PEORIA, Ill. -- Caterpillar Inc. delivered a body blow to the North American motorcoach industry last month when it announced it was bailing out of the on-highway truck and bus engine market.

Since Caterpillar re-entered the bus industry early in this decade it had become a strong competitor to Detroit Diesel and Cummins as an engine supplier, and it helped push its engines by becoming an important financier of new coach purchases.

That all will come to an end as Caterpillar exits the on-highway bus and truck engine market by 2010, opting instead to work with Navistar International Corp. to develop off-road trucks.

The Cat announcement, which was hardly a surprise (see June 15 Bus & Motorcoach News), was nonetheless startling.

Leaving the on-highway commercial vehicle market is a major break with Cats historic strategy but, at the same time, it confirms speculation that it might sell, dispose of, or shut down its truck-and-bus engine business because it represents only 6 percent of its total engine sales.

Keeping it would have required significant investment by Cat to comply with tough Environmental Protection Agency emission rules that go in affect in 2010.

"This is a way to exit the business and focus on more profitable areas like mining machinery," said one financial analyst.

The impact on the motorcoach industry will be immediate, profound and long lasting. Initially it will affect four North American over-the-road coach brands: MCI, Van Hool, BCI Falcon and Blue Bird.

Caterpillar is the standard engine in BCI Falcon and Blue Bird coaches, and an option in MCIs and Van Hools.

When Detroit Diesel begins exclusively supplying engines to Setra in 2010 (see March 15 Bus & Motorcoach News) and Caterpillar leaves the market, MCI and Van Hool will at this point -- have a single engine supplier, Cummins.

In fact, Cummins is expected to be the major benefactor of Cats decision. Cummins is a long-time supplier of motorcoach and truck engines, but its sales to the coach industry over the years have lagged far behind those of Detroit Diesel.

"We believe Caterpillar's decision in part reflects the technological lead that Cummins has in on-highway (commercial vehicle) engines, where emission standards and regulation are increasing, and competing with the need for fuel efficiency," Standard & Poor's equity research said in a note.

Similar speculation appeared in news accounts of Cats announcement. One report suggested Caterpillar may have decided its ACERT engine, which cost hundreds of millions of dollars in development costs, wouldn't be competitive in the 2010 regulatory environment.

Meanwhile, even though Caterpillar says its dealers will continue to provide long-term support and service for the engines it has in the market, the companys departure from the bus industry likely will have negative implications for the resale value of coaches equipped with Cat engines.

Asked to comment on Cats announcement, MCI released a statement from Patricia Ziska, company vice president and chief customer officer:

"MCI is continuing to invest in powertrain research and development. Since 2004, there have been a number of highway engine offerings required to meet the new emission changes. MCI has provided its customers with the best technology and innovation available and will continue to do so.

"MCI plans to continue to offer all three engines (Detroit, Cat, Cummins) in 2008 through 2009, with reassurance from all engine manufacturers that service and support will continue."

A spokesman for ABC Companies, distributor of Van Hool coaches, was not immediately available.

So, what does Cat plan to do when its no longer supplying engines for over-the-road trucks and buses? It says it plans to invest $1 billion over the next two years to expand its off-highway machinery line, particularly equipment used in mining and large-infrastructure construction.

Caterpillar said its alliance with Navistar will mean the introduction of a North American Cat-branded, heavy-duty truck for use in large projects, such as road construction, by 2010.

In a statement, Caterpillar Group President Douglas Oberhelman said: "With nearly 90 percent of our engine business being off-highway, we'll continue to concentrate on our substantial and growing opportunities to supply engines in the petroleum, marine, electric power-generation and industrial markets -- as well as produce engines for our own construction and mining equipment."

In addition to the heavy-truck venture in North America, Caterpillar and Navistar said they will work together to develop and manufacture commercial trucks in certain regions outside North America.

"The combination of Navistar's truck design, development and manufacturing expertise and Caterpillar's unparalleled worldwide distribution creates a significant advantage for global customers," said an executive with Navistar's truck group.