LISLE, IL – Volkswagen Truck and Bus is investing US $256 million (Cdn $329 million) in Navistar, assuming a 16.6% stake in the company and forming an alliance that will bring a Volkswagen powertrain to North America as early as 2019.

While the companies will collaborate on technology and licensing Volkswagen products, Navistar itself is to remain independent.

Volkswagen AG also holds interests in MAN, Scania and Caminhões e Ônibus truck brands. Those nameplates may be unfamiliar to most North American buyers, but they accounted for 179,000 vehicles last year, including medium- and heavy-duty trucks built at 25 sites in 17 countries.

Navistar now accounts for one in every four Class 6-8 trucks on Canadian and American roads, in addition to vehicles sold in Mexico and Latin America, and it also has an independent engine manufacturer in Brazil. Navistar and Volkswagen make a combined 260,000 trucks and buses per year.

“It’s just the great next step for the company in our efforts to become a great truck company,” said Troy Clarke, Navistar president and CEO, referring as well to the need to be meet “technical mileposts” for next-generation products.

“It relieves anxiety on the part of some of our customers, which has affected consideration of our product,” he added. “If you’re a company that buys trucks, you don’t want to buy something and then find that that technology is stranded or discontinued at some point in time in the future. It disrupts your residual value that you often rely upon for the down payment for the next truck that you might have.”

Navistar’s struggles with technical mileposts involved a failed attempt to use Exhaust Gas Recirculation (EGR) to meet tighter emissions standards. The company eventually adopted the Selective Catalytic Reduction (SCR) method used by other manufacturers. But earlier this year, it also paid a US $7.5-million penalty to settle charges that it had misled investors along the way. According to the U.S. Securities and Exchange Commission, the U.S. Environmental Protection Agency had raised concerns about the EGR strategy as early as 2011 and 2012, even as Navistar said that was the way to go.

Navistar did not admit or deny the charges.

Euro 6 emissions standards are comparable to the U.S. Environmental Protection Agency’s Phase 2 Greenhouse Gas standards that will govern 2018-2027 model years, noted Andreas Renschler, CEO of Volkswagen Truck and Bus and member of the Board of Management of Volkswagen AG responsible for commercial vehicles. “The base engine is more or less the same. The aftertreatment system from a concept point of view is the same.”

And, of interest to North American buyers, Volkswagen also has a big block engine among its commercial offerings.

“There is a well-established trend in the industry, globally, along vertical integration,” Clarke said. But he also stressed that Navistar’s relationship with Cummins remains, referring to the engines as an “outstanding product” that continues to gain traction with customers. “We will continue to offer Cummins products for a period of time.”

It would “seem logical” that the new powertrains will be built in North America, given Navistar’s capacity, Clarke said, responding to a related question. The company’s facility in Huntsville, Alabama produces the proprietary N13 13-liter engine – which itself was developed through an earlier licensing agreement with MAN — while a facility in Melrose Park, Illinois machines crankcases, camshafts and crankshafts, and builds engines as a whole.

The promise of sharing technology with Volkswagen extends beyond powertrains alone. The new partnership is expected to collaborate on “all aspects of commercial vehicle development,” according to a statement announcing the deal. That includes driver assistance systems, connected vehicle solutions, platooning and autonomous technologies, electric vehicles, and cab and chassis components.

“All trucks will be connected. All trucks will kind of know where they’re at. All trucks will be talking back to somebody who can monitor the costs of them, and their maintenance needs,” Clarke said, referring to telematics, connected vehicles, and safety systems as the next areas of growth.

By Year 5 of the deal, the companies expect to save about US $200 million (Cdn $257 million) per year thanks to procurement activities and engineering-related savings.

While Volkswagen recently took out a dividend of US $1.1 billion (Cdn $1.4 billion) in Scania shares, reportedly to help offset a US $15.3 billion (Cdn $19.7 billion) settlement for a passenger vehicle emissions scandal, it has agreed to hold its Navistar shares for a minimum of three years.

As to whether this is the first step toward a merger, Renschler said, “our options are open”.

In the meantime, Navistar has other priorities. It is preparing to launch the first generation of trucks under its Horizon Project, which will be unveiled later this month.

NOTE: This version of the story reflects discussions during a conference call with journalists, and additional background information on the two companies.