Is the U.S. Heavy Truck market going the way of Europe?

MergerTalk: US truck engine makers near end of road?

CHICAGO (Reuters) - Caterpillar Inc. (CAT.N: Quote, Profile, Research) and Cummins Inc. (CMI.N: Quote, Profile, Research), the two big U.S. diesel engine manufacturers, are at a crossroads, bankers say.

The dilemma: To keep their heavy-duty truck engine operations rolling, will they need to align themselves more closely with a single domestic truck maker?

In Europe, the top manufacturers of heavy-duty trucks -- Sweden's Volvo Group, and Germany's DaimlerChrysler and MAN AG -- are vertically integrated, producing both the chassis and engine.

But in North America the industry is divided.

The European players, Volvo and DaimlerChrysler's Freightliner unit, have tried in recent years to impose their vertical template on the marketplace, encouraging customers accustomed to being able to order their trucks with outsiders' engines in them to go with in-house drivetrains instead.

But the two other big manufacturers, Bellevue, Washington-based Paccar Inc. (PCAR.O: Quote, Profile, Research) and Warrenville, Illinois-based Navistar (NAV.N: Quote, Profile, Research) -- continue to outsource their so-called Class 8 heavy-duty engines, primarily to Peoria, Illinois-based Caterpillar and Columbus, Indiana-based Cummins.

But a big change -- the kind that drives deal-making -- is afoot. The wheels were set in motion in late 2004, when Navistar, Cummins' key customer, announced plans to develop a new big-bore engine with MAN.

When Navistar announced the deal, says one banker, "it sent shivers through the Cummins organization."

PACCAR makes its own engines for the European market (it owns DAF, Leyland, and Foden in Europe as well as Kenworth and Peterbilt here in the U.S.), so they have a potential Euro source as well. Cummins has more to worry about because Caterpillar engines are seen as a premium product, so drivers and owners would probably change truck brands to have a CAT motor. So any maker that chose to drop CAT would have some lost sales and perhaps many lost sales for Peterbilt, which has a "Premium truck" image. Cummins motors are more fuel efficient but don't have as devoted of a following. Right now they are the sensible fuel economy and cost choice in an IH, Kenworth, or Pete; and an alternative to the expensive to maintain Volvo motor in a Volvo. Already the market is much more fenced off than the 60s to the 90s where at most manufacturers buyers could choose Cat, Cummins or Detroit power. Detroit diesel in a typical bit of short term thinking was sold off by GM right after developing the Series 60 engine, the best fleet motor on the market, to Penske. A few years later Penske sold Detroit to DaimlerChrysler and all of the manufacturers outside the DC portfolio (Freightliner, Western Star and Sterling [formerly Ford's heavy truck unit]) dropped Detroit engines from their options list.

Until the Euro emissions standards catch up with the US 2010 standard though I don't see PACCAR moving to bring their euro product here. IF they did, it would probably slot in as the standard motor in place of Cummins with Cat motors remaining the "step up" option. Navistar seems to be struggling right now so it is hard to tell how their joint venture will shake out. Americans have traditionally resisted European diesels because of high parts costs and unfamiliarity (DC also offers Mercedes diesels in their heavy truck products but they haven't found a large following),