Lisle, IL – Driving through the Chicago suburb of Lisle you can’t miss the large complex of Silicon Valley-looking buildings just north of Warrenville Road near Interstate 88.
A giant glass circle planted on top of the main building’s front lobby appears to be an artist’s vision of a nine-story-tall satellite dish. Inside, the lobby is lined with blown-up photos from the company’s 181-year history. International trucks, military vehicles and a pristine 1972 International Scout are parked near the building’s entryway.
The lobby and adjoining floors boast enough square footage for all 3,000 employees of Navistar to gather for major announcements, said Jack Allen, who was named Navistar’s president for North American Truck and Parts in June when the company restructured much of its management.
“This facility is a phenomenal enabler for us to be able to align,” Allen said. “You can instantly talk.”
Talk from Navistar has been largely quiet this summer, despite a shakeup of some truck executives and hints that a major announcement was looming.
About six months after most Navistar employees moved into the new facilities, they heard the announcement many had been waiting for: The company would switch to SCR. Despite the suspected inevitability of that change, the announcement has prompted many to ask whether a bankruptcy or other major changes would consume Navistar.
“When we made the decision that we were going to do SCR – we brought everybody together and told them what we were going to do – instant communication,” Allen said. “It gets everybody focused and aligned right away at what it is we need to do.”
Focused or not, Navistar has been roundly criticized for sticking with its in-cylinder engine gas recirculation treatment system while every competitor switched over to selective catalytic reduction with urea-based diesel exhaust fluid. The company also received more negative headlines in early August after it disclosed the Securities and Exchange Commission is examining accounting and disclosure issues at Navistar dating back to 2010.
Navistar will begin rolling out trucks with 15-liter Cummins engines and Cummins urea-based exhaust after-treatment systems later this year. By spring 2013, Navistar plans to begin rolling out its own 13-liter engines with Selective Catalytic Reduction or SCR after-treatment. Company leaders, including Allen, say using both technologies now may provide the competitive advantage Navistar sought by being the lone manufacturer that didn’t require truck drivers to add urea-based fluid.
“We think that because of all the work we’ve done on the in-cylinder product – because of that work we’re in the best market position to be able to fine tune and optimize the engine and the after-treatment to drive the best performance and the best fuel economy in the market,” Allen said.
Allen and Navistar will have skeptics to win over, which the company acknowledges.
How they got here
During the past 10 days, Navistar has held small meetings with groups of journalists. Navistar unveiled its decision to integrate its existing EGR with an SCR system with DEF after treatment. Packaged together, Navistar is calling the system ICT+, which stands for In-Cylinder Technology Plus.
Beyond explaining its new system and its timetable, Allen said they wanted to “set the record straight” amid recent headlines like Forbes Magazine’s “Troubled Navistar props up finances but now faces SEC probe.”
“A lot of things have been written about us in the last weeks and months,” Allen said.
Navistar, Allen said, wanted to have a long-term competitive advantage both for its customers and against its competitors. Allen said such lasting advantages are a rarity in business and particularly in trucking, where innovations like aerodynamics are quickly emulated.
“We think it would have been good for our customers that are constantly having their margins compressed to have a system that didn’t require SCR,” Allen said.
With EGR, International trucks not only met the .05 NOx standard as required by 2007 EPA emissions rules, but exceeded them. This allowed the company to build up enough credits to continue to sell EGR systems even after Navistar couldn’t get its Advanced EGR engines to meet the lower .02 NOX emissions standards for 2010.
During the past two years, Navistar used those credits and EPA Nonconformance Penalties or NCPs to continue selling its EGR system.
Navistar’s technology needed to match the number of credits the company had accumulated, Allen said.
“And that’s really where the wheels came off the cart,” he said. “It’s really in the timing of that technology to be ready, versus when the credits ran out. We got to the point where the intersection of those two factors were coming together like a freight train.”
In early June, the company decided internally to make the switch.
“We came to the conclusion that the time required to continue through the process we were on – relative to the anxiety this was causing internally with the dealers, with the analysts, with the investors – that it was time to take a different direction,” Allen said. “We made a decision to go a different direction, and that’s where we’re going.”
Though Navistar repeats the “moving forward” mantra, it’s impossible not to notice how painful this summer’s decision to change has been.
“It looks like we won’t know – we’ll never know whether or not that technology and the credits would have lined up and whether or not it could have happened,” Allen said. “What we do know is we were onto something. And the reason we know we were onto something is by how long our competitors screamed. If you think about it, if they weren’t worried that we had a competitive advantage, why would they care? Why would they make such a big deal? So we do know we were onto something.”
Part of the pain of giving up on EGR has to be the reported $700 million Navistar spent developing the system.
Tim Shick, Navistar’s Vice President for North American Engine Sales, said customers with recent International engines needn’t worry.
“The thing those people want to know is, ‘what’s happening with the engine that I bought? I bought it because you told me it was the lightest, most powerful, most fuel efficient, and I found out that was largely true – what are you changing,’” Shick said. “So it’s a nice thing to be able to say, ‘nothing really.’ That’s the strategy.”
The truck manufacturer’s engineers say very little will have to be altered on the company’s trucks to both add Cummins engines and after-treatment systems, and to adapt the SCR system onto Navistar trucks with Navistar engines.
In addition to an electrical recalibration and engine harnesses, Navistar says the only other change of note between Cummins ISX engines and Navistar’s engines will be a sensor. That relative simplicity will help the company make the switch, said David Majors, vice president of Navistar’s Product Development-North America Platform.
“From the back of the hood to the front of the fifth wheel – what we launch with Cummins is identical to what we launch with the MaxxForce,” said Majors.
The ProStar with 15-liter Cummins ISX will be launched first, Majors said, and the company hopes to put the 9900 into production in April 2013. PayStar trucks will follow, he said, and International trucks will begin rolling out 13-liter MaxxForce engines integrated with Cummins SCR systems in April 2013.
Navistar will send launch teams to each of its plants dedicated to help the rollout of each truck model.
“Everybody has had their issues launching these products,” Majors said. “We don’t want to live through any of those. That’s part of the great benefit of us going with SCR after everyone else. All those lessons have been learned.”
Using Cummins engines was Navistar’s way to “lean forward and step forward in the marketplace very quickly to re-establish the position we’ve had here over a number of years and get back to where we were,” Allen said.
Another timing benefit is Navistar’s new headquarters, which Majors said is the first such company building to house both engine engineering and truck engineering under the same roof.
Truck and engine engineers spend much of their workdays in a room Navistar has designed for collaboration. In another conference room, four projectors have the capability to show the entire truck – to scale – at a resolution at ten times the level of a 1080p HD television.
In addition to the new technology, Navistar recently announced news aimed at showing financial strength to withstand its SCR adaptation.
Navistar recently obtained a $1 billion line of credit from a group of major banks including J.P. Morgan and Goldman Sachs.
“We think it’s way more money than we need to get through this transition,” Allen said. “We took that action to try to quell – quiet the market – to take some of the noise out of the system and take away some of the speculation that’s there.”
Will the combined technologies drive International truck prices upward?
“What’s a competitive price in the market?” Allen asked rhetorically. “That’s where we’re going to be.”
Near the end of this tour, the group of journalists visit a call center where Navistar employees work near walls lined with truck parts while they help customers with maintenance and repair issues.
Then they show us a smaller glass enclosed call center staffed by sharply dressed employees and adorned with large flat screens breaking down phone call data.
Through the glass is a bistro – one of several coffee shops located throughout the Navistar campus.
After renovating its building, which formerly housed Lucent Technologies offices, Navistar has made several college campus-like areas that offer quiet and a new backdrop.
When employees began moving into the new headquarters in January, a key question, Navistar said, revolved around which major American coffee franchise would be available at the campus: Dunkin Donuts or Starbucks.
Rather than tie itself to a single brand – this time Navistar chose both.
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