Article

European Way Gains Momentum

Vertical integration flourishes as truck builders advance their component manufacturing plans or strike new supplier agreements.

November 2006, TruckingInfo.com - Feature

by Tom Berg, Senior Equipment Editor

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Put simply, vertical integration means an original equipment manufacturer has control of everything that goes into the making of a truck. In Europe and Asia, most OEMs decide what's best for their customers, building some components themselves – most notably, engines and transmissions – and obtain other items from select suppliers. As a result, some very good trucks are being constructed, technology tends to move along swiftly, and freight moves reliably down the road.

In North America, truck building is edging closer to that practice as OEMs – many with ties to Europe – assume the role of spec'ing components that used to be played by fleet managers. For the past 10 to 15 years, the OEMs have been paring down their options lists to the most popular items and eliminating the oddball stuff. OEMs argued that it simply costs too much to engineer in things that few people want and that might not even do the job better.

On the other hand, fleet managers claim they've learned over the years what works and what doesn't work in their operations. And they know what companies back their products. Thus, they order accordingly. This tends to make them conservative – reluctant to accept new products and new technology until the new gear has been proved reliable by large fleets with the resources to experiment. Managers believe they know how to spec productive and durable trucks, and they pretty much resent having their choices yanked away from them by OEM executives who think they know better.

OEM ENGINES

The majority of engines and transmissions – the most expensive components in a truck – are still obtained from outside suppliers, primarily Caterpillar, Cummins and Eaton. But an increasing share is being built by the OEMs themselves, with preferred supplier agreements covering more of what OEMs don't build. Here are the current examples:

• Freightliner's ownership of Detroit Diesel causes it and its sister companies, Sterling and Western Star, to be standard with Detroit – or, because they're all owned by DaimlerChrysler, Mercedes-Benz diesels. However, they offer Cat and Cummins engines where demand is high enough.

M-B's German-built medium-duty 900 engines have gained enough sales volume that the 926 will be built by Detroit Diesel in Michigan, starting in January. A new heavy-duty series, with models eventually replacing the Detroit Series 60 and M-B 4000, are scheduled to start production later in 2007.

• Volvo Trucks has won increasing popularity for its own D12 diesel. Its Volvo Powertrain arm in Hagerstown, Md., has begun building new D series diesels for Volvo and a similar MP series for sister company Mack. Volvo will continue to offer the Cummins ISX in two truck series, but Mack is dropping Cummins' ISX and ISL altogether because it sold very few of them.

• International Truck and Engine, which has long built its own midrange engines, is a little more than a year away from offering its own heavy-duty diesels. Based on designs from MAN of Germany, these will have advanced features along with simplicity that will lower manufacturing costs and allow them to sell for less than the Cat and Cummins big-bore diesels International now offers.

For instance, the upcoming MaxxForce diesels from International will have high-tech fuel injection, but each will mount a pair of simple turbochargers instead of a complex and costly variable-geometry turbo. And by building the engines itself, International will better control each unit's profit potential.

• Paccar has stayed away from trying to build its own diesels, but is obtaining private branded engines made by Cummins, a long-standing partner. The PX-6 and PX-8 engines will be used exclusively by Paccar's OEMs – Kenworth and Peterbilt – in their conventional-cab medium-duty trucks. The PX-6 is Cummins' upcoming 6.7-liter ISB, while the PX-8 is the 8.3-liter ISC. Both go to EPA '07 specifications in January, when the changeover officially begins.

The PX engines will not differ technically from their Cummins counterparts, but will be painted dark gray instead of Cummins red and will use Paccar-oriented accessories.

The prices paid by Paccar for its PXs might be less than what it would pay for Cummins-branded engines, allowing higher profit potential for Paccar and perhaps lower selling prices for customers. And the Paccar-chosen accessories – alternators and the like – will guarantee more parts business for KW and Pete dealers, who will also be the primary servicing centers for the PXs.

In announcing the PX engines, Kenworth and Peterbilt executives waxed enthusiastic in describing the PX's ratings and promised performance. They did not appear happy to acknowledge that "exclusive" means that they have to drop the other midrange engine in their lineups – Caterpillar's C7. Dealers will have to explain to Cat loyalists among their truck customers why they can no longer get the C7, and how the PXs will be better for them.

The PX name is not new. Paccar uses it for diesels in trucks built by its DAF subsidiary in Europe. And Paccar points to its long-running relationship there with Cummins, which supplies engines to DAF (which also builds its own). The 6.7-liter Cummins will be the only engine offered in a DAF-built Class 7 low-cab-forward truck to be sold in North America as the Kenworth K360 and the Peterbilt 220. For some reason the engine will be called an ISB, not a PX-6.

CATERPILLAR'S OUTLOOK

Cat's fortunes in the medium-duty market seem to be sliding, with Freightliner and Sterling also dropping the C7.

The Cat's market share has slipped among Chevy and GMC buyers, GM-Isuzu executives say. As recently as two years ago, 80 percent chose the C7, and now 50 percent spec it. Price is one reason: The C7 currently costs $1,500 to $2,000 more than the 6H, and dealers point that out to customers. But the 6H (formerly the Duramax 7800) has also proved itself through performance and reliability, and dealers are proud to sell it. They also like the idea that they'll get parts and service business while C7 users can choose instead to go to Cat distributors.

Caterpillar will still supply heavy duty diesels to several high-volume OEMs. The C13 and C15 will be optional in certain Freightliner, Sterling, Western Star, Kenworth, Peterbilt, and International trucks. However, use of EPA '07-spec Cats will come later in 2007 because OEMs report delays in getting test engines and are finding it more difficult to "package" the extra piping needed by Cat's Clean Air Induction system.

While competitors have proclaimed that they're ready for 2007 and the tighter emissions limits, Cat is tardy in completing developing its new engines, OEMs say. As of mid-October Cat had not released price figures, so the OEMs could not announce what upcharges they'll have to apply to Cat-powered trucks.

International plans to offer big-bore Cats in many of its Class 8 models, including the new ProStar highway tractors. But executives say the ProStar is going into production with only the Cummins ISX. They figure Cat's C13 will be ready in fall of '07, and the C15 a month or two after that. Their own 11- and 13-liter MaxxForce diesels should be available in January of 2008. Reports of Cat test engines failing early and often are not true, according to OEMs. It's just that Cat is late to the '07 game.

Thus we can add difficult technology to the factors limiting choice in specifications, along with OEMs' desire for more control and marketing agreements between them and suppliers. All trends point to fewer options.

Will trucks and their operators be the worse for it? Experiences with dealers and miles of hauling will tell that tale.

MERITOR-EATON LEGAL GRINDING CONTINUES

Another development on the vertical integration scene concerns heavy-duty transmissions. You may have heard (and can read in Hotline in this issue) that ArvinMeritor is suing Eaton Corp. over alleged predatory practices in marketing its Fuller gearboxes. The suit says Eaton forced OEMs to encourage customers to choose Eaton transmissions over Meritor's, and rewarded those OEMs who did by paying lucrative rebates.

Eaton denies ArvinMeritor's allegations, and they'll be fought out in court – the latest in a series of legal battles between the two huge component suppliers who have otherwise used technology, quality and product backing as weapons as they struggled over the years to earn their places in North American truck building.

Whatever Eaton has done, it's enough to have gained 95 percent of Class 8 transmission business, the lawsuit says, and drive ZF Meritor – a joint venture between ArvinMeritor and German-based ZF Friedrickschafen – out of business. ZF Meritor announced it will cease selling transmissions by year's end, though it will continue supporting those now on the road.

An Eaton spokesman declined to comment to HDT on the allegations because of ongoing litigation.

But Meritor's allegations were seemingly supported by one former private-fleet manager in a phone interview with HDT.

"This is not hearsay," said Herman Miller, now a maintenance consultant in Green Bay, Wis. "When I was at Shopko [Stores], I bought Freightliner Argosies and tried to get them with Meritor transmissions like I had been buying.

"But between a direct-drive 10-speed Meritor transmission and a direct-drive 10-speed Eaton transmission, the upcharge for the Meritor was $2,500. Now, I know that the cost to Freightliner for the Meritor was not that much more than for the Eaton, but I was being discouraged from ordering the Meritor because Eaton was paying big rebates to Freightliner for selling Eaton transmissions."

Miller cites Eaton's alleged tactics as an example of how marketing agreements between OEMs and suppliers not only narrow fleet managers' spec'ing choices but also can lead to monopolies. "It's just not healthy for one supplier to have all the transmission business," he says. "When they're in that position, what's going to stop 'em from doing anything they want?"

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