Navistar engine will power Cat-brand construction trucks.

Caterpillar Inc., the construction and mining machinery giant, unveiled a new strategic alliance on June 12 with Navistar International Corp. to develop, build and sell medium and heavy duty commercial trucks worldwide. It marks a strategic shift from Cat as a component supplier for on-highway trucks to a vertically-integrated truck builder.

Peoria, Ill.-based Caterpillar says it will halt engine sales to other truck makers, which had accounted for about 6% of its engine sales, once federal 2010 clear-air rules go into effect. It will still service and support those engines during their lifespan, however. There are currently 1.6 million Caterpillar on-highway truck engines in service.

Caterpillar, meanwhile, will develop mid-range engines for buses and utility trucks for export markets with Warrenville, Ill.-based Navistar subsidiary International Truck and Engine Corp.

Caterpillar’s on-highway diesel engine business has faced uncertainty after problems associated with power plants designed to meet 2007 U.S. clean-air rules allowed Columbus, Ind.-based rival Cummins Inc. to gain a large North American market share. The North American truck-making industry traditionally has bought its engines from independent suppliers like Caterpillar and Cummins, but the rapidly changing market has seen more truck builders like Bellevue, Wa.-based Paccar Inc., producer of Peterbilt and Kenworth, move its engine-making in-house.

“Kenworth will continue to offer and supply Caterpillar engines for trucks produced in 2008 and 2009,” says one Paccar executive. “Caterpillar parts, engine certification�and training for the Kenworth dealer network will continue for the foreseeable future.”

The Caterpillar-Navistar joint venture will roll-out a CAT-branded “severe service,” construction-grade, heavy-duty truck in 2010 powered by Navistar’s MaxxForce engine. The companies’ partnership comes amid a truck market downturn due to a slowing economy and soaring diesel fuel prices that have prompted sporadic independent trucker protests. A surge in truck purchases in 2006, as long-haulers rushed to meet 2007 clean-air rules, now means there are now more trucks chasing less freight.

Cat’s truck will focus on construction, one of its core markets.

“With nearly 90% of our engine business being off-highway, we'll continue to concentrate on our substantial and growing opportunities to supply engines in the petroleum, marine, electric power generation and industrial markets—as well as produce engines for our own construction and mining equipment,” said Douglas R. Oberhelman, Caterpillar group president, in a statement.

rior to the announcement, Cat did not intend to use selective-catalytic reduction, which injects a solution of urea into the exhaust stream and is a popular solution today in Europe, to achieve nitrogen-oxide reductions in the U.S. in 2010. Navistar announced last year that is does not plan to implement SCR.

Caterpillar, in a separate statement, said that it would invest $1 billion over the next two years to streamline operations and expand capacity at its five Illinois production facilities, focusing on off-highway machinery used in mining and large-infrastructure construction.