Case Problem 15 Navistar Internationals Netting System

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Navistar International Corp. was formed in a reorganization of International Harvester in 1987, the farm and equipment manufacturer. Today, Navistar manufactures and markets medium-and heavy-duty trucks, school buses, and mid-range diesel engines in North America and selected export markets. The company's products, parts, and services are sold through nine distribution centers, 16 used truck centers, and a network of 1,000 dealer outlets in the USA, Canada, Brazil, Mexico, and 75 other countries. Navistar also provides financing for its customers and distributors, principally through its wholly owned subsidiary, Navistar Financial Corporation.

During a dismal stretch from the late 1980s through the early 1990s, Navistar was the industry's underachiever. In 1995, however, new Navistar CEO Horne had created a "culture of entitlement" that made the company a sluggish competitor. As part of his effort to energize Navistar, he has introduced a number of top-level managers from other companies into the truckmaker's historically insular executive suite. With the new management team in place and a solid stream of cash from strengthening industry conditions, Navistar has achieved significant productivity increases at its existing plants, built new facilities, and revitalized the once-stable product line. These actions along with its unique netting system have enabled Navistar to improve its financial performance significantly in recent years (see figure 15.2).

Navistar's netting system depends on a currency clearing center located in Switzerland. The netting system works on a monthly cycle. By the 15th day of each month, all participating subsidiaries send information to the currency clearing center on payables and receivables exist-

Return on equity 42.2%

Net income ($ millions) $544

$299

$150

1996 1997 1998 1999 Year

1996 1997 1998 1999 Year

Sales and revenues ($ millions) $8,647 $7,885

1996 1997 1998 1999 Year

Figure 15.2 The recent financial performance of Navistar International Source: www.navistar.com; accessed July 7, 2000.

ing at that time in local currencies. The clearing center converts all amounts into dollar terms at the current spot exchange rate and sends information to those subsidiaries with net payables on how much they owe and to whom. These paying subsidiaries are responsible for informing the net receivers of funds and for obtaining and delivering the foreign exchange. Settlement is on the 25th day of the month and the funds are purchased 2 days in advance, so that they are received on the designated day. Any difference between the exchange rate used by the Swiss center on the 15th and the rate prevailing for settlement on the 25th gives rise to foreign-exchange gains or losses, and these are attributed to the subsidiary.

Navistar used this original clearing system for intracompany transactions and did not use the system for its transactions with independent companies. After a decade with this system, the company introduced a scheme for foreign-exchange settlements for payments to outside companies. There are two different dates, the 10th and 25th, on which all foreign exchange is purchased by and transferred from the Swiss center. The payment needs are sent electronically to the center from the subsidiary more than 2 days before the settlement date. Then the center nets the amounts of each currency in order to make the minimum number of foreign-

exchange transactions. The subsidiary, which owes the foreign exchange, settles with the clearing center by the appropriate settlement date. This netting system can cut the total number of transactions with outsider companies in half.

The use of interdivisional leading and lagging makes the cash management system even more flexible. If a subsidiary is a net payer, it may delay or drag payment for up to 2 months while compensating the net receiver at the prevailing interest rate. Net receivers of funds may, at their discretion, make funds available to other subsidiaries at an appropriate interest rate. In this way, the Swiss clearing center serves to bring different subsidiaries together so that they can reduce outside borrowing. The netting with leading and lagging has allowed the company to eliminate intracompany floats and reduce the number of transactions by 80 percent.

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