The Volkswagen Truck & Bus (VW) division of Volkswagen AG is buying a 16.6% stake in U.S. truck maker Navistar – a new stock issuance priced at $15.76 per share, equaling some $256 million in fresh cash – as part of a new global joint venture between the two companies that aims to deliver VW-built powertrain options to Navistar-branded trucks starting in 2019, along with “significant” cost savings for both companies especially in terms of global sourcing and parts procurement.

“This is a major milestone on way to create a ‘global champion’ truck business,” noted Andreas Renschler, CEO of Volkswagen Truck & Bus, in a conference call with analysts and reporters.

Renschler, who formerly headed up Daimler AG’s global truck business before joining VW back in early 2015, added that this partnership also enables VW to gain access to the North American truck market.

“It is a highly attractive alliance since it brings together two companies with a complementary geographic footprint,” he added. “Together we cover 25% of global [truck] market. We strongly believe this a very, very powerful global position. Combined, the two companies will build 226,000 commercial vehicle units per year. That gives us significant global scale.”

In terms of savings, Navistar said it expects the alliance to be accretive beginning in its first year, with “cumulative synergies” to ramp up to at least $500 million over the first five years.

By year five, the alliance is expected to generate annual synergies of at least $200 million for Navistar, with its annual “run rate” expected to grow materially thereafter as the companies continue to introduce technologies from the collaboration.

Walter Borst, executive vice president and chief financial officer at Navistar, added that he believes the majority of the deal’s expected savings won’t kick in until the early part of 2019 and will come from procurement and “more efficient spend” in regards to “structural costs,” especially on engineering side of business.

“I feel very feel comfortable with our liquidity position and even more comfortable with it with this deal,” he noted on the call. “I sleep better knowing we have over $1 billion in cash on hand [as] we need $500 million to run the business.”

Troy Clarke, president and CEO of Navistar, added during the call that both companies will benefit from the ability to better integrate powertrains thru the deal plus optimize the overall capital spend for both, while lowering the costs associated with developing “next generation” powertrains.

Clarke told Fleet Owner telematics represents another big potential area of cooperation and savings for both Navistar and VW. “If you think about it, all [commercial] trucks are slowly fitting into the same ‘box’ where emissions and connected vehicles are concerned,” he said. “The software may be different but the hardware is the same. Personally I am excited about the opportunities for collaboration here.”

Clarke stressed, though that new partnership won’t substantively affect Navistar’s effort to renew its “entire truck portfolio” in 2018; an effort dubbed “Project Horizon” that will witness a new product introduction every four to six months on average, with the first to be introduced at the end of this month.

“But now we will be able to go in and align product platforms,” he pointed out. “We are certainly counting on structural efficiencies. There is a well-established trend in the global [truck] industry along vertical integration, though it is pacing out differently for countries and participants in the market.”

Clarke emphasized, though, that products springing from the Navistar/VW will be “steered by what customer want” and offers in his words “a tremendous opportunity for us both to be even more customer focused -- not just in terms of products but services going forward.”

A few other key points made during the call:

  • Renschler noted that VW Truck & Bus generated gross revenues of 30.4 billion Euros (some $27.17 billion U.S.) in 2015, employs 76,000 worldwide and built 179,000 commercial vehicles units worldwide last year.
  • The deal provides VW with the opportunity to claim two seats on Navistar’s board of directors.
  • Clarke said Navistar’s gross revenues topped $10 billion in 2015 and said the company’s network of over 800 dealers providing 8,000 service bays and 7,600 technicians is a key focus of the alliance.
  • Clarke added that the 13 liter engine Navistar currently offers – its N-13 unit – is derived from a previous deal made with VW subsidiary MAN. “So we have a close engineering relationship with MAN [and] this was the genesis of the opportunity we saw together.” He noted VW’s engine portfolio plays up into the 15-liter “big bore” realm and down into 9 and 10 liter displacement as well. “We will work over the next few months to align our product portfolio,” Clarke said.
  • Borst said neither company has filed the necessary paperwork yet to consummate the partnership but that he does not expect to face too many regulatory challenges. “We’ve got a few in the U.S. and a few other jurisdictions: Mexico, Canada and Brazil other key ones,” he said. “Hopefully regulators see this as we do; that there are no issues in this area.”
  • Neither side mentioned how Cummins, a major supplier of engines to Navistar, will be affected by the new partnership. “The Cummins engine in our product truly outstanding; we anticipate offering [the] Cummins product for a long period of time,” Clarke noted. “So we are not speculating or making announcements on that today.”
  • Clarke pointed out that while truck orders “are thin for everyone” right now, he believes the new partnership with VW with “eventually” translate into increased market share. “The [truck manufacturing] industry as a whole has to get through this valley, this fall in orders, and get back to order volumes that reflect demand.,” he explained. “That will give us a clearer view. Our products are more than competitive now and [the VW partnership] now gives access the global scale of technology. It gives customers one more good reason to consider Navistar. It allows us to get better and get better fast.”
  • Clarke added that the deal would also “relieve anxiety” on part of customers about Navistar’s powertrain systems and its ability to integrate technology. “They don’t want to buy stranded technology; that affects residual values which they use for the down payment on their next truck,” he said. “This deal will get at this in a big way. This also gives us an opportunity to get back on the balls of our feet in the market.”