Keep on trucking: An overlooked lever for sustainability
Your friendly neighborhood 18-wheeler may hold the key to battling climate change.
Meet Daimler Trucks
As consumer attention sharpens on inefficient passenger cars as the villain of climate change and Tesla as the hero, we overlook a different culprit: heavy-duty trucks, the vehicle category that constitutes 5% of wheels on the road, but accounts for 20% of vehicle emissions .
Daimler Trucks (“DT”) is establishing itself as an alternative hero in this overlooked category through technical innovation, but the road is long, and more progress is needed, particularly in R&D investments and realizing network efficiencies through technology.
Climate pressures on a complex system
DT is a powerhouse in trucking, supplying 40%+ of heavy-duty trucks in the US . Through a capital-intensive manufacturing process involving 86,000+ global employees, DT transforms raw materials and parts from thousands of suppliers into 500,000+ of the most sophisticated trucks in the world every year . This complex global operating model is vulnerable to climate change effects on a variety of dimensions.
At the simplest level, DT is heavily exposed to regulatory risk resulting from climate change pressures, particularly newly legislated emissions targets in the US. These pressures necessitate changes in R&D and DT’s innovation engine that will strain budgets and margins.
In August 2016, the US EPA passed legislation requiring improvements in fuel efficiency projected to yield 1.1 billion metrics tons in CO2 reduction through 2027, and $230 billion in “net benefits to society” . DT will be forced to incorporate expensive technologies into its trucks to meet these targets, and also to ramp up its innovation capabilities to meet future, more stringent targets. In practice this will mean an expansion of its already robust $1.44 billion R&D budget , additional PP&E investments, and development of new types of human capital and production processes.
Less obvious are the ramifications of exogenous changes such as extreme weather and political instability on the environment in which the DT supply chain operates. Both extreme weather and political instability can be interpreted as additional sources of variability in a complex and lean production system. DT factories and offices are located around the world and in many emerging markets (e.g. Brazil, India) , and the diaspora of their supply chain actors – suppliers, distributors – is even greater. Extreme weather events and political unrest that starve the system of components and introduce variability have the same ramifications in the DT supply chain as they do in a factory line: reduced output and increased unit costs.
Innovating the problem away?
Not one to sit on its laurels, DT is embracing the challenges posed by climate change through R&D investment and technology innovation. In July 2016, DT unveiled “Mercedes-Benz Urban eTruck”, the first working prototype of an all-electric big rig in the world, just one year after developing the “Inspiration” a self-driving Freightliner truck [5,6]. Taken together, these innovations hold the potential to leapfrog existing regulatory requirements and to make trucking networks vastly more efficient, but they are years or decades from commercial viability. In the nearer term, DT regularly develops product improvements that result in efficiency gains such as improved drive trains and body designs. Importantly, while innovation and R&D may be the answer to climate change regulation for DT, that is a direct result of the premium margins they’ve been able to sustain through their success to date, and not every OEM will be able to fund the R&D journey needed to address climate change with technology.
A more generalizable solution to climate-change-induced supply chain challenges is DT’s moves towards reducing coordination costs between supply chain actors, and enforcing sustainable practices in the operations of its partners through “Supplier Sustainability Standards”. A major strategic pillar of DT’s sustainability strategy is to increase local procurement – for example from 60% to 80% local content in Beijing . Operationally, this reduces reliance on single suppliers that can be “taken down” by exogenous events such as extreme weather or political unrest, decreasing the risk in the system.
Hitting the gas pedal
DT is at a crossroads, and to succeed, it needs to accelerate its current technology bets, and expand its role beyond a traditional OEM. While DT’s technical innovations in electric and self-driving trucks are impressive, they are far from commercialization. To embrace a future of zero-emission trucks, DT needs to make a Tesla-Gigafactory-sized bet and invest to commercialize these products. It also needs to think more broadly about how it can make the entire trucking ecosystem more sustainable – for example, by backing innovative startups like FR8 Revolution, which is using algorithms to more effectively load and route trucks, leading to lower costs and emissions for trucking companies .
Climate change looms large, and a truckload of change is needed to address it – but DT is ready for the challenge.
 The New York Times, New Rules Require Heavy Duty Trucks to Reduce Emissions by 25%, August 17, 2016, http://www.nytimes.com/2016/08/17/business/energy-environment/epa-truck-emission-standards.html?_r=0
 Statista, Class 8 Truck Manufacturers Market Share in the United States as of July 2016, https://www.statista.com/statistics/274937/market-share-of-truck-manufacturers-in-the-united-states/
 Daimler, Daimler Trucks at a Glance Edition 2016, March 2016, https://www.daimler.com/documents/company/business-units/daimler-trucks-ataglance-2016-en.pdf
 Environmental Protection Agency, EPA and DOT Finalize Greenhouse Gas and Fuel Efficiency Standards for Heavy Duty Trucks, August 16, 2016, https://www.epa.gov/newsreleases/heavydutyaug162016
 TechCrunch, Mercedes-Benz Shows Off The First Fully Eletric Heavy Urban Transport Truck, July 27, 2016, https://techcrunch.com/2016/07/27/mercedes-benz-shows-off-the-first-fully-electric-heavy-urban-transport-truck/
 Bloomberg Businessweek, Daimler Veers Into Maximum Overdrive, May 14, 2015, http://www.bloomberg.com/news/articles/2015-05-14/daimler-s-freightliner-tests-self-driving-truck-in-nevada
 Daimler, Sustainability Report 2015, https://www.daimler.com/documents/sustainability/other/daimler-sustainability-report-2015.pdf
 The Wall Street Journal, Funding Snapshot: Trucking Software Startup FR8 Revolution Raises $8.5m Series A, http://www.wsj.com/articles/funding-snapshot-trucking-software-startup-fr8-revolution-raises-8-5m-series-a-1464713857
Images courtesy of Mercedes-Benz and FirstPost
Student comments on Keep on trucking: An overlooked lever for sustainability
Vincent – awesome post and thanks for sharing. I agree with you that the only way this company succeeds is if it innovates in a large way to combat future regulation and create a step-function change to zero-emission trucks. I wonder if a solution to consider here is a partnership for DT with Tesla or other EV innovators. As you know, Tesla is operating the Tesla Gigafactory to supply the worldwide production of lithium ion batteries. If DT could partner with Tesla for its R&D and battery technology, I believe it could greatly accelerate its timeline of commercialization of zero-emission trucks and expand its role beyond a traditional OEM.
Thanks for starting the conversation Vincent. At this point, I don’t think a partnership with Tesla or other EV innovators would make much sense for two main reasons. First, Daimler Trucks (“DT”) is leading the pack in “greening” big rigs, and I feel that bringing on other partners would only slow DT down. Second, the engineering and vehicular necessities of hauling 80,000 lbs. of equipment and cargo along highways and city streets is far more demanding than a 4,000-5,000 lbs. passenger vehicle .
I also think an Tesla-Gigafactory-sized bet might miss its mark. The average commercial truck on U.S. roads is growing older, not younger. A recent study shows that the average age of commercial vehicles was 12.5 years in 2007, and was 14.8 years in 2014 . DT should be cautious, focusing on reaching the right solution rather than reaching a solution as soon as possible.
Nevertheless, I do agree with PThatai that DT must continue to focus on “innovat[ing] in a large way”. The Urban eTruck is a perfect focus for the company. At our trucking company, we recently rolled out a fleet of half-natural gas and half-electric urban “last mile” delivery trucks. Focusing on greening smaller trucks with less hauling demands is a good start to fixing this very large problem.
 “How Much Does Model S Weigh – The Definitive Answer”, Forums – Tesla Motors, Inc., available at https://forums.tesla.com/forum/forums/how-much-does-model-s-weigh-definitive-answer
 See, e.g., “Class 8 Commercial Vehicles Continue to Drive Overall U.S. Commercial Vehicle Demand, IHS Says,” available at http://news.ihsmarkit.com/press-release/automotive/class-8-commercial-vehicles-continue-drive-overall-us-commercial-vehicle-de
Vincent – great post! I think that that in addition to innovating on core technology and partnering with technology innovators such as Tesla (as Pallavi recommend in her comment), DT has a huge opportunity here to work within the supply chain to optimize for more logistical efficiency. You did hint towards this when you mentioned DT and its supplier coordination costs.
For example, DT can reach out to its customers to work on increasing full-load shipments, reducing the number of trips, preventing a high number of empty truck returns, and prioritizing in-region suppliers (relates to the local procurement concept in your post). All these operational improvements can be enacted in addition to mainly focusing on cleaner C02 technology. Not to mention, DT can use these operational improvements to become an integrator of the supply chain, versus just one piece of the supply chain. This can improve DT’s overall value proposition and scope of agency within the supply chain. Therefore, focusing on logistical efficiency not only aligns with DT’s sustainability goals, but also can serve as a strong strategic move.
Hi Vincent, most people in the autonomous car industry that I talked to think the first adoption will happen in long-haul trucking. They have yet to identity a model how autonomous driving and electric car can work together in this case. However, there have been many companies working on making specialized e-trucking business such as public bus, UPS delivery trucks and mining trucks. I think this is an industry ready for inflection.
Hi Vincent! Agree that for electric trucks to work out financially, there needs to be a Tesla sized bet to get the economies of scale for their eTruck. I am wondering though if they got enough buy in to make such a hefty CAPEX investment in what I’m sure is a very lean company that is sensitive to economics downturns. Like Pallavi mentioned, a partner may be the best bet for getting over this risk, but less so a supplier partner, but more a buying partner. A big shipping company with green targets to hit on their own could be a perfect partner to help the executive team make big bet investments with the comfort of a buyer on the other end.
Separately, it does seem like a eTruck may be quite a long time to launch – did you know when that might be? In the short term, a better way to hit sustainability targets while reducing costs would be to make those efficient supply chain links. That being said, that is a lot of innovation and change (new truck, new factories, new supply chain process) for a company to go through at once so I hope they have a solid team behind this.
Vincent – thanks for this super interesting post! We often hear how the majority of emissions come from burning fossil fuels, particularly from vehicles, but I think the trucking industry is often overlooked – both as a contributor, but also (as you pointed out) as a key driver of innovation. I thought you brought up some great suggestions in regards to DT accelerating its technology bets and focusing on supply chain optimization. I wonder if DT could also look at potential public/private partnerships to give its R&D development the boost it needs? I assume the public sector (US Postal Service, etc.) also has a sizable fleet of trucks, and would also benefit greatly from these innovations. This may also give DT more leverage to engage with policy makers as new regulations are developed. One question that I often have, when thinking about challenges like the one facing DT, is why does commercialization take so long? Climate change is clearly an urgent challenge…if we have the technology, should we not push for commercialization at a much faster rate? I realize that I’m likely oversimplifying this, but would love to hear your thoughts on why commercialization is such a big challenge!