Navistar International Corp. (NAV) said it wants to lower its costs for assembling heavy-duty trucks by shifting more production from Canada to Mexico.

Most of Navistar's heavy-duty trucks have been built at the company's Chatham, Ont., plant. But the Illinois-based company said Tuesday it's considering moving some of Chatham's volume to a plant in Escobedo, Mexico, where Navistar's heavy-duty rigs are built for the Mexican market.

Navistar's attempt to divert production from Chatham is a major issue in contract talks under way between the company and the Canadian Auto Workers Union, which represents Chatham plant workers. The union's contract with the company expires at the end of June.

Navistar Chairman and Chief Executive Daniel Ustian said building more trucks in Mexico would better-align Navistar's production operations with the location of its suppliers and trucking companies, making it cheaper to obtain components and deliver new vehicles.

"Many of our suppliers have moved from the Midwest down into the Southwest and even into Mexico and that poses a challenge to our cost structure" in Chatham, said Ustian, during a conference call with Wall Street analysts Tuesday. "The logistics can cost as much or more than putting the vehicles together."

Ustian said the company also has picked up additional heavy-duty truck customers recently whose operations are largely in the South and Southwest.

Ustian did not offer specifics on how many trucks the company wants to shift to Escobedo, which already produces medium-duty trucks sold by Ford Motor Co. (F). But he said he's considering a plan whereby Chatham would supply trucks to customers in Canada and the Northeast U.S. and Escobedo would provide trucks for the rest of the U.S.

Most of the 1,100 Chatham workers are laid off as a result of falling truck sales caused by a downturn in the U.S. economy. Before the current sales slump began in 2007, production at Chatham reached as much as 200 trucks a day.

A representative for the union said Navistar's plan would idle large portions of Chatham's operations, leaving the plant underutilized and vulnerable to a permanent shutdown.

"It's an excuse, in our minds, to move our work to Mexico," said Bob Chernecki, an assistant to Canadian Auto Workers President Ken Lewenza. "We're being devastated. The commitment to Chatham is clearly not there."

Navistar and the union engaged in a protracted standoff earlier in the decade that featured a six-week strike by the union in 2002. In 2003, Navistar announced it would close Chatham and move its operations to Escobedo.

Ustian, however, relented after the union agreed to $31 million in cost reductions at the plant. It also received more than $40 million in federal and provincial government money for modernization and worker training. In exchange, Navistar agreed to maintain a minimum production of 35 trucks a day at the plant.

During contract negotiations this spring, Navistar has insisted the production guarantee be eliminated and wants greater flexibility over the plant's uses and its workforce.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com

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