Caterpillar, Navistar to jointly make, sell trucks

CHICAGO (Reuters) - Caterpillar Inc (CAT.N) and Navistar International Corp NAVZ.PK are forming an alliance to jointly build and sell a variety of trucks worldwide, the companies said on Thursday.

The agreement is a sign that the North American truck-making industry is consolidating along the lines of the business in Europe.

"It's imperative for us to be in front of the industry, which is vertically integrating," Doug Oberhelman, head of Caterpillar's engine group, told Reuters.

The news also quashed speculation that Caterpillar would exit the on-highway truck engine business, a market that has recently provided the company with more challenges than opportunities.

However, Caterpillar will stop supplying engines to other North American manufacturers of these vehicles, starting with the introduction of engines designed to comply with 2010 U.S. clean-air rules.

As a result, Caterpillar's archrival in the diesel engine space, Cummins Inc (CMI.N), now looks poised to capture more of the North American market in coming years, analysts said.

Cummins shares were up more than 12 percent in midday trading, while Caterpillar and Navistar rose more than 3 percent.

PRODUCT PLANS

Caterpillar, the world's largest maker of mining and construction equipment, said one product from the Navistar alliance -- a heavy-duty dump truck for miners and builders -- would be on the road by 2010. A full line of trucks for that market would be on sale by 2012, Oberhelman said.

"We're going after a customer base we know well," he said.

Outside North America, Caterpillar and Navistar will introduce a full line of medium and heavy duty on-highway trucks, the companies said.

That would put Peoria, Illinois-based Caterpillar in direct competition with companies it once supplied with engines.

That was widely seen as a victory for Cummins, because it leaves the Columbus, Indiana-based company "increasingly the sole independent engine provider to the U.S. truck engine market post 2010," according to a note from Citi Investment Research analyst David Raso.

Word of the linkup was not entirely unexpected. The fate of Caterpillar's on-highway diesel engine business has been uncertain for more than a year, after problems associated with powerplants designed to meet tough 2007 U.S. clean-air rules allowed Cummins to gain a big share of the North American market.

That threw a big question mark over Caterpillar's engine business at a time when North American truckmakers like Paccar Inc (PCAR.O), which traditionally bought engines from independent suppliers like Caterpillar and Cummins, began making them in-house.

'NICE FIT'

At the Reuters Manufacturing Summit in February, Caterpillar Chief Executive Jim Owens said a partnership with Navistar was "a potentially nice fit."

The partnership also comes when the North American big-rig truck market is in a downturn, due in part soaring fuel prices that have prompted sporadic protests by independent truckers.

Adding pressure is the slowdown in the U.S. economy. A surge in truck purchases in 2006, as long-haulers rushed to buy ahead of the implementation of the 2007 clean-air rules, now means there are too many trucks chasing too little freight.

As a result, the rebound that truckmakers were counting on in 2008 has not materialized.

Industry tracker A.C.T. Research estimates manufacturers will receive orders this year for 234,000 Class 8 trucks -- the biggest rigs. That would be up just 10 percent from last year's trough of 212,000 and down significantly from the 378,000 produced in 2006.

"Given that the independent on-highway truck engine supply business is in secular decline anyway, this cooperation, in our view, is at least better than nothing," JPMorgan analyst Ann Duignan said in a note to investors.

Separately on Thursday, Caterpillar said it would invest $1 billion in five Illinois facilities over the next three years.

The company's shares were up $2.67, or 3.4 percent at $81.60, while Navistar rose $2.40, or 3.3 percent, to $74.30. Cummins gained $7.87, or 12.5 percent, to $71.

(Editing by Lisa Von Ahn)