By now we are all familiar with Tesla (NASDAQ:TSLA) CEO Elon Musk's tweet on April 13th, formally announcing a September unveil for the company's new semi truck, and opening what I believe to be the equivalent of Pandora's Box for the company.
With just the tweet to go on so far, the word "semi" in his message would imply they are targeting the Class 8 category of big tractors. These are the trucks we see every day, of every week, transporting goods to every store we shop at, wander through, or get dragged to by our wives, girlfriends, or significant others. Truck unloading ramps can be found at every big box store and major retailer across the country.
Most trucking companies specialize in one of three areas: short, medium (regional operators), or long hauls. Most of the trucks sold here in the U.S. begin their useful lives operating on medium and long haul routes. These are the units seen most often on freeways. They are easily identified by the longer length cabs which include a sleeping compartment behind the driver. These drivers can spend weeks out on the road at a time. Their cabs can include a refrigerator, microwave, television and one or two beds in bunk style. Unless they are equipped with a separate generator, the large diesel engines in these trucks run virtually nonstop. The majority of operators keep these trucks operating long hauls for 7-10 years. Mileages in the multi-million mile range are not uncommon. Well maintained trucks can routinely get more than 700,000-1,000,000 miles between engine overhauls.
The big names in this market are Volvo, Peterbilt, Mack, Freightliner, Kenworth and International, with the upcoming additions of Nikola and Tesla.
So, assuming the Tesla team has done its homework, let's look at what the marketing research folks would have found.
Class 8 Y-T-D U.S. sales thru May 31, 2017: 67,021 units down 21.9% from the same point last year. Units in dealer inventory stood at 347,148 across the U.S. on the same date, and rising. here.
With rising costs and retailers looking for better pricing on shipping, operators are increasingly being squeezed on expenses. They really only have two ways to cut expenses make trucks last longer, or find cheaper ways to fuel their trucks. With the complexity of the systems on board big rigs, substantial savings are just not to be found in maintenance. Even tire costs remain about the same as well, with the move to the new wider rear tires cutting the total count from 10 to 6 on each tractor, but not decreasing costs.
Incoming new entrant Nikola Motor Company is taking a new tactic with the development of the Nikola One which utilizes hydrogen fuel cell technology combined with electric motors. Their main strengths are the proposed range of 800-1,200 miles between fill-ups, which translates to a reduced number of required filling stations across the country, 1,000,000 miles of free fuel included with each new truck and reduced weight compared with current diesel powered trucks. With stated $1,500 reservations totaling nearly $3 billion and rising, they are certainly a market contender.
Up until now the biggest push to lower operating costs has been in converting existing diesel engines to run on cheaper CNG, LNG or RNG. Companies like Omnitek (OTCQB:OMTK) and Westport Fuel Systems (NASDAQ:WPRT) are leading the charge in developing, installing and servicing conversion kits. State incentive programs have been growing across the country to help operators of both commercial and government fleets to make the switch. Here in Florida operators can apply for incentive payments of up to $25,000 per vehicle and $250,000 total per year to aid in the purchase, lease or conversion of natural gas fleet vehicles. In the last fiscal year ended 6/30/16, Florida doled out $5.87 million, and the entire 2017 allocation of $6 million has been spent, here.
Does a conversion program always work? No. Bison Transport in Alberta, Canada, tried a pilot program using 15 trucks converted to LNG from 2013-2015, and ended up pulling the plug because they did not see enough improvement in costs after converting their trucks. However, Veddor Transport in neighboring British Columbia bought the 15 trucks to augment their 50 other nat gas fueled trucks. Seems the incentives offered to operators for conversions there are far superior to Alberta, here.
Aiding in this push for conversions are new players in the field of fueling stations. The largest in the U.S. at this time is Clean Energy Fuels (NASDAQ:CLNE). They have built a network of natural gas fuel stations across the country providing CNG, LNG, and now RNG. Royal Dutch Shell, Plc (NYSE:RDS) (NYSE:RDS.B) has signed an agreement with TravelCenters of America, LLC (NYSEMKT:TA) to build natural gas fueling stations across the U.S. at select locations.
The second phase in the life cycle of a long distance truck as the miles accumulate along with service issues is to be sold to short distance operations where they tend to live out their last days of useful life in the United States. Working from centralized hubs, these operations tend to have large maintenance departments with mechanics specialized in keeping these relics running. You will see lots of these trucks operating around U.S. ports, where daily driving is limited to about 100-175 miles per day. These trucks are usually hauling containers coming off ships headed to local distribution centers or train yards for the next phase of their journey.
This ability to keep older trucks operational makes it economically feasible for long haul operators to trade them in on new trucks. But now there is a new wrinkle in this life cycle.
In 2008, the Port of Long Beach in conjunction with the SCAQMD put new rules in place meant to rid the roads of these older, noisy, smelly, polluting trucks. A June 16, 2017, article article in the USA Today Network profiles how a seemingly good idea nearly bankrupted all of about 800 companies operating at the port almost overnight. New regulations ordered the entire fleet of nearly 16,000 trucks be quickly replaced by new, cleaner rigs resulting in a $2.5 billion nightmare unlike anything experienced at any other U.S. port at that time. Those older trucks were mostly owned by their drivers. Most of them immigrants, working to feed their families. With their trucks suddenly worthless, many were forced to sign leases for new trucks provided by their contractor companies. And that is where the nightmare was transferred from the contract companies to their drivers, as the story details. It has taken years for the impact of that 2008 decision to be fully appreciated and the financial consequences are ongoing. It is not unreasonable to expect other ports and smog-affected cities to follow suit in forcing older trucks off U.S. roads. That could prove a disaster since new, or even never, trucks are not cost effective on short runs. Increasing those transport costs would eventually make their way to higher consumer prices.
Tesla, in a show of its unblinking courage, has decided to enter this murky market.
1) Where operators live or die on paper thin margins, and must have trucks capable of going millions of miles on their original engines or overhauled swap-outs.
2) Preferably where new replacements, when needed, can be purchased with tax or cash incentives.
3) Trade-ins to offset the cost of new trucks are made possible by the extended uses available to older trucks. (That could be going away in the near future.)
4) When new trucks are not economically feasible costs can be reduced (with the help of incentive programs) by converting their existing fleet to cheaper fuels, the apparent best to date being environmentally friendly RNG.
5) These conversions are made feasible by existing nationwide networks of natural gas refueling stations.
Now let's look at what Tesla (in my opinion) will have to bring to the table in September to be competitive. (I will not be making any technical comparisons since Tesla does not actually have a truck yet.)
1) An all new BEV tractor with a 500 mile per charge range. We can assume it will have great aerodynamic styling in the fabulous artist renderings to be shown at the unveiling. Unlike the solar roof, could we actually see a truck rolled out on stage like at the Nikola Motor presentation in 2015? TBD.
2) I would guess it safe to assume it will tout the unparalleled ability to drive itself across the U.S. with drivers along for the ride. Self-charging too perhaps?
3) Since none of the SC stations I have visited can accommodate big rigs for charging, Tesla may need to announce the rollout of a new nationwide network of truck charging locations.
4) In order to travel the required 500-1,000 miles per day of most big rigs operated by either single or team drivers now, they will be introducing an optional battery swap program where the packs can be changed out by Tesla crews in about the time it takes a NASCAR pit crew to carry out a pit stop during a race. (Tire changes will be optional, done at an added cost).
5) Operators need not be concerned with future battery pack replacement costs, since the truck will include a 2,000,000 mile / 10 year warranty.
6) Warranty maintenance will be carried out by roving crews patrolling every major U.S. freeway and meeting drivers roadside, or at whichever truck stop they choose which will exceed every customer's expectations! This will be a necessary feature since no other roadside repair services will know how to work on these battery powered trucks.
7) Margins will be "off the hook awesome," since each truck will come loaded with standard features at twice the cost of most competitors trucks or about $300,000, but will include free charging or the optional pack swaps, so zero fuel costs.
8) Within two weeks of the unveil a Tesla spokesperson will be announcing they have "sold out" their entire truck production until 2025, taking 1,000,000 reservations at $2,500 each.)
9) Using the reservation funds, Tesla will build a new truck Gigafactory in Oslo, Norway. This way cold weather performance and brake tests on icy surfaces can be performed in the parking lot saving valuable testing time. (Employees will be shuttled to work from home by drones freeing up the parking lot.)
10) Some of you may be thinking why not just go with a new short distance truck without a sleeper? Possible, but since most short haul trucks are purchased used that would really limit the market for Tesla.
Author's note: I have tried to inject a little tongue 'n cheek humor here, but the seriousness of this entry to the proposed market is obvious. Market and governmental forces are at work here that are putting even seasoned, long term manufacturers at risk.
The fact is "unintended consequences" are something planners sweat bullets over every day. Big Rigs are complicated machines, subject to periodic DOT inspections and NHTSA regulations. Drivers, and operators face new hurdles every year. The latest being electronic logging mandates. It is no secret in the industry that drivers for years have fudged logs to drive longer/farther then they were allowed by law. Many claimed it was the only way to remain profitable. New mandated equipment is GPS controlled. If the truck moves it gets recorded, period. Thousands of drivers have felt forced to retire or quit the business rather than become compliant and forced to buy the expensive equipment. The OOIDA worked hard to get the regulations changed or at least delayed to no avail. Operators are concerned their trucks will no longer be profitable, which is sure to delay replacement expenditures. None of this is positive news for a newcomer like Tesla.
So to recap: Tesla wants in to a market with:
1) Declining sales and growing inventories.
2) Where they face massive capex expenditures for a new factory (unless they partner with another manufacturer) and possibly an entirely new charging network.
3) While facing industry headwinds from federal and state government regulations.
If that wasn't enough, other companies are working hard to prolong the life and reduce the operating costs of the trucks in operator's existing fleets, thereby delaying or preventing them from having to invest in new trucks at all. In support of these companies' efforts new alternative fuel networks are already in place and growing, and helping to promote the growth in sales of natural gas powered cars, pickups, and vans now being offered by Ford, GM, and Dodge.
Under all of this (pun intended) is that, according to the USEIA website, the U.S. holds enough known natural gas reserves to fuel the country for the next 93 years, and that does not take into account the growing availability and supply of RNG, here.
Despite all of this, Tesla management sees big trucks as a "great opportunity" for BEV technology.
Disclosure: I am/we are long CLNE, SHORT TSLA VIA PUT OPTIONS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.