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April 24, 2017 3:15 AM, EDT

Suppliers Continue to Find Opportunities Despite OEMs’ Vertical Integration Push

John Sommers II for TT

This story appears in the April 24 print edition of Transport Topics.

Truck makers are putting their respective names on more and more of the key components in the Class 8 trucks they build, expanding on their earlier move into manufacturing proprietary engines. They’re now adding axles, transmissions, collision mitigation systems and even fluids.

Suppliers, however, said they continue to find opportunity in many forms: sometimes by helping in the truck makers’ verticalization, by positioning themselves for a central role when engine makers must further reduce emissions, or by devising products to replace proprietary components once they have exceeded their useful life.

At the same time, suppliers are not above vertically integrating aspects of their own business. A key question is how much further will truck makers go on the path to vertical integration.

OEMs likely are investigating all areas, said John Blodgett, vice president of sales at research firm MacKay & Co. “I would assume they have people who evaluate all segments of the truck.”

However, “not all components are commodities,” Blodgett said, adding that he believes it’s helpful to have companies that “live and breathe a particular component or systems area. They can drive new innovation and should be rewarded for that. We don’t want to lose that.”

John Nelligan, vice president of sales and service at Meritor Inc., said, “If we didn’t bring the best product to the table, we would be in trouble. That’s the bottom line for us.”

“We have been able to work with each of the OEMs to get the right recipe for them, and then also work with the fleet to make sure they keep wanting our products,” Nelligan said.

Cummins Inc., the nation’s only remaining independent engine maker, has mostly weathered the storm from vertical integration, said Neil Frohnapple, an analyst with Longbow Research. “That has largely run its course with engines.”

Although Cummins still may lose some market share at Paccar Inc., which manufactures its own MX engines, Cummins has gained market share at Navistar Inc., parent to the International Trucks brand, Frohnapple said.

All OEMs still offer Cummins as an option because a lot of customer loyalty remains for its engines, he said. Also, neither Paccar nor Navistar have a 15-liter engine, so Cummins will always have a place at those OEMs, Frohnapple said. From a capital cost standpoint, it “doesn’t make sense” for other OEMs to spend money to develop a 15-liter engine, he said.

At Eaton Vehicle Group, a unit of Eaton Corp., the future of components is all about scale. Eaton’s global scale “allows us to remain very competitive” in manufacturing clutches, transmissions, automation technologies and power management, said Gerard DeVito, chief technology officer.

Separately, Eaton and Cummins recently agreed to form a joint venture to develop automated transmissions for medium- and heavy-duty trucks.

That 50-50 venture, to be named Eaton Cummins Automated Transmission Technologies, will be better positioned to meet the demands of vertically integrated OEMs while improving the per- formance of combined Eaton- Cummins powertrains, Eaton said.

Other suppliers also know what’s at stake.

Vertical integration, while focused on improved performance, also is about parts sales that drive OEMs’ revenue and profitability, said Len Badal, global Delo brand manager at Chevron Lubricants.

From the fleet side, certain common and problematic components can get expensive to replace.

One large package-delivery fleet annually runs through 2,500 to 3,000 diesel particulate filters, which capture soot particles, said Frank Jenkins, senior manager of the heavy-duty marketing group at Denso Products and Services Americas Inc., an affiliate of Denso Corp.

DPFs range from $1,000 to $5,000 new, Jenkins said, and Denso is going after that replacement market.

At the same time, Class 8 sales leader Daimler Trucks North America, a unit of Daimler AG, underscored the importance it places on vertical integration, including its own aftertreatment technology housed in a “one box” arrangement, as opposed to others’ modular approach.

“The success and benefits of component and system integration into our vehicles is measured by the acceptance of our customers,” said Kary Schaefer, DTNA’s general manager of marketing and strategy.

The company’s top-selling Freightliner brand offers multiple component options, she said, adding that as its Detroit engine product portfolio has expanded, “the benefits of integration are being increasingly asked for and realized by our customers.”

A startup truck maker looking to disrupt the market, meanwhile, views vertical integration differently.

Nikola Motor Co. has laid out plans to develop a zero-emission hydrogen-electric Class 8 truck and bring the first units to market in the United States in 2020.

“It’s necessary to some extent to be vertically integrated in order to do something new,” said Jonathan Spira, Nikola’s chief financial officer. “But I’d love not to be fully vertically integrated in every aspect of the operation because it just takes more capital and could slow us down a little bit. We’d like to get to market as quickly as we can, and execute well.”

Meritor is one of the suppliers Nikola is working with and co- designed the industry’s first independent suspension for the truck.

Meritor, also making the Paccar- branded axle, is the exclusive supplier of axles for Volvo Group in Europe and helped DTNA with development of its own axle in the late- to mid-1990s.

“I always think, in the long run, we would always want to have the Meritor name out there,” Nelligan said. “Without it, our brand goes away.”

DTNA said its Detroit unit manufactures front-steer, single- rear and tandem-rear axles in the same facility where it makes engines and transmissions. But Meritor still accounts for about 50% of its axle build, Nelligan said. “They are a great customer for us. We also have drivelines, brakes and a bunch of other content on those trucks.”

DTNA also has Detroit Assurance, its proprietary collision mitigation system that integrates into the new Cascadia, Schaefer said.

In all of this, fleets still want choices, Nelligan said. For the most part, “they don’t want the integrated top-to-bottom approach,” he said, adding it’s been “the same story” for the past 20 years.

“The fleets have massive pull in North America, and they want people to get up and think axles and breathe axles and help them with their products that day,” Nelligan said.

Meritor has 100 people in the field working with fleets and getting them to pull through its products when they spec a truck, he said.

Brett Wacker, vice president of maintenance at Dart Transit Co., a truckload carrier in Eagan, Minn., said spec’ing a truck involves managing requests for components and features from different divisions within the company — such as recruiting, safety and maintenance.

“You have to look at each one of those items and combine them together to make the one piece of equipment, and then you say to the OEM, ‘Can you devise this for me? Yes or no?’ ”

If one truck maker cannot accommodate specific items a fleet is requesting, another may be better vertically integrated to do that, he said.

“The business is theirs to be lost,” Wacker said of the negotiation process.

Meanwhile, Eaton, whose transmissions often are coupled with Cummins’ engines, is planting another flag, this time in the area of vehicle electrification to add to its appeal with OEMs. Its purchase of Cooper Industries created its own vertical integration, DeVito said.

“The OEMs are coming to grips that there are going to be multiple voltages on trucks, and they are looking for folks in the vehicle space to do that,” he said. “The best place to do electrification and mix mechanical and electrical power is on the transmission.”

The $13 billion acquisition of Cooper Industries, completed in 2012, had a lot of aspects that were vehicle-related, DeVito said. The power distribution pieces were fuses and circuit breakers.

“Now, if I come in and say, ‘I have a transmission and a clutch, the transmission has an electric motor, a multivoltage device, and here’s a distribution system for you to plug all that into your truck,’ yes, clearly, I would say that is a form of vertical integration from having more of a subsystem to deliver [to OEMS] versus individual components,” DeVito said.

And then there are all those pesky proprietary transmission fluids.

None of the OEMs uses the same formula, Chevron’s Badal said. “So next thing you know, you have four different transmission fluids, and you are trying to figure out which product goes in which transmission so not to lose your warranty.”

Losing a transmission means spending about $25,000 to replace it, plus the downtime of the truck, he said.

“It’s not easy for these [fleet] guys,” Badal said. “They used to have to only have one transmission fluid. Now they could have up to four, depending on the size of the fleet,” he said.

Meanwhile, replacing aftertreatment systems introduced to meet new emission standards in 2007 and 2010 are expected to be become the second-largest aftermarket segment next to tires, and worth about $2.8 billion in 2020, Denso’s Jenkins said.

Denso will distribute replacement DPFs and diesel oxidation catalysts under the PowerEdge brand, and Clean Diesel Technologies Inc. will manufacture the components.

“We have engineered into their [proprietary] systems,” said Jason Soika, vice president of sales at CDTi, speaking of systems from all engine makers, except Paccar.

Soika readily acknowledged the effort targets vertical integration.

“Or maybe you could call it survival of the fittest,” he said. “The urgency of the fleets is focused on ‘find us alternatives and do not allow that captive situation to occur.’?”