With the North American truck market slumping due to soaring fuel costs and decreased demand, Peoria-based heavy equipment manufacturer Caterpillar and Warrenville-based truckmaker Navistar International yesterday announced a partnership to build and sell trucks globally, in a move reminiscent of similar consolidation seen in Europe recently.

This deal also quashes speculation that that Caterpillar would completely exit the on-highway truck engine business, a business that has thrown up more challenges than profits in recent times. However, Caterpillar will stop supplying engines to other North American manufacturers of these vehicles, starting with the introduction of engines designed to comply with 2010 US clean-air rules.

Such a move is expected to benefit Caterpillar's rival diesel engine maker, Cummins Inc., who may garner a larger share of the market. On this expectation, Cummins shares gained much more yesterday than either Caterpillar or Navistar.

Under the partnership arrangement, Navistar will begin producing a Caterpillar-branded heavy truck designed for "severe service" applications, such as road construction, which will be sold in the US through Caterpillar's network of dealers.

Navistar and Caterpillar will also build and sell commercial medium- and heavy-duty trucks in some countries outside North America, a move that will help Navistar expand its overseas presence.

For Navistar, the alliance will generate new production volume that promises to create additional manufacturing efficiencies and lower costs per unit. That's in line with the truck company's strategy of leveraging its own assets through production partnerships.

The alliance will take advantage of Caterpillar's extensive distribution network, especially for severe service trucks in North America, a segment Navistar has not typically focused on, said Dee Kapur, president of Navistar Truck Group.

"It's imperative for us to be in front of the industry, which is vertically integrating," said Doug Oberhelman, head of Caterpillar's engine group.

Separately, Caterpillar, which has been struggling to keep up with overseas demand for a variety of heavy machinery that it primarily manufactures in the Midwest, said it expects to spend $1 billion through 2010 to streamline operations and boost capacity at five major Illinois factories: in East Peoria, Joliet, Decatur, Aurora and Mossville.

Caterpillar shares rose $1.57, or 2 per cent, to close at $80.50. Navistar shares climbed $2.50, or 3.5 per cent, to $74.40.

Caterpillar Inc. is a United States-based corporation headquartered in Peoria, Illinois. Caterpillar (commonly referred to simply as CAT) is, according to their corporate website, "the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines."

Famous for their products featuring caterpillar tracks and a distinctive yellow paint scheme, Caterpillar produces a wide range of engineering vehicles, including the range of Caterpillar bulldozers.

Caterpillar is one of the 30 companies whose stock is tracked in the Dow Jones Industrial Average. It is a Fortune 100 company ranked first in its industry, with more than $40 billion in assets, and declared revenues of $45 billion last year.

Navistar International Corporation (formerly International Harvester Company) is a manufacturer of International brand commercial trucks, MaxxForce brand diesel engines, IC Corporation brand school buses, Workhorse brand chassis for motor homes and step vans, and is a private label designer and manufacturer of diesel engines for the pickup truck, van and SUV markets. The company is also a provider of truck and diesel engine parts and service.

The company's products, parts, and services are sold through a network of nearly 1,000 dealer outlets in the United States, Canada, Brazil, and Mexico and more than 60 dealers in 90 countries throughout the world. The company also provides financing for its customers and distributors principally through its wholly owned subsidiary, Navistar Financial Corporation.

Navistar had annual revenues of $9.7 billion in 2007.