Paccar: Built For The Long Haul

Premium quality is what has kept Paccar trucks on a 67-year winning streak

Herbert J. Schmidt is a truck guy, but not just any truck. It's Kenworth or nothing. For the past 20 years, Contract Freighters Inc. has bought only Kenworth rigs, and the chief executive of the Joplin (Mo.) trucking company intends to stick with Kenworth again in 2006, with plans to order at least 700 new trucks. Sure, these 10-wheel diesels cost up to 10% more than rivals' trucks. But when Schmidt factors in everything else -- reliability, trade-in value, even the plush interiors that attract better drivers -- he says they're worth it. "It's not the price," he says. "It's the quality."

Thanks to loyal customers like Schmidt, Paccar Inc. (PCAR ) is king of the road. The Bellevue (Wash.) company, which makes Kenworth and Peterbilt trucks, is the top capital-goods producer among the BusinessWeek 50 list of the best-performing large companies, ranking 16th overall. With record profits and sales in 2005 -- industry analyst David Bleustein of UBS Securities (UBS ) figures Paccar netted $1.1 billion on $14.1 billion in revenue -- Paccar has now made money for 67 consecutive years. Analysts predict that streak will easily extend to 68 in 2006, with $1.3 billion in earnings on sales of $14.7 billion.

Like a luxury auto maker, Paccar's ability to demand a premium for its trucks lies in its focus on quality, in everything from product design to technology to dealer experience. To that end, Chairman Mark C. Pigott, 51, great-grandson of the company founder, benchmarks Paccar against industry leaders in a variety of businesses. He measures his information technology group against Microsoft Corp. (MSFT ) and boasts that Paccar's custom manufacturing model is every bit as efficient as Dell Inc.'s (DELL ). People may scratch their heads at the peer group Pigott has chosen, he says, "but that is what pushes us to be a world leader." In a Feb. 13 ceremony, Paccar will receive the National Medal of Technology, conferred by the Commerce Dept., for its legacy of innovation.

That outside-the-truck thinking makes sense for Paccar. Today, commercial trucks are mostly commodities, mass produced for big fleet operators whose topmost concern is the sticker price. Paccar, however, still custom-builds trucks to individual specifications. Buyers are offered thousands of options, from engines and axles to upholstery and the dials on the dashboard. Part by part, they design the truck they want on a computer with a dealer. Orders are then zapped to Paccar's factories, where workers assemble trucks for delivery six to eight weeks later.

Paccar has spared no expense to be a technological innovator. Its computerized machinery can make prototypes of parts in hours, rather than the days or weeks it takes to sculpt them out of foam or clay. That allows the company to upgrade its models more frequently. To afford the outlays, Paccar big rigs list for $115,000 to $120,000, more than models from DaimlerChrysler's Freightliner, the market leader. But drivers love them. "It's similar to Harley-Davidson (HDI )," says Kurt Jorgensen of Waukesha, Wis., who co-owns eight Peterbilt dealerships. "The product's got a mystique."

That kind of brand equity ought to help Paccar keep its profits streak going, even with some speed bumps ahead. In 2007, stricter federal standards on diesel engines go into effect. Compliant engines are expected to cost as much as $8,000 more, while getting worse mileage. As a result, trucking companies are likely to move orders up to 2006, damping demand next year. Analyst Brian M. Rayle of FTN Midwest Research Securities Corp. in Cleveland sees Paccar's profits falling to $930 million in 2007 and sales sliding to $12.5 billion. Pigott looks beyond the down cycle, however. As long as it keeps producing the best products, he says, Paccar will keep cruising.

By Michael Arndt

    Before it's here, it's on the Bloomberg Terminal.