Navistar International, the legacy of Cyrus McCormick and his revolutionary harvester, marks its 100th anniversary this year. Chairman and Chief Executive John Horne reaches back even further, however, to describe the past year at the $6.72 billion company -- all the way back to Dickens' Tale of Two Cities. "It was the best of times," Horne says. "It was the worst of times."
The worst is blindingly obvious. In the fiscal year ended Oct. 31, sales of Navistar vehicles -- the company switched to heavy- and medium-duty trucks and school buses after quitting the farm business in 1985 -- plunged 31% from 1999's peak. As a result, Navistar (NAV) swung from record earnings of $544 million in 1999 to a $23 million loss in 2001, ending a six-year stretch of profitability. And with unit sales down an additional 16% in its first quarter, Horne concedes Navistar will lose money again in 2002.
On top of that, tragedy struck. On Feb. 5, 2001, a fired employee burst into the company's truck-engine plant in Melrose Park, Ill., where Horne started work as an engineer in 1966, and began shooting. Before committing suicide, the gunman killed four former colleagues and wounded four others.
Still, Horne swears that in other respects, 2001 was a good year. For one thing, Navistar completed a five-year plan to thoroughly modernize its manufacturing operations, which stretch today from Canada to a new diesel-engine factory in Brazil. The company also formed a 50-50 venture with Ford Motor to build medium-duty trucks in Mexico. And Navistar rolled out its first new line of International trucks since the 1980s, with plans to launch five more models this year.
Investors see the best in Navistar, too. Its share price has leaped 75% in the past 12 months, to $44.06 on Mar. 1, the highest level since January, 2000.
The company's modernizing efforts, which have cost $3 billion since 1997, have put Navistar tantalizingly close to Horne's ultimate goal: to make money even in the depths of a manufacturing recession. Moreover, the 64-year-old CEO believes he has the means to do it. How? Cutting fixed costs.
Until last year, for example, Navistar had rented office space in three buildings, including part of a high-rise in downturn Chicago. Today, it leases just one building -- a brand-new six-story headquarters in suburban Warrenville, Ill. -- at 42% of the previous price. Horne recently invited BusinessWeek Correspondent Michael Arndt to his second-floor office to review 2001 and lay out his hopes for 2002. Here are edited excerpts from their conversation:
Q: How would you characterize the last year?
A: It was absolutely the worst economy we've seen in the truck cycle going back to at least 1991. Volumes are off more. Pricing is off more. From the general economy, it has been horrible.
But it has been the best of times because we're changing the company. I look back at 1997, at the time we put our new strategy in place. We were really struggling in the truck business. We hadn't done a new truck in eons. So here we are today, in a little over four years, with a new truck. And not only a new truck, but a new way of designing and manufacturing trucks.
We put in a new body-press line in our main truck plant in Springfield, Ohio. Four presses in a row, about 40, 45 feet tall, that stamp big panels of trucks, such as roofs, doors, and floors. We can change that press line in less than 10 minutes. That's Toyota speed.
We also have something called an intelligent body-assembly system. Every truck cab goes into an inspection booth. There are 35 or 40 laser cameras that pick up key locating points in the cab. Each cab is 82 inches wide. The whole variance in that cab is now less than the thickness of a dime.
Q: That should help when the economy recovers. But are you frustrated by how long it's taking the economy to turn around?
A: No, because it happens to us every 10 years. We had a downturn in 1981-82. We had another downturn 10 years later. And, gee, we've got another one now. It surprised us by the severity, but not the fact that it was occurring.
We will get through this downswing. And we're in much better shape to get through it than we ever were. Even in a down economy, we're close to breakeven. In the past we couldn't do that. We're redesigning the company's operations so as we go back up the cycle, all our costs will be variable.
Q: How do you do that?
A: One simple way is you work overtime when times are good. Our new bus plant in Tulsa, Okla., has a very interesting design that we might be able to apply more broadly. The bus business is seasonal. Everybody wants their bus before school starts, but nobody wants one at Christmastime. So we have peak parts of the year when we have to build lots of buses.
We've designed the operating process at the Tulsa plant so the basic workweek is four 10-hour days. Then you can add any part of a Friday and any number of Fridays, depending on demand. By adding every Friday, you can add 25% capacity. If you add only every other Friday, you get 12.5% capacity, and so on.
So you can follow the market very easily, with a 25% capacity swing. And people still have Saturdays and Sundays off. And at the bottom of the cycle or the bottom of the season, they've still got their 40 hours of pay, and none of their friends got laid off. Isn't that a wonderful environment?
We've been doing variable costs elsewhere. Going up the last cycle, I was encouraging the engineering department, for example, to have 20% of their work farmed out. That way, when we hit the downturn, they could bring that work back in-house and not lay off our people.
Q: One of the overarching trends in manufacturing today is globalization. You have moved in to Latin America, but Navistar is still only in the Western Hemisphere. Do you need to be bigger?
A: We have to have scale, and our joint venture with Ford allows us to have scale. We're going to add another 20,000 to 25,000 units to our medium truck business through that joint venture. Just on purchasing -- and we're just starting on this -- we're saving over $7 million on an annualized basis on just three components: transmissions, axles, and cooling systems.
And we have a concept of another product line we're working on with Ford. It's a little truck that has a Mazda cab, which is a Ford brand. It has a Ford transmission and chassis. It has our new V-6 diesel engine. When you get all done with this, who knows where this product is going to be sold around the world. But remember, I said Mazda, so you might have some idea.
We're going to be bigger. We are big, but we need to work with existing distribution systems, because to go out and start a new distribution system on your own is ungodly expensive.
Q: It was just over a year ago that the shootings occurred. Are things back to normal?
A: They're as normal as things can be. Take September 11, which happened to the entire country. Is the country back to normal? Eventually, you accept it happened. You still grieve about it, but you get on with your business and lives, because you can't do anything about what happened.
About a month after [the shootings] happened, I went back and spent about a half a day just talking to the people who were there. We also had a moment of silence at 9:40 a.m. a year later throughout the company.
Q: How have the shootings affected you? Did you have nightmares?
A: It occurred right where I had started work with the company. A lot of people I know are still there. So it hit pretty close to home. But no, I don't get nightmares. Leadership is not about wringing your hands and fretting. It's about getting out and doing something about it.
Q: This is Navistar's 100th year. What are you going to do to celebrate?
A: We may ring the closing bell at the New York Stock Exchange on our birthdate. But I really don't want any distractions from what we are doing. The focus right now is to manage through the downturn.