Navistar suspends production of Ford diesel engine

WARRENVILE, Ill. — Navistar International says it’s halting production of the Power Stroke diesel engine that it builds for Ford Motors F-Series pickups because the carmaker has “stopped honoring the terms of agreement under which the engines were built.”

The two long-time partners have been embroiled in a major contract dispute over commercial terms and production of these engines. As a result, says Navistar, production for Ford will cease indefinitely at its Indianapolis, Ind., and Huntsville, Ala. facilities.

Navistar’s principal operating company, International Truck and Engine, has been the exclusive diesel engine supplier for Ford’s heavy-duty pickup trucks since 1979 and recently launched a new 6.4L Power Stroke diesel engine that meets 2007 emissions standards. It’s estimated that about 70 percent of Ford Super Duty trucks have an International engine.

The action would surely affect Ford’s new 2008 Ford F-Series Super Duty, a key launch for the automaker, which has already been delayed because of the conflict.

Ford took Navistar to Michigan court in January, alleging Navistar was in breach of contract. The companies locked horns over the price Navistar was charging Ford and the extent of Navistar’s financial obligations in warranty claims.

Ford took the unusual step of “debiting” Navistar for a portion of those costs — meaning it withheld payment in order to recover funds it claims Navistar owes it under the warranty agreement.

New York auto and trucking analysts at Bear Stearns say both companies are “tied at the hip” for diesel engines for many of the F-Series trucks. For this reason, the company speculated a few weeks ago “that mutual fear would bring peace.”

However, while the firm doesn’t think either company can afford to extend the standoff beyond 30 days, an immediate disruption for the vehicle class could take its toll, it says in a note to clients.

“In our view, it’s impossible to quickly swap out the engine and put another manufacturer’s diesel in place, and that a gas engine is an unsatisfactory option for certain applications.”