Navistar's Clarke Talks Change, Opportunity, Turnaround

LOUISVILLE -- In his first official outing as Navistar International's new  president and COO, Troy Clarke jumped right in Friday morning by assuring the audience of supplier executives that "Navistar's not going anywhere but up."

"Recently we have come through some challenging issues," he said, referring to problems such as the company's financial losses and its failed attempt to meet 2010 emissions regulations without using selective catalytic reduction. "But if I can paraphrase Mark Twain, the rumors of our demise have been greatly exaggerated. We are moving ahead with renewed dedication and resolve."

Clarke's speech drew one of the largest crowds the Heavy Duty Manufacturers Association has ever had for its annual Breakfast Briefing at the Mid-America Trucking Show.

Clarke was named president and COO of Navistar last August, not long after being named president, Truck & Engine in July.

Moving on to broader issues, Clarke outlined four of the top issues that will affect where the trucking industry manufacturer and supplier business will be focusing its efforts: The price of fuel, the driver shortage, regulations, and economic-driven changes among carriers.

"We're gathered on the biggest stage of the trucking industry, the Mid America Trucking Show," Clarke said.

While uncertainty characterizes the external climate the industry operates in, he said, including such issues as sequestration and regulation, "We can only blame Washington for so much. No industry is immune from change. In fact, change is the only constant we can count on. We succeed by turning uncertainty and the need for change into opportunity."

1. Diesel Prices

"Over the next decade, one thing is certain," Clarke said. "Fuel economy will never be good enough."

That's not only because the price of diesel will continue to be high, he said, but even more so because of its volatility. "Each new global crisis seems to send the price of diesel fuel on a wild ride," he said.

That may change, however, as the U.S. increases its ability to meet its energy needs domestically. Clarke pointed out that the U.S. Department of Energy predicts by 2017, the U.S. will overtake Saudi Arabia and Russia to become world's largest oil producer.

At the same time, truck makers and industry suppliers are working diligently to develop more fuel-efficient equipment. "The entire industry is converging on a set of similar technical solutions," he said. "More and more focus will be on efforts to optimize the entire vehicle. It’s not just about engines." He said the main areas being addressed are electronic integration of powertrain systems, improved aerodynamics and rolling resistance. "Fuel economy gains will come in smaller increments and at higher product cost and complexity."

"Many people are still looking for another alternative," Clarke said. "Many believe that alternative is natural gas. We've seen hybrids and electric drivetrains come to market, but if there's one that people in this industry are truly excited about it's natural gas."

Because of the abundant domestic supply, Clarke noted, natural gas should cost less than diesel. And perhaps more importantly, it should be less volatile. "It's a domestic solution, so the next Arab Spring will not affect the price of natural gas. This should translate into more stable prices for natural gas."

"In the '50s commercial vehicles shifted from gasoline to diesel power. Many believe this will be a similar transformation."

2. The Driver Shortage

The pool of ready and able truck drivers continues to dwindle, Clarke said, with the American Trucking Associations saying we already have 25,000 fewer truck drivers than we need.

"Certainly new regulations affecting drivers mean many who were once welcome as truck drivers have to be turned away," Clarke said. "But there's also a social issue that may be larger. Driving a truck does not have the same appeal to young people as it did to previous generations. As manufacturers, it's our responsibility to build products that are easier to drive and safer, requiring shorter training times for a  driver to become productive."

3. Regulations

Increasing government regulations have not only been targeted at unsafe drivers and fleets, but also at reducing harmful emissions from trucks.

"Compliance comes at a price," Clarke said. "It increases both the cost of operations and the cost of equipment. Emissions surcharges alone over the last decade have added more than $20,000 to the cost of each heavy-duty truck sold and $10,000 to each medium-duty truck." 

That added value is not retained over time, affecting the used truck market, he said. Nevertheless, he said, "used trucks are more expensive and technologically advanced than ever before, and that can impact the used truck buyer." Financing can be harder to come by, and repairs that were once done by an independent garage may now have to be taken to the dealer, at additional cost.

"When it comes to trucking, our leaders in Washington have a strong regulation mindset," Clarke said – however, he said, that's just part of being in this business.[PAGEBREAK]

He said the next level of fuel economy regulations will force manufacturers and suppliers to think more holistically about the tractor-trailer as a whole unit, and that's going to require more cooperation among truck makers, trailer makers, and various component suppliers and suppliers than ever before.

4. Economics: 'The new normal'

Everyone keeps asking when truck sales will return to a normal level. Clarke, however, said the definition of "normal" may have changed.

"We've seen in the past decade an unprecedented period of change in our industry," he said. "The recession was a catalyst to expedite some changes that carriers have been evolving for more than a decade."

Large fleets are growing, he said, while the number of small fleets as a percentage of the total is dropping.

In addition, he said, "We may have experienced a permanent shift in the age of trucks on the road." The number of miles run annually is down, and trucks are simply lasting longer than they used to. "What many of us once considered to be significant pent-up demand might not be that at all."

The length of haul is changing, partly due to the rise of intermodal as an option for longer-haul freight, Clarke said, and events like expansion of the Panama Canal will continue to change freight patterns in North America.

"When you look at these factors together, the implications are significant," Clarke said. "Bigger customers with more trucks are looking for growth opportunities in places they haven't played in the past." Fleets have made great strides in productivity to help offset the increased costs of acquisition and operation, he said, and so far are letting those productivity increases absorb increasing freight levels without adding capacity.

Clarke's Bets

Clarke concluded with his projections for each of these areas, saying, "I would bet:"

• Fuel prices will stabilize and experience less volatility over the next two decades, but the industry will continue to focus on improving fuel economy and looking to alternatives to reduce costs. "I would bet that natural gas is here to stay."
• Given the driver shortage, manufacturers will press forward with features that make trucks much easier to drive. "Many of these features exist today, but as small penetration options," he said, citing examples such as automated transmissions, lane departure warning systems, blind spot cameras and parking assist systems, saying they are going to become more sophisticated. "Of course all these things are going to come at a cost."
• Equipment prices are going up, "but I would bet we're at the beginning of a new cycle of regulations, so we need to work closely together to make sure we go about this the right ways."

"But I am optimistic about the future, because change brings opportunity," Clarke said. "Every future scenario you consider, it requires trucks, and at the end of the day we believe it requires a lot of them. 

"What has struck me more than anything about this business is the world economy rides on trucks."

Turning Around Navistar

Of course, what many in the audience wanted to hear was about Navistar itself. In a Q&A session after his address, Clarke answered some questions that had been previously submitted.

When asked what his most difficult task has been so far, Clarke cited last year's cuts and closings, including the Garland, Texas, plant. 

"Last summer we definitely found ourselves in a situation where problems were walking in the door one after the other," Clarke said. "The good news is, you didn't have to go far to find something to work on. The bad news is, we had to make some hard decisions.

"It never gets easier. You're impacting communities and families. You just make sure you do it with lots of compassion and get it done quick, get it behind you so you can build the company going forward. Unfortunately, early in my tenure in this position we were forced to have to do that. It is the kind of thing you lose sleep over."

Asked about its global presence, Troy noted that he was recruited to Navistar initially to expand the global portfolio. While it has successful operations in Brazil and other countries where American-style cabovers are used.

Navistar's joint venture in India, which it shut down as part of its cost cutting measures, was well-intended, Clarke said. Most of the trucks currently used in India and other developing countries are low-cost trucks that don't last long. Navistar believed a market would grow in India for higher-quality trucks that cost more up front but lasted longer, what Clarke called "productivity trucks," but that did not come to pass.

However, Clarke was optimistic about Navistar's prospects in China.

"I'm still kind of excited about the Chinese truck market," he said, where they are partnered with a company with a cabover truck configuration that should be well suited to the market. "I think that's really the opportunity for us," he said, noting if it takes a couple of years to get things right, that's OK. It's more important to take the time to gain a solid understanding of the market than to rush.

Asked about the top three issues at Navistar the company needs to address, Clarke said those were very clear in a turnaround situation like this.

"The first thing you do is give the organization real clear goals, real clear timetables and metrics. Our first goal this year is we're making a big move on quality. It's our intention to be the quality leader.

"The second thing is we've got to finish our transition to SCR. We need to hit those dates and launch at a high quality  level.

"And last but not least, we have to deliver our 'Drive to Deliver' plan. We have financial targets for the year.

"None of us gets out of bed thinking about, 'What else can I think of doing today.' If we have an extra hour of effort or time, we work on one of those three things."

Clarke wouldn't make a prediction on when the company will return to profitability. "If I did, you'd all be insider traders," he said. However, he said, if the truck market picks up the last half of the year as many are predicting, that will be good for the company, and he said by this time next year he expects things to be a lot better.

CORRECTED: Clarke is chief operating officer, not chief executive officer.