-compliance penalty for each one sold. A final EPA ruling as to the amount of the NCPs per engine is expected in 30 to 60 days. The announcement also said that Navistar would adopt a proprietary selective catalytic reduction system based on Cummins exhaust after-treatment systems.

A Federal Appeals Court decision last month ruled that EPA did not follow proper procedures in assessing non-compliance penalties (NCPs) to the MaxxForce 13 engines. The ruling also said that initial NCPs of $1,200 per engine were insufficient punishment and created an unfair advantage for Navistar over competitive companies that invested in SCR technology.

The court decision intensified the industry spotlight on Navistar’s struggle to develop an EGR-only emissions solution as well as the company’s ability to continue selling non-compliant engines. Additionally, reports of reliability issues with MaxxForce-equipped International Trucks and questions about the value of MaxxForce-equipped used trucks have led to Navistar’s stock prices to drop from $47.42 a share in February to $24.75 a share by mid-August.

Prior to the decision, Navistar’s EGR-only project had devolved into a bitter war of words and lawsuits against competitors, the California Air Resource Board, EPA and even customers as the company struggled to perfect its emissions solutions before EPA credits expired. The fallout left Navistar battered, and the North American trucking industry awash with rumors of unreliable engines and angry dealers and customers. Mainstream reporters for Forbes and The Wall Street Journal in recent months questioned the company’s long-term cash-flow situation and viability, and reported on shareholder efforts to remove top Navistar officials. There has been speculation that an acquisition of the venerable North American truck maker by foreign automakers or full-blown bankruptcy are likely outcomes.

Allen and other Navistar officials expect nothing like that, now that their new strategy is in place. Customers should not be hesitant to purchase an EGR-only MaxxForce-equipped truck between now and March, Allen says. And likewise, he predicts concerns over the resale value of EGR-only MaxxForce will prove to be temporary as well.