Now that Navistar is profitable will VW still aim to acquire?

 Front end grille of a Navistar International Semi Tractor in February 2017 (Photo: Jonathan Weisse, Shutterstock).

Front end grille of a Navistar International Semi Tractor in February 2017 (Photo: Jonathan Weisse, Shutterstock).

Call it a case of too much of a good thing.

It was only in 2010 when Navistar held 28 percent of the U.S. and Canadian heavy-truck market, narrowly trailing leader Freightliner, a division of Daimler A.G. Then, by the first quarter of 2013, the number was down to 14 percent, the company reported.

When VW purchased Navistar, the nation's third-biggest seller of commercial trucks, it was vulnerable and had few options. When VW closed on its $256 million deal this past March for a portion of Navistar, it was for an almost 17 percent stake. The two sides focused on the $500 million in synergistic savings they hoped to reap in the next five years by sharing engine technology and procurement, as well as Navistar's dealer network. They also noted the arrival of two senior VW executives joining Navistar's board.

Oh, how things have changed in a year. The VW emissions scandal is but a memory, perhaps because executives were indicted, and they agreed to absorb billions in restitution (relative chump change to an industry leader, they passed Toyota as the largest carmaker in 2016).

One thing the groups didn't mention: The trans-Atlantic linkup could well be a prelude to VW eventually buying the rest of Navistar, a heartland manufacturer with roots going back to Cyrus McCormick and the invention of the reaper in the 1830s. "The strategic alliance with VW provides a blueprint to full ownership by VW," predicts Stephen Volkmann, an industrial goods analyst at Jefferies in New York. How soon? Many analysts say an acquisition is probable in two to four years.

In 2013 times were tough for Navistar. It was losing market share, due largely to its bungled three-year, $700 million effort to develop new technology for large diesel engines that could meet federal emissions standards.

Vicki Bryan, a senior high-yield analyst at Gimme Credit in New York, said, "VW is only waiting now for Navistar to get its debt down and cash earnings up before they integrate all their operations." According to Crains, Navistar still carries $3.1 billion in long-term debt for its manufacturing operations and another $3.1 billion in unfunded retiree obligations, and has been losing money steadily, with a loss of $62 million in the first quarter that ended Jan. 31, roughly doubling its year-earlier loss of $33 million.

Navistar is no stranger to dramatic consequences from emissions-related troubles. The reason for those three years of very bad news boiled down to this: the company had to kill most versions of its so-called premium vocational trucks in 2010. Why? Because they lacked diesel engines that complied with U.S. federal air-pollution rules.

Navistar’s market share tanked when its pollution-control technology failed to meet industry standards and brought the company to the brink of collapse. Declining demand for heavy trucks in North America, which led Daimler to cut the profit outlook for its truck unit earlier this year, only added pressure.

Volkswagen Trucks CEO, Andreas Renschler, said a full merger with Navistar is possible once a technology and procurement alliance between the two truck makers takes shape. Immediately after the sale, Renschler was asked whether he could foresee a full merger with Navistar.

"On our way to becoming a global champion all options are open," Renschler said.

Renschler repeated the answer when he was asked whether Volkswagen's truck and buses businesses could be spun off from the German parent company.

As Freightwaves recently reported, Navistar just delivered a massive quarter. "Our 2017 was a breakthrough year, as we returned to profitability and grew our market share 1.5 points," said Troy A. Clarke, chairman, president and CEO. "These results were driven by stronger sales, our steady investment in the industry's newest product lineup, early results from our strategic alliance with Volkswagen Truck & Bus and our ongoing focus on cost."

"We think 2018 is shaping up to be one of the strongest industry years this decade, and we're positioned to make it a breakout year for Navistar," Clarke said. "We'll drive even greater customer consideration with our commitment to uptime and our ongoing cadence of new product launches, which will include the introduction of our new medium-duty vehicle, as well as new IC Bus offerings. At the same time, we will build on our alliance with Volkswagen Truck & Bus by investing in and collaborating on the major technologies that are reshaping our industry, including electric, connectivity and autonomous."

Will the two companies still merge? All things are possible, especially after Navistar completely clears its debts. But right now, they'll come at a higher price than maybe anyone could have predicted just a few months ago.