Picking partners

| July 24, 2001

Truck makers, having embraced the idea that less is more, are narrowing the engine choices for their vehicles. The move started four years ago, and it has accelerated in recent months. It’s intended to help manufacturers lower production costs and keep a lid on retail costs while optimizing the performance of selected components.

Volvo took the first steps in this direction in 1997 when it stopped offering Caterpillar power. Late last year, the company signed an exclusive supplier agreement with Cummins and dropped Detroit Diesel. Cummins is also the exclusive outside engine vendor to Mack.

Officials of Paccar, parent company of Kenworth and Peterbilt, in February made Cummins the company’s default engine and indicated that ties to Detroit Diesel would be severed by mid-summer. Freightliner buyers can still spec engines from Cat and Cummins, as well as Freightliner’s sister companies, Detroit and Mercedes-Benz, but it appears that menu will shrink.

What’s driving these alliances? Corporate mergers, emissions standards and market conditions – major issues for the manufacturers, but of little concern to buyers, many of whom have strong loyalties to truck brands and engine brands.

Paccar, parent of Kenworth and Peterbilt, made Cummins the company’s default engine, giving Caterpillar a secondary status. Paccar officials have also indicated that ties to Detroit Diesel would be cut this summer.

Dan Meyers, owner of Three-D Transport in West Unity, Ohio, runs 20 Kenworths that pull covered wagons across the Rust Belt. All but two of his trucks are Detroit-powered. But that mix is going to change, partly because of a good working relationship he’s established with his Kenworth dealer. “Any piece of equipment is only as good as the service you can get for it,” he says. “There tends to be more maintenance issues on trucks than engines. If it were the other way around, I might be inclined to stay with the engine instead of the chassis.”

Meyers says other buyers he’s talked with want to see how the alliances shake out. Tom Stone is in that category. The owner of Shenandoah Motor Express in Versailles, Ohio, started converting his fleet to Detroit-powered Kenworths three years ago. Now, he must choose between the two products. “I’m not sure what I’ll do,” he says. “These are new rules, and I have to determine how I want to play the game. It’s not business as usual. I’m being forced to make the changes by things I cannot control or even influence.”

Stone says he was stunned when he heard that Paccar was shedding Detroit Diesel, but he’s “come to realize that this isn’t the end of the world. I know that every engine manufacturer makes good products,” he says. “Sure, these alliances might take away some of the flexibility we had in the past, but maybe that flexibility has cost us a bunch of money over the years.”

Cost is just one problem associated with a wide selection, says Laura Wenzler, a marketing director for Cummins. Manufacturing complexity grows with the number of component suppliers, resulting in generic assemblies and diluted component performance. With a narrower range of choices, she says, engine makers can work much closer with truck makers to “integrate a total solution in the vehicle, and end users benefit from that.”

Cummins, having contracts with Mack, Volvo and Paccar, has been the most successful player in striking deals with truck builders. Its long-term supplier agreement with Paccar, which makes it the company’s default engine, has caused considerable head-scratching in the industry because Cat accounts for about 65 percent of Kenworth and Peterbilt installations.

Kenworth General Manager Ed Caudill says the Cummins deal allows the companies to “take out some of the costs” of truck production. At the same time, Caterpillar has been a “great partner” and “the marketplace will determine what engines go in our trucks,” he says.

Dave Semlow, Cat heavy-truck marketing manager, says his company is in discussions with Paccar, International and Freightliner regarding increased integration. “We fully intend to be a full player with those three,” Semlow says.

The next round of emissions cuts, effective October 2002, gives truck makers another incentive to work with fewer engine suppliers. “With the upcoming emissions mandates, it gets pretty expensive to engineer a host of engines into a chassis,” says Frank Bio, a director of marketing for Volvo. “The changes in 2002 won’t be so bad, but the next level, in 2007 – that’s when we’ll have real issues with installations.” Bio says this complexity will compel truck makers to compromise or optimize their designs.

In introducing its system for reducing emissions, called ACERT, Cat recently announced that it had stopped developing cooled exhaust gas recirculation, which is seen as the standard for cutting emissions.

Caudill noted that cooled EGR – the strategy favored by every other engine manufacturer – could cost $1,000 to $1,800 for the engine hardware and another $2,000 to $3,000 on the truck. Using ACERT would require less new engineering, Caudill says.

Unfortunately, ACERT won’t be ready for the market until the fourth quarter of 2003 – more than a year past the deadline set by the Environmental Protection Agency. Cat is now appealing to the EPA for an extension. Regardless of what happens in the short term, Cat officials are confident, Semlow says. “We wouldn’t have gone to ACERT if we didn’t believe it was a better solution.”

If Cat succeeds with EPA, the Cummins-Paccar pact will have little effect on most Pete and KW buyers – even those who choose vehicles from dealers’ stock. Rick Hendricks, a salesman at Inland Kenworth in Albuquerque, N.M., says most dealers understand customer preferences, and they’ll continue to spec the components that have the broadest appeal. If that means ordering a yellow engine, so be it. “We never get a base-model truck,” he says. “We probably couldn’t sell it.”

Meanwhile, industry consolidation, especially since last year, has increased the pressure for more integrated truck manufacturing. Freightliner, which already owned Sterling, acquired Western Star; Volvo AB acquired Mack Trucks. DaimlerChrysler, Freightliner’s parent company, purchased Detroit Diesel Corp.

That move, said Freightliner President Jim Hebe in January, signaled increased integration at Freightliner. “It’s pretty safe to say we will have a strategy to deal with engines, transmissions and axles,” he said. “Does that mean we’ll be totally integrated? No, but that means we will probably have fewer partners.”

The company is holding off on post-2002 engine offerings to see what results from engine makers’ talks with EPA, Hebe says. “If the agency decides against extending the deadline, we will be trimming some engines.”

Not many truck makers want to install parts made by their competitors, so while Detroit Diesel has the inside track at Freightliner, it is essentially out at Volvo, Peterbilt and Kenworth. Keith Brandis, vice president of marketing for Volvo Trucks North America, says almost a third of the company’s Class 8 buyers spec’ed Detroit Diesel, so customers were unhappy when that option was eliminated. “We met with them face to face and told them we could not share that information with our competitors,” Brandis says.

International hasn’t disclosed much about its plans. “We’ll have to weigh the cost of [reducing engine choices] vs. the potential loss of not having a certain brand,” says Dennis Webb, vice president and general manager.

No one expects the North American truck market to copy the European model, in which engine, transmission and suspension are predetermined by truck brand. Nevertheless, vertical integration “is definitely a trend, and I think you’re going to see more of it,” says Nick Panza, Peterbilt’s general manager. “And you will probably see more of it from us as well.”

Volvo is also moving in that direction, Brandis says. “We had the benefit of seeing both methods of manufacturing, thanks to our European influence. Our vision was to move closer to the middle of the two camps.”

“As costs get squeezed and the competition gets tougher,” Panza says, “the only way we can be successful and our customer can be successful is if we start narrowing the focus. The critical issue is making sure we put [the most appropriate products] in the hands of our customers. That’s an education process – education of the sales team and education of the customer.”

Pat Mauldin, sales manager and vice president at Tom Nehl Truck Co. in Jacksonville, Fla., is skeptical of any attempt to limit choices. “The only thing [limiting selection] is going to do is make some people buy products they don’t want,” he says. “In that respect, it’s a bad deal because no matter what anyone says, the customer is still the boss.”

- Jim Beach and Paul Hartley contributed to this article

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