International’s Keate to OEMs: Take capacity out and keep it out

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International Truck and Engine Corp. has bucked the trend among U.S. truck manufacturers by introducing new product lines in 2001. Rather than shelve its “High Performance Vehicle” line of medium-duty, severe-duty and regional haul trucks until the economy improved,International brought them to market as products designed to improve customers’ bottom lines. The new product line is a testament to integration; International says it was able to both optimize peformance and cut production costs by using only International engines and limiting component choices.

International’s parent, Navistar International Corp., is launching other initiatives as well. This summer, it finalized plans with Ford Motor Co. for a joint venture, labeled “Blue Diamond,” to build Class 6 and 7 commercial trucks at the International plant in Escobedo, Mexico. The joint venture will produce trucks with distinctly Ford and International cabs built on International’s recently introduced chassis and with International engines. Later, the joint venture plans to build Class 3-5 commercial trucks. Also, Navistar will take over parts distribution for Ford’s medium-duty products.

For a detailed look at these initiatives and industry trends, we spoke with Steve Keate, president of International’s Truck Group, in late fall. Keate took over the position in June 1999 after joining Navistar in 1995 as vice president and corporate controller.

CCJ: Give us an overview of the truck market today.

Keate: I wish I had better news to report. The challenges that we’ve faced for the past year and a half or so are still with us. Demand for the products we offer industrywide is probably going to continue at about the same anemic level for all of 2002.

We must manage our costs very aggressively while continuing to follow through with investments in new products and quality processes within our plants. It’s going to be a tough year, but we feel pretty good about where we are positioned.

CCJ: When do you expect sales to turn upward?

Keate: It would appear that in 2003 we’ll begin to get out from underneath this used truck issue. There will be more challenges for our customers over the next 12 months, but I do think there should be an opportunity for our customers to get some pricing relief. For the industry in general to get healthy, our customers will have to be able to raise prices. If we get through this used truck situation and the economy recovers late next year, there will have been a shakeout in our customer base that should allow for better pricing in the future.

CCJ: How is International positioned regarding the used truck problem?

Keate: We understand that in a cyclical business you have to manage your used truck exposure carefully. We didn’t take some business on over the last couple of years that we could have written because of the risk associated with used trucks. In hindsight, that turned out to be a very smart move. We’re positioned pretty well with regard to used truck capacity.

CCJ: What must happen to resolve the used truck situation?

Keate: We’ve got a serious case of indigestion that unfortunately we’re going to have to live with until supply and demand come into balance. Our projection is that we’ll get back into balance in 2003. There is no silver bullet that will eliminate the problem near term.

CCJ: Has the truck manufacturing industry changed structurally in terms of how it approaches sales?

Keate: It’s easy to talk about this in hindsight, but there needs to be discipline on the part of OEMs to take capacity out of the system and keep it out. When the economy comes back, and the opportunity is there to sell one more truck, it’s having the discipline to say, ‘We’re not going to do it.’ We’re all living with the results of chasing that one last sale. It’s not a sustainable business model. You can’t support the investment that’s required. You can’t have a business that’s attractive to invest in on the part of shareholders.

Nor are you doing your customers any favors. They are asking us for things that we can’t deliver these days. From 10 customers out of 10 I hear, “You have to help me with my used truck value problem. I have trucks that are, on my books, worth $45,000. What can you do for me?” Quite frankly, I can’t do anything at this point because the market value of those vehicles is $20,000. So the result is that you have many businesses in deep financial trouble because they expected the values of their trades to be worth a certain amount of money. They built their businesses around it.

CCJ: Didn’t the industry see this coming?

Keate: Some saw it better than others. At International, we appreciated the fact that as strong as the industry had been for a number of years, it was still a cyclical business. We didn’t make commitments to certain customers that we couldn’t live up to. I feel good about that. We take seriously the arrangement we have had with our customers and the need to live up to our commitments.

CCJ: In this environment, are there areas of strength and opportunity for truck manufacturers?

Keate: Let me talk specifically about International. We have some opportunities in the over-the-road market as a result of the way we have positioned our company – the strength of our dealer network, the product investments we have made and the fact that we do have some used truck capacity. We’re well positioned to meet the needs of our customers in a way that, frankly, our competitors will have a difficult time doing in this environment.

In addition to that, because we are replacing our entire product line, I feel very good about growing our business in the medium-duty segment through the new 4000 series, in the severe-service segment within the 7000 series and the regional-haul segment with the 8000 series.

CCJ: What was the strategy behind the Blue Diamond initiative with Ford?

Keate: That started with a belief that to be a successful truck OEM, you have to have scale. The Blue Diamond joint venture provides an opportunity for International and Ford to become more cost-efficient and go to market with new products that individually they might not be able to do.

CCJ: Do you envision someday coproducing a Class 8 product?

Keate: I wouldn’t speculate on that. We’re going to look for every opportunity we can to strengthen the International brand, wherever that takes us.

CCJ: Do you expect further consolidation in the truck market?

Keate: First, the industry has to rationalize capacity. You have been seeing that over the last couple of years in a reduction in the number of units produced and the number of shifts. You are now seeing announcements of plant closings. We’re likely to see more of that. As for consolidation of brands, I don’t think the rationale for it is as compelling as it was a few years ago. I don’t see a screaming need for more consolidation at this point.