Navistar International Corporation Business Information, Profile, and History

History of Navistar International Corporation

Navistar International Corporation is America's largest manufacturer of medium- and heavy-duty diesel trucks. Until 1986, Navistar was known as International Harvester, a leading manufacturer of agricultural and construction machinery, with 47 manufacturing plants comprising 38 million square feet. Years of dramatic financial losses, however, forced the company to sell off these primary businesses to focus on the production of diesel trucks, a move that necessitated the lay off of thousands of workers and resulted in a reduction in sales by more than 50 percent. With a new name and a new "diamond road" symbol, the company looked forward to more successful years. Although the company ranked 126th among Fortune magazine's top 500 industrial companies in 1993, Navistar had yet to turn an annual profit in the 1990s.

Navistar traces its history to 1831, when Cyrus Hall McCormick invented a machine for reaping grain. McCormick's reaper did not gain immediate acceptance among American farmers; in fact, ten years passed before he sold his first reaper, and, by then, his patent had expired. To stay ahead of the competition, McCormick developed such sales techniques as the warranty and the extended guarantee. Early reapers were bulky and noisy, and, at the Great Exhibition in 1851, the Times of London disparagingly referred to McCormick's entry as a "cross between ... a chariot, a wheelbarrow, and a flying machine." Soon thereafter, however, the reaper became increasingly popular; the reaper and The McCormick Harvesting Company would eventually prove to have a dramatic impact on the farming industry.

While McCormick died in 1884, his company continued to experience rapid growth. In 1902, McCormick Harvesting was merged with four other struggling agriculture machinery manufacturers to form International Harvester. This merger was contested by critics who charged that the new firm represented a monopoly on the industry, and, for more than 20 years, the company would be involved in several antitrust suits. However, Cyrus H. McCormick, descendant of the inventor and the company's first president, defended the merger by arguing that it gave the new company opportunities and resources that were beyond the reach of smaller companies. "Presently," he wrote, "there was afforded to the business world the unique spectacle of five competitors in one line coming together for the preservation of their concerns and of the industry, and for the fulfillment of their hopes of a future that was to count for much in the swelling total of American enterprise."

The courts eventually agreed that Harvester neither raised prices nor stifled competition, and that the conglomerate actually helped farmers by developing and marketing new equipment. Harvester's product line expanded to include a wide range of tools used to speed the production of food, including disk harrows, harvester combines, feed grinders, and manure spreaders. In 1907, Harvester introduced a new piece of farm equipment called the auto wagon, a high-wheeled, rough vehicle designed to carry a farmer, his family, and his produce over rutted mud roads to the marketplace. Prompted by the success of the auto wagon, the company eventually designed new models with water and air-cooled engines as well as lower, rubber tires rather than wooden wheels.

The company also began marketing its machinery abroad, and, between 1903 and 1912, sales climbed from $53 million to $125 million, capitalization more than doubled, and foreign sales rose 388 percent to $51 million. By 1912, more than 36,000 dealers in 38 countries were selling McCormick products. During this time, the company's work force grew to 75,000, and management invested in iron mines, coal mines, and acres of forest property, all of which provided the raw materials for producing farm machinery. Although the company suffered a huge loss during the 1917 Russian Revolution, when its Russian interests were taken over by the new government, Harvester's growth continued into the 1920s, as the U.S. economy expanded, new roads were built for trucks, and the international demand for agricultural equipment increased.

While Harvester continued to enhance its offerings--introducing a line of walk-in freezers in the 1930s, for example--the company sought to promote competition in the agricultural machinery industry by refusing to invoke tariffs and by protecting its patents for no more than five years. The company also experienced vigorous competition in both the construction and the truck industries, while building up a vast dealer and supplier network. Eschewing any corporate restructuring during this period of rapid growth, Harvester simply added new divisions, over which managers had relatively little control and had to clear even minor decisions with the central offices. As a result, Harvester became a rather large and unwieldy collection of businesses, gaining a reputation for conservatism, antiquated management techniques, and strictly in-house promotions. Nevertheless, this form of organization saw Harvester through the Great Depression and into World War II.

In 1940, Harvester accepted $80 million in defense contracts from the government. Even before the Japanese attack on Pearl Harbor, which prompted U.S. entrance into the war, 20 percent of the company's total output was defense-related. Harvester employed its dealer network to haul in millions of tons of ferrous scrap from the fields of farmers and also sent its mechanics into the army in order to service and maintain military vehicles. Moreover, Harvester subsidiaries in Great Britain during the war were able to raise agricultural production there by one-third. Wartime production accounted for $1 billion in sales, and the company's contributions to the war effort garnered a Business Week cover story and several awards.

However, the war left Harvester financially weakened, and the company was unprepared for the postwar years. High taxes and a concentrated research effort cut profits; in 1945, the company reported $24.4 million profit on $622 million in sales, a significant decrease from 1941's earnings of $30.6 million on $346.6 sales. Moreover, one Harvester official noted in Forbes that "the company's leadership in many articles of farm equipment [was] almost too well-established to bear expansion without charges of monopoly."

Nonetheless, the company continued to expand whenever possible. Harvester entered the consumer market for air conditioners and refrigerators, introduced a mini tractor, the Farmall Cub, for small farmers, and manufactured an 18-ton crawler tractor for the construction market. A mechanical cotton-picker, introduced in 1942, sold well, as did a self-propelled combine and pickup baler. Furthermore, the company's overall market changed, and, by 1948, farm equipment accounted for less than half of the company's total sales. Trucks were the company's single largest item; construction equipment and refrigeration equipment comprised the remainder of its product line.

These new units and a capital improvement program improved profits, which peaked at $66.7 million in 1950, representing a performance that Harvester would not match for nine years due to an overextended budget, conservative management, and intransigent unions. Harvester's efforts to reduce labor costs were opposed by some of its 80,000 workers and 28 unions. An innovative pension fund program and in-house promotions placated workers, but even more difficulties arose when Harvester tried to reduce wages during the McCarthy era. During this time, the company accused the leaders of the Farm Equipment Workers union of communist sympathies, while the workers accused Harvester of using such "red smoke screens" to cover up wage cuts. Nevertheless, Harvester won an "Industrial Statesmanship Award" from the National Urban League during this time for establishing racially integrated plants in Memphis and Louisville; "Fair employment," remarked one Harvester manager, "is good business."

The company's profit margin remained dangerously low, however, due to high labor costs, poor management, an inadequate organizational structure, and its failure to introduce innovative products, many of which, competitors claimed, were merely redesigns of existing machines. Moreover, Harvester's much-touted policy of in-house promotions was actually stifling research and technological advances; most Harvester officers stayed with the company for as long as 30 years.

In 1955, Harvester sold its line of refrigeration equipment but kept its other losing ventures and failed to modernize antiquated plants. Intent on conserving its resources, the company failed to emphasize growth and began a slow and steady decline. "For too many years, as long as there was cash to cover the dividends, few executives really cared about how much the company made," one Harvester director later observed. Moreover, tradition was valued to a fault at Harvester; although sales for one of its truck models remained poor, for example, the truck was kept in production. And although Harvester retained its market share, competitors alleged that it did so only by making government and fleet deals at cost.

Beginning in the late 1950s, a series of company presidents attempted to reverse the economic fortunes of the company. Frank W. Jenks, president from 1957 to 1962, standardized production, reduced district offices by half, reduced the number of dealers from 5,000 to 3,600, and increased expenditure for research and development. In 1961, Harvester re-entered the consumer market with a jeep called the Scout and a small lawn and garden tractor named the Cub Cadet. The company also expanded its promotional campaign for a station wagon, the Travelall, which resembled a scaled-down truck.

All three of these new products could be produced inexpensively, as the company did not have to retool its plants to manufacture them and they could be sold through the company's already existing distributor network. While new products increased sales, profits only rose temporarily before Harvester found itself ranked the second in the farm machinery industry, having been surpassed by John Deere & Company. In response, management tried to improve upon Harvester's ten to 15 percent share of the construction industry but failed to gain any ground on Caterpillar and other competitors. By 1964, Harvester's truck line was its only viable product, comprising close to half the company's total sales. Harvester had the largest market share of the heavy-truck market--31 percent.

Throughout the 1960s, Harvester's profits declined, as the company expended more capital and went deeper into debt. Its labor costs were higher than General Motors; its management had poor communication channels; and low-selling products, such as the in-city truck, named the Merco, continued to be produced at high volume. Moreover, Harvester's decentralization policy failed to allow plants in different countries to share research or manufacture interchangeable parts. Although these plants would eventually work more closely during the 1970s, Harvester's construction products were still sold under several brand names, in direct competition with one another. In 1974, such products were combined under the PayLine name to present "a united front to the industry."

Even though Harvester was larger than most of its competitors, it ranked second or lower in each of its three industries. In 1968, Cyrus H. McCormick's grandnephew, Brooks McCormick, took charge of the company, closing several inefficient plants, including the famed McCormick Works in Chicago. Under McCormick, younger executives were hired, dealerships were reduced, and a Chrysler executive named Keith Mazurek was appointed head of advertising. Mazurek promptly doubled the advertising budget, put the best-selling models on the main assembly lines, and reorganized the district dealer network along regional lines. However, profits continued to decline. While sales in 1971 passed $3 billion, profits reached a mere $45 million. Forbes described the company as virtually all sales and no profits and warned that Harvester's profits were far behind all its main competitors.

In 1977, Harvester brought in Xerox executive Archie R. McCardell, who quickly reduced costs and engineered a profit increase from $203.7 million to $370 million in his first year. However, McCardell's cutbacks led to a crippling strike in 1979, and, over the next year, the company suffered more than $1 billion in losses, falling $4.2 billion into debt. When McCardell resigned in 1982, industry experts predicted that the company would soon file for bankruptcy. New managers tried to restructure the company, but, as one observer noted, "The new management is doing some very good things, but it is like putting a band-aid over a massive stomach wound."

Moreover, Harvester's share in the construction and farm markets continued to decline, and it fell to a number two ranking in heavy trucks, after Ford Motor Co. Although the company had cut its employment from 98,000 to 15,000 and shuttered all but seven of its 42 plants, it still lost $3.3 billion from 1979 to 1985. Troubled by soft markets and persistent creditors, Harvester entered a period of continuous restructuring. The corporation sold its construction line and then its agricultural holdings. The sale of its agricultural line to Tenneco for $488 million in 1985 helped the company reduce its long-term debt to less than $1 billion.

In 1986, Harvester was renamed Navistar International Corporation, a name that management hoped would reflect its new focus on high technology. The company also left the gasoline powered truck market, relying primarily on its line of diesel powered medium- and heavy-duty trucks. Navistar manufactured diesel engines for the medium trucks and used engines from other companies for the heavier trucks. The emphasis on fuel-efficiency, along with the solid construction and reliability of the trucks, prompted Navistar to advertise them as "LCO," or lowest cost ownership. That year, after recording its first annual profit since 1979, chief financial officer James Cotting petitioned investors for a 110 million share, $471 million stock offering. The cash infusion helped Navistar retire a significant amount of its high-interest debt and thereby avoid bankruptcy.

In the late 1980s and early 1990s, Navistar held one-fourth of the heavy- and medium-duty truck market (the leading share) but continued to face several challenges. Fallout from reorganizational divestments included a $14.8 million settlement with 2,700 employees of former subsidiary Wisconsin Steel, who had charged that their parent company had deliberately spun them off to a purchaser who had no experience in the steel business. Moreover, intense competition from better-funded domestic and international rivals in a declining truck market--which sunk to a five-year low in 1990--also hindered Navistar's efforts to realize consistent earnings gains.

One of the most costly problems faced by the corporation evolved in part from its drastic labor cuts of the 1980s. The pension plan that was regarded as innovative in the 1950s became unacceptable in the 1990s, as Navistar found itself with 3.3 benefit-consuming retirees for every active employee. Health benefits squandered seven percent of the company's annual sales. In 1992, Navistar made an innovative move to revamp its benefits structure by filing a declaratory judgment action in federal court. The legal maneuver, which was immediately countersued by the United Auto Workers, asked the court to sanction the company's plan to reduce benefits to 40,000 pensioners and their 23,000 dependents. Navistar held out what amounted to half-ownership of the company in exchange for the benefits concessions. In August 1993, under the supervision of the federal court, labor and management agreed on a two-tier plan, which actually reduced overall costs and improved benefits. The settlement slashed Navistar's liability from $2.6 billion to $1 billion but compelled the company to engineer a one-for-ten reverse stock split.

During this time, Cotting, who had become Navistar's chairperson, invested in modest overseas expansion, product development, automation, and plant renovation. While these investments brought product and production improvements, they did not result in profits; in 1994, Navistar had still not recorded an annual net income and had reported losses $889 million. Nevertheless, Cotting expressed his unflagging confidence in the company's ability "to translate Navistar's traditional strengths--a broad product line and a strong and capable distribution network--into bottom-line results."

Principal Subsidiaries: Navistar International Transportation Corp.