Battery electric vs. fuel cell: truck makers must place their bets

Truck makers must begin to make a choice as to which alternative powertrain solution works for them. By Jörn A. Buss and Romed Kelp of global consultancy Oliver Wyman

While truck manufacturers face many challenges, the most immediate and significant is likely the need to develop an alternative powertrain that will eliminate, or at least significantly reduce, greenhouse-gas (GHG) emissions.

What is much less clear is which technology in particular should substitute internal combustion. The industry may have reached a consensus that the future for passenger cars will be electric—even if the timetable may still be debated—but no such agreement exists on where to go with commercial vehicle powertrains in the mid- and long-term. As a result, even as pressures mount for action, truck makers are more often than not uncertain about how to respond—a reluctance to act they may come to regret.

Over the past year, a slew of new regulatory hurdles for commercial vehicles have been proposed or adopted, calling for drastic cuts in GHG emissions. Among the most notable: in May 2018, the European Commission proposed its first ever carbon-dioxide (CO2) standard for heavy-duty commercial vehicles that would require a 15% reduction from 2019 levels by 2025, and a 30% cut by 2030. California’s Phase 2 GHG regulation is slated to take effect in 2020, with longer term reduction targets in 2024 and 2027 for heavy-duty vehicles. Several major global cities and a few national governments are also moving to enact future bans on diesel vehicles and, in some cases, all fossil fuel vehicles.

Oliver Wyman - slide 1

Given such trends, it’s time for truck and bus makers to become proactive about exploring the wide range of alternative powertrains that are being developed. They need to start placing their bets on which is most likely to provide the best performance and efficiency over the long run.

A diverse array of emissions-reduction strategies

Today any diesel truck emits carbon dioxide (CO2), nitrogen oxide (NOx), and particulate matter. To cut emissions to levels that adhere to standards required by European cities, incremental development of next generation advanced (bio) diesel hybrid engines becomes expensive and ultimately ineffective. In the end, even these non-plugin hybrids are only capable of reducing emissions by an estimated 20% under the most optimistic scenarios.

For this reason, we see only three alternative solutions manufacturers need to consider in order to meet the latest standards on emissions and prepare for a future of even stricter rules. They are:

  • compressed or liquified natural gas-powered vehicles (CNG/LNG)
  • battery electric vehicles (BEVs),
  • fuel cell electric vehicles (FCEVs)

Each of these has respective advantages, drawbacks and variations that historically lean powertrain R&D teams will have to deal with. Still, they represent the most promising mid- and long-term propulsion technologies. Most manufacturers do not have the bandwidth or expertise to cover all three options effectively while still supporting diesel engines, and as such, will have to eventually make a bet.

Batteries are the biggest cost drivers in electric vehicles and, given current technology, they add significant weight to the vehicle, adversely affecting the loading capacity of the truck and its TCO

Given the current state of the technologies, long-term zero emission freight hauling can only be achieved via battery and possibly hydrogen FCEVs. Not surprisingly, nearly all global truck OEMs have announced battery-electric model launches despite high battery cost and weight concerns. The hope is that dynamic wireless charging, currently being tested, will help keep battery weight low and load capacity high. While fuel cell-powered trucks offer longer ranges, the current outlook on their total cost of ownership (TCO), as well as substantial infrastructure requirements, make them a less attractive option.

For the interim period, CNG and LNG gas-powered trucks appear easier to implement but are limited by fuel infrastructure and the inability to comprehensively solve CO2 concerns—unless we talk about Biogas. At least they address part of the emissions question around NOx and particulate matter.

Oliver Wyman - slide 2

Varied uptake

Because there are no common standards on emissions across geographies, truck manufacturers will be forced to take a region-specific approach to the problem, which will result in higher costs and less effective products. Given the current landscape of regulations, infrastructure development, usage profiles, and manufacturers’ strategies, it is reasonable to expect the following regional scenarios to develop as truck makers wait for battery advances and/or a less expensive solution to hydrogen fuel cell infrastructure:

  • in Europe: a significant adoption of CNG and eTrucks for urban distribution and more LNG trucks in the long-haul segment beside a long-haul diesel reliance
  • in the US: a slow adoption of CNG and LNG solutions and some eTruck pilots by larger fleets, but outside of California an ongoing reliance on diesel trucks for both short and long haul
  • in China: a strong push directly to eTrucks and fuel cell technology for all forms of trucking, building on the already successful eBus development

The investment in a multitude of interim and long-term alternative technologies will require significant capital expenditure and skill, and it is likely to diminish the competitive advantages of some manufacturers and disrupt downstream revenue. Consequently, OEMs need to be proactive in adapting their business models and rethinking technology investments, aftersales, and remarketing in relation to the technology that is selected.

Four elements to success

Manufacturers can proactively address these issues in four ways that will handle potential challenges spanning the entire truck lifecycle.

First, rigorous technology investment prioritisation—that takes into account customer acceptance and the need to remain differentiated—will help OEMs manage R&D effectively. This will not just focus on the powertrain, but ideally will involve a ‘powertrain pack modularisation strategy’ with a flexible chassis structure to accept various powertrain solutions over time. This approach will help minimise costs and allow truck makers to remain flexible in order to address changing needs.

Where the principal component is the battery, sales of powertrain-related spare parts will begin to dry up and a major source of today’s aftersales revenue and profits will go with them

Strategic decisions will need to be made on whether to build innovation leadership in specific fields, be a fast follower, or hedge investments and whether to buy technology from the outside. A key enabler of success will be forging partnerships with diverse stakeholders. In addition, lobbying political decision makers regionally and in key global markets for common emission rules would also be advisable to reduce the complexity and cost of investments.

Secondly, OEMs need new sources of downstream revenue once eTrucks become mainstream. Today, conventional powertrains contribute significantly to aftersales and bottom-line profits. With eTrucks, where the principal component is the battery, sales of powertrain-related spare parts will begin to dry up and a major source of today’s aftersales revenue and profits will go with them. What’s more, battery manufacturers may opt to sell directly to truck owners in the aftermarket, eliminating that source of aftersales revenue as well. While a CNG/LNG solution will prolong truck makers’ ability to generate spare parts revenue, it is an interim solution at best, given the emissions problems with natural gas. In the end, a temporary solution is likely to create complexity and stranded assets in the supply chain.

In order to be future-ready, OEMs need to develop new sources of downstream revenue, such as advanced connectivity features, over-the-air updates, uptime offers, and mobility packages built around risk-based pricing and truck-as-a-service offers to balance the erosion in spare parts sales. Efforts to control the battery replacement market are a given, even if the promise of controlling this business would be difficult for OEMs, and likely come with low profit margins.

If their business models are strategically repositioned, the world’s major truck makers will be able to capture a fair share of future profit pools that arise from zero-emissions trucking

The third consideration is around successful remarketing. The used-truck business will require a rethink, particularly around vehicle architecture and modular lifecycle concepts including retrofitting and strategies for revitalising each unique truck technology. For example, used trucks from Europe historically find a second and third life in Eastern Europe, the Middle East, and Africa. With fragmented markets for each alternative solution, remarketing will be limited to markets where technology, emission standards, and infrastructure are supportive.

Ultimately, this will hinder used-vehicle sales abroad and limit residual values. These exports have already seen a decline because of existing technology gaps and the flood of out-of-date EURO 5 vehicles after their ‘ban’ in Europe. Rapid adoption of eTrucks will further aggravate these pressures. As such, remarketing chains must be adapted to local technology opportunities, while considering the expectations and needs of second- and third-life markets.

Oliver Wyman - slide 3

The final strategic necessity is to develop new sources of differentiation. OEMs must fundamentally overhaul their business models, recasting and reconfiguring themselves as providers of integrated transport solutions. In the past, conventional powertrain performance, based on power and fuel efficiency combined with reliability and truck load capacity, has been a key source of competitive advantage and differentiation, as well as a core driver of TCO.

Until now, truck makers have had full control over the powertrain, including strong ties to the short list of truck transmission manufacturers. A switch to eTrucks carries a significant risk of losing that control, with performance and load capacity mainly driven by the battery. Batteries are the biggest cost drivers in electric vehicles and, given current technology, they add significant weight to the vehicle, adversely affecting the loading capacity of the truck and its TCO.

The shift to alternative powertrain technologies will not happen overnight. However, manufacturers must act now

With the battery manufacturing space being dominated by Asian companies—holding over 90% of battery production capacity (excluding Tesla)—OEMs can expect to have little control over this core differentiator. As such, individual OEMs must seek alternatives early on to mitigate that loss, further product commoditisation and associated price pressures. This will require a shift in focus from truck sales and individual aspects of business to integrated service offerings and new mobility solutions.

The shift to alternative powertrain technologies will not happen overnight. However, manufacturers must act now, not only to deal with the associated technical and commercial challenges, but also to proactively turn the disruption into opportunity. If their business models are strategically repositioned, the world’s major truck makers will be able to capture a fair share of future profit pools that arise from zero-emissions trucking.

This article appeared in the Q3 2019 issue of M:bility | Magazine. Follow this link to download the full issue.

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