What Tesla’s Semi Truck Must Do to Seduce Truckers

 In U.S.
Tesla Inc. is about to introduce its biggest product yet, at least in terms of raw tonnage.

Tesla Chief Executive Elon Musk has promised to unveil an electric semi truck on Thursday that will drive like a sports car and beat its diesel counterpart in a tug of war. “This will blow your mind clear out of your skull and into an alternate dimension,” he wrote on Twitter this week. But none of that really matters.

Unlike the U.S. market for luxury sedans and SUVs, where Tesla has been able to succeed against stylish, high-priced rivals with stylish, high-priced electric vehicles, truck drivers and delivery fleets need to make money with their big rigs. It’s an unglamorous and ultralow-margin business in which one factor matters above all else: cost. And the truck market is huge. In North America alone, the largest heavy duty freight trucks—Class 8 semis—account for about $30 billion in sales each year, or more than 250,000 new trucks, according to industry data tracked by Bloomberg.

Tesla’s foray into commercial trucking is coming at an impossibly tough time for the company. Its first mass-market car, the Model 3, is already months behind schedule, and Tesla is spending a billion dollars a quarter to get things up to speed. Skeptics will see the truck unveiling as a distraction from the company’s biggest existential test yet.

But this isn’t a product launched on a whim. Tesla has been secretively working on this truck for the past two years under the leadership of Jerome Guillen, who ran development of Daimler’s vaunted Freightliner semis before joining Tesla in 2010. He took over the truck program after leading development of the Tesla Model S luxury sedan. (As far back as a year ago, I spoke to a person close to the company who had already been for a ride in one of Guillen’s Tesla Truck prototypes.)

The Tesla Truck is aimed squarely at one of the biggest unaddressed segments of Musk’s self-declared mission “to accelerate the world’s transition to sustainable energy.” Here’s a look at what it would take in terms of cost and performance to shift freight from diesel to electric and shake up the world of trucks.

Taking Diesel Out of Trucks Won’t Be Easy

Electric motors have clear advantages for hauling: instant power, zero tailpipe pollution, supercheap fuel, and fewer moving parts to maintain. In financial terms, these advantages are most easily realized in local delivery trucks, which start and stop frequently and can return to a central hub at night for charging. That’s why the pilot electric trucks to come from more established competitors such as Cummins and Daimler have ranges of 100 to 220 miles.

While Tesla hasn’t disclosed specifications for its upcoming truck, the company appears to be aiming at something bigger: longer ranges and possibly even true long-haul trucking routes. A Reuters report in August that suggested Tesla would offer a truck with a range of 200 to 300 miles, perhaps short of long-haul status, became accepted wisdom among Wall Street analysts. Musk, as he often does, took to Twitter to promise something more: “Semi specs are better than anything I’ve seen reported so far,” he wrote last month.

A silhouette of a truck released by Tesla ahead of Thursday’s event.

Source: Tesla Inc.

Class 8 trucks, which have a loaded weight rating of at least 33,000 pounds, come in a variety of shapes and sizes, from trash trucks and cement mixers to city buses all the way up to tractor-trailers whose drivers spend days and nights living on the road. The most common day cab delivery trucks cost around $100,000, and big rigs with sleeper cabins are about $150,000. While the Tesla Truck will likely address more than one application, the battery size will say a lot about Tesla’s real focus.

Batteries are the single most expensive component of an electric truck, and the battery of a cross-country hauler could cost $100,000 even before they build the truck around it, according to prices tracked by Bloomberg New Energy Finance. The sticker price of any electric truck, regardless of size, is going to be higher than its diesel equivalent because of those costly batteries.

But that upfront investment can be offset by cheaper operating costs. Running a truck on electricity saves tens of thousands in fuel costs as well as savings of roughly 7 cents a mile on lower maintenance costs, according to Bloomberg estimates. Then there’s Tesla’s wild card: Will the truck, expected to roll out by 2020, come with some level of autonomous driving? Tesla has been in talks with California and Nevada agencies about testing semis that can automatically follow a lead vehicle, a technique known as “platooning.” Platooning cuts fuel costs by reducing wind drag. And if the autonomous driving system is good enough to run without a driver, it could also dramatically cut labor expenses, which add about 57 cents for every mile on the road.

For a Tesla Truck to truly begin to take diesel market share, savings will need to offset the higher sticker price in about two years, according to the average estimate of six analysts surveyed by Bloomberg. With a payback period much beyond two years, Tesla would need to establish a track record of reliability and high resale values before any of the major trucking fleets would take a risk on it, said Lee Klaskow, a senior transport analyst at Bloomberg Intelligence.

A Sleeper Truck?

A rough way to gauge Tesla’s initial truck ambitions involves asking a simple question: Would anyone sleep in this truck?

Any range less than 400 miles is likely meant for local and regional deliveries, the sort of thing done by UPS and FedEx or the type of hub-and-spoke model used by giant retailers such as Wal-Mart Stores Inc. to move goods from distribution centers to stores or warehouses. If Tesla wants to go after the longest routes to replace what are known as “over-the-road” trucks, which feature sleeping cabins for multi-day driving stretches, the company will need a range of at least 500 miles—or else a way to charge an electric truck that’s faster than anything in use now. The battery needs for each of these categories would be different, and so would the costs.

Here are two scenarios for how a battery-powered truck would compete with the diesel equivalents for both local deliveries (trucks known as day cabs) and long-distance hauling. These are both ambitious assumptions, suggesting unprecedented range and industry-leading battery prices. But only by offsetting the higher upfront cost can Tesla achieve the magical two-year payback period and convince truckers to ditch diesel.

Bloomberg analysis

Finding the Electric Truck Advantage

Tesla could lower the sticker price.

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