NAV Navistar International Corp

Volkswagen alliance on heavy-duty trucks aims to challenge Daimler's Freightliner

By William Boston and Bob Tita 

Volkswagen AG's new development alliance with Navistar International Corp. fuels the German company's ambition to chase rival Daimler AG into the about $30 billion a year North American heavy-duty truck market.

Volkswagen's shares of such truck sales are larger in Europe and Latin America and it has a joint venture with Sinotruk (Hong Kong) Ltd. in China. But Daimler entered the U.S. long ago, and has built a business that now accounts for about 40% of U.S. heavy-duty truck sales.

Volkswagen sought to even the score on Tuesday with its $256 million investment in Navistar, a 16.6% stake that will give it two seats on the Lisle, Ill.-based truck maker's board. The stake and related development-and-procurement alliance will broaden Volkswagen's U.S. footprint and global truck-market operations.

Behind the intensifying rivalry are two executives who have switched sides in the battle between the two German automotive giants.

Andreas Renschler, chief executive of Volkswagen's Trucks and Buses business, was the architect of Daimler's U.S. strategy. Passed over as chief executive, he left Daimler at the end of 2014 and was tapped by Volkswagen patriarch Ferdinand Piech to mold the fragmented truck businesses into a global enterprise.

Mr. Renschler's former colleague and rival, Daimler Trucks Chief Executive Wolfgang Bernhard, is benefiting from the business that he built. But he wouldn't compare Volkswagen and Daimler's bids to grow in North America.

"You can ask that question of somebody else in 10 years," he said in an interview on Tuesday.

Mr. Bernhard knows Volkswagen well. A decade ago he ran Volkswagen's namesake car brand, pursuing an aggressive strategy to standardize components and streamline the business. At Daimler Trucks, he has driven efforts to create common truck platforms and develop new technology.

Messrs. Renschler and Bernhard are approaching the U.S. and global truck business with similar strategies.

Both are trying to bring the German auto industry's obsession with standardization and common vehicle platforms to a U.S. market equally obsessed with freedom of choice.

"We're trying to do something that the passenger car guys started already decades ago, what they call the platform strategy," Mr. Bernhard said. "You use components in one vehicle and try to disperse that in your lineup as much as possible and by that you create economies of scale."

Daimler owns truck maker Freightliner and engine supplier Detroit Diesel that have put its North American operations far ahead of Navistar. The parent company of Mercedes-Benz has quietly amassed 40% of heavy duty truck sales in North America in recent years.

Detroit Diesel builds engines that are standardized enough to keep development costs down even while producing versions of the same engine for the U.S., European and Japanese markets.

"These are the beginnings of a platform strategy. Now we are rolling it out to transmissions, we are rolling it out to axles and we are rolling it out to medium duty engines," he said.

Creating a global truck platform that can allow Volkswagen to share components across many different brands and models was a big driver of this week's Navistar deal.

Volkswagen's investment in Navistar, at $15.76 a share, represents a 12% premium to Friday's closing price. The two companies expect regulatory approvals of the deal by early next year.

Navistar anticipates cost savings of $500 million within the first five years of the venture and annual savings of $200 million after that. Initially, those savings were expected to come in the form of cheaper raw materials and commodity components through Navistar's wide-ranging procurement alliance with Volkswagen.

Navistar CEO Troy Clarke said the alliance provides Navistar access to engine technology that should help it reclaim share lost to competitors a few years ago due to engine reliability problems. Navistar has about 11% of heavy-duty truck sales in North America, down about half from five years ago.

"We want to get as much of that market as we can," Mr. Clarke said on Tuesday. The alliance "will increase [customer] consideration of our products."

Volkswagen's investment also provides a measure of stability for cash-strapped Navistar, which has battled worries from customers and investors that it would run out money.

"It gives some of their customers a sigh of relief to know that [Navistar] is going to be around for the long haul," said Eric Starks, CEO of transportation consultancy FTR in Indiana.

The deal, details of which were first reported on Monday by The Wall Street Journal, comes as Navistar deals with the fallout from a run-in over emissions regulations and a declining market share that has left it trailing rivals in a North American commercial truck market wrestling with a slump.

The bulk of potential savings from the venture aren't expected to be realized until after 2019, when Volkswagen plans to launch a new global platform for its heavy-truck brands MAN and Scania and that it will now jointly develop with Navistar.

Volkswagen's MAN unit took a restructuring charge of more than EUR200 million last year as part of Mr. Renschler's push to boost earnings and savings by more closely integrating the German truck maker with VW's Swedish manufacturer Scania.

Development of the new truck platform is still in the early stages and was one of the reasons why Volkswagen wanted to do the Navistar deal now.

"We are working on common powertrain platforms with MAN and Scania and now Navistar is part of it and can be there from day one," said Volkswagen's Mr. Renschler. "We want to have a powertrain-based platform that will be used around the world."

Write to William Boston at william.boston@wsj.com and Bob Tita at robert.tita@wsj.com

(END) Dow Jones Newswires

September 07, 2016 02:48 ET (06:48 GMT)

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