When the federal government bailed out General Motors, it scuttled the old guard. Blame had to be placed. Long-time managers had to go. In the process, the saving of America’s No. 1 automaker would eventually lead to salvation for another company.
Troy Clarke, then president of GM’s North American operations, was one of those the company had “retired.” A lifelong GM executive, Clarke previously oversaw its operations in China and headed its Mexican business. He quickly took a consulting gig at Navistar International Corp., which builds big trucks and buses.
Little did Clarke know that he had jumped out of the frying pan into the fire. He was about to witness Navistar waste more than $2 billion on the consequences of an ill-fated truck engine program and yield its commanding market position to competitors.
The Lisle, Ill., company is one of the nation’s oldest industrial concerns. Its roots date back to the 1834 patent that Cyrus McCormick obtained for the mechanical reaper. Through mergers and acquisitions, the business rose to prominence as International Harvester. But starting about a decade ago, the company, known since 1986 as Navistar, made a variety of technological and strategic errors as it planned new trucks to meet increasingly stringent regulations limiting diesel engine emissions.
As the disaster played out, Clarke’s status at the company changed faster than that of a teenager on social media. He went from consultant to president of Navistar Asia Pacific in 2011, and then chief operating officer in 2012 before finally taking control as chief executive in 2013.
“I have been around companies that have failed and others that have turned around. The magnitude of the challenge at Navistar was big,” said Stephen D’Arcy, a Navistar board member and the retired head of PWC’s global automotive consulting practice.
All Clarke had to do, D’Arcy said, was maintain liquidity, generate cash to develop new products and recruit skilled managers to a distressed company. It was a tightrope. Clarke had no inkling about what he faced.
“I was contacted by the company because they had global growth expectations, not because they were in trouble,” Clarke told Trucks.com during a day of interviews recently with senior executives.
As he focused on Navistar’s overseas opportunities during his time at the Asia Pacific unit, Clarke began to get a sense that all wasn’t right.
“It’s not like you’re standing in a dark room and a light comes on,” Clarke said. “There’s shades of gray in the process.”
Warning Signs and Failed Engines
By the middle of 2012, Clarke’s job responsibilities expanded to include Navistar’s emissions strategy. He began to see that things had started to go awry. It started with a simple request. Clarke was summoned to a board of directors meeting where he was asked about his contacts at the Environmental Protection Agency.
There was a problem with Navistar’s line of MaxxForce 13 truck engines. They relied solely on exhaust gas recirculation technology, or EGR, to control nitrogen oxide emissions. Other truck makers used another system, known as selective catalytic reduction, to control emissions.
Navistar had relied on environmental credits to sell the engines. But those were about to run out and the EPA hadn’t approved sale of the MaxxForce engines without credits. That forced Navistar to switch gears and incorporate both technologies into its emission control efforts. That meant that its trucks needed a costly, seat-of-the-pants reengineering to incorporate the new emissions reduction system into the existing vehicle architecture.
“It looked like we just had a non-compliant engine, and we just had to make some decisions,” Clarke said. “There’s some engineering data, there’s some time regulations. It all had to be matched up.”
It wasn’t so simple.
As 2012 rolled along, Navistar began to detect an alarming increase in spending on warranty work for the engines.
“Not only do we have an engineering program we’ve got to manage to get to compliant vehicles, but we also have what turned out to be a lot of warranty issues coming to us,” Clarke said.
Eventually Navistar would spend more than $1 billion on warranty work for MaxxForce-equipped trucks. It would write off almost $500 million to account for used trucks it repurchased from angry customers and resold at a loss. That was on top of the $700 million it had invested to develop the ultimately faulty engines.
The Bottom Drops Out
Things got worse.
Navistar ticked off an entire customer base. Before the emissions and reliability issues, the company had 33 percent of the U.S. and Canadian market for trucks and buses in the Class 6 through 8 weight segments. That fell by more than half to 16 percent by 2015.
“So now the problem becomes a little more complex,” Clarke said.
As the company lost customers and paid out huge sums to fix and repurchase vehicles, it drove straight into a cash crunch. That forced Navistar to manage cash at a level it never had previously.
“We didn’t have that skill set,” Clarke said.
That left Navistar with the prospect of recruiting veteran talent to a company that was tottering. As Clarke built his team, he drew from a familiar well — General Motors.
Walter Borst, the automaker’s treasurer during its restructuring, became Navistar’s chief financial officer and took on the cash management challenge. Terry Kline, the former chief information officer at GM, took the same post at Navistar. He would provide the type of detailed reports that Clarke needed to best understand what was happening at the company on an almost daily basis.
At the same time Clarke winnowed the executive ranks.
“We found we had a lot of round pegs for square holes, so we began to make changes,” he said.
A business review found that Navistar employed 60 vice presidents and three very highly paid consultants.
“In a matter of weeks, we had 20-some vice presidents and no very highly paid consultants,” Clarke said.
Clarke and his management team drew a line in the sand. If the company’s cash reserves fell below $500 million they would start to explore bankruptcy reorganization.
“The first priority is cash because that’s the air you need to breathe,” Clarke said.
Plotting a New Course — and Message
Navistar’s reconfigured management then decided that any venture that was not core to the business had to be closed or divested. The company had too many silos, or quasi-independent businesses that were burning through cash.
“There were just too many mouths to feed. We had motor homes and garbage packers and concrete mixers — all those things are going to use cash,” Clarke said.
Navistar’s culture also needed to change, including improving its relationship with a heavily unionized workforce.
Clarke and other senior leaders toured the company’s factories, making sure that problems such as leaking roofs and other issues were addressed promptly.
Daniel Ustian, Navistar’s previous chief executive, was an absentee landlord, said Jason Barlow, president of the United Auto Workers local at the International Corp. truck factory in Springfield, Ohio.
“These guys are more hands-on,” Barlow said. “When we need things in the plant, they get it for us.”
The new management sought union workers’ views on what they needed to make the best vehicles.
“Who better understands how to improve manufacturing than the people on the floor?” Barlow said.
At the same time, Clarke’s team had to figure out how to route cash to fund a complete redesign of Navistar’s entire truck lineup. The company wouldn’t survive with the models it had on the market.
With the industry focusing on everything going wrong at Navistar, Clarke came up with a plan to change the conversation: He wanted to show where Navistar was headed.
As he did when he tapped GM alumni for his senior team, Clarke once again drew from the auto industry for inspiration. Automakers display concept vehicles to signal where their design language and development plans are headed. Clarke asked Navistar designers to launch Project Horizon — a concept truck for display at the 2013 Mid-America Trucking Show. They had just 12 weeks to build the vehicle.
The result was a steel cab truck that became the basis for Navistar’s new fleet, including the International LT long-haul truck, the International RH regional hauler and the International HV, or heavy vocational truck. The last vehicle in the series, the International MV, or medium vocational truck, will make its appearance at the Work Truck Show next week in Indianapolis.
The company borrowed $1 billion to help fund the new product line. Customers are starting to come back. Late last year, US Xpress, a large Chattanooga, Tenn., trucking company, reached a multiyear deal worth more than $200 million to purchase 1,665 International LT semi-tractors. The deal consists of 1,400 sleeper trucks and 265 day cabs. Navistar’s market share inched up to 17 percent last year, its first uptick since 2009.
“We had our best sales year ever last year, and this year we are already running ahead of last year,” said Tom Bagwell, executive vice president of Peterson Trucks in San Leandro, Calif. The company operates four of Navistar’s International Truck dealerships in California.
Thinking Bigger, Partnering with VW
But just stabilizing the company wasn’t enough to ensure that it was a sustainable business. Early on, Clarke realized that Navistar needed an industry partner to gain scale in purchasing power and to share the burden of developing new engines and other components. Navistar also needed access to rapidly developing autonomous driving and electric powertrain technology to keep pace with its larger, better capitalized rivals such as Daimler Trucks and Volvo.
Last year Volkswagen Truck & Bus purchased 17 percent of Navistar for $256 million and gained two seats on the company’s board of directors. The partnership will create $500 million in volume purchasing savings for Navistar over the first five years. The companies also are working together to develop a new line of diesel truck engines and electric trucks.
Besides the cash infusion, the partnership is paying sales and marketing dividends, Clarke said. The deal provided a stamp of approval from one of the industry’s biggest players and demonstrated that Navistar had turned a corner, he said.
All of these moves have paid off.
Navistar swung from a loss of $97 million in 2016 to a $30-million profit last year, its first since 2011. UAW members each took home a $1,000 profit-sharing check.
“Overall, everything is going in the right direction,” Barlow of the UAW said. “We have made the turn for the best.”
Navistar’s stock has soared from a low of $6.80 in January 2016 to close at $39.16 on Friday a 476 percent gain.
“Management has done a spectacular job of taking a company that was in a really bad position and restructuring its foundation in such a way that it is now poised for success,” said Brian Sponheimer, an analyst at Gabelli & Co.
Navistar is more efficient, is structurally more profitable and has a strategy that is easily communicated by management, he said.
He sees Volkswagen eventually acquiring the rest of Navistar that it doesn’t own, noting: “That’s the logical conclusion to this.”
Although it sells cars in the region, Volkswagen doesn’t have a truck presence in North America. Throughout its troubles, Navistar has held on to a large dealer footprint that’s valuable and not easily replicable. Such a deal would also provide VW with the profitable opportunity to sell more engines and replacement parts, Sponheimer said.
Executives at both Navistar and VW have avoided speaking publicly about a merger, focusing instead on the benefits of their current partnership.
And despite the progress, Clarke said, there’s still much work to be done. One year of profit is good but not yet a trend. And he said there’s still a mountain of market share to recapture.
“There’s going to be bumps in the road,” Clarke said, “but the bumps don’t seem as big anymore because we’ve gone through so much already.”