PACCAR's announcement last week that it will build a new $400 million powertrain facility in the Southeast United States continues what appears to be a trend among U.S. truck OEMs: in-house engine production.
PACCAR cited strong demand for its DAF, Peterbilt and Kenworth brands in announcing that the manufacturing and assembly facility should be complete in 2009. The company said the 400,000-square-foot plant will be its most technologically advanced facility and will be configured for maximum flexibility to supply products and components to PACCAR facilities and customers on a global basis.
Prudential Equity Group analyst Igor Maryasis said that when the facility is up and running, all major North American truck OEMs (including PACCAR, Navistar, Volvo, and Daimler) will be offering their own home-built heavy-duty engines in the U.S.
"For truck OEMs, vertical integration should provide cost advantages, more after-market access, and more price negotiating power with engine suppliers," Maryasis said. "Truck OEM dealers are likely to drive demand for home-built engines without major increases in marketing budgets on the truck OEM's part."
The analyst said that while the trend is not likely to have an immediate impact on the traditional North American engine suppliers such as Cummins and Caterpillar, "it suggests an increasingly less favorable longer-term outlook."
Maryasis noted that with the largest exposure to the North American heavy-duty engine market, Cummins may soon be pressed to realign its product portfolio towards adjacent end markets.
The long-term impact on Caterpillar would appear to be less significant. Caterpillar's Class 8 Truck business is more incremental in its nature - engine technology and parts are used in virtually all of the company's machinery - and makes up only about 6-7 percent of Caterpillar's total revenue, he said.
