Stewart & Stevenson Services Inc.

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Stewart & Stevenson Services Inc.

2707 North Loop West
P.O. Box 1637
Houston, Texas 77251
(713) 868-7700
Fax: (713) 868-7692

Public Company
Employees: 4,300
Sales: $982 million
Stock Exchanges: NASDAQ
SICs: 3511 Turbines and Turbine Generator Sets; 3799
Transportation Equipment, Not Elsewhere Classified

Stewart & Stevenson is one of the worlds leading suppliers of power systems and related mechanical equipment. The company manufactures gas turbine generator sets for electric power, as well as diesel and gas-powered equipment, which it supplies to all the branches of the U.S. military. The largest distributor of diesel engines worldwide, Stewart & Stevenson also produces such diverse items as: oil drilling and pumping products, aircraft and cargo tractors for the airline industry, diesel-powered refrigeration and air-conditioning units, and cable extractors for the communications industry.

In April 1903, C. Jim Stewart, a blacksmith working in Houston, Texas, joined Joe R. Stevenson, a woodworker with his own business, in order to form a partnership. Each of the young craftsmen contributed $300 of their own resources and signed a contract to establish a horse and buggy business, which they named Stewart & Stevenson Inc. Stewart contributed his blacksmith skills and Stevenson provided the woodworking skillswhile the contract stipulated that both shall do such things in and about said business which shall be necessaryand the company began offering carefully crafted, handmade wagons, buggies, and carriages.

Within two years, the men had built their business into a highly profitable and respectable enterprise. A unique company for its time, the operation wasnt an ordinary horse stable but an indoor horseshoeing parlor. Managers worked next to the horses, and both managers and groomers wore three piece suits. Not surprisingly, the companys reputation grew as word spread about the sturdiness and meticulous detail that went into every four-wheeled transport built.

In 1905, the Southern Motor Car Company heard of the growing reputation of Stewart & Stevenson and asked the two men to repair an automobile. The automobile was a four cylinder, 24-horse powered roadster called the Dixie Flyer, which had almost been destroyed by fire. Since it gave them an opportunity to diversify and take advantage of the trend towards a new form of transportation, Stewart and Stevenson quickly signed a contract with Southern Motor. Rather than rebuilding the original body of the car, however, they decided to build a brand new four-door wooden body, which became the first four-door, touring car body in Houston.

As the automobile industry grew during the following years, Stewart & Stevenson became leaders in building bodies for four-door touring cars and two-door roadsters. At the same time, however, the company continued making buggies, wagons, and carriages for people living in the rural areas of Texas. At the onset of World War I, Stewart & Stevenson was contracted by the U.S. government to build horse-drawn wagons for the Army Medical Corps. By the end of the war, as automotive vehicles began to replace horse drawn transport along the Western Front in France, the company was asked to build more bodies for engine-powered cars and trucks.

During the 1920s, Stewart & Stevenson shifted production to meet the needs of customers, who demanded new, improved car designs. During this time, Stewart & Stevenson would purchase a truck or car chassis, for example, add engine and other parts from various manufacturers, and then customize the body to the requirements of the customer. In this way, the company provided a unique, customized design for car hoods, truck beds, and other components. Stewart & Stevenson also agreed to act as a franchise for the Detroit Diesel Corporation, and began to customize diesel engines according to the specific needs of companies within various industries. By 1930, the company was the largest distributor of customized diesel engines in the United States.

Throughout the 1930s, the market for customized car and truck bodies declined, due to decreases in demand caused by the Great Depression as well as competition from the automotive industrys assembly lines, which had developed more sophisticated techniques. To compensate for its declining business in this area, Stewart & Stevenson worked to develop the commercial market for customized diesel engines. In 1938, the company became a distributor for General Motors new diesel engine. With confidence in its ability to customize General Motors diesel engines, as it had with Detroit Diesel, Stewart & Stevenson created the Engine Division to market the new product. By the end of the decade, the company was selling its customized General Motors diesel engines to run ice plants, cotton gins, and lumber mills.

Although World War II virtually eliminated the market for commercial diesel engines, Stewart & Stevenson was again called upon by the U.S. government, which wanted the firm to supply products for diesel-powered equipment. One of its first contracts called for Stewart & Stevenson to supply 35 mobile diesel generator sets with the capability of operating on Russian M-4 heavy fuel and, most importantly, in temperatures ranging from 40 to 100 degrees Fahrenheit. The work for the U.S. government marked a turning point for the distributor of diesel engines and power units; during the war years, Stewart & Stevenson became the second largest supplier of diesel engines and diesel generator units under the auspices of the Lend Lease Act.

Stewart & Stevenson was also asked by the government to reconfigure approximately 4,000 General Motors model 6-71 diesel engines at the rate of 40 per day. The engines were designated for use in the U.S. Armys Sherman Tanks. When the terms of the contract were concluded and all the engines had been delivered, the company voluntarily returned over $1 million to the American government for what it regarded as excess profits.

The innovative engineering and management confidence that developed out of the companys work during the war years contributed to its success in the postwar era. The most important ingredient of Stewart & Stevensons business was its concentration on the development of diesel power. Some of the more important products manufactured by the company at this time included: a vertical crankshaft diesel engine designed specifically for deep-well turbine pumps; one of the first lightweight power generator sets to operate at 125 degrees Fahrenheit and at elevations of 10,000 feet or more, designed for and used by the U.S. armed forces for many years; and the first winterized, gasoline engine, aircraft support units developed for and used by the U.S. Air Force.

Although C. Jim Stewart and Joe R. Stevenson were no longer making decisions for the company, Stewart & Stevenson continued its history of success into the 1950s. New management, some of it comprised of family members and some hand-chosen by the two founders, proved equally skilled at developing new markets. In the early 1950s, the company made a significant expansion into the marine market by selling and distributing its General Motors diesel engines to the work boats employed off the Gulf Coast. The company was one of the participants in what has come to be known as the Dieselization of work boats in the Gulf Coast waters. Moreover, Stewart & Stevenson entered the market for oilwell and petroleum products equipment during this time by supplying hydraulic control equipment for drilling rigs and providing highly sophisticated diesel pumps for oil production units. In 1956, the company constructed the first diesel power engines with 1,000 horsepower, which doubled the horsepower of the Detroit Diesel engine product line. In 1958, the firm expanded into the growing market for airline ground support equipment and introduced an innovative diesel powered, self-propelled, ground power unit, which supplied commercial aircraft with electrical power while being serviced on the ground.

During the early 1960s, the company began to design and construct heavy equipment using gas turbine engines. Toward that end, the company used and adapted General Motors Allison gas turbines; during the decade Stewart & Stevenson received 15 awards for its applications of the turbines. The company also used and adapted Garrett and General Electric turbine engines for various industrial applications. The company continued to develop diesel and turbine power applications for the airline support, marine, oilfield and defense industries. In the late 1960s, the company developed the DIESELDRIVE, a compact, high-speed diesel engine to be used for stern-driven pleasure boats. Soon, Stewart & Stevenson began to apply gas turbine engines for use in pleasure craft, and launched a campaign to become one of the largest suppliers of propulsion packages for such vessels as trawlers, shrimp boats, and offshore oil rig supply boats.

In the early 1970s, Stewart & Stevenson procured a lucrative contract from the U.S. Navy to supply turbine engines for powering medium-sized ships and smaller boats, particularly vessels that formed the fleet of the U.S. Coast Guard. While the company also moved into the market for gas-fired generators, the nascent cogeneration market eventually became the focal point of its activity. The business began to boom with the passage of the 1978 federal energy deregulation law. Deregulation required utility companies to purchase power from co-generators, which were industrial facilities or plants that used steam and natural gas-powered generators to generate electricity for sale to other businesses as well as for use in their own operations. This turn of events created a new market for electrical power, and Stewart & Stevenson rapidly positioned itself to become a leading worldwide supplier. By providing gas-fired generators ranging between 20 to 50 megawatts, the company began to supply power to numerous electric utility companies, as well as cogenerator plants, around the world. As a result, Stewart & Stevenson quickly became the leading supplier to developing nations in the Pacific Rim, Middle East, and Latin America.

Much of the companys success during the 1960s and 1970s was directly related to the burgeoning oil industry in the United States. When the industry collapsed in the early 1980s, Stewart & Stevenson was hit hard. While most of the firms customized diesel engines and parts were sold to drilling rigs and offshore supply vessels, management was still forced to write off $26 million in losses. Moreover, in just two years, from 1981 to 1983, revenues were cut in half to $237 million, a significant part of the labor force was laid off, and executive pay was lowered by 20 percent. In an attempt to adapt to the shrinking oilfield market, the company expanded its presence in the aircraft ground maintenance market and extended its distribution operations by becoming a franchisee for both Perkins Diesel Engines and John Deere industrial equipment.

During the mid-1980s, Stewart and Stevenson reached an agreement with General Electric Corporationat that time the leading international manufacturer of aircraft enginesto package its most popular aircraft engine throughout the United States and Canada. Stewart and Stevenson also signed a contract with the Gas Research Institute to design and manufacture modification technology that would convert oil-burning diesel engines to compressed natural gas for buses and other commercial vehicles. Additional attempts to offset losses in the oilfield industry involved competing for larger contracts to build all-purpose trucks for the U.S. Navy and Marines, and manufacturing gas-turbine pumping systems for oil pipelines in Saudi Arabia.

Bolstered by expansion into new markets and its reputation for flexibility, Stewart & Stevenson was able to compete in a rapidly changing manufacturing environment. From 1986 to 1989, the companys revenues almost doubled, with gas-turbine sales accounting for nearly 50 percent of the growth. While most of the remaining revenues came from supplying custom-built diesel generators, the companys market share of aircraft ground maintenance equipment, and its distribution of John Deere construction equipment, began to contribute substantially to company profits.

In both 1985 and 1988, Stewart & Stevenson made bids to design and build a new generation of trucks for the U.S. Army. The Army asked the prospective contractors to submit designs based on its specifications and, in order to save funds, requested that widely available commercial components be used to build the truck. With a history of adapting the designs of other manufacturers, Stewart & Stevensons design team had soon built a truck with cab parts from an Australian company, a transmission from Allison, an engine from Caterpillar, an axle from Rockwell, and tires from Michelin, a French company. While the company drew criticism regarding its use of a foreign tire manufacturer for the original truck parts, award of the contract was granted in 1991, and Stewart & Stevenson received a five-year, $1.2 billion deal to build 11,000 trucks. When Stewart & Stevenson discovered that the U.S. Army hadnt redesigned its trucks since the time of the Korean war, management made a commitment to pursue new orders from the Army, Navy, and Air Force, and American allies such as Israel and Kuwait. Management also decided to adapt the truck to meet the needs of customers in the construction, oilfield, and utility industries.

Stewart & Stevensons sales rose from just under $400 million in 1987 to $686.4 million in 1991. During the same period, earnings rose from $15 million to $35.7 million, and, by 1994, sales had increased to $982 million. The company seemed well positioned as one of the worlds leaders in harnessing power.

Further Reading

Boisseau, Charles, An Engine For Profits, The Houston Chronicle, 1991.

Capability Transcends the Years: Stewart & Stevenson, Houston: Stewart & Stevenson, 1990.

Cook, James, Were Still Harnessing Power, Forbes, May 29, 1989.

Palmeri, Christopher, Off-The-Shelf And Onto The Road, Forbes, July 18, 1994.

Thomas Derdak

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Stewart & Stevenson Services Inc.

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