Volkswagen’s Navistar Partnership Will Open Gates To North America


Volkswagen AG (OTCMKTS:VLKAY) is buying a stake in the U.S.-based commercial vehicle manufacturer Navistar, and this will mark the German group’s entry into the U.S. heavy-duty truck market, where its brands Scania and MAN are not currently present. Moreover, this allegiance will go hand-in-hand with the company’s push for more collaboration between its brands to encourage cost savings and build a global commercial vehicles operation.

Last year, Volkswagen pooled together the global activities of MAN Truck & Bus, MAN Latin America and Scania under one umbrella- Volkswagen Truck & Bus in order to create a global brand focused on increasing profitability by collaborating on platforms while maintaining autonomy of the individual brands. In the long term, the company expects synergies from the integration to bring savings of up to €1 billion ($1.12 billion) per year. As Volkswagen still battles through the aftermath of the emissions scandal, the Navistar partnership will give the company presence in the $30 billion a year North American heavy-duty truck market.

Volkswagen Truck & Bus has agreed to subscribe to a capital increase of Navistar resulting in a 16.6% holding for $15.76 a share or a combined $256 million to pursue a strategic technology and supply cooperation and establish a procurement joint venture. This puts Volkswagen on par with the largest shareholders, activist investors Carl Icahn and Mark Rachesky, who have accumulated a combined stake of ~40% in Navistar since 2011.

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The problem here for Volkswagen is that Navistar has been losing market share in the U.S. heavy-truck market, dominated by Daimler, accounting for ~40% of North America heavy-duty truck sales, Volvo, and Paccar. [1] Navistar’s market share in North America has halved in the last five years to 11%. Another problem is the declining demand for heavy trucks in North America, which led to Daimler slashing its profit outlook for its truck business earlier this year.

However, the big picture here is that this partnership opens Volkswagen to opportunities in North America, where around 240,000 trucks will be sold this year, and puts it one step closer to forge a global commercial-vehicle operation with higher relative profit margin. According to Volkswagen’s press release, Navistar will be able to profit from the German group’s powertrain technologies and Volkswagen, in turn, will benefit from significantly higher volumes. Volkswagen and Navistar expect to reap combined synergies of $500 million over the next five years through collaboration and annual savings of $200 million after that.

Volkswagen could be looking to even increase its holding in Navistar, and this strategic alliance could turn out to be a win-win for both companies. Navistar has been battling its eroding market share since its pollution-control technology failed to meet U.S. industry standards, and Volkswagen has also been grappling with the after-effects of the dieselgate scandal. This development will give confidence to Navistar’s investors that the company does, in fact, have capital and is here to stay, but more importantly, for Volkswagen, this could be a way to find growth in North America, where the German company has been struggling even before the news of the emissions scandal broke out last year.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Volkswagen

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Notes:
  1. Volkswagen Taking 16.6% Stake In Navistar, wsj.com []