Vertical integration, where the OEM decides what goes into its trucks, is gaining ground as heavy truck builders advance their component manufacturing plans or strike new supplier agreements.
A modern truck has hundreds of feet of wiring and thousands of electrical circuits, which can be complex and confusing for technicians. An alternative is multiplexed wiring, now used on certain Internationals and Freightliners.
Not many years ago, makers of heavy trucks bragged that they were "custom builders." They had to be, as the business grew up in North America with outside companies supplying components and subsystems to the original equipment manufacturers that assembled them. That's changed, and OEMs are not nearly as willing to customize their vehicles to suit customers' demands or whims. Vertical integration, where the OEM decides what goes into its trucks, is gaining ground as heavy truck builders advance their component manufacturing plans or strike new supplier agreements.
Vertical integration is how it's done overseas. In Europe and Asia, most OEMs decide what's best for their customers. OEMs themselves build some components — most notably, engines and transmissions — and obtain other items from select suppliers. Some very good and technologically advanced trucks are built this way, and they reliably move cargo down the road.
In North America, light- and medium-duty trucks have been built this way for many years, and though midrange customers sometimes have choices of engines and transmissions, the choices now aren't nearly as great. The heavy-duty market is edging closer to that practice as OEMs — many with ties to Europe — assume the role of component spec'ing 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 offer things that few customers want and that don't do a job better, only differently.
Fleet managers complain that they've learned over the years what works and doesn't work in their operations and what suppliers satisfactorily back their products, and they order accordingly. This tends to make managers conservative — reluctant to accept new products and new technology until they're proven absolutely reliable by large fleets with the resources to experiment. Fleet managers resent having their choices taken away by OEM executives who think they know better, but OEM execs are winning.
Engines comprise the primary example of how choices have shrunk, but the trend toward vertical integration is also evident in transmissions, drivelines, axles and suspensions. They are among the still spec'able heavy-duty drive train components, but most OEMs analyzed their options lists and identified the most popular parts, then eliminated the rest. This greatly simplified their ordering and engineering costs and increased their potential profits; OEMs have also argued that it helped them to hold the line on vehicle prices.
Marketing agreements between component makers and OEMs are another major factor. In medium- and heavy-duty trucks, all OEMs offer certain Eaton transmissions, Spicer drivelines, Spicer or Meritor axles, and Hendrickson, Chalmers, Watson-Chalin and certain other suspensions. Some OEMs developed their own tandem-axle suspensions that compete with those of outside suppliers. But they also emphasize private-branded components built for them by those same suppliers, often with features exclusive to that builder but sometimes all but identical to those still carrying vendor names.
An example is Hendrickson, which says it is now the preferred suspension supplier to International Truck. Hendrickson executives explain that for years they have done "pull-through" marketing — trying to convince truck users to spec Hendrickson products based on superior design, performance and durability. They still do this, but have found that a supplier agreement with a volume truck builder yields more business.
Usually OEMs have the upper hand in such deals, and can force price concessions in return for steady, guaranteed business. But sometimes a vendor has considerable clout. Eaton Fuller manual transmissions have become so popular that its only competitor, ArvinMeritor, has quit the manual transmission business. ArvinMeritor says it was forced out by predatory practices. A former fleet manager told us that Eaton required at least one OEM to place hefty price premiums on Meritor transmissions, forcing him to accept Eaton gearboxes. ArvinMeritor is suing Eaton, but still markets the ZF-made FreedomLine automated mechanical transmission.
Many engines — the most expensive component in a truck — are still obtained from outside suppliers, primarily Caterpillar and Cummins. But an increasing number are built by OEMs themselves, and two have plans to build more of their own. The trend is for an OEM to be standard with its own engines, if it has them, and offer one vendor's series, often through preferred-supplier agreements. Here's the current situation:
The PX-6 and PX-8 engines will be used exclusively by Kenworth and Peterbilt in their conventional- and low-cab-forward medium-duty trucks. The PX-6 is Cummins' 6.7-liter ISB while the PX-8 is the 8.3-liter ISC. PXs will not differ technically from their Cummins counterparts, but are painted dark grey instead of Cummins red and use Paccar-branded accessories.
The prices paid by Paccar for 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, including alternators and starters, will guarantee more parts business for KW and Pete dealers, who will also be the primary servicing centers for the PXs.
Kenworth and Peterbilt executives are enthusiastic about the PXs' ratings (from 200 to 330 horsepower) and high performance, and say that they are overcoming dealers' and customers' unhappiness over the loss of Cat power. Executives even claim that a few Cat distributors are considering the buying of Kenworth and Peterbilt midrange trucks because they like their premium features and might overlook the Cummins-built power.
Paccar's upcoming big-bore diesels will be built at Columbus, Miss., based on MX diesels designed by Paccar's European subsidiary, DAF. One is a 12.9-liter model with 410 to 510 horsepower in Euro-emissions versions. Paccar says the plant will be completed in 2009, in time to equip 2010-model trucks with the engines. Paccar is not saying if it will cut out Caterpillar or Cummins big-bore engines at that time, but it's possible that one might go.
Cat's fortunes in the medium-duty truck market seem to be sliding, as Freightliner and Sterling have also dropped the C7. They offer Cummins ISB and ISC as options in their midrange models, along with the standard M-B 900 series. The two remaining customers for the C7 are Ford, in its F-650/750, and General Motors, in its Chevrolet Kodiak and GMC TopKick C6500/7500/8500 trucks. In all cases, the C7 will be the premium engine, as a Cummins ISB will be standard in the Fords and the Isuzu 6H will be standard in the Chevys and GMCs.
The Cat's popularity has slipped among Chevy and GMC customers, GM managers say. As recently as three years ago, 80 percent of buyers chose the C7, and now about 33 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.
And, GM says, the 6H (formerly called Duramax 7800) has also proven itself through performance and reliability, with a claimed B10 life of 481,000 miles (which means 90 percent of all 6Hs will still be running at that point). Dealers are proud to sell it, and 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. Cat lost market share earlier this year with a relatively slow start in production of EPA '07-spec engines (though not many '07 diesels of any make have actually been built or sold). But Cat's insistence that its products are premium in quality and deserving of their premium prices is costing it some sales.
Among the premium features of current Cat diesels, in the view of the builder's marketers, is its Clean Gas Induction system. Other builders send cooled but raw exhaust gas into combustion chambers to reduce formation of NOx. But Cat's version of exhaust-gas recirculation takes filtered gas from the rear of the particulate filter and sends it to the engine's air-induction system in a separate pipe that parallels the exhaust system. Thus only clean air goes into its engines, and Cat marketers have torn down competitors' diesels to show that their innards are indeed dirtier. That, marketers say, will probably make them wear out faster.
Competitors wonder why it's harmful to put raw exhaust gases into the cylinders that produced them in the first place. And they counter-argue that Cat CGI's filtered exhaust gas still contains acids that can attack turbos and charge-air coolers, causing worse problems. Fitting the CGI piping into a chassis can be troublesome, and Sterling gave that as a reason to exclude Cats from a recently introduced L Line model. Is this a valid reason, or another way to push customers toward Detroit and M-B "family" engines? What will happen to the big yellow engines come 2010 when engines become even more complex?
Another round of EPA emissions tightening is scheduled for January 2010. This will require further reduction of oxides of nitrogen (NOx), and engine builders are preparing to do it with technology that'll be new to North America. Detroit Diesel-Mercedes-Benz and Volvo Powertrain have announced that they'll employ Selective Catalytic Reduction, along with cooled exhaust-gas recirculation already used. SCR injects a urea solution whose active ingredient, ammonia, causes chemical reactions in exhaust that breaks down NOx into non-harmful gases, including water vapor.
SCR is now successfully used by most builders in Europe and Japan. Japanese builders have not said they'll use SCR in trucks destined for the United States in 2010, but they almost certainly will. Caterpillar, Cummins and International say they are close to deciding how they'll meet the '10 regs, and will announce their approaches by year's end. Greater complexity adds expense, especially if OEMs have to deal with different aftertreatment types. This could push them toward greater simplification in their engine offerings and even more vertical integration.