The Rising Rumble Of American Diesels

For nearly forever, it seems, U.S. makers of diesel truck engines have tried in vain to break into international markets. Even the $2 billion-plus they've invested since 1983 to meet U.S. pollution control standards couldn't round up foreign orders for the cleanest-burning engines in the world. Until now.

In just seven months Cummins Engine, Caterpillar, and Detroit Diesel, the U.S. Big Three, have begun to make inroads overseas. Cummins has forged joint ventures to build midsize diesel engines for India's Telco and for Japanese rival Komatsu. Caterpillar moved into Russia through a joint venture with truckmaker Amo Zil. Detroit Diesel is forging closer links to German giant Mercedes-Benz. And these deals, say U.S. engine makers, could be only a start. The combined diesel truck engine markets of Japan and Europe are double the size of the $3 billion U.S. market. "The opportunity to leverage what we have developed is finally beginning to unfold," says Caterpillar Engine Div. Vice-President Richard L. Thompson.

If he's right, the key will be new pollution laws overseas that match the ones U.S. engine makers have already struggled to meet at home. To comply with rules in Europe and Japan, engines must emit less of two pollutants: smog-causing nitrogen oxides and particulates such as carbon. In the U.S., these impurities had to be cut by more than half from 1985 to 1991, with more reductions still due. By decade's end, particulates must be cut by 80% from the 1985 levels and nitrogen oxides by 67%. U.S. makers will hit the targets even as they boost mileage--by up to 20%--using electronic fuel injection and other technologies.

SHORT TRUCE. That leaves the ball with truckmakers in Asia and Europe. They usually build their own engines and resist working closely with U.S. rivals. "We must develop European technology to meet European standards," says Michael Schittler, Mercedes-Benz senior vice-president for commercial engine development. Still, overseas producers face a hard reality. Tightening emission regulations mean "you can't be in this business long-term without mounting the research effort we did," says Cummins Chief Executive Henry B. Schacht.

So the Europeans have started consorting with the enemy. Mercedes led, in a 1991 deal with Detroit Diesel to develop fuel systems that will help the German company meet late-1990s emission standards. The effort is partly based on the electronic fuel system used in Detroit Diesel's Series 60 heavy-duty truck engine, which already meets 1994 U.S. emission standards and helped the company turn a $10.5 million profit last year, vs. 1991's $5.2 million loss. Similarly, Sweden's Scania tied up with Cummins last year to develop a fuel system.

Both partnerships are seen as precursors of wider-ranging pacts. "The Americans have positioned themselves nicely," says Ladenburg, Thalmann & Co. analyst Frank Prezelski. Ironically, the products of the alliances may show up in the U.S. first. Mercedes and Detroit Diesel--which has pushed its U.S. market share from 4% in 1988 to 26% last year--are teaming up on an engine for small heavy-duty trucks to be sold in North America. Detroit Diesel is starting to build that model, initially for use only in trucks made by Mercedes and its wholly-owned Freightliner Corp.

So far, the overseas deals seem to bear out the decision by the U.S. companies a decade ago to diversify. To lessen their dependence on the erratic market for 18-wheelers, U.S. producers, particularly Cummins, expanded into midrange engines. These, it turns out, are easily reconfigured to fit into short-haul trucks and construction machinery in Asia or Europe. In March, Cummins--which earned $67.1 million last year before special charges, after a $14 million loss in 1991--arranged a joint venture with rival Komatsu Ltd. to build up to 30,000 engines a year in Japan.

Cummins' joint venture with India's Telco also involves the so-called B-

series engines. Cummins will operate the factory, due to start production in 1995, and the venture is expected to reach its peak revenue, $200 million, later in the decade. Cummins has signed similar deals in China, Russia,and Zimbabwe. Then there's Mexico, the one foreign market that has thrown open its doors to U.S. heavy-duty truck engines. As trade between the two countries has boomed, Mexican trucking companies have scrambled to buy trucks that meet U.S. standards. Sales of Cummins engines in Mexico grew 20% in 1991 and 1992, helping boost its Latin American sales by 10% last year, to $355 million.

Still, that's tiny compared with the opportunity American truck manufacturers spy in Japan and Europe. The Komatsu deal, Schacht hopes, is a sign of things to come. He can at least say this: The fantasy U.S. engine makers had of leveraging their technical superiority into international leadership no longer seems like a pipe dream.

        -- Advanced fuel injection
        -- Better emission controls
        -- New noise controls
        -- Power-enhancing turbochargers
        -- Lighter motors=bigger freight capacity
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