Navigating and Winning the Shift to Vehicle Electrification

Vehicle electrification remains a hot topic.  In his annual letter to stakeholders, BlackRock’s CEO Larry Fink asserted last month:

“The next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators – that help the world decarbonize and make the energy transition affordable for all consumers. With the unprecedented amount of capital looking for new ideas, incumbents need to be clear about their pathway succeeding in a net zero economy. And it’s not just startups that can and will disrupt industries. Bold incumbents can and must do it too. Indeed, many incumbents have an advantage in capital, market knowledge, and technical expertise on the global scale required for the disruption ahead.”

Many incumbent commercial vehicle manufacturers and component suppliers are grappling now with how they can best respond, disrupting their traditional product offers and business models in the pursuit of maintaining market share in this once in a generation market disruption. While the path forward is necessarily different for every company, we find that executives should be focused with their teams on three key areas: customer value creation, product & technology planning and development, and financial performance & potential.

1. Customer Value Creation: Partner with Customers to Develop End-to-End Solutions

Many fleets have made bold sustainability commitments & goals – and at the same time remain committed to improving total cost of ownership, end-customer satisfaction, and their own employees’ satisfaction.  To deliver against all of these goals, much more than the vehicle’s power-pack will have to change.

No one player has “cracked the case” on an end-to-end electrification solution – but those who focus on first becoming experts in their customers’ end-to-end production processes are the likely winners. 

Partnering with customers to understand goals & priorities and to define jointly how their end-to-end processes can evolve for electrified vehicles will be key to achieving market adoption.  For example: How will electricity be generated and transmitted (at the depot, at the jobsite, etc.)?   How will EV drivetrains impact vehicle uptime and duty-cycle performance (and what compromises may need to be made)?  Where will vehicles be charged (at depots, during routes, etc.)?  How will vehicles be repaired & maintained to ensure uptime – and by whom?  

This range of issues spanning customers’ processes end-to-end and how manufacturers & suppliers will address these needs can be tackled with a master plan that clarifies a wide range of issues. . . with flexibility to evolve as more is learned.

2. Product & Technology: Embrace Optionality and Be Willing to Partner in Testing Demonstration Units

With hundreds of millions of dollars already being invested on new electrification technology and product development, it is understandable that CTOs, R&D leaders, and product planners, want to “pick a winner”. 

Distinct vocations with disparate duty-cycle requirements – school & transit buses vs. refuse vehicles vs. mining & construction equipment – will necessitate offering a portfolio of different solutions to address distinct customer segment needs and ensure optionality as demand evolves. 

Managing this complexity requires technologists & product planners to develop roadmaps that integrate the “pull” of the Market (requirements & drivers shared by customers) with the “push” of Technology evolution (capabilities and readiness / feasibility) into a set of Product Plans / Visions and Action Plans that indicate the pace of development and when critical issues will be addressed. 

For example, consider the sequencing of upgrading current vehicle models with conventional powertrains into a fully electrified and optimized vehicle architecture. 

Choosing to develop multiple technologies & products of course has investment implications. Building-in this optionality necessitates embracing customers and ecosystem partners (suppliers, technology affiliates, etc.) in the development process to test and iterate demonstration units & prototypes jointly in concept validation, in each target beachhead market, ahead of advancing into production process and factory validation stage-gates.

3. Financial: Understand How Profit Pools Will Change and Communicate Strategy & Timelines to Temper Investors’ Expectations

Investors recognize the imperative to shift to electrified vehicles over the next decade and they are also beginning to recognize what manufacturers & suppliers have known for years: there will not be a one-to-one conversion of profit pools.

Take, for example, aftermarket parts sales, a high margin annuity that many manufacturers & suppliers rely on to drive earnings performance.  Battery electric drive trains require fewer parts and have far less frequent maintenance & repair needs (no oil & filter changes!) as compared to conventional internal combustion drivetrains. To offset this decline, a whole new portfolio of services can both strengthen your end-customer relationships, complement EV products, and deliver new profitable growth annuities – for example: battery leasing programs, charging infrastructure financing & installation services, maintenance & repair outsourcing services or technician upskilling programs, etc.

The now clear reality of the electrification transition in commercial vehicles over the next decade-plus means all commercial vehicle players must develop a response to retain and expand their financial potential to deliver value to shareholders.  Given the uncertainty, companies need to communicate their electrification strategy and the timing of how it will unfold, rather than surprising the market (and competitors) with a splashy production-ready launch, as has often been the last decade-plus’s paradigm.

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The journey to mass-market EV adoption in commercial vehicle markets is long and far from over. While it comes with many challenges, companies that act quickly and boldly rethink how they can position themselves to deliver customer value will be rewarded with favorable perception amongst investors.