Navistar International Corp.

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Under the terms of the deal, the joint venture in 2010 will roll out a CAT-brand “severe service,” construction truck powered by Navistar’s MaxxForce big-bore engines, which the company designs and builds in partnership with Germany-based MAN AG. Warrenville, Ill.-based Navistar will manufacture the future CAT-brand engines and trucks, while Caterpillar “will be contributing its expertise,” says Navistar spokesman Roy Wiley.

Cat’s ACERT on-highway engine, built to meet 2007 U.S. emission regulations, has been plagued with fuel-economy and maintenance problems, industry sources say, allowing Columbus, Ind.-based rival Cummins Inc. to gain a large North American market share. On top of that, the rapidly changing heavy-duty vehicle market has seen more truck builders like Bellevue, Wash.-based Paccar Inc. move its engine production in-house.

The partnership also comes amid a market downturn due to a slowing economy and soaring diesel-fuel prices. A tougher 2010 emission deadline looms with technological and cost uncertainties, as well.

Cat’s new truck will focus on construction, one of its core markets, and will be sold exclusively through Cat dealers, where contractors will be able to purchase and finance equipment and trucks on the same invoice. Construction trucks represent about 10% of the total heavy-duty on-road vehicle market, with Mack as the sector leader, according to market analyst ACT Research.

Peoria, Ill.-based Cat says it will halt engine sales to other truck makers, which had accounted for about 6% of its engine sales, once federal 2010 clean-air rules go into effect. It will still service and support those engines during their life span, however. About 1.6-million engines are in service.

aterpillar Inc. inked a supply deal on June 12 with Navistar International Corp., marking a strategic shift from Cat as an engine supplier for highway trucks to a vertically integrated truck manufacturer. The venture also will develop midrange engines for buses and utility trucks for export markets. Because its truck-engine production will be ramping down, Cat is investing $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.