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October 15, 2015

Navistar’s Wrong Diesel Engine Technology Costing Millions

Sometimes betting on the wrong horse can cause a truckload of trouble and an awful lot of money.

Navistar International Corp. recently reported a fiscal third-quarter net loss of $28 million.  Navistar’s last profitable quarter came in mid-2012 and much of Navistar’s problems stem from the fact that they bet on the wrong diesel engine technology.  Their diesel engine emission technology proved to be a disaster, ultimately costing Navistar more than $700 million, and it continues to haunt them to this day.

As rival engine makers, such as Cummins, Daimler, and Paccar all developed an emissions system based upon adding urea to the exhaust gases, Navistar went another direction and made the decision to develop an exhaust gas recirculation (EGR) technology that funneled emissions back into the engine’s cylinders (in the hope of lowering the nitrogen oxide released and meeting the new U.S. emission rules). Not only did the technique not reduce the emissions sufficiently to meet the new U.S. standards, but the reliability of the engines was in a word – awful.

Navistar reversed course and abandoned the technology in July of 2012, making a deal with Cummins to use its engines. But the damage had been done.  Navistar’s initial decision proved to be devastating on many fronts.  First, the Department of Justice has sued Navistar on behalf of the Environmental Protection Agency.  They allege that Navistar’s 2010 heavy-duty engines violated the Clean Air Act and failed to meet EPA emissions standards for that year. If Navistar is found liable, civil penalties could total in excess of $300 million — a fine of up to $37,500 per day for each violation.

Secondly, even though the company will continue to pay warranty costs for its previous engine strategy, several large trucking companies have filed class-action lawsuits claiming that Navistar knew its EGR-only MaxxForce engines had defects and Navistar concealed those problems from buyers. Additionally, the suit claims Navistar failed to properly repair the engines during the warranty period, and thereby decreased the trucks’ value and shortened the expected life of the engine.

Speaking for a family of companies that have purchased hundreds of new Navistar trucks during 2008 thru 2013 and also sold both new and used Navistar trucks, the trucks’ consistent failures have been nothing short of one colossal headache – both mentally and monetarily. We’ve seen an erosion of revenue profit and loss, as well as damage to our goodwill, all triggered by the costs associated to fix the engines.  We’ve had to provide and pay for replacement trucks to customers due to inoperable trucks. The costs associated with sudden breakdowns and angry customers have been enormous.

Further compounding the disaster is the substantially lower trade-in value and resale value of the post-emission Navistar trucks.  Because their problems are so widely known now, the various truck marketplaces are backing away from anything 2008 or newer with a Navistar nameplate.  Their trade-in and resale values have sunk like a rock.

Navistar faces a big public relations hurdle, as well as the prospect of having to pay big penalties and legal fees as prosecutors escalate their legal fight.

And adding fuel to the fire, Navistar also recently received notice from the U.S. Securities and Exchange Commission of possible enforcement action.  The SEC is investigating Navistar for alleged violations of disclosure and transparency of financial statement regulations, as well as questions surrounding the company’s possible misrepresentation in its efforts to earn EPA certification for its engines dating back to 2012.

There are many challenges ahead for Navistar as it struggles to rejuvenate its truck sales in both the medium and heavy-duty markets. Medium-duty Class 6 and 7 trucks represent the industry’s largest segment.  And Navistar’s medium-duty trucks account for roughly 26 percent of the market. However, they have suffered a significant loss of market share and are down sharply from almost 36 percent just 3 years ago.  And with Ford making a big push in the medium-duty market in 2016, Navistar’s medium-duty market share will continue to be challenged. Ford ended its relationship with Navistar due to a multitude of engine problems.  Since 1994 Navistar had built every Ford V-8 Power Stroke engine used in Ford’s F-Series. But Ford discontinued their Navistar-built diesel V-8 diesel and in 2010 replaced the Navistar diesel with a new 6.7-liter diesel V-8 that Ford designed in-house.  The relationship between Ford and Navistar ended due to poor engine quality, high repair costs, and plummeting customer satisfaction.

Navistar has certainly gone through a rough couple of years. Their revenue declined by 23% between 2011 and 2013 and their operating profit went from a positive $590 million in 2011 to a loss of $410 million in 2013.  But Navistar believes the company will regain much of its lost market share and return to profitability.  Will they?  I don’t know.  Billionaire investor Carl Icahn certainly thinks so.  He started building a position in the company in late 2011 and has been slowly increasing his stake, currently holding 16.27 million shares of Navistar. Additionally, Navistar still has a good strong dealer network (including our local dealer) and the Cummins engines are working out well.  But they have lost an immeasurable amount of goodwill and it’s hard to gauge whether the market will let “bygones be bygones”.  Should we feel sorry for Navistar?  No, customers lost a tremendous amount of money buying their product, and support and resolution from 2008 to 2013 was barely more than lip service.  But the Navistar story is still being played out.  They have changed their business and operations strategies and many believe they are ripe for a turn-around.

Filed Under: News

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