Detroit Diesel Corporation History

Address:

13400 Outer Drive West
Detroit, Michigan 48239-4001
U.S.A.

Telephone: (313) 592-5000
Fax: (313) 592-5058

Public Company
Incorporated: 1987
Employees: 3,700
Sales: $1.56 billion
Stock Exchanges: New York
SICs: 3519 Internal Combustion Engines

Company History:

Detroit Diesel Corporation manufactures diesel and alternative fuel engines for use in trucks, buses, coaches, commercial and pleasure marine craft, power generation, the construction industry, and the military. Detroit Diesel products are distributed through more than 130 authorized distributors in 88 countries around the world. With 1993 annual sales of $1.5 billion, Detroit Diesel ranked 269th on the 1994 Fortune 500. For some time, the company was named Detroit Diesel Allison (DDA) and had strong ties with auto giant General Motors. In 1988 Penske Corp. purchased DDA's assets, and, as of 1994, auto racing legend Roger Penske served as CEO of the company. Penske turned the beleaguered company around, stretching its market share in the heavy-duty truck category from a meager 4 percent in 1988 to over 26 percent in 1993.

General Motors pioneered the development of practical, lightweight, powerful, and fast two- and four-cycle diesel engines. Initially the incentive to develop such engines came from the enormous profits available if diesel could replace steam in the locomotive industry. According to Alfred P. Sloan, president of GM during the 1920s and 1930s, Charles F. Kettering can be credited with the foresight and drive behind the practical application of diesel power. Kettering supervised experiments at GM as early as 1921 to develop a smaller, more efficient diesel. As Sloan tells the story in his memoirs My Years With General Motors, he dropped by Kettering's office at the research laboratories one day and said 'Ket, why is it, recognizing the high efficiency of the diesel cycle, that it has never been more generally used?' Kettering explained that technical problems in diesel engine design up to that time had meant that the engines simply would not perform the way the engineers wanted them to. Sloan replied in his typically forthright manner, 'Very well--we are now in the diesel engine business. You tell us how the engine should run and I will see that available manufacturing facilities are provided to capitalize the program.'

The small, practical GM diesel engine might never have been developed, however, if Kettering hadn't also been a yachtsman. Kettering's fascination with diesel engines led him to purchase a diesel engine built by Winton Engines for use in his personal yacht. Kettering was so impressed with the Winton engine that he convinced Sloan to buy the Cleveland Ohio company. Alexander Winton, one of America's pioneer auto makers, was reportedly enthusiastic about the sale of his company to GM. He wanted to see the potential of diesel realized but knew that the cost of developing such an engine was beyond his scope. The apparently happy takeover was almost derailed by the market crash of 1929, but the sale went through in 1930. Simultaneously, GM purchased another Cleveland-based company, Electro-Motive Engineering Company, which had worked closely with Winton in the 1920s in their endeavor to develop a diesel-powered locomotive engine. The purchase of these companies was a great risk for GM in those economically turbulent times. The risk paid off but only after a number of years of intensive and often distressing research and development.

The break for the two-cycle GM diesel engine came when the company decided to use it as the power source for its dramatic reconstruction of an assembly line for the 1933 Chicago World's Fair. The diesels required continual repairs, prompting Kettering's son to comment that 'the only part of the engine that worked well was the dip-stick.' Nonetheless, locomotive companies were impressed with the power and efficiency of the engines compared to the steam locomotives they had been operating for years. Demonstration runs showed that a diesel-powered locomotive could cut the running time from Chicago to the West Coast by more than twenty hours. Once the industry decided to convert to diesel, GM had a corner on the market. No other major manufacturer built a diesel locomotive engine until after World War II. The success of the locomotive diesel foray prompted GM in 1937 to set up Detroit Diesel Engine Division to research, develop, and promote smaller diesel engines for marine and industrial use.

The importance of the railroad began a precipitous decline after World War II, but Detroit Diesel had already moved decisively into the truck and industrial sectors. Its main competitor in the postwar years, Cummins Engine Co., began to fight seriously for market share in the 1960s. However, the trucking industry was booming and there appeared to be an almost limitless market for the powerful diesel engines.

In 1970, Detroit Diesel Engine division was consolidated with GM's Allison division. Allison had been added to GM in 1929, during the same period of expansion and diversification that had seen the founding of Detroit Diesel. Allison played an important role in developing engines for aircraft used by American and Allied forces during World War II, producing an estimated 70,000 aircraft engines during the war. After World War II GM decided that its future in the aircraft business rested with providing engines to other manufacturers and it merged its Detroit Diesel and Allison divisions. In spite of the recession in the auto industry in the mid-1970s, Detroit Diesel Allison continued to perform well. By the beginning of the 1980s, Cummins had assumed the top spot in the diesel engine market, but Detroit Diesel still controlled a respectable 30 percent of the domestic market.

Over the next six years, however, Detroit Diesel underwent a precipitous decline, and by 1987 its market share had dwindled to less than 5 percent. The reasons for this calamitous fall are complex. In a 1985 article in Automotive News, L. F. Koci, then general manager of DDA and later president of the independent Detroit Diesel, cited an influx of diesel engines from Europe and Japan as a major cause of the drop in DDA sales. Although imports certainly contributed to falling sales, Detroit Diesel had lost much of its market share to the American Cummins Engine Co. A spokesman for Detroit Diesel after it had become an independent company acknowledged in a 1988 article in Financial World that 'in the late 1970s and early 1980s [DDA] was letting bad product out the door. The engines weren't performing well and we lost some good customers.' Parent company General Motors had made some attempt to revitalize DDA; however, of the $50 billion spent on plant modernization by GM through the 1980s, only $100 million went towards the floundering DDA. It was a case of too little too late, and by 1987 GM began to look seriously for a buyer to take the beleaguered division off its hands.

The company didn't look long. Roger Penske, the famous auto racer and wunderkind of the auto business world, was immediately intrigued at the prospect of reviving the lumbering old giant of the auto industry. By early 1988, Penske and GM had signed an agreement wherein Penske obtained ownership of 60 percent of Detroit Diesel's stock and GM secured the remaining 40 percent. Penske retained much of the old personnel at Detroit Diesel, continuing to employ engineers and management who had a long association with GM. Rather than overhauling the company by purging it of its old brass, he simply realigned the corporate goals. As reported in Financial World in 1988, he eliminated redundant computer costs, and consolidated manufacturing operations in an effort to cut the operating budget by more than $70 million. However, he kept such long-standing Detroit Diesel employees as L. F. Koci, Detroit Diesel general manager at the time of the takeover.

In order to revive Detroit Diesel, Penske had to get results quickly. Within the first two years of independent operations Detroit Diesel had more than doubled its market share. By 1993, this share had risen to 26 percent, mostly at the expense of its arch rival Cummins. Although under Penske's management revenues grew by more than 60 percent, heavy investments in research and development reduced profits to only one percent of sales. This low level of earnings combined with a depressed American economy led to two consecutive years of losses in 1990 and 1991. In the long run, however, Penske's persistence seemed to pay off: the company rebounded in 1992 and had a net income of over $20 million in 1993.

Aside from some cost-cutting measures and reorganization of the company, the early success of Penske's Detroit Diesel came on the strength of one item: the Series 60 engine. According to Business Week in 1991, the electronically controlled Series 60 engine was 'ground-breaking' and, in addition to offering 'dramatically better fuel efficiency, it boasts nifty computerized features that diagnose mechanical problems and can monitor engine use--and thus track driver productivity.' The Series 60, the first engine of its kind to be electronically controlled, was introduced during the first quarter of 1987. It was the product of a 'clean-sheet' design that applied the latest technology to every stage of the manufacturing process, including production, assembly, and testing. Detroit Diesel originally claimed the engine needed an overhaul only once every 500,000 miles; the company later extended this boast to 750,000 miles. Over the next several years the truck engines seemed to hold up well, and the $82 million that the Series 60 had brought the company by 1993 suggested that Detroit Diesel had overcome its reputation for unreliable products.

Joint ventures with other major manufacturers further consolidated the revival of Detroit Diesel. German giant Mercedes-Benz entered into an agreement with Detroit Diesel in 1991 to develop electronic fuel delivery systems. As part of an engine development financing agreement, Diesel Project Development, a wholly owned subsidiary of Mercedes-Benz, bought $20 million of Detroit Diesel debentures in 1993, giving the German firm an 11 percent stake in the company. Volvo Penta also came to an agreement in 1993 that promised Detroit Diesel exclusive rights to certain Volvo Penta marine diesel products within the NAFTA area. Perkins Engine, based in England, and Detroit Diesel made an agreement in 1988 that facilitated certain aspects of distribution. Perkins also agreed to manufacture some smaller engines for Detroit Diesel, providing them with a variety of engines ranging from 5 to 2,500 horsepower. In 1993 Detroit Diesel formed a joint venture company with RABA PLC of Gyor, Hungary. The new company, named RABA-Detroit Diesel Hungary, Kft., reportedly will use RABA as its Eastern European manufacturing center, opening up an extensive potential market for products. Finally, in a return to its roots, Detroit Diesel entered into a 'technology coalition' with Republic Locomotive to build new electronically controlled locomotive engines.

These joint ventures represent a strategy that each of the major U.S. engine makers, Detroit Diesel, Cummins Engine, and Caterpillar, had begun to employ by the early 1990s. Rather than continuing to fight each other for a dwindling share of the American market, each company attempted to increase foreign sales. The U.S. manufacturers hoped that forging ties with foreign companies would open European and Japanese markets, where potential sales were double what could be had in the U.S. market. The management of Detroit Diesel believed that the NAFTA and GATT agreements would 'provide opportunities for growth even after considering the cyclical nature of the North American heavy-duty truck market.'

As Detroit Diesel faced the late 1990s, Environmental Protection Agency standards for bus and truck engines posed the greatest challenge. The company had gotten the jump on the competition after the EPA set emission standards for the 1990s by being the first manufacturer to come out with an entirely new model. Due to the high-tech production system used on the Series 60, less than 1 percent of the engine's components needed modifications to meet the steep reductions in particu-late emissions stipulated by the EPA in 1991 and 1994. The company's engines could be depended on to meet emission standards through 1997, but the future was not assured after that date.

Detroit Diesel hoped that the impressive amount of research and development the company had factored into its operating budget would ensure the company's edge in fuel efficiency and emission standards. A great deal of their research since the introduction of the Series 60 focused on developing engines that would run on cleaner fuels. Some of these experiments led to test units that ran on natural gas as well as methanol, ethanol, and other alcohol-based fuels. If one of Detroit Diesel's competitors, however, developed a conventionally fueled model that could meet the emission standard before Detroit Diesel's experiments came to fruition, then the company would be set back considerably.

Despite the promising first few years of the Penske-owned Detroit Diesel, in the mid-1990s the company retained a large debt load from the lean and rebuilding periods. In an effort to offset this debt, the company completed an initial public offering (IPO) of 4.75 million shares of common stock in October of 1993. The result of the IPO was to offset the company's debt by $99 million. The ongoing series of joint ventures with companies both large and small, in the United States and overseas, positioned the company to broaden its market and product line. All of these joint ventures were closely tied to the company's goal of using high-tech advancements to stay ahead of the competition as the industry faced ongoing pressure about environmental issues. The company that seemed finished in 1985 appeared ready to fight for a place as an international leader a decade later.

Principal Subsidiaries: Detroit Diesel Remanufacturing Holdings, Inc.; Detroit Diesel Overseas Distribution Corp.

Detroit Diesel Corporation History

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