False Expectations

Navistar has long contended that SCR is a hassle for fleet owners and easy for scofflaws to defeat. Its EGR strategy aimed to capture a part of the market that didn't want to deal with SCR and urea.

"In the near term, Navistar could actually do reasonably well with its EGR engine, as there are customers who prefer to avoid urea," says J.P Morgan analyst Ann Duignan in a recent investor note. "Additionally, the fear of a redundant or stranded engine technology is less of an issue since Navistar will continue to offer the same basic engine with Cummins SCR components."

Navistar in 2009 claimed that 13-liter engines were sufficient to cover nearly 80% of the Class 8 market. "The company hoped to convert roughly 60% of its 15-liter customers into [using] 13-liter engines," explains Morningstar analyst Basili Alukos in an investor note. "[Navistar] believed it would only alienate 20% of the industry without a 15-liter engine. Clearly, this expectation was false."

Navistar on Aug. 2 announced a U.S. Securities and Exchange Commission investigation of company "accounting and disclosure matters" from November 2010 to the present. On the upside, Navistar has attained a five-year, $1-billion loan from a group of banks led by JP Morgan Chase and Goldman Sachs to aid the company through its rough patch.