Scharfsinn86
With climate change creating chaos all over the world this year, there is beginning to be serious attention paid to exit from burning fossil fuels. The “low hanging fruit” for emissions reductions is the power and transport industries. In 2021 global emissions from the transport sector accounted for an astonishing 37% of CO2 emissions from end-use sectors. By far the biggest global transport emissions (~76%) came from wheeled transport (in comparison with shipping ~11% and aviation ~9%). So it is easy to see why wheeled transport is under the microscope. While there are still some who argue about the electrification of personal transport, my conclusion is that the fate of the ICE (Internal Combustion Engine) is sealed, not the least because just about every major manufacturer no longer has plans to continue producing vehicles with an ICE. Bans on sale on new ICE vehicles are not far off. The situation is different for commercial transport and especially large trucks. Here I examine Volvo Trucks (OTCPK:VOLAF) and Tesla (TSLA) plans for big trucks. Both plan for a decarbonized future, with Volvo hedging its bets on a possible role for FCEV along with BEV big trucks, while Tesla is clear that the future is BEV. There are some clear takeaways for investors: investment involving the ICE and oil is going to be increasingly challenged, companies involved with electrification of transport have a massive market opening up, while hydrogen’s future is unclear.
Volvo heavy truck BEV vehicles
Volvo Trucks has been aggressively entering the BEV market for trucking and it claims to have the broadest BEV lineup in the industry. It has just expanded its electric truck range to 6 vehicles, with heavy truck electric production versions of the three ICE models, which represent two thirds of the group sales, recently released (FH, long haul, well 186 miles (300km) with a 540 kWh battery; FM, medium haul, and FMX, construction applications). Having already sold 1,000 heavy duty BEV trucks (19 meters long, 18 wheels, around 40 tons) and 2,600 BEV trucks in all, Volvo is already very well established in the space. It makes a big claim that by 2030 BEVs will account for 50% of the trucks it sells globally, while in Europe 70% of its truck sales will be BEVs. The report I link above claims that truck drivers experiencing driving a BEV truck don’t want to return to driving a truck with an ICE.
Luca Socci recently overviewed the AB Volvo (Trucking) Group, which is not to be confused with Volvo Car Group, owned by Chinese Zhjiang Geeley Holding Group which owns a highly complex auto conglomerate. Luca Socci’s review of AB Volvo Group included comparison with 3 other trucking groups that have spun out of bigger manufacturers (Daimler, Iveco and Traton) recently. I refer investors to Luca’s overview which concluded that the Volvo Trucking Group is a market leader and the shares undervalued. Since Luca’s report was published in June, VLVLY’s shares have drifted down slightly from $17.50 to $16.65.
Volvo trucks have a comprehensive BEV truck portfolio but Tesla might define big truck BEV offerings
More than any other company Tesla has defined the rise of the BEV for personal transport. It is clear that FCEV (Fuel Cell Electric Vehicle) hydrogen technology has missed the opportunity to be a player in personal transport as the world exits the ICE (Internal Combustion Engine).
Elon Musk has been emphatic that he sees no contest between BEV and FCEV technology in the quest for domination of commercial transport and this also seems to be the case with replacement of diesel power in light commercial vehicles. However, there persists a view that hydrogen will ultimately become the technology winner for big trucks. And from this position hydrogen enthusiasts see hydrogen invading the personal transport space when (if) a hydrogen supply network gets established. This is predicated on the view that transport needs an engine and fuel. This is crucial to the future of hydrogen, because invariably when green hydrogen projects are discussed the story reverts back at least in part to wheeled transport.
For the above reason I see how the hydrogen versus BEV battle is resolved being critical to whether a hydrogen industry gets established (or not). A note to those thinking that the hydrogen industry is assured, it is worth reading the fine print. The phrase “we’re still some years away before it becomes commercially available” is an overused one in the hydrogen story.
The defining feature of the Tesla Semi that distinguishes it from competitors is the combination of its size (Class 8, 80,000 lb total weight) and range (300 and 500 miles). Just as happened for personal transport, many are invested in the impossibility of Tesla’s ambition. When (if?) Tesla establishes the above specs in the real world of heavy transport, I can’t see hydrogen competing. Note that other big truck BEV manufacturers (eg Volvo see above) are manufacturing a heavy truck about half the size of the Tesla Semi and with less range (eg Volvo see above), or a heavy truck but with much reduced range (eg Daimler Truck’s (OTCPK:DTRUY) Freightliner, the biggest truck maker in the US, is making an 82,000 lb Class 8 electric truck, the eCascadia, although with a range of 220-230 miles based on 438 kWh usable battery capacity.
Given the challenge of huge size and substantial range, it isn’t surprising that Tesla has been slow in getting its Semi to market. Tesla attracts passionate views for or against the company, and those who are dismissive see the slow release of the Semi (due for release since 2019) as an indication of impending failure. Others note what Tesla has achieved over the past 5 years and are impressed. I’m in the latter category.
My take is that it is clear that the Semi exists, but the charging infrastructure might be a significant risk for the Semi, in the same way that lack of a hydrogen network is an issue for big FCEV trucks. However, I don’t think that building a charging network is as big and expensive a problem as is building out hydrogen infrastructure. Nevertheless being able to charge a vehicle with batteries comprising perhaps 1 MWh is not a trivial task. However, Freightliner is confident that they have charging solved with 90% charging in 90 minutes for their eCascadia.
Tesla usually succeeds, so I look forward to seeing how the Semi network gets built out. There is an interesting aside about the timing of Tesla’s release of the Semi for the US market. It has been suggested that the Inflation Reduction Act 2022, which offers as much as $40,000 support for big BEV trucks, might have some relevance to the sudden dusting off of the Semi launch.
The news is that the first customer, PepsiCo (PEP), has confirmed that it will get an initial delivery in December of 15 Semis out of 100 Semi vehicles ordered, so we don’t have long to wait. The Semi has new specs, with 2 models, powered by 3 electric motors, available and having a range of 300 or 500 mile fully loaded (gross weight 82,000 lb). The size of the batteries has not been revealed but the long range version is likely to have ~1 MWh batteries. It is reported that Tesla claims its Semi can add 350 miles of charge in 30 minutes on an (unnamed) megacharger.
If the launch is successful and Tesla Semis begin to appear in numbers, this will almost certainly spell the end of hydrogen for heavy transport and hence all wheeled transport, because big trucks are the last horizon for FCEV technology.
Demonstration projects, why I’m sceptical about hydrogen
The above examples of penetration by BEV trucks into the commercial trucking industry show that BEV technology is ready and able to substitute for diesel-powered trucks now, and that is what is happening for smaller trucks and even large 40 ton trucks (eg Volvo). These vehicles are being sold and used in commercial operations.
FCEV (hydrogen) trucks remain as future opportunities, rather than as vehicles for sale.
As far as I can gather hydrogen projects remain as demonstration projects that are wound up upon completion. Why wind up a successful project? An example is a recent demonstration project in Los Angeles which involved Toyota Motor North America and Kenworth Trucking Company (a wholly owned subsidiary of Paccar Inc (PCAR)), along with Shell (SHEL) which provided hydrogen fuel infrastructure (3 hydrogen refueling stations) and a $41 million grant from the California Air Resource Board (CARB). This project was a validation of 10 jointly developed T680 FCEV (a Class 8 Fuel Cell Electric Vehicle) trucks’, ability to match performance of diesel-powered trucks currently used in the Port of Los Angeles ZANZEFF (Zero- and Near-Zero Emissions Freight Facilities) “Shore to Store” project.
The sum-up is that the successful “Shore to Store” project paves the way for further development and commercial opportunities for FCEV trucking.
Some of the trucks remain and will be used for “demonstration or as working models” including one truck to be used by Toyota. If the project was successful, why not replace the diesel trucks? Perhaps success was only possible with a $41 million grant? The goals seemed to be technical rather than financial. Perhaps one of the limitations was that the FCEV trucks only operated on limited set routes. There was no information about the details of refueling etc. Toyota is reported to be planning to produce fuel-cell powertrains at Toyota Motor Manufacturing in Kentucky in 2023.
Perhaps revealing is that 4 Gen Logistics, a privately owned commercial operator on the route that “Shore to Store” took, has just ordered 41 Volvo VNR BEV trucks, albeit with some support from California’s Hybrid and Zero-Emission Truck and Bus Voucher Incentive project and the Mobile Source Air Pollution Reduction Review Committee. 4 Gen Logistics is building its own BEV charging facility on land owned by Port of Long Beach with a 10 year agreement and also a second charging infrastructure facility at Rialto. This will enable 80% charge in 90 minutes. I presume they looked at the FCEV demonstration results. I pay attention when commercial groups make long term commitments.
Conclusion
The pace is quickening for the electrification of commercial road transport, with recent emphasis beginning to focus on big trucks, as personal transport is pretty clearly locked in to the BEV. There remains a lot of hype about hydrogen (fuel cell) versions of medium sized and big trucks, but it isn’t clear that real sales are happening. This is probably due to lacking infrastructure and long term costs as hydrogen fuel gets priced (that is if (big if) the infrastructure gets built).
The reality is that electrification is rapidly gaining ground for smaller trucks, especially in cities where diesel powered vehicles are frowned upon. The arrival of the Tesla Semi (at last!) may help sort out the reality of a battle or not between BEV and FCEV versions of the big trucks. Tesla is all-in on the BEV, while Volvo is still holding out for a role for FCEV in the big truck sector. I remain unconvinced that FCEV is going to compete and I suspect that, just as happened with BEV versus FCEV for personal transport where it quickly became clear that BEV has won that battle, we may soon see that BEVs are so much more competitive and easier to implement that hydrogen will lose out here too. I think this is a crucial issue for investors interested in hydrogen, because if hydrogen doesn’t get to have a role in transport it will make development of a hydrogen industry so much harder. There is a lot of hype about hydrogen and I’m not convinced I want to invest in this area.
Notwithstanding how the BEV/hydrogen story plays out for the big trucks, it is clear that we are at the beginning of the end of the ICE in trucking as well as personal transport. My take is that we are beginning to see the end of the ICE for ALL wheeled transport. This has not been accepted by holdout companies in the oil & gas sector. Most notably, recently Exxon Mobil (XOM) CEO Darren Woods acknowledged the end of gasoline/diesel for personal transport, but suggested that commercial transport (trucks) will make up for the loss of the personal vehicle ICE market. Given what is happening with trucking, I think that oil/diesel will disappear as a fuel for ALL wheeled transport, not just personal transport. This has big implications for a market for oil that comprises ~45% of overall oil use. Note that the disappearance of the ICE also impacts the future market for biofuels, which rely on the continued use of internal combustion engines. An oil industry which loses 45% of its oil market will look very different.
I am not a financial advisor but I follow closely the exit of the ICE from wheeled transport and where hydrogen fits in the future of wheeled transport. I hope my commentary helps provide some information that is useful as you and your financial advisor contemplate investment in BEV or FCEV vehicles in the truck space.
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