Navistar's green-diesel gamble
Ex-CEO Ustian's bold strategy to leapfrog rivals fails
Former CEO Daniel Ustian: Diesel strategy aimed to grab a “competitive advantage.”
Navistar International Corp. believed it had the next big idea for the trucking industry: pollution-reducing diesel engine technology that would be cheaper and more customer-friendly than the method adopted by its competitors.
Instead, Navistar almost became the next big bankruptcy, after its engines repeatedly failed to meet federal emissions standards.
The company's $700 million gamble ultimately cost its CEO his job, damaged its earnings and reputation with customers and raised the possibility that Navistar would be taken over by activist investors or sold. Its stock has lost more than half its value in the past eight months.
Navistar's former chief, Daniel Ustian, promised that the company would gain a "competitive advantage" by forging its own path while the rest of the industry was going in a different direction. He might have been proved right -- if the technology had worked.
The near-collapse of Navistar, which makes trucks, school buses and diesel engines -- it supplied engines to Ford Motor Co. for Super Duty pickups until a dispute ended the relationship in 2009 -- shows the risk that comes with trying to be an innovative manufacturer. Many companies have been humbled by trying to leapfrog competitors with a promising idea that didn't work. Among other recent examples, Ford's glitchy touch-screen systems sent its quality ratings plummeting, and General Motors spent years trumpeting the Chevrolet Volt, yet sales have been well short of its targets.
But playing it safe by letting others lead can be a losing proposition as well, says Ron Harbour, senior partner in charge of global auto manufacturing for the consulting firm Oliver Wyman.
"I applaud Navistar for the road they took," Harbour says. "They've made, I think, some good strategic decisions over the last five to 10 years that really did pay off. They're taking a hit from this one, but my hope is that everything works out for them."
Analysts say most of Navistar's troubles stemmed from Ustian's decision years ago to exclusively focus on a technology known as exhaust gas recirculation, or EGR, in order to meet the EPA's oxides of nitrogen emissions standards for diesel engines. In contrast, everyone else in the industry chose a chemical treatment process known as selective catalytic reduction, or SCR.
SCR was more expensive, and it required truckers to carry a fluid called urea and aftertreatment equipment in their rigs at all times.
The EPA standards took full effect at the beginning of 2010, but two and a half years later, Navistar still hadn't passed the agency's testing. After burning through a stockpile of credits to offset noncompliance, it racked up tens of millions of dollars in fines before giving up on the EGR-only strategy in July. The following month, Ustian retired.
Navistar, of Lisle, Ill., has replaced Ustian on an interim basis with Lewis Campbell, the former CEO of industrial conglomerate Textron Inc. It promoted former GM executive Troy Clarke to be its president.
Campbell has said 2013 will be a rebuilding year for Navistar but that he expects a significant turnaround for the company within 18 months.
"We are all about fixing this company," Campbell, who spent 24 years at GM in product design, engineering and manufacturing, told investors at the end of October. "And we will do it or die trying."
Interim CEO Lewis Campbell: “We are all about fixing this company. And we will do it or die trying.”
Navistar's stumbles have come as most big truck and engine makers are enjoying larger sales and profits. Earnings for the first nine months of 2012 were $1.3 billion for Cummins Inc. and $858 million for Paccar Inc., which produces Kenworth and Peterbilt trucks. Meanwhile, Navistar lost $241 million in the first three quarters of its 2012 fiscal year, which ended Oct. 31, and has withheld guidance on the fourth-quarter results it will report in December.
Navistar stock closed at $19.54 on Thursday. Eight months earlier, it closed at $41.65.
Navistar has been slashing costs and taking steps to boost cash reserves to give it more time to recover from its misstep. In October, it raised $200 million from a stock offering and announced plans to close an assembly plant in Garland, Texas, with 900 workers. It also signed a deal to put Cummins engines in some trucks and to use Cummins' emissions-reducing technology.
Still, Navistar's prospects remain "grim," says Vicki Bryan, senior high-yield analyst with the bond research firm Gimme Credit. She says the company could run out of liquidity in early 2013.
"Its strategy for survival after abandoning its failed engine technology in July as we projected is expensive, ambitious, and requires perfect marksmanship to succeed in implausibly record time, all while global market conditions are rapidly worsening for commercial truck makers," Bryan wrote in a recent report. "Good luck with that."
A Navistar spokeswoman declined to discuss the decisions made under Ustian's leadership. She said Navistar achieved the first milestone of its new plan in mid-November when it began producing ProStar Class 8 trucks with Cummins 15-liter engines and aftertreatment systems.
Navistar's CFO, A.J. Cederoth, said at a recent investor conference that the new management team has a sense of urgency as the company works to improve quality and regain lost market share.
Navistar's North American market share for Class 8 trucks was 18 percent in the third quarter, the company says, down from 21 percent in the same quarter a year ago and 32 percent in the third quarter of 2010.
"We're not going to dig ourselves completely out of this hole by the end of 2013, but I think if we do the right things we will have us -- we will be well on our way by the end of the year," Cederoth said Nov. 13.
Clarke: Former GM exec helps lead Navistar.
Plan B needed
Other analysts are more optimistic. Brian Sponheimer, an analyst with Gabelli & Co. who follows Navistar, says his biggest criticism of the company is that it went all-in on an unproven technology without a backup plan.
"The former management should not be judged on their decision to use a technology that ultimately didn't work," Sponheimer says.
"Innovation should be rewarded," he says. "Unfortunately, the engineering wasn't there to meet the target. Hindsight makes us all smarter than we really are, but the fact is that the company should have had a Plan B up and ready to go."
According to Oliver Wyman, about 40 percent of r&d investment in the auto industry goes into innovations that never reach customers or aren't accepted in the market. Only 10 percent of the automotive technologies being developed at any given time have the potential to be "blockbuster innovations," the firm says.
"A small minority pay off, but when they do it can be a change-the-world thing," Harbour says. "The transportation industry is littered with success and failures of innovations, some of which worked out fabulously and some of which failed miserably. I'd certainly hate to be in an environment where the motivation to take those kinds of risks doesn't exist anymore."
You can reach Nick Bunkley at email@example.com. -- Follow Nick on