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Cleaner diesel fuels growth at southeast-side factory: Former International Harvester plant is a star for Chicago-based parent Navistar International Corp.

August 29, 2005

Workers at the once-beleaguered International Truck and Engine Corp. plant on the city's southeast side are thinking expansion following a $300 million plant upgrade and word of an aggressive 2006 marketing campaign designed to clean up the public image of diesel engines.

Improvements to the 1.1-million-squarefoot Brookville Road facility were necessary to meet U.S. Environmental Protection Agency mandates for diesel engines set to take effect in 2007, but the plant's future seems secure well beyond that. The local subsidiary of Chicago-based Navistar International Corp. has a contract to supply engines for Ford Motor Co. pickup trucks through 2012.

It's a line of work that could mushroom if local officials succeed in swaying public opinion in favor of new diesel technology. Widespread acceptance could spur the growth of diesel in passenger vehicle markets, a trend that could lead to the addition of a third shift at the plant and increase the parent company's profit line.

So confident are International officials, they've already begun upgrade plans for the EPA's 2010 mandates on diesel engines.

"You don't make an investment like this without expecting a strong return," said Walter Liptak, who covers Navistar from KeyBanc Capital Markets' Chicago office. "This line out of Indianapolis has become an important one for Navistar."

Despite market growth and technological advances, Navistar officials admit diesel's dirty reputation persists and must be countered with a huge educational campaign. They've already launched www.greendieseltechnology.comas a lead-in to next year's marketing blitz.

"It's been a battle to communicate to the general public about what's going on," said Patrick Charbonneau, Navistar vice president of government relations. "That's why heading into 2006, you'll see a much bigger marketing effort. We have some new products coming onto the market, and we think then the public will see what diesel engines are really all about."

Reversal of fortune

The upbeat mood at the plant today represents a reversal of the gloomy future it faced two decades ago.

The factory operated for years under the International Harvester banner, manufacturing a wide range of products, from farm implements to refrigerators. But the company eventually divested itself of many of its lines and rebranded as Navistar, focusing on engine manufacturing, later concentrating on the diesel market.

The change didn't come without pain. The parent company shrunk from 120,000 employees to 12,000 in the late 1980s. Fears were rampant the local plant would be shuttered until a deal was signed with Ford in 1992 to produce its Power Stroke diesel engine. Demand for the engine doubled within a year of its 1994 launch.

Now the plant is dedicated solely to making components for and assembling the Power Stroke, with International's 1,100 union workers producing 1,100 of them daily, or about 280,000 annually.

When the plant began adding employees to meet the Ford contract, its payroll grew from fewer than 900 in the early 1990s to more than 1,500 in 2002. More than 300 workers were laid off in 2002 when the plant began producing an updated engine for Ford, a project that required fewer assembly workers.

Navistar employs another 550 at the Indianapolis Castings Corp. foundry directly west of the International plant, but the two facilities operate separately.

With Ford holding its market share in the light- and super-duty truck lines, and diesel technology improvements hitting the market, International Plant Manager Horn said the east-side plant is again poised for growth.

Clearing the air on diesel

Industry figures show Ford's Power Stroke engine has slightly more than 50 percent of the diesel pickup truck market, with another Indiana product, an engine Cummins Engine Co. makes for Daimler-Chrysler, a distant second and General Motor Corp.'s Duramax engine third.

About 60 percent of super-duty rated pickup trucks sold in the United States have diesel engines, according to industry figures, and diesels are starting to infiltrate the light-duty class.

"There are several advantages of diesel that should keep demand strong in the pickup truck markets," said Andre TeissierduCros, publisher of the Diesel Air Newsletter, an industry publication based in Atlanta, Ga. "I think there will be growth, but there are also challenges."

Because diesel engines are about 20 percent more fuel-efficient than gasoline engines, and have higher torque and loadhauling capabilities, they have long been popular with commercial truckers. But the movement to passenger vehicles and pickups took a big hit in the early 1980s when General Motors' introduction effort flopped.

GM's diesel engines often froze when the temperature sunk below freezing, acceleration was poor, and sooty emissions angered environmentalists and even stained garage floors.

"Those issues have been solved," said Jay Gore, director of Purdue University's Energy Center at Discovery Park. "It's a matter of manufacturers' making the investments to implement the technological advances and increasing public awareness."

Horn said International frequently conducts "white hanky" tests at its facility, demonstrating the Power Stroke engine leaves no black mark on a handkerchief laid over an exhaust pipe and retains no diesel smell.

Alliance with Ford:

Strength or weakness?

As Ford's sales of pickup trucks go, so goes the success of International Truck and Engine, said Liptak, the KeyBanc analyst, noting some see that reliance as a vulnerability despite Ford's stronghold on the North American market.

The Power Stroke engine once had the best horsepower and torque in its class, but Horn conceded that Cummins and Duramax have closed the gap. Still, Horn remains optimistic.

"I don't think we have our eggs in one basket," he said, noting that International could do work for other firms by adding a third shift, thus adding 18 percent to its production capacity.

"You can always run faster," Horn said. "New business and new revenue is always a great reason to go faster."

Navistar President and CEO Dan Ustian said this year he is committed to doubling the company's revenue to $15 billion within five years. Navistar also makes mediumand heavy-duty trucks and school buses. Diesel engines account for 23 percent of the company's revenue and 19 percent of the company's profits. About 60 percent of Navistar's diesel engine production comes out of Indianapolis.

"There's growth potential in their diesel engine market as there is continuing dieselization of North America," Liptak said. "But some would like to see it become more profitable."

Eyes on the future

Although Navistar's Charbonneau said the local plant must compete with other Navistar-owned facilities for expansion opportunities, he said the Indianapolis operation is well-positioned.

"If you would go around the world to look at diesel engine manufacturers, you won't find one more modern than the one in Indianapolis," Charbonneau said. "No doubt, it is positioned for growth."

Teissier-duCros said Navistar's local plant has the capabilities to enter passenger vehicle markets in a big way. He said a movement to get diesels put in sport utility vehicles could be a big boost. But he wonders what new technologies, such as the electric hybrid, and lingering negative public perception will do to that effort.

"The hybrid is seen as new and green, good for the environment," said TeissierduCros, also a business strategy consultant for manufacturers. "Diesel is perceived as industrial and outdated."

But Purdue's Gore said some of diesel's capabilities are just earning recognition.

"More than 50 percent of the cars in Europe are diesel for a reason," Gore said. "Companies like Mercedes and Peugeot have been pioneers in the industry. I think you'll find diesel works very well with an electric hybrid application."
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