Let’s start with some quick comments on the overall trucking industry.

These days, it’s maybe one of the most exciting phases of the trucking industry, of the last 100 to 125 years, because there is a fundamental change, which is driven by the environment, which is driven by CO2 reduction, which is driven by the recent Green Transportation. This means totally new emission-free propulsion systems and it means, on the other hand, significantly increased efficiency. A buzzword comes into play here, which is digitalization. To make this more hectic, truckers always want to get feel and touch. If you look at a truck or a trailer truck on the highway today, then you should imagine that, on average, a truck is only loaded up to 50%. It varies by country; some countries have a 60% average and some countries a 48% average. This means that with information technology, you can ensure that that truck is not loaded 50%, but 60%, 70% or 80%, and you will need 10%, 20%, 30% less trucks on the road.

You may think that for people in the truck business, like myself, who by the way, has a truck driver’s license, that this is not a good message, because the more trucks you sell, the happier you are. No; it’s not true. But let’s say the success of trucking gets to the problem of trucking because crowded highways drives the perception of the population against truck transportation. This is not good for the trucking industry. It must be an accepted industry. Trucking, nowadays, is on the borderline of being not accepted or being criticized. But there is no alternative to trucking because, as we have seen during the unfortunate Covid-19 time, without the truck, our daily life would not work.

There is no alternative to trucking because you can shift transportation, partially, to the train but this is very limited. If you want to double the transportation volume in trains, in Germany, then you would just move 10% of the truck load to the train. So we are talking 1%, 2%, 3%, 4%, 5% which again, which can be flexibly shifted if there are good connections. This is just one example as to why there is no alternative for trucking.

Having said this, coming back to your question, emission, alternative propulsion, innovation at its best and, secondly, digitalization, to increase the efficiency. This makes trucking very, very interesting.

What drives the total cost of ownership for larger trucks and how has this evolved?

This is the central thing for trucking. We call it total cost of ownership. This means what the cost is to run and operate the truck, one mile, one kilometer, one hour, in total. Why is this so important? These are the costs for the truck operator and impact revenue and margin for transportation. By the way, the margin in the trucking business is quite small. We are talking about 2% to 3% return on sales, just to give you an idea. It’s a very competitive industry. We are talking B2B. There is simply no emotion. There was some part of emotion in the US, the so-called owner operators, but this is also very much reduced. So the statement that there is no emotion is 99% true, because nobody buys a truck and spends €100,000 because his son, his daughter, his wife says, this is fancy to have a truck; please buy a truck. Nobody says that. It is pure business, B2B.

In B2B, the cost is the name of the game; total cost of ownership. The breakdown is relatively simple. There are two big parts in total cost of ownership. One is the driver, which is roughly one third. The other is the fuel, which is also roughly one third. That gives you two thirds of your total cost of ownership. The rest is the purchasing price, commoditization, maintenance, insurance, tires which then adds up to the 100%. The purchasing price itself is below 10%, for a long-haul truck. There is a second element to the total cost of ownership which is the uptime which, mostly, in the trucking industry, is not calculated into the total cost of ownership. There is no science behind it, but it is the uptime on the positive side and the downtime on the negative side. This is the truck running. The pay in is the durability of the truck. If you have a 2% to 3% return on sales and if, during the year, the truck is one week or 10 days down, due to some failure in the workshop or parts are missing and we have to wait for them, then you can easily calculate that 10 days in a year has an impact on your return on sales, so your total profit of the year is done. This gives you the background as to why uptime, the running of the truck, is so important.

This leads to the fact that service operations in the trucking industry are even more important than in passenger cars. Every truck will, of course, have to have regular servicing and will, sometimes, have a failure. There is no product out there that doesn’t have a failure. Even airplanes, with the highest redundant systems, unfortunately, sometimes they have accidents. But the name of the game is to be quick; let me give you the best benchmark example. The big fleet in the US, which is running tens of thousands of trucks, the average downtime of a truck, if the truck has a problem, from off the highway to on the highway – running to the workshop, going to the bay, getting repaired, out of the workshop, to the highway – is 1.6 hours. You may say, if it’s a headlamp, 1.6 hours is reasonable; I agree, it’s reasonable. But if you have an engine change – and this is all included in this average of 1.6 hours – or if you have an electronic problem, it’s just 1.6 hours.

This tells us the competitiveness of this industry and the importance of service in this industry and the importance of uptime. As a summary, the total cost of ownership is driver – remember the driver when we make speak later about the autonomous cost factor – fuel, and today we have the highest fuel efficiency in this super developed aggregates, components and engines. A heavy-duty truck, loaded with 40 tons has an average fuel consumption today of 27 or 30 liters per 100km. Maybe you are a little bit too young, but listeners of my age remember very well that passenger cars used to have this fuel consumption. Now a truck, loaded with 40 tons, operates at 27 liters of diesel, per 100km. Even then, the cost factor is one third. The rest of the components are the infrastructure costs of a truck.

{audio:0:13:59} What drives the buyer of a heavy truck to choose one OEM versus another?

First of all, it’s the flexibility of the OEM to make tailor-made out of the endless variants of a truck; a specific truck for the purpose the buyer is looking for. The variants in trucking are much higher than in passenger cars. To give you an idea, when I was at an assembly plant for trucks, maybe one of the biggest in the Western hemisphere, doing 600 heavy-duty trucks a day, I always said to the visitors, if you see two identical trucks – not from the same customer who has ordered 10 trucks, which are on the line – but from different customers, then I will invite you to dinner. It was an easy bet for me and I did not even have to ask for compensation if I win the bet, because you will hardly find, in 600 trucks a day, two identical trucks. That gives you a feeling for the variety of trucks.

So flexibility is one side; let’s say documented flexibility, where you can take out from the module kit. But also, not documented flexibility. Nearly every OEM, nearly every truck plant, has a special customer fitting center, after the big assembly plant. This indicates that there is high flexibility. If a customer comes to you, you have to fulfil his wishes, his rational wishes, for his transportation needs. Because if you can’t and you have a compromised solution, then you don’t have the best asset for what we discussed before around the total cost of ownership. Only the best asset serves the best fuel consumption and the best efficiency in transportation and the best usage and the least misusage. With that comes the least downtime.

If a customer wants to buy a truck, then at the highest level, you have to fulfil his needs and then you have to deliver the best total cost of ownership. This means the best fuel consumption with the best durability and a good price, I would say. After the explanation about total cost of ownership, it’s not only about the cheapest one. Remember that the purchase price is less than 10% of the total cost of ownership.

What does this mean for a new entrant coming into this market? How hard is it to establish a presence?

It’s very hard. The biggest challenge is that you have to have the sales and service network. Downtime/uptime is so important. If there is a problem, the customer is not prepared to drive 100km to the next service station. For 100km, they would have to drive nearly 1.6 hours and the timeslot has gone, so to speak. When you ask yourself why are there not more Chinese trucks in Europe, or why are they not trying to sell Chinese, Indian or Japanese trucks in Europe, the single biggest reason is, there is not a good sales and service network available. You would only have this if you did a cooperation with somebody who has a good sales and service network. Also, the service network is often more dense than the sales network. We talk about hub and spoke, so you have one sales point and, maybe, three, four, five, 10 service stations around this sales point. But you would have to do a cooperation with an OEM who had this.

Once you have your network, then you have to have patience. The client, the fleet, the truck owner will only buy one or two trucks from you, as a new entrant, and test this truck for one, two, three years. If it operates very well, then he might say, next time I will buy three of them. He cannot run the risk of buying trucks which are not performing. Remember, downtime, profit gone, business gone, bankruptcy. Today, with the Volvos, the Scanias, the MANs, the Mercedes, in Europe, these trucks have one thing in common; they are super modular, they are all high performing and they may differentiate a little bit, like the cream on the cake. This is because there have been decades of competition which educated or forced the system to the highest performance in the parameters that we discussed.

To come back to a very big truck market, like China, where there are some very big OEMs, it’s obvious that you ask the question as to why there are no Chinese trucks in Europe. There is no sales and service network and even if one of the big European brands would let a Chinese OEM would use his network, then the perception of the Chinese quality, rightly or wrongly, is let’s see, let’s wait and then there would be a little test buying.

In 2011 you had experience launching a battery EV truck. What did you learn? What has changed since then?

In the past years, alternative propulsion systems was some kind of belief and hobby. I was lucky enough to serve as CEO in a company that was and is very aggressive in this area – Mitsubishi Fuso. Back in 2005, this company developed the first light-duty hybrid truck. It was the best-performing truck in the world. It had an eight-liter fuel consumption per 100km in distribution. There was no regulation which forced this. We thought that this was increasingly requested technology, but it was not the case. The diesel trucks are so developed and the trucking industry is so conservative, maturity driven, no risk, that over years, we hardly saw 2,000 hybrid trucks around the world, which was very frustrating.

The lessons learnt were that it is a very conservative industry and even if the payback for the higher price of the hybrid version – because you have a diesel engine and then you have an electric engine and batteries and a more complex system on the truck – was three to four years, depending on how much distribution you are building, it was not a convincing argument to most customers, or all customers, because we sold 120,000 diesel trucks around the world, every year and over five to 10 years, we sold between 1,000 and 2,000 hybrid trucks.

But we were convinced it was good to invest in this innovation, also cooperating with the Japanese government. On the passenger car side, there were hybrids and Prius and so on. It was a little bit odd for the society in Japan, which was supportive. We thought up the first battery electric truck in 2011 and showcased it on the IAA in Hanover, the biggest commercial vehicle show in the world. It was, of course, a big hello. In the following years, we did customer testing, with 10 vehicles. It was supported by the government, with funding. In Portugal, we operated 10 battery electric vehicles and in 2011, the truck was built up with a company in the UK. These 10 trucks in Portugal were running very well, with real distribution work. They were used for real work, operating every day.

Then we developed this truck to a serious truck, which you can buy now, in the US, in Europe and in Japan. It is a battery-electric light-duty truck, with between 3.5 GVW and 7.5 GVW. I have to say, the other learning was, there was also a potential payback of four years, but the sales volume is very limited. We have to learn that if you bring this new technology and it is not forced by regulation, it takes a very, very long time to switch the market to green. But this was yesterday.

{audio:0:28:01} Now we have regulations which forces us to reduce emissions. As an example, in Europe, and it’s very similar in the US and in Japan and China, the regulation says that the system of transportation has to reduce CO2 emissions, compared to 2019, by 15% by the year 2025 and by 30% by the year 2030. The commitment in the trucking industry is to have reduced CO2 by the year 2040, by close to 100%. This tells us that now, by regulation, there must come alternative solutions. It’s no longer a customer choice, which I described before. It’s now a must. This is a must for the OEMs; this is a must for the supplier industry; this is a must for the truck operators. At the end of the day, it is a must for all of us, as consumers of the goods which are transported by the truck. You cannot exclude the fact that it might be that transportation is getting more expensive, but I am not completely convinced about that. Some people are saying that this is very bad. It would not be a problem because we have experienced this in the last 10 years, when there was already a strong CO2 reduction. You may have heard of this in Europe, with the Euro 3, 4, 5, 6 regulations, which caused a lot of additional technology in the truck, which increased the costs a lot, which was compensated for by efficiency on the supplier side and efficiency on the OEM side. Also, by efficiency on the truck operator side. And our yoghurt, which we buy at the supermarket, is maybe one or two cents more expensive, but we don’t realize it.

It’s a mixed bag and if transportation does get a little bit more expensive, in the whole chain, it is absolutely not a game changer. Having said this, to turn the emission regulations into a scenario, if we are saying that CO2 has to be reduced by 15% by 2025 and by 30% by 2030, let’s take the example of 2030. This means that you have, basically, to have 30% of your trucks emission free, so in your total mix, you come down by 30%; 70% conventional and 30% emission free. Or less percentage conventional and more emission reduced. As a quantum point, when you talk about the speed of change of propulsion systems, then you should imagine that within the next 10 years, on an increasing scale, one third of all the trucks you see in Europe, on the road, have to be emission free.

{audio:0:32:41} The question of how many exactly that will be, in five, 10, 20 years is of no relevance –  if it’s 30% or 35% or 45% – because there is a switch where the customer says, like in the passenger car industry, where there is a run on cars like Tesla. The importance is that you have to have a mature performing alternative to these combustion engines.

Lets evaluate the competing alternatives to combustion engines.

If today, the engineers or the industry talk about alternative propulsion, then you hear what you just mentioned; electric means battery electric or fuel-cell electric, on-board generation. You hear about CNG and LNG, gas engines; compressed natural gas and liquid natural gas. You hear about synthetic fuels. To prioritize this a little bit, CNG and LNG are CO2 reduced but, by far, not CO2 free, so it will be a kind of transition technology. The OEMs who have CNG and LNG engines in their portfolio, they will sell more of those in the next five years, to contribute to the 15% and 30%. But it will not be the solution. It’s a temporary, partial solution to the meeting of the regulation. It’s not a sustainable technology.

Synthetic fuels, based on the knowledge of today, is not a good solution, because to produce the total efficiency in the value chain, to produce synthetic fuels, store synthetic fuels and run the engine with synthetic fuels is too low for it to be of any factor to make sense.

So today, the strong belief is that the solution for future propulsion is electric, either battery electric or fuel cell. The question you raised is, what will be the part of these two basic electric propulsion variants. The answer is quite simple. The short distance and the distribution tasks could be done by pure battery electric vehicles. The long distance must be done by fuel cell. This is because, for physics, you need a certain energy store in your tanks, so to speak, whether it’s the diesel of today or the battery or if it’s hydrogen, converted into electricity. If you want to store the energy which the long-haul trucks need, running 500km a day, or even trucks running 24/7, then there is no fantasy that you can store this energy in a battery, even in the interpolated batteries of the future. You would have to have tons of batteries in the truck and then you cannot load anything actually onto the truck. You will reduce your payload, so it’s not a competitive solution.

Therefore, you have to have a solution which can store the energy and adds less weight to the truck and this is fuel cell. By the way, you can already see this in practice in the bus industry, which is very correlative to the truck industry, in the powertrains. It’s basically the same powertrains. Where you see the most battery electric vehicles today, is in city buses. Nearly every OEM offers, today, electric city buses. Not every OEM is yet in a position to offer serious electric trucks. They are on the way and in three years, this will be the case.

In summary, battery electric, short distance distribution; fuel cell, long distance, long haul.

{audio:0:40:00} These days, Nikola is, let’s say, the shining star and I admire these entrepreneurs and I have a lot of respect for them. It’s a totally open question how they develop. Arrogant guys are saying, it’s all a fantasy, they have not filled up one gap. Then you hear rumors that it’s a little bit fake, in showcases which have no reality behind them. I’m not part of this game. I think they have a 50/50 chance. I say 50/50 and not 30% chance and 70% risk because it comes back to what we discussed before. In Europe, they have a service network. Why? They have partnered with Iveco. In the partnership with Iveco, they can service their electric trucks in Iveco’s service network. So that big roadblock is eliminated. Therefore, I give them a 50/50 chance.

As a buyer of a fleet of heavy duty trucks, if there is something equivalent from an established manufacturer, with a history of excellence in service and performance and reliability, why would I choose Nikola?

Because Nikola may offer earlier, a good technical solution, as compared to those offered by others. You may test a Nikola truck, by buying one out of 10, when you buy 10 trucks, and be prepared to take that risk. Nikola stole an advantage that they made their truck greenfield. They designed it to be electric. Brownfield OEMs are designing their vehicles, their trucks, along the lifecycle, to electric. If you assume the truck lifecycle of 15 years for the chassis and if you have done a new chassis five years ago, you still have this chassis for 10 years. So you design an alternative propulsion system into this chassis. Due to the fact that the truck is so flexible and so packed, you have to make compromises, which are not bad compromises; they are good compromises. But it’s like when you buy a house and you do renovations. Maybe you have to make some compromises, compared to the fact of building a new house.

Therefore, there are some conceptual limitations in the brownfield, established OEMs, temporarily. On the positive side, a truck is not only a propulsion system. Remember reliability. This is the whole system; the chassis, the axles, the cabin, the driver comfort, the security system that we didn’t talk about, because security is no longer an issue. Of course, there are accidents, unfortunately, but with all the lane departure systems, the automatic braking systems and so on, you hardly have accidents with trucks bumping into something in traffic and having accidents.

Let’s say that 60% to 70% of a truck, if you gave the powertrain 30% to 40%, is still what the so-called traditional OEMs – the Volvos, the Daimlers – are what a company like Nikola has to build up. There might be a difference between passenger cars, like Tesla, and Nikola. Nikola is in a B2B business. Remember, in B2B, money is the name of the game; no emotion, no nothing. Tesla has had good sales in California. It was chic, somehow, to buy an electric car. This is not a buy criterion for trucks.

{audio:0:46:34} In summary, Tesla has the advantage of the greenfield approach and no legacy. The traditional OEMs have the advantage of top-notch service networks, which goes straight to their products and which have to be trained for Nikola first, with Iveco in Europe. They also have the advantage of 70% of the truck functionality, which is durability, driver comfort and safety. Also, nowadays, energy and fuel consumption. For example, Mercedes has introduced the MirrorCam, which are mirrors left and right of the cabin, so you have less air resistance, and with that you can save 0.5% around fuel. These are all things which are still part of the advantage of the old system. Remember the flexibility of trucks which we talked about. To get a real market share, you have to have the flexibility in your truck layout. What Nikola might do, is that they could focus on certain segments, but then their market share will be limited, because they cannot afford to do all these variants. This is too cost-intensive for them to do, as a start-up.

How long will it be before the incumbent OEMs have an equivalent solution to Nikola? And once they do, how can Nikola compete with their service networks and the ability of incumbents to customise vehicles?

In answer to your first question, in an average of five or six years. Depending on the lifecycle, which I explained, you might be about to change or you may be at the early stage of the lifecycle and then it will take longer. In answer to your second question, it’s hard for me to say and maybe it sounds a bit arrogant because, as I said, I have a lot of respect for Nikola and I wish them very good luck, because competition is always good, but it will be hard for them. I see one chance; if they cooperate with OEMs, like Iveco, and if you draw the picture that, in the next 20 years, the system changes from today, with the internal combustion engine, ICE, tomorrow I see electric. This means that Iveco customers are also changing from ICE to electric. This means that in the whole scope of Iveco, the market share could shift to Nikola; let’s say to Nikola with Iveco. Now it is about shareholding, because they will market this truck not as Iveco, but they will market it as Nikola. If Iveco has a 7% or 8% market share today, in Europe, ceteris paribus, this shifts, over the next 20 years, to the product branded Nikola, produced by CNH, mother of Iveco, in cooperation with Nikola’s company.

I hope that this works for Nikola and this would give them a perspective in Europe, if all this works out fine of, let’s say, up to 10%. For the rest, it’s twice as hard, because they have to conquer the Volvo, Renault, Scania, MAN, Mercedes customers. Besides all B2B, there is a loyalty because, as I said, the trucks are all on the same level. They are all in the Champions League; in the world class performance Champions League. The European trucks are really the champions, followed by the Japanese, followed by the Americans, followed by the Chinese, followed by the Indian OEMs. There is good loyalty but with the cooperation, I think Nikola has a good chance to survive and get to the magnitude of 10%.

You’re saying that it’s very much a question of their ability to secure partnerships with major incumbents?

Yes. Without partnerships, everything is possible and nothing is impossible. I have seen Chinese, in South Africa, offering super cheap trucks, flooding the market and having 50% market share, having no sales or service network, and as quickly as they appeared, in one or two years, they disappeared in the next one or two years. There is no mercy in this competitive, cost-driven market.

The market is highly consolidated. Volvo Trucks. Mack in the US, Volvo and Renault in Europe, United Diesel in Asia, Eicher in India, Dongfeng partnership in China, this is group number one. Six brands around the world. The second group is Daimler, with Freightliner in the US, Mercedes in America, Mercedes in Europe, Mitsubishi Fuso in Asia, BharatBenz in India, FAW in China; six brands around the world. The third group is TRATON, with Navistar in the US, Scania in Europe, MAN in Europe, VW do Brasil in Latin America, Sinotruk in China, Hino in Japan. Six brands. These are the big three elephants. Then you have PACCAR, with Kenworth, Peterbilt and DAF, a European brand. The American truck is special; it’s a little bit different. It’s not a cab over the engine which has limitations in length. You have Iveco, which is a bit standalone. Now we have Nikola.

Then you have a highly consolidated supporting competitiveness, which is another challenge for Nikola. Again, it’s the advantage of greenfield that maybe they make it. If one of these groups develops something, by innovation, if it’s digital, if it’s propulsion, then can leverage the volume around the world of 500,000 trucks. Nikola up to now, it can leverage zero trucks, just to give you an idea how important it will be for Nikola to partner. I think they have realized and, therefore, they do this. In the US, maybe tomorrow, they are going to do some partnering but, in the US, you have a totally different market structure. You have 26 big fleets, the Penskes, the Ryders, which represent 70% of the market. If you have four or five fleets and they have all their own service stations and if you have one, two, three, four, five fleets on your side, who have their own service network, a truck operator might be able to conquer the market?

This would be my advice to Nikola. Get one, two, say three fleets, big fleets and then you grow to 10% to 15% market share. Maybe there are better alternatives but it’s a good alternative. Iveco has a 10% market share and then, at least, you have a starting point. In Asia, find a partner there. Look at China. China has 50% of the world’s truck market. Every second truck is in China. Not every second heavy-duty truck.

What do you think is going to happen to industry margins over the next 10 years?

The margins will come under even stronger pressure over the next 10 years, I would say, due to several reasons. First of all, you have to invest in new technology. You have to keep the old technology because you cannot afford to lose the performance. You add complexity into the system because you have new elements, new propulsion systems which, at the beginning, is more expensive because of the volume. There are cost pressures which are not that easy to pass on to the customer. As I explained, the customer has to swallow a part of it, but he won’t take the cost of the new propulsion system engine.

Last, but not least, the service of the electric trucks will not be more than ICE trucks, because it’s a much simpler technology. You have the battery; the fuel cells are a little bit more complex, but basically, you have the cells and the tank and you don’t have these hundreds and thousand parts of a combustion engine. The after-treatment is a chemical plan, which is a sensor system circulating exhaust to get all the exhaust emissions.
This is highly complex and the biggest part in the aftersales is the powertrain. In the future, you will not have, in black and white, the engine and the transmission. It’s a very simple transmission. Two thirds of your powertrain is gone and 60% of your aftersales is gone and after sales is profit. Having said all this, this puts a significant pressure on the margins of trucking, over the next 10 years.

Therefore, in Europe with the cycle, if the downcycle now comes on top, I do not know one truck company that, these days, is not in a restructuring phase. You must do this without any compromise to the new technology because you have to have this new technology. It has to be matured, because you have to comply with the emission regulations. If not, you will pay more penalties and your reputation will suffer. And in a tough industry, people will say, oh, this is a bad brand; they are underperforming. It’s a vicious circle.

So we’re going into a pretty tough time for the industry, for the next few years?

Nikola: Disrupting Trucking Industry Incumbents?

Former CEO & Chairman, Daimler Trucks Asia

inpractise.com/articles/trucking-nikola

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Executive Bio

Albert Kirchmann

Former CEO & Chairman, Daimler Trucks Asia

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Nikola: Disrupting Trucking Industry Incumbents?(July 14, 2020)

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