Match Requirements Are Effectively Crippling Small Business Innovation:
‘The Only Hope of Moving Forward Is More Severe Government Regulations’
Cost-share requirements allowing companies access to advanced vehicle development funding pose a financial burden that make it unlikely for smaller firms to survive, let along bring cleaner and more efficient vehicles to market. So argues advanced heavy duty vehicles veteran Tom Bartley, who has made his opinion known to Southern California’s South Coast Air Quality Management District, which handles much of the state’s funding for low-emission, high-efficiency vehicles, notably from CARB and the CEC: the California Air Resources Board and the California Energy Commission.
“Primarily because of the huge capital investments required, transportation is essentially an oligopoly,” Bartley says. “Except for some of the efforts of Tesla, Daimler, and ZF, there is little or no motivation for the top companies in the industry to change their behavior to meet clean air goals.
“History shows that there would probably be absolutely none without a significant government regulatory push. These are not bad guys,” Barley says: “That is just the way an oligopoly works.”
Here, slightly edited, are Bartley’s comments to SCAQMD.
These comments are specifically aimed at the heavy-duty vehicle projects within the vehicle technology program, but may be applicable to other aspects of the program. In the areas of alternative fuels and lightweight vehicles I have mostly been an observer, while I have actually participated in advanced technology development for heavy-duty vehicles as an employee and consultant for over twelve years.
Pass a New Law
I submit the hypothesis that the CEC grants match and cost-share requirements are straining their recipients and limiting the probability of successful deployment. If the CEC and CARB would like to award profit contracts, but are prevented under current law, I suggest finding a legislative champion to introduce a bill that would allow CA state agencies, like CARB and CEC, to award contracts for R&D or demonstration projects that don’t require cost-sharing and allow profits.
To summarize the points below:
- Because of the oligopoly character of the heavy-duty vehicle transportation market, the primary manufacturers have no economic motivation for expensive advanced technology development or rapid deployment of clean air vehicles.
- Through this Vehicle Technology Program the CEC has used the strategy of investing in advanced technology demonstration projects by small businesses to show the oligopoly what could be done, but the capital intensive and competitive nature of the transportation industry severely limits the application and deployment of these technologies.
- Even with the use of subsidy incentive PULL and regulation penalty PUSH tools, the price differential between the standard diesel trucks and the ZEV trucks makes it impossible to develop a market in near term outside of the traditional oligopoly OEMs.
- Because the R&D demonstrations provided by small businesses are both technically and financially risky, without profits from near term markets, cost-share and matching fund contracts challenge the actual existence of the small businesses and do not serve the CEC strategy of using small businesses to show the major companies what advanced technology can accomplish. NASA didn’t go to the moon with cost-share contracts, nor does the DoD get new weapon systems with cost-share contracts.
- The CEC can potentially speed up the development and deployment of demonstrated technologies by making the contracts’ more attractive. Speeding up the development and increasing the probability of deployment can be a metric used to evaluate each contract using benefit/cost ratios, and be summed to evaluate the whole program.
- History tells us that changing the behavior of the business of transportation OEMs, suppliers, and consumers is challenging and slow. CEC, CARB, the U.S. EPA and DoE need to use all the development, deployment, and PUSH-PULL tools at their disposal. Recent EV truck announcements by Daimler and Tesla are encouraging, but it is very unlikely that production capacity and market acceptance will occur rapidly enough to meet the long term clean air goals.
- Therefore, some out-of-the-box thinking is required for new hope of reducing unwanted emissions, like: having the government specify the type and number of trucks it wants, put it out for bid, and require all new replacement trucks of that type to be purchased or leased from the government until such time as the OEMs can offer these vehicles to the market on their own.
In concept, the measurement of the effectiveness of any of the projects and extend it to the program as a whole is straightforward. Simply take the ultimate value of the deployed technology from the project and multiply by the probability of the actual occurrence; using the deployment year, calculate the present value; and divide by the investment cost to get a benefit/cost score. I suggest that estimating the value of the deployment is the easy part, while projecting the year deployed and the probability of the occurrence is much more difficult.
OEM ‘Oligopoly’ Needs to Change
To increase the probability of deployment, the difficult part, requires a change in behavior by the OEMs, suppliers, and consumers, which, in turn, requires an understanding of the transportation marketplace and what motivates the players in the market.
The transportation industry, in almost all aspects, is an oligopoly that becomes more oligopolistic as the vehicle weight increases. Transportation is one of the most capital intensive business sectors and does not operate in a free and open capital market place.
While Google may list dozens of manufacturers, in practice, there are a few dominating OEMs at the top of every supply chain, e.g., lightweight passenger cars, medium and heavy-duty trucks and buses, fuels, and major component providers. If you Google it you can find a gaggle of other companies, but the point I’m addressing is where are the 100,000 ZEV Class 7, 8 on road and yard tractor trucks going to come from? Only the manufacturers listed in bold below have the capital, facilities and other required resources for this California market at the necessary volumes.
Profit, Profit, Where Is the Profit?
Except for Daimler, Navistar (who virtually wasted a $10 million government grant), and, perhaps, Kalmar, the big manufacturers have not shown any interest in developing a battery electric or other heavy-duty ZEV truck with in-house R&D resources that they are serious about taking to the market.
From Economics we learn that the primary motives of the oligopoly companies is to defend or increase market share and reduce costs for larger profit margins. The top management financial outlook is typically three to five years while the new technology product development cycles is usually longer. New product R&D is, therefore, seen as a cost item reducing profit margins. Taken as a whole, oligopoly companies collaborate and cooperate to maintain barriers to enter the market by smaller companies, and compete for ownership of intellectual property which can be used for preventing the deployment of new technologies as well as advancing it. Perhaps, with exception of the Toyota Prius and the Tesla BEVs, observations of the transportation market support the oligopoly hypothesis. Even the Prius development can be seen as a long term market share response in defense of the threatened hybrid developments of the big three auto manufacturers in the US.
PUSH or PULL?
Looking back at the late 1960s I saw the beginnings of exhaust emission reductions due to the PUSH of CARB and EPA regulations. Changes were made that would not have occurred waiting for the PULL of the oligopolistic marketplace. Over the years the same oligopoly environment motivated a lot of pushback from the OEMs and caused delays in implementing and deploying emission and fuel reduction advancements. The CARB ZEV credits PUSH program can take credit for the battery and plug-in hybrid lightweight EVs available today.
The CEC and CARB Technology Demonstrations developed new advanced technologies for heavy-duty vehicles, but they have a low probability of near term acceptance and major deployment by any of the oligopoly companies at the top. The products are too expensive for effective for market PULL even with substantial government subsidies and too much government PUSH regulation could be damaging to the economy. For the embedded oligopoly companies who are the major OEMs and suppliers, there is simply not enough carrot or stick motivation for them to dramatically change their behavior.
Heavy Vehicles Are Different
There are significant market and technical differences between the passenger car and the medium to heavy-duty vehicles industries. The advanced technologies do not easily scale up from lightweight passenger vehicle to the medium and heavy-duty vehicle. Even the patent office recognizes the intellectual property differences between vehicles above and below 10,000 pounds GVWR. Lightweight private vehicles are paid for with spendable income while the heavier vehicles are paid for out of the cost line affecting profits. Not only does a commercial business have to worry about how much to pay for a vehicle, but also how much the competition has to pay for their vehicles.
Looking at the outlook for Class 7 & 8 heavy-duty battery electric (not hybrid) trucks, I see where Daimler already offers a 120 miles range electric truck with a 43,000 lb load; and Tesla claims to be developing a heavy-duty electric truck and to be looking at a pickup in the class of the Ford F-150.
Navistar, Paccar (Peterbilt and Kenworth), Freightliner, Volvo-Mack, and a few other manufacturers who build specialty vehicles like yard tractors (Kalmar) and construction and service rigs are the small handful of heavy-duty truck producing companies. For the future, some Japanese companies like Hino (owned by Toyota), Isuzu, Mitsubishi, UD Quon, and other international entries are unlikely candidates to add to the USA market list. For off-road equipment, other companies like Caterpillar, John Deere, Komatsu, Volvo, Hitachi, Liebherr, and other international make up the list. Curiously, mining earth moving trucks are so big that they are assembled on site at the mine.
Heavy-duty truck manufacturers, in general, need a production volume of at least 2,000 to 2,500 vehicles per year to break even. Less volume causes the price to increase and the market goes away, catch 22.
I’m sure that six times the amount of batteries per vehicle attracts Tesla, but, except for the driver cab environment, virtually nothing easily scales up from electric passenger vehicles. And even with the Tesla high volume low cost battery pack, the heavy-duty EV truck is likely to cost more than $100,000 more than a standard diesel truck. Unlike the roadster or other Tesla models, it is very doubtful that any of the potential buyers will put out a deposit to reserve one of these trucks. I forecast that they will need at least 24 months to develop a valid production design and at least another 24 months to be able to put it into limited (a few hundred units per year) production. Most likely, similar to how they started with the roadster, Tesla is talking with a major manufacturer, either Navistar or Peterbilt, for the development.
Daimler could start pushing their electric truck if they can get the price down or the subsidies up.
CNG Holds Promise
The other companies will probably take a wait-and-see position to evaluate the market competition. So, optimistically, five years from now the other guys will each start their own development perhaps trying to short cut the process by using TransPower’s (if they’re still around) or someone else’s technology to get a product in production to the market within 10 years from now. However, small companies like TransPower lack too many of the required resources to seriously play in this market. Perhaps there could be enough production capability to put 100,000 of these vehicles on the road within 15 years.
The more promising opportunity in the shorter term is using CNG fuel, especially renewable biofuel, with the latest cleaner CNG engine technology. While not a ZEV vehicle, the initial capital cost is more affordable and the emissions are much less than diesel. However, caution is advised because the primary engine supplier essentially has a monopoly with the economic motivation of aiming for a sales volume that makes the most profit, not necessarily cleanest air.
Ports Hold Promise
Looking at the market, the vast majority of sales will probably come from replacement of old trucks. The typical life of a passenger car is 10 to 20 years, 200,000 to 300,000 miles; transit buses 12 years 500,000 miles, except in Canada it is 20 years 1 million miles; and class 8 trucks more like 1 to 2 million miles,10 to 20 years. For battery electric ZEV Class 7 or 8 trucks with a range of 100 to 150 miles in drayage applications, about 50,000 miles per year, a million miles, 20 years. Because drayage uses many old long haul trucks, this replacement cycle could be a relatively short 5 years. Therefore, somewhere between 5% and 20% of the trucks are replaced per year. For the Ports of LA and Long Beach with an estimated 15,000 of these trucks, the market would be between 750 and 3,000 trucks per year. There had better be many more applications for 150 mile range between recharging to come up with 100,000 trucks to use the developing production capacity.
“The strategy of using small businesses to get to new technology through R&D demonstrations has been a good one, but it is highly improbable that these technologies will ever make it to deployment because of the oligopoly and the capital requirements,” Bartley told F&F. “There is no easy market path for small businesses to get big or even to survive.
“To that end, the cost-share and matching funds contract requirements do a disservice to state programs and severely strain the resources of the small businesses. Without a current market, products, and an R&D budget, these companies have to make a profit to stay in business. Cost-sharing through a contribution of overhead expenses is only a bookkeeping way of slowly going broke.
“NASA would not have gone to the moon with cost-sharing contracts, nor would the Pentagon ever field a new weapons system with cost-sharing contracts,” Bartley says.
“The only hope of moving forward is more severe government regulations, at least similar to the EV credits program, to achieve climate change, clean air, and energy conservation goals.”
Tom Bartley is the principal of San Diego-based
Transportation and Energy Consulting,
619-379-6755; [email protected]