Ford-Navistar Contract Dispute Could Threaten Truck Production

The Navistar International Corp. earlier announced the suspension of the production of Power Stroke(R), a diesel engine intended and made especially for Ford trucks. The suspension is anchored on the contract between the engine manufacturer and the Ford Motor Company. Critics in the industry are saying that if the contract dispute would continue, the truck production of Ford would be greatly injured.Ford said that a decision by its key supplier Navistar to stop supplying diesel engines will not disrupt production of the Ford F-Series Super Duty pickups "in the near term." However, the automaker did not say how long Super Duty pickups may be made if price issue is not settled. Ford did not give further details about how long it could keep its truck lines running if Navistar holds out. The automaker has started producing its redesigned Ford F-Series Super Duty pickups in Louisville, Ky., late last year. The Super Duty pickups are arriving in showrooms this month. Navistar, a Warrenville, Ill.-based manufacturer, is the exclusive 6.4-liter PowerStroke diesel engine supplier for Ford's heavy duty pickup trucks. For it to withdraw from the contract is detrimental to Ford. This is because Ford relies on the Super Duty to boost its sales. After losing a record $12.7 billion last year, Ford could not afford to lose more.In a statement, Navistar said it "pays its suppliers and employees under contract terms and that it expects Ford to honor the terms of its agreement." Navistar said it will stop making the engines at its Indianapolis and Huntsville, Ala. factories, but added that the Huntsville plant will continue production for other customers.Ford said the engine manufacturer is the one violating that contract. "Ford has always honored the agreement and will continue to do so in the future," said Ford spokesman Tom Hoyt. "We have been working very closely with Navistar for many months to resolve these contract issues."In January, Ford sued Navistar. The lawsuit alleged that the engine manufacturer was not complying with warranty cost-sharing agreements and that it had unjustifiably raised prices on its products. It further stated that Navistar had even threatened to cut off shipment if the automaker did not pay the new prices for its engines."Ford and Navistar are tied at the hip for diesel engines for the F-250 and F-350," Peter Nesvold, a New York-based Bear Stearns analyst, said. "While we don't currently expect an extended outage, 30-plus days would be material to both Navistar and Ford. It's impossible to quickly swap out the engine and put another manufacturer's diesel in place," Nesvold added.Andrew Casey, an analyst with Wachovia Capital Markets LLC in Boston noted that the companies are likely to reach an agreement before long. "This is likely a short-term negotiation squabble," Casey said.With a multitude of suppliers either in bankruptcy or close to filing, Ford is now working closely with an auto consultant to spot troubled suppliers and move proactively to avoid further interruptions in parts shipments. Last fall, Ford halted the production of the Ford Fusion because bankrupt Collins & Aikman Corp. has suspended its auto parts shipments. And this circumstance should now be avoided to safeguard Fords dominance in the truck production. The contract dispute is never easy as remedying the supply for Volvo aftermarket parts. It takes swift and clever decision to support the goal.Anntaylor


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