Death By Hubris: The Decision That Could Bankrupt A Great American Manufacturer

[seftonm]

Two and a half years past the deadline for compliance, Navistar’s engine still isn’t clean enough to pass the EPA’s emissions test.

Joann Muller - FORBES - Aug 2, 2012

Can they turn it around? --Ed.

This is the story of what happens when you gamble—and lose. When you get reasonable advice—and ignore it. And when one smallish decision cascades into a bet-the-company one.

In 2001 Dan Ustian, then head of Navistar International’s diesel engine unit, faced a slew of new air quality regulations from the Environmental Protection Agency. More stringent engine standards were already set to take effect three years hence, and the EPA was now requiring at least a 90% reduction in the amount of nitrogen oxides and soot emanating from diesel engines. Even diesel fuel itself was being reformulated to cut down on its sulfur content.

The new rules meant that Navistar, as well as rivals like Volvo, Mack, Freightliner, Paccar and Cummins, would have to redesign all their engines for American roads, using technologies that were less than perfect or inventing new ones. EPA estimated the cost of compliance, including the new fuel, would be substantial: $4.2 billion. But engine makers would have plenty of time to adapt. The new standards wouldn’t even begin to be phased in until 2007, with full implementation slated for 2010.

Ustian had several engineering paths available, including the use of nitrogen oxide adsorbers (“traps”) or a chemical treatment system called selective catalytic reduction, which European rivals favored. But neither was yet capable of achieving the eventual EPA requirements—they’d need further engineering development.

Ustian, then in his early 50s, was Navistar’s rising star—a professional manager, rather than an engineer, he would soon be promoted to president and then chief executive. Rather than following rivals with SCR, he decided, fatefully, to go with his gut. He figured truckers didn’t want to bother with an extra tank of fluid aftertreatment, so Ustian staked $700 million—and the fate of the company—on further advancing an existing diesel engine technology called exhaust gas recirculation (EGR)... [Read More]

[xcel]

Hi Mike:

That was a great story!

While I am personally a fan of SCR, if it were me in his position, I most certainly would have been developing “both” just in case. The “just in case” has arrived with multiple year forethought and that CEO has screwed up so bad he should no be allowed to hold onto his job. Risk has great rewards but in this case, he simply ignored his subordinates and it may have caused yet another historic US manufacturer to disappear it future.

Wayne

[CRT1]

Wow, it is totally insane that they guy still has a job let alone the fact that is is making $6+ mil per year.

[PaleMelanesian]

"The buck stops here."

[Blackbelt]

Why does corporate America continue to reward incompetence?

[CRT1]

Its a political structure like anything else in this world. He is getting paid because he played the political game well and made some gambles that paid off. He probably sits on the Board of the companies that his Board Members run, so it is a big game of circular back-scratching (I kept it G-rated).

[WriConsult]

That was a fantastic read! Here's where the real hubris kicked in:

Originally Posted by Forbes

Rather than force them from the marketplace, in 1985 Congress allowed EPA to establish fines that would let a company stay in business while it worked on a solution, without giving an unfair advantage to competitors that did manage to comply.

For Navistar this was a godsend. The company had banked so many credits in earlier years that it could lawfully use them, in lieu of fines, all the way until this year. But rather than buying time for a plan B, Ustian, who was convinced a breakthrough was just around the corner, plowed forward with his EGR plan, full steam ahead.

Whoops. And there you have another tragedy of management failing to listen to warnings from engineering. Classic.

[PaleMelanesian]

Originally Posted by CRT1

Its a political structure like anything else in this world. He is getting paid because he played the political game well and made some gambles that paid off. He probably sits on the Board of the companies that his Board Members run, so it is a big game of circular back-scratching (I kept it G-rated).

You can add political offices to the circle. (ex. Monsanto & FDA, corn corporations and EPA ethanol requirements)

[Harold]

Why would they listen to the engineers , they are the only ones that make sound decisions!!! H

[ALS]

Originally Posted by Harold

Why would they listen to the engineers , they are the only ones that make sound decisions!!! H

Gee that would be too simple of a solution. Could it be he didn't like what they were telling him and his large ego got in the way of making the best decision for the benefit of the company and its shareholders.