As Amazon flirts with a $500 billion market cap, letting Jeff Bezos try on the title of world's richest man on for size if only for a few hours, for Amazon's competitors it's "everything must go" day everyday, as the bad news in the retail sector continue to pile up with the latest Fitch report that the default rate for distressed retailers spiked again in July.
According to the rating agency, the trailing 12-month high-yield default rate among U.S. retailers rose to 2.9% in mid-July from 1.8% at the end of June, after J. Crew completed a $566 million distressed-debt exchange. Meanwhile, with the shale sector flooded with Wall Street's easy money, the overall high-yield default rate tumbled to 1.9% in the same period from 2.2% at the end of June as $4.7 billion of defaulted debt - mostly in the energy sector - rolled out of the default universe.
In a note, Fitch levfin sr. director Eric Rosenthal, said that “even with energy prices languishing in the mid $40s, a likely iHeart bankruptcy and retail remaining the sector of concern, the broader default environment remains benign."
He's right: after the energy sector dominated bankruptcies in the first half of 2016, accounting for 21% of Chapter 11 cases, in H1 2017 the worst two sectors for bankruptcies are financials and consumer discretionary.
And if recent trends are an indication, the latter will only get worse as Fitch expects Claire’s, Sears Holdings and Nine West all to default by the end of the year, pushing the default rate to 9%. "The timing on Sears and Claire’s is more uncertain, and our retail forecast would end the year at 5% absent these filings," Rosenthal wrote.
The list includes name brands such as Gymboree, Payless, rue 21 and the Limited, all of which cited the Amazon affect as a contributor to their downfall.
“Many retailers have echoed the familiar cries of those that filed before them—the proliferation of online shopping, rapidly deteriorating brick-and-mortar retail, the rise of fast fashion, hefty lease obligations and shifting consumer preferences,” Reorg First Day said in a midyear review.
While it is far from empirically, and certainly scientifically established, every incremental retail bankruptcy should add approximately $5-10 billion to AMZN's market cap, further cementing Jeff Bezos as the world's richest monopolist man.
Tuesday, July 11, 2017
Prime Day Predictions, 2017
With Amazon Prime Day nearly upon us, we enlisted our panel of five million online shoppers to predict what is in store for Amazon’s shopping holiday.
Prime Day will be Amazon’s biggest day ever
Prime Day 2016 was Amazon’s biggest day ever with Amazon’s US sales volume (including Prime Now) 18 percent higher than the previous Cyber Monday. With Prime Day starting earlier and lasting longer this year, we expect growth of 20 percent over Prime Day 2016.
Past buyers will catch the Prime Day bug
In 2016, growth was principally driven by spend per buyer, which was 14 percent higher than in 2015. We also expect to see growth in spend per person as Amazon and its vendors should be sufficiently prepared for site traffic and for inventory needs on key products. There is still plenty of room for growth with Prime Day buyers as only 16.2 percent of past Amazon buyers bought on Prime Day last year.
Prime Day will drive expansion of key Amazon platforms
Amazon has historically used Prime Day very successfully to drive growth of its consumer platforms. Amazon Prime membership is the best example, of course, but the opportunity is much broader than bringing more Prime members into the fold. Amazon’s Echo, Kindle and Fire TV products accounted for 70 percent of the top 10 selling products. Each of these products, which are marginally profitable for Amazon, become buying platforms for Amazon shoppers for everything from toilet paper to electronic books.
New Amazon platforms are primed for Amazon’s shopping holiday
Prime Now, Amazon’s same day delivery platform, grew nearly twice as fast as Amazon’s overall sales between Prime Day 2015 and 2016. That growth, however, accounted for less than one percent of Amazon sales leaving a lot of room for more. We’re watching to see how many Amazon customers join Amazon’s Spotify competitor, Amazon Music Unlimited, which is hoping to entice users with a subscription of $.99/month for four months. We’re also very curious to see how the newest additions to the Echo family preform, especially the Echo Look, which is available and (at least briefly) in stock.
Shoppers will sleep in this year
In years past, the two biggest sales peaks came in the morning and afternoon of Prime Day. This year we expect the same with the key difference being that sales will start the evening before, which will allow the most ambitious deal seekers a good night’s rest.
Competitors will largely wait for Prime Day to pass
In 2015, many retailers created their own sales on Prime Day in a vain effort to draft off of Amazon’s holiday, but to no avail. In 2016, many Amazon competitors decided to save their sales for another day when there was less attention on Amazon–Amazon captured 75 percent of sales on Prime day compared with 29 percent the rest of the month. As tempting as it is for competitors to try to capitalize when shoppers have their wallet out, we believe that retailers will again save their promotions for another day.
About this data
With a panel of 5 million online shoppers, Slice Intelligence gives the most detailed, and accurate digital commerce data available, and is reported daily.
Slice Intelligence is the only service to measure digital commerce directly from the consumer, across all retailers, at the item level, and over time. Our retailer-independent methodology precisely measures commerce as it happens. By extracting detailed information from hundreds of millions of aggregated and anonymized e-receipts, Slice can map the entire Purchase Graph, connecting each and every consumer to all their purchases.
Slice gets its data from e-receipts – not a browser, app or software installed by the end-user – so its measurement reflects comprehensive shopping behavior across multiple devices, over time which are key in an increasingly omnichannel retail world. Slice Intelligence is the exclusive e-commerce data provider for the NPD’s Checkout Tracking e-commerce service.
"Amazon Assistant": The New Path-to-Purchase Disruptor!
Vice President, Digital Marketing at Behr Process Corporation
This week I was on an ecommerce site and I got a sudden pop up for an Amazon price comparison on the top of the page! I forgot that last year I downloaded the Amazon Assistant tool for Firefox. It never did anything so I forgot I had it. UNTIL NOW! Whatever they did to activate it, suddenly every ecommerce site I go to has pricing comparisons on Amazon of the same item or a like item. They even show the ratings and reviews and offer one click to go to the page. I am an active Prime member and becoming more loyal every day because of my Echo. Now with this assistant, I see sites like Walmart.com, Target.com, Macys.com and others being in more trouble, especially since it is estimated that over 65% of US households are Prime members now (about 80MM). This could be the ultimate disruptor of my path-to-purchase for many cateogries, as it makes it so easy and convenient for me to make smart purchases and give more business to Amazon. If more people learn about it and see that it is available on ALL the major web browsers, it could make a major impact and really hurt the competition. One to watch!
By providing better search results, Netflix estimates that it is avoiding canceled subscriptions that would reduce its revenue by $1B annually.
These and other findings are from the McKinsey Global Institute Study, and discussion paper, Artificial Intelligence, The Next Digital Frontier(80 pp., PDF, free, no opt-in) published last month. McKinsey Global Institute published an article summarizing the findings titled How Artificial Intelligence Can Deliver Real Value To Companies. McKinsey interviewed more than 3,000 senior executives on the use of AI technologies, their companies’ prospects for further deployment, and AI’s impact on markets, governments, and individuals. McKinsey Analytics was also utilized in the development of this study and discussion paper.
Key takeaways from the study include the following:
Tech giants including Baidu and Google spent between $20B to $30B on AI in 2016, with 90% of this spent on R&D and deployment, and 10% on AI acquisitions. The current rate of AI investment is 3X the external investment growth since 2013. McKinsey found that 20% of AI-aware firms are early adopters, concentrated in the high-tech/telecom, automotive/assembly and financial services industries. The graphic below illustrates the trends the study team found during their analysis.
Source: McKinsey Global Institute, Artificial Intelligence, The Next Digital Frontier
AI is turning into a race for patents and intellectual property (IP) among the world’s leading tech companies.McKinsey found that only a small percentage (up to 9%) of Venture Capital (VC), Private Equity (PE), and other external funding. Of all categories that have publically available data, M&A grew the fastest between 2013 And 2016 (85%).The report cites many examples of internal development including Amazon’s investments in robotics and speech recognition, and Salesforce on virtual agents and machine learning. BMW, Tesla, and Toyota lead auto manufacturers in their investments in robotics and machine learning for use in driverless cars. Toyota is planning to invest $1B in establishing a new research institute devoted to AI for robotics and driverless vehicles.
Source: McKinsey Global Institute, Artificial Intelligence, The Next Digital Frontier
McKinsey estimates that total annual external investment in AI was between $8B to $12B in 2016, with machine learning attracting nearly 60% of that investment. Robotics and speech recognition are two of the most popular investment areas. Investors are most favoring machine learning startups due to quickness code-based start-ups have at scaling up to include new features fast. Software-based machine learning startups are preferred over their more cost-intensive machine-based robotics counterparts that often don’t have their software counterparts do. As a result of these factors and more, Corporate M&A is soaring in this area with the Compound Annual Growth Rate (CAGR) reaching approximately 80% from 20-13 to 2016. The following graphic illustrates the distribution of external investments by category from the study.
Source: McKinsey Global Institute, Artificial Intelligence, The Next Digital Frontier
High tech, telecom, and financial services are the leading early adopters of machine learning and AI. These industries are known for their willingness to invest in new technologies to gain competitive and internal process efficiencies. Many startups have also had their start by concentrating on the digital challenges of this industries as well. The MGI Digitization Index is a GDP-weighted average of Europe and the United States. See Appendix B of the study for a full list of metrics and explanation of methodology. McKinsey also created an overall AI index shown in the first column below that compares key performance indicators (KPIs) across assets, usage, and labor where AI could make a contribution. The following is a heat map showing the relative level of AI adoption by industry and key area of asset, usage, and labor category.
Source: McKinsey Global Institute, Artificial Intelligence, The Next Digital Frontier
McKinsey predicts High Tech, Communications, and Financial Services will be the leading industries to adopt AI in the next three years. The competition for patents and intellectual property (IP) in these three industries is accelerating. Devices, products and services available now and on the roadmaps of leading tech companies will over time reveal the level of innovative activity going on in their R&D labs today. In financial services, for example, there are clear benefits from improved accuracy and speed in AI-optimized fraud-detection systems, forecast to be a $3B market in 2020. The following graphic provides an overview of sectors or industries leading in AI addition today and who intend to grow their investments the most in the next three years.
Source: McKinsey Global Institute, Artificial Intelligence, The Next Digital Frontier
Healthcare, financial services, and professional services are seeing the greatest increase in their profit margins as a result of AI adoption. McKinsey found that companies who benefit from senior management support for AI initiatives have invested in infrastructure to support its scale and have clear business goals achieve 3 to 15% percentage point higher profit margin. Of the over 3,000 business leaders who were interviewed as part of the survey, the majority expect margins to increase by up to 5% points in the next year.
Source: McKinsey Global Institute, Artificial Intelligence, The Next Digital Frontier
Amazon has achieved impressive results from its $775 million acquisition of Kiva, a robotics company that automates picking and packing according to the McKinsey study. “Click to ship” cycle time, which ranged from 60 to 75 minutes with humans, fell to 15 minutes with Kiva, while inventory capacity increased by 50%. Operating costs fell an estimated 20%, giving a return of close to 40% on the original investment
Netflix has also achieved impressive results from the algorithm it uses to personalize recommendations to its 100 million subscribers worldwide. Netflix found that customers, on average, give up 90 seconds after searching for a movie. By improving search results, Netflix projects that they have avoided canceled subscriptions that would reduce its revenue by $1B annually.
Tesla says it will show us a world beating semi-truck this September - something the industry believes impossible.
Commercial long haul trucking is all about economics. Lower cost per mile matters, bling doesn't count. Can Tesla pull this off?
Tesla's semi truck will use Model 3 motors suggesting a radical departure in truck design. If successful this could let Tesla win.
Tesla's technology and experience with grid storage can enable a strongly competitive electric truck business model.
If Tesla's truck is a success, very rapid, economics-driven truck industry transition could further stress battery supply chains.
Tesla (NASDAQ:TSLA) tells us that come September, it will unveil a powerful, long-range, all-electric semi truck. Tesla isn't talking about a short range, specialty truck for delivering feathery light croissantes from the bakery to some Silicon Valley Sunday brunch. This Tesla truck is supposed to haul heavy line-haul freight over long distances, across mountain ranges from one end of America to the other. Tesla's electric truck will supposedly compete with the best diesel rigs on the basis of cost in an industry that looks at cost down to fractions of a cent per mile.
Trucking is a highly competitive industry, driven almost entirely by cost, cost, and cost. Even the coffee truckers drink ($0.004/mile) is a consideration. Tesla has sold a lot of electric cars on the basis of high performance and 'bling', but can Tesla engineers sharpen their pencils, put on their green eyeshades, and compete on cost? If Tesla can build a world-beating semi-truck that also delivers lower overall per mile cost, it might disrupt another industry. And, that is something investors should care about.
There is just one thing. Everyone in the industry "knows" that a realistic battery - electric truck isn't possible. Batteries weigh too much. Batteries cost too much. Batteries take too long to recharge. While it might be possible to make a fuel cell - electric truck that could be refueled with hydrogen, or a diesel truck that uses liquefied natural gas, there is absolutely no way ever, ever that a battery truck can do this job.
Seeking Alpha author John Peterson recently explained that an electric semi-truck will necessarily weigh too much, and in any case, the pollution from diesel trucks has been a solved problem for a decade - so why bother. Anton Wahlman suggests Toyota (TM) has beat Tesla to the green truck market with its 200-mile-range fuel cell - electric demonstrator truck. Donn Bailey believesTesla is reaching too far in its quest to change long haul trucking. I have great respect for these authors, and each of them has made thoughtful and reasoned arguments.
Contacts in the industry tell me that several electric truck projects are up against the very problems these authors describe. Nonetheless, I believe Tesla can, and likely will, deliver a world beating, long range, all electric semi truck. Tesla's unique approach to electric propulsion using high speed induction motors and integrated thermal management for batteries, motors, and power electronics, combined with its high volume electric car production and experience in grid storage will enable it to achieve what others believe impossible.
In this article, we will look at three things. First, the technical aspects of long haul trucks will be explored, and a likely Tesla approach that enables longer range, higher performance, and reasonable weight will be shown. Second, operation of electric semi trucks will be explored, and from that, a business model and comparative costs will be developed. Finally, implications of Tesla's entry into the heavy truck market will be analyzed for existing market players, for Tesla's other businesses, and for the increasingly critical battery and battery materials supply chain.
Before we do that, there is something to say. The following presentation of a potential (likely?) Tesla semi truck and operating business model is undertaken to assess whether or not Tesla could surprise technologists and the market with their electric semi truck. The underlying supposition is that being smarter than I am and working harder than I do, Mr. Musk and his team can be expected to do as well, and probably a good deal better than what is presented here. And no, I have no illusion that Tesla engineers will tack this article to their cubicles.
Technology Issues
Heavy Class 8 semi trucks are a well established, commodity product delivered by a mature industry using diesel engine technology. These semi trucks are really more "tractor" than "truck" - in fact semi trucks are often referred to as "tractor-trailers" which is exactly what they are. The tractor is not much more than a huge diesel engine, transmission and drivetrain attached to a fifth-wheel (the thing the trailer hooks on to) and some wheels to let it roll along. The body is just there to keep rain and bird poop off the machinery, give the driver a place to sit and to push air out of the way as the contraption drives down the road.
What is important for our discussion of a likely Tesla electric semi truck (tractor) is that these trucks are crammed with lots of big, heavy machinery. Any solution that doesn't get rid of that machinery will not have the room or the weight carrying capacity for a large battery. And, without a large battery, an all electric truck isn't going very far, down the road or in the marketplace.
Mechanical Arrangement of Diesel and Fuel Cell - Electric Trucks
With both the diesel truck and the fuel cell - electric truck, much of the central frame area gets filled up with heavy machinery - diesel engine, transmission, driveline, differentials, and axles in the case of the diesel and electric motors, gearboxes half-shafts and independent suspension in the fuel cell - electric truck.
The NIKOLA ONE does have room for a 320 kWh battery, good for 100+ miles of electric range, but the truck had to be lengthened to accommodate a fuel cell "range extender" to get useful range. It is not practical to pile batteries higher to fit more within the available frame length because that would make the truck too heavy. These pictures give an idea how much machinery gets loaded into the central frame for a conventional electric or fuel cell - electric truck.
Tesla Technical Advantage
Here is where Tesla's technology advantages and electric car manufacturing and design experience become important. Tesla does three things differently in its electric cars that translate directly to the solution for getting a big battery into a truck without making the truck too big or too heavy.
Tesla uses induction motors rather than permanent magnet motors. Induction motors can operate efficiently at higher speed and over wider range of speeds, reducing weight while increasing power.
Tesla uses integrated thermal management and liquid cooling for its battery, power electronics, motors, and passenger compartment. Liquid cooling and active cooling (i.e. use of refrigeration to reduce coolant temperature below ambient.) allow motors to operate continuously at higher power levels than allowed by other cooling approaches - something that is important for trucks that must pull heavy loads up long mountain grades.
Tesla will be using a new induction motor for its high volume Model 3 electric car. Several of these motors used together will match nicely the power and torque requirements for a long range, line-haul truck. And, Elon Musk has said that is exactly what Tesla will do.
The engineering bottom line from combining high speed induction motors, active liquid cooling, and a volume production motor design is that Tesla will be able to move both motors and gearboxes into the wheel hubs and out of the central frame. This will save weight and open up space for a very large battery and give Tesla's electric truck very long range.
To begin this technical discussion, we need to appreciate the differences between "conventional reduction gears" like Tesla uses in Model S and Model X and "planetary reduction gears" which are regularly used in automatic transmissions and turboprop aircraft engines. I know this is a bit geeky, but bear with me.
Tesla is likely to shift to a planetary reduction gearbox for Model 3. The side load on the high speed motor shaft bearings in the Model S and Model X is likely the significant bearing life limiting factor, and a planetary reduction gear eliminates this side load. A planetary reduction gear will also be a lot smaller and lighter - and cheaper. The drawback is that a planetary gearbox requires integrating design of motor and gears together, making it a more difficult design and development problem. A Model 3 motor and planetary reduction gear might look something like this.
The scaling relationship is that the volume and weight of an induction motor vary as the 3/5ths power of the rated motor torque. For example, this figure compares weight and torque of a series of similar design induction motors to this theoretical 3/5ths power scaling relationship.
Combining the motor and first planetary reduction gear from the Model 3 with a 6:1 planetary hub reduction gear similar to the Arvin-Meritor axle linked above results in a "hub motor" something like this.
In this design, a carbon rotor disk brake is fitted to the intermediate drive shaft, replacing the heavy duty disk or drum brake normally used. This is a practical size and weight-saving approach for a Tesla all electric truck because the motors and battery system are sized for high torque/power and can absorb (regenerate) energy on long, steep downgrades at high speed, leaving the brakes used only for final stopping or emergency situations. So, while the small, high speed disk brake will have much higher wear and shorter pad life than a large "truck size" brake, this is not a problem because these brakes are only rarely used.
Where all this effort to apply Model 3 motors to an in-wheel or "hub motor" design pays off is shown in this sketch.
By combining likely Model 3 motor and gearbox elements with conventional heavy truck hub reduction gears, a small, compact electric driveline results. At the same time, the central spine of the truck is made available to house a very large battery.
The drive approach shown, using a solid axle allows for a particularly simple and robust trailing arm and air-spring suspension similar to that used on many of today's diesel trucks.
Simplicity and robustness of a truck suspension is important because suspensions experience extreme forces when hauling heavy loads and because maintenance requirements for a complex suspension and driveline can drive up per-mile operating cost.
Interestingly, each solid axle - hub motors - disk brake combination shown here weighs somewhat less than a corresponding diesel truck differential, axle, and brake equivalent.
The importance of placing the drive motors and their reduction gears in the wheel hubs is that the center frame of the truck becomes available to hold a really large battery. As illustrated, the frame rails of a conventional truck are replaced by a simple, large cross-section, hollow rectangular beam running the length of the truck. Modules containing Tesla's new 21-70 cells fill the interior of this structural beam.
Each battery module used in the current Model S and Model X 100kWh batteries has a volume envelope (exterior prismatic envelope including mounting lugs) of about 15.4 liters and contains 516 18650 form factor cells, the volume of the cells occupying about 55% to the envelope volume. Using this same 55% volume packaging factor, the box-beam frame as shown holds 76,800 21-70 cells. Taking the density of these 21-70 cells to be the same as Tesla's 18650 cells, each 21-70 cell weighs 67.4 grams and the 76,800 cells together weigh 11,393 pounds (5,178kg). Allowing an additional 25% weight for the module containers, wiring, coolant tubes, etc., total weight of the battery modules, not including the weight of the structural box-beam itself is 14,241 pounds (6,473kg). Yes, the battery is heavy, but as we shall see in a bit, this isn't the last word on battery weight.
The simplicity and packaging efficiency of the Tesla truck is a key element that will make Tesla successful. Comparing the layout of the Tesla truck to that of the NIKOLA ONE shows how much simpler is this approach compared to a traditionally packaged truck with driveline components mounted to the frame.
Specifications and Performance
To understand how well or poorly will the Tesla electric truck compete against current diesel and potential future fuel cell - electric trucks, we must know what its performance is. In calculating the Tesla truck performance, various parameters were used, and these are summarized below.
Parameter
Value
Description
Cell Specific Energy
371 Wh/kg
Energy stored in each kg of cells. Assumes a 40% improvement over 2012 Model S cell architecture and chemistry in 2019. (<5%/yr improvement)
Inverter+Motor Efficiency
85%
Efficiency converting battery energy to mechanical energy at motor output shaft.
Gearbox Ratio
24:1
4:1 x 6:1 planetary reduction gear
Gearbox Efficiency
97%
Power loss in gearbox is 3% of input mechanical power.
Motor Power Limit from max battery power limit (per motor)
Maximum Motor Speed
18,000 RPM
From these parameters, the following truck performance characteristics were derived. In all cases, these characteristics are for a combination of the Truck and a Trailer with GCW (Gross Combination Weight) of either 60,000 pounds or 80,000 pounds, as indicated and operating under no wind, sea level conditions.
Before considering weights and payloads, I need to point out that the battery in the truck need not be a full 2MWh. There are many applications where a smaller battery that reduces the weight of the truck, allowing greater payload in exchange for shorter range is a more economic arrangement. For that reason, two configurations with a 2MWh and a 1MWh battery, respectively, are presented. Aside from different size batteries, both truck configurations are the same. The small 1MWh battery configuration will achieve the acceleration and gradeability performance of the large battery configuration at similar weights.
Note that in the above weight charts, the curb weight does not include the weight of the driver for which an additional 250 pounds is allowed when computing payload.
Operational Considerations
Before we can understand the economics of operating a Tesla electric truck, it is necessary to think about how these trucks will be used. Two things are key to electric truck economics - How frequently and for how long is the truck charging, and how much does that charging cost the trucking company.
This brings us to the concept of "stage length", that is the distance over which an electric truck in line-haul service can regularly and routinely operate. Variations in trailer weights and in weather conditions necessitate practical stage length less than the "ideal" range of the truck to assure successful operation under adverse conditions. As a result, most of the time, trucks arrive at the charging station with substantial remaining charge. Over time, charging stations will proliferate so that truckers will choose where to recharge, more fully depleting the battery and minimizing total number of recharging stops.
In the economic analysis that follows, we use a stage length equal to 75% of the ideal range at 65MPH and 60,000 pounds GCW.
Charging time is critical for electric trucks. An electric truck with a 2MWh battery, charging from a 15A 120V wall socket will require about two months to fully charge. Even if this truck connects to all the charging bays at a three-charger, six-charging slot SuperCharger, it would take 6 hours to recharge. A "LudicrousCharger" of say 3MW (theoretically capable of recharging a Model S100D in 2 minutes, if the battery could withstand that charging rate) would still need 40 minutes to recharge most of a 2MWh truck battery. Operating at 400 Volts, the charging cable would need to carry 7,500 Amperes. A small crane would be needed to lift the plug and charging cable. While such a charging solution could be built, it still requires 40 minutes or more to recharge, and a station able to charge several trucks at once would require a very robust grid connection and incur spectacular demand charges.
Having looked at several recharging schemes, I concluded that battery swapping is a much more attractive approach for a line-haul electric truck. The envisioned Tesla truck with the battery located within the central box-beam frame allows convenient swapping through the front of the truck without requiring specialized machinery operating from beneath the truck, or large clearance space beside the truck - both significant considerations in determining the size and cost of truck recharging (battery swap) stations.
An important advantage of the battery swap approach is that the swap station operator can choose when to recharge in coming batteries and thus capture the lowest time of day electric rates. This is not possible with a "SuperCharger" solution unless large amounts of grid connected storage is used at the charging station.
Battery swapping also supports flexibility to match battery size in the truck to the load and range requirements of particular routes and loads. Swapping enables an interesting business model wherein the truck operator never owns the battery - making these trucks cheap to initially purchase (battery not included). The operator then rents a battery of desired capacity at an hourly rate that reflects the equivalent leasing of the battery, plus a fixed fee each time the battery is swapped for a fully charged battery. Energy cost is included in the fixed "swap fee".
The battery swap station must finance an inventory of batteries ready to be swapped from the swap fee, while the batteries in trucks are financed by the hourly rental fee. How this business model works with respect to the Tesla truck is illustrated in the following sketch. At any time, the truck operator is paying the battery capital cost (through the hourly rental) for only as much battery as needed for the particular route and load.
Interestingly, Tesla is already selling modular grid storage systems that are ideally sized to perform charging of these 1MWh and 2MWh battery packs. PowerPack grid storage technology incorporated into truck battery swap stations would even allow stations to use some of their inventory batteries to provide grid stabilization services, generating substantial additional revenue not included in this model.
Of course, when the economics of this model are assessed, both the truck operator and the swap station have to be profitable or the model is not sustainable. This brings us to costs and the fundamental competitiveness or uncompetitiveness of a Tesla electric truck.
Comparing Costs
The key result from analyzing the Tesla truck, Freightliner truck and NILOLA ONE truck is seen in the following plot of operating cost per mile as a function of utilization. The 1MWh Tesla truck has lower operating cost over the range of utilization rates seen in line-haul trucking. The 2MWh Tesla truck excels at very high utilization rates, and when operated 1,000 miles per day or more (team drivers), is 15 cents a mile cheaper than a diesel truck to own and operate.
The economic case for swap station operations is as compelling as that for the truck itself. The following chart shows the present value of swap station inventory batteries as a function of the number of swaps each inventory battery makes per day. The model accounts for cost of recharging energy, cost of performing the swaps, and overhead. Profits over seven-year period and the assumption that batteries retain 30% of their cost basis are discounted at 8% to compute the net present value per kWh. This calculation shows that Tesla would see approximately 100% gross margin over battery module cost if batteries are "turned" just 1.3 times per day. And, as stated earlier, no allowance is included for revenue from grid connected storage services such as spinning reserve, frequency stabilization, etc.
Just as was the case when estimating performance, assumptions were necessarily made when estimating costs. The following table lists the assumptions used. The intent is that these costs and related assumptions apply to the case of a Tesla truck first delivered in mid 2019, two years from now.
Cost Element
Value
Description
Battery Cost
$100/kWh
Tesla's battery cost at module level
Battery Price
$150/kWh
Used for setting battery hourly rental rates
Lease Rate
4.75%
Rate used for converting truck operator costs to per-mile values
Lease Term
84 months
Lease duration for assessing truck operator capital costs
Lease Residual
30%
End of lease residual value
Federal truck excise tax rate
15%
Applicable to purchase price of truck
Sales tax rate
8%
Applicable to sales price + FET
Applicable to Swap Station
Cost to perform battery swap
$40
Burdened marginal cost of swapping. Same for 1MWh or 2MWh pack
Cost of electricity
$0.035/kWh
Cost of electricity for recharging - assumes off-peak average rate across all stations
Energy to recharge 1MWh / 2MWh pack
960 / 1,920 kWh
Assumes 10% useable capacity remaining at turn-in and 90% charging efficiency
Charge Station Overhead
$1/kWh/month
Overhead is taken as proportional to the amount of batteries in 'inventory'
Discount Rate
8%
Used to discount station profits
Present value breakeven cost
$100/kWh
Cost Swap Station inventory batteries
Truck Operator Ownership, Energy & Maintenance Costs
Similar to diesel. This is a fuel cell system + an electric truck
Tires $0.03/mile
Tesla truck
Price $150,000
Battery NOT included
Fuel: Hourly rental + Swap fee. See figure above.
Dist between swaps: 407mi (1MWh) / 814mi (2MWh)
Maint. $0.07/mile
Simpler than diesel
Tires $0.03/mile
Similar to diesel
Overall Competitiveness
There are four (and perhaps more) areas of cost and performance that matter in line-haul trucks. The following chart compares the Tesla electric truck to both current diesel trucks and potential future fuel cell - electric trucks.
The Tesla electric truck has the lowest cost per mile (operation and ownership) and the lowest acquisition cost. While the Tesla truck likely will fall short in ultimate range, range per charge is sufficient for practical line-haul applications, and fast battery swap recharging largely mitigates any shortcoming. For payload, the Tesla truck is competitive, with the added advantage of being able to tailor the battery size to trade payload against range.
Implications
From the above analysis, it appears Tesla could deliver a semi truck that is competitive both in performance and economically. This does not mean Tesla will necessarily introduce an electric semi truck with the characteristics described. But it does show there is a path by which Tesla could offer a very compelling electric truck. Come September, we will see.
For other companies in the heavy truck business, a compelling Tesla electric truck could be very disruptive. If Tesla achieves a low cost of acquisition and low operating costs as it appears it may be able to, then the highly cost sensitive trucking industry can be expected to switch to Tesla trucks, or to similar offerings from others. How nice Tesla makes the truck look, how quickly the truck accelerates, how fast the truck hauls loads up steep hills will all make news. But how much it costs per mile to own and operate Tesla's truck is what will matter in the end.
The difficulty for established truck makers should Tesla's truck be a success will be similar to the problem legacy ICE car makers are facing with the advent of practical, good performing electric cars. In the case of heavy trucks, however, the shift in market demand - driven largely by economic considerations - could be much more abrupt. This could leave legacy truck makers scrambling for three things: High speed, compact, liquid cooled induction motor drivelines, sufficient cell supply to build lots of trucks with huge batteries, and charging or battery swapping infrastructure to support their electric truck models in service.
All of the things legacy truck makers need to compete in electric line-haul heavy trucks are things Tesla is good at, things where Tesla holds a lead in technology, manufacturing or capacity. And, when it comes to cell supply and electric driveline engineers, carmakers scrambling to enter the electric car arena will be competing for those assets, too.
For Tesla, there will be significant impact from entering the heavy truck business. Tesla building say 10,000 heavy trucks of the kind described would require the equivalent of 60,000 Model 3 motors, inverters and drivelines - something significant but manageable. A much more significant impact would be on the battery side. If the 10,000 Tesla heavy trucks each use the 2MWh battery, and swapping stations average one inventory turn per day, then 4MWh of truck batteries will be needed for each truck (one battery in the truck + one battery in inventory at a swap station). Ten thousand trucks a year on this basis would require 40GWh of additional cell supply. This is more than the entire design capacity of the fully built out Nevada GigaFactory. It is also more cells than Tesla will need to make 500,000 Model 3 cars. No wonder Elon Musk is talking about building a lot more GigaFactories.
Other aspects of Tesla's business that could see impact from a successful entry into heavy trucks include grid storage and SuperChargers. In the operating and business model described, trucks are supported by battery swap stations at trucking "hubs" and along major trucking routes. These swap stations will need charging systems for recharging exchanged batteries, and as pointed out, the inverter/charger equipment Tesla currently uses with their PowerPack product is both nicely sized for charging these big truck batteries, and configured to allow some of the batteries in swap station inventory to be used for grid connected storage applications, increasing station revenue. Standing up swap stations to support 10,000 truck per year production as described above is equivalent to installing 20GWh of grid storage per year! That's a huge increment in Tesla's grid storage business. Of course, if Tesla does stand up a robust heavy truck battery swap infrastructure, there will be the opportunity to sell access to that infrastructure to other truck makers/other trucking operators - though that would require, for logistical reasons, that other truck makers adopt Tesla's physical, electrical, and cooling standards for their batteries.
The bottom line for Tesla is that successful entry to the heavy truck market with an electric truck offers an opportunity to grow the business very significantly. Tesla investors will want to pay close attention in September and assess how well or poorly Tesla's electric truck is likely to compete and whether or not Tesla will disrupt another industry.
The likelihood that Tesla will introduce a compelling heavy truck and start the ball rolling toward widespread use of electric heavy line-haul trucks is one more indicator we are looking at rapidly ramping battery demand. If Tesla initiates disruption of heavy trucks, that is one more huge increment for the battery and battery materials supply chain that is already ramping to support a switch to electric cars and mass deployment of grid storage systems.
I believe there are some interesting opportunities for investors in the battery supply chain. Resource companies in nickel, cobalt, and of course lithium are potential winners. So are some of the specialty companies making things like cell separators and electrolytes. Cell makers are also on the list of companies investors will be looking at. Other analysts will undoubtedly cover the major players and are likely to offer better and deeper understanding of company financials and competitive positions of these companies. But there are also some small players with unusual approaches or technologies that while much riskier offer potentially enormous investor returns.
As the battery and battery materials supply chain stretches with explosively ramping demand, bottlenecks are bound to develop. If investors can find a small company with the solution to a potential battery supply chain bottleneck such a company may be worth a flyer. But let's be perfectly clear, such companies will be very risky investments, and one's chance of losing every dollar invested is probably greater than one's chance of having a 10 bagger or 50 bagger with such a stock. I have recently been looking for these kinds of small companies with potentially silver-bullet solutions and have made small investments in a couple of them. I am going to describe these companies and the rationale that led me to take a flyer on each. I don't think I have necessarily found the "best" companies in the arena, and I'm still looking. Perhaps readers will identify additional candidates in the comments.
The first company that caught my eye is Pure Energy Metals (OTCQB:PEMIF). The company aims to use a solvent extraction process to obtain particularly pure lithium hydroxide from lithium brine deposits without the time, cost and environmental impact associated with the conventional evaporation pond concentration step used by the major lithium brine extraction companies. Pure Energy has secured some lithium claims in Clayton Valley, Nevada adjacent to the existing Albemarle (NYSE:ALB) lithium operation.
Two things about Pure Energy interest me. First, because the process it intends to use can be ramped quickly (no delay of years waiting for brine in evaporation pools to concentrate). So, Pure Energy can (at least in theory) respond more quickly to any choking of lithium supply. Second, because the solvent extraction process produces comparatively pure product, the company may find itself supplying makers of the highest energy density cells, and find its product in particularly high demand.
Pure Energy Metals has a website here with news about the company and links to company financials and other Canadian filings. The Seeking Alpha page for Pure Energy Metals that links from the ticker symbol above also has information on company financials. According to a June 7th filing, the company has exchanged up to 22.5% (warrants fully exercised) of the company for substantial additional lithium claims in Clayton Valley plus an additional $2 million in capital. The company now holds lithium claims essentially boxing-in Albemarle's Clayton Valley lithium deposit.
This strategic move by Pure Energy Metals came at a steep price in terms of dilution and is indicative of one of the risks investors will face should they put money into this stock. Some of the other important risks associated with speculative, micro-cap companies of this kind include becoming illiquid due to disappearing market interest in the company. And, of course, being a comparatively small company ($26.7 million market cap at this writing) with no significant income stream, the company runs a real risk of becoming insolvent.
The second company is Nano One (OTCPK:NNOMF). This company is developing an interesting process for making lithium ion cathode materials. Its process mixes the input materials (for instance cobalt, nickel, aluminum, and lithium in the case of NCA cathode material) in an aqueous solution to form nanoparticles of uniform composition. These nanoparticles are then sintered to produce cathode powder.
There are two advantages to Nano One's process that could respectively open up possible future bottlenecks in supply of lithium hydroxide and potentially enable manufacture of better performing cathode materials and better batteries. The first advantage is that the Nano One process can use either lithium hydroxide or lithium carbonate as feedstock where current processes for nickel containing cathode materials must have lithium hydroxide and cannot use lithium carbonate. This means Nano One's process is a way around supply chain issues that may occur with the refining of lithium carbonate into lithium hydroxide.
The second Nano One process advantage is that it very uniformly distributes cathode constituents within the final cathode powder. This may prove significant as a way to get the highest storage capacity and hence the highest energy density cells. Because the Nano One process can be used for most common lithium cathode materials (NCA, NCM, NMO...), it is likely to be of interest to cathode material and lithium cell manufacturers.
I was able to talk a couple of weeks ago with Dan Blondal, Nano One's CEO and came away with the impression that these are a group of competent folks with a great solution in search of a problem. And, because I believe the right kind of problems may be coming our way in the battery materials supply chain, I think Nano One has a shot to make investors (including me) some money down the line. Here is a talk Dan Blondal gave at the InvestorIntel’s 6th Annual Cleantech & Technology Metals Summit on June 28th.
The Nano One website provides links to its financials and Canadian filings. In addition to the several micro-cap risks discussed with respect to Pure Energy Metals, Nano One has additional risk in that this stock is very thinly traded. Over the last 10 days, average daily volume has been just over 8,000 shares. Should an investor in this company need to exit the stock, it may not be possible to do so over a short time period.
I have no relationship with either Pure Energy Metals or Nano One other than as a (minor) shareholder. I don't think anyone should invest in these companies solely on the basis that I have done so. Nano One in particular is a very small company, is very thinly traded, and investors should appreciate the significant risk associated with this and similar very small public companies.
The reason for presenting my rationale for investing in these small and potentially risky companies is to illustrate the kinds of interesting, though highly speculative opportunities investors may find beyond established players in the battery supply chain. Because the lithium battery supply chain is likely to ramp rapidly over the next few years, I believe an opportunity exists for some (very definitely not all) small, innovative companies in this space.
Simplicity and robustness of a truck suspension is important because suspensions experience extreme forces when hauling heavy loads and because maintenance requirements for a complex suspension and driveline can drive up per-mile operating cost.
