Solid ground: Navistar leader touts Cummins 7-decade alliance

A seven-decade business partnership between Illinois-based Navistar International Corp. truck and bus manufacturer and engine maker Cummins Inc. is on firm ground, Navistar’s top executive told analysts Thursday.

Navistar, which reported a third-quarter net loss of $34 million on Thursday on revenues of $2.1 billion, is committed to continuing its long-standing business relationship with Columbus-based Cummins, said Troy A. Clarke, Navistar president and CEO.

“Cummins is a great partner for us. Their engine in our product is helping us create outstanding vehicles that are getting a lot of traction in our market,” Clarke said.

“We work closely with them; they are important to us. We are including their products in all of our new product launches which are taking place over the next 18 months. We expect to collaborate with them, and I think we’ll be in business with Cummins,” Clarke added.

The earnings report and assurances from Navistar regarding its partnership with Cummins come two days after Navistar announced that it has formed a wide-ranging strategic alliance with Volkswagen Truck & Bus, an arm of the German automaker Volkswagen, which is buying a minority stake in Navistar for $256 million.

Navistar and Volkswagen said they were entering a procurement joint venture that will help source parts for both businesses. There will also be technology sharing, with an anticipated emphasis on powertrain technology.

Volkswagen Truck & Bus will acquire 16.2 million Navistar shares at $15.76 per share and will be allowed to name two directors to Navistar’s board. Navistar will remain an independent truck, bus and engine company.

Navistar expects savings of at least $500 million during the first five years. By the fifth year, the company anticipates the alliance will generate annual savings of at least $200 million for its business.

Maryland-based Stifel Financial Corp., just ahead of Tuesday’s partnership announcement, said the deal had the potential to affect Columbus-based diesel engine maker Cummins Inc. negatively.

So far this year, 73 percent of the Navistar Class 8 trucks used a Cummins engine.

“If reports are correct that Volkswagen intends to sell engines in Navistar trucks, Cummins could face vertical integration risk at Navistar,” Stifel reported.

Daimler, the largest commercial original equipment manufacturer in North America, has also been moving toward vertical integration — supplying more of its own products, Stifel reported.

Navistar, Daimler and fellow truck manufacturer PACCAR are all Cummins customers.

The Cummins stock price initially dropped after Tuesday’s announcement of the Volkswagen-Navistar deal. Cummins experienced a single-day loss of about $10 a share from the prior business day’s close, before regaining some ground this week.

“The VW Navistar deal was the culprit,” analyst Mark Foster of Columbus-based Kirr Marbach said. “It potentially puts Cummins business with Navistar at risk, as VW will likely supply engines at some point.”

However, Navistar’s Clarke said the deal with Volkswagen is creating misconceptions about how that will impact Navistar’s relationship with Cummins. He said Navistar has no plans to displace Cummins engines in the near future, addressing speculation about the impact.

“There isn’t as much substance behind that as a lot of people seem to consider,” Clarke said.

Cummins spokesman Jon Mills said Thursday that the company is looking forward to continuing its strong partnerships with Navistar, a customer of more than 70 years, and Volkswagen, a customer of more than 30 years.

“We don’t expect any changes in our business with Navistar in the near-term and look forward to the launch of their Project Horizon trucks with Cummins engines later this year,” Mills said. “In fact, as Navistar leaders noted during their earnings call, all Navistar products with planned launches over the next 18 months will feature Cummins products.”

Today, Navistar has a majority of Cummins engines in its heavy-duty trucks and a strong majority of it medium-duty trucks and buses have Cummins engines, he said.

Cummins also will work to continue to strengthen its relationship with Volkswagen, as it is engaged in successful joint ventures with Volkswagen subsidiaries, Mills said.

“Ultimately, we are committed to delivering industry-leading products to all our customers to help them be as successful as possible,” he said.