Questions Remain, But This May Now Be The Time For The Tesla Semi (NASDAQ:TSLA)

Recent comments by Elon Musk suggest that Tesla (NASDAQ:TSLA) is now preparing to bring the Semi to market. It may not have been the company's first priority as they ramped up production of the Model 3 and Model Y and worked on new facilities in Shanghai and Berlin. In addition, Tesla has been supply-constrained for battery cells to meet demand for these existing products.

My article last year detailed the niche role the Semi could play in Tesla's line-up of products. Now, the commercial truck market seems to be swinging towards e-trucks over diesel models on environmental and cost grounds. The total market will be huge. Electric cars may be "sexier", and electric buses more directly affecting the consumer, but trucks are a high-volume revenue business.

The biggest growth market for such trucks will be in Asia, but North America will still represent a major business. The big question will be whether Tesla is able to differentiate itself from the entrenched competition. The market will need to know updated range and pricing. The revenue value may not be over-impressive if Tesla focuses only on the North American market. If they were to gain a market for a Semi manufactured in China for the Chinese market, then the Semi could be more than just a niche product.

In general, this is set to be a constant steady growth business over the next decade. The annual market value for new trucks is estimated to be US$67 billion by 2024 by one reckoning or US$160 billion by 2025 according to another report using somewhat different criteria and definitions. Truck sales have been growing steadily for a decade or more. Stronger growth has been concentrated in Asia. For instance, in 2018, for the 6ft Plus Truck size, 59% of demand came from Asia. This was primarily from China and India. The e-truck market will undoubtedly grow at a much faster rate than the market as a whole as e-trucks start to take market share from diesel trucks.

Two of the groups most involved in e-truck development, Daimler (DDAIF) and Volvo (OTCPK:VOLVY), have an advantage of long-term joint ventures in China. Asian truck manufacturers are growing more strongly than Western ones. Leading Asian players include Dongfeng Motor (OTCPK:DNFGF), Isuzu Motors (OTCPK:ISUZF), Hino Motors (OTCPK:HINOF) and the Tata Group (TTM). Asian truck growth is driven by rapid urbanisation and logistical services growth in a generally stronger economic growth area. This is further spurred by increased consumer demand and better road networks.

A Deloitte report some years ago illustrated the trend up to 2024 as illustrated below:

Deloitte.

Asia, and in particular India and China, was where Deloitte expected the growth to materialise, and so it has proved.

The size and promise of the e-truck market specifically were detailed in a McKinsey report a couple of years ago. Another report, by Business Insider, had predicted e-trucks of all shapes and sizes to increase in the USA from 31,000 units in 2018 to 332,000 units by 2026. A recent report by Rhein Associates sees a gradual shift over to e-trucks and hybrids in North America. They would comprise 6.8% of the market by 2030.

The time may now have come for e-trucks for a number of reasons:

Autonomy or semi-autonomy would also mean freight could be moved around the clock when drivers' hours of operation are not an issue. U.S. truck drivers are allowed to work 11 hours out of every 24 according to Federal regulations.

A further plan had been published in June by California's electric utilities. The "West Coast Clean Transit Corridor Initiative Strategy" calls for a charging infrastructure for Class 8 trucks to extend along the whole 1,300 miles corridor from Mexico to Canada. The giant challenge is to be able to provide the tremendous amount of electricity required at each stop.

Another example is that of the EU. They have mandated that heavy duty vehicles must reduce emissions by 30% by 2030. That would equate to 200,000 Class 8 trucks requiring 90,000 charging stations. Diesel trucks are now being subject to new EuroVI regulation which will be hard to comply with and cause increased diesel truck costs.

Tesla is targeting the Class 8 market, representing trucks with over 33,000 lbs gross vehicle weight rating. There are some well-established big players working on such e-trucks. These include Daimler, Volvo and the Sino division of Toyota (TM).

Daimler has been trialing their heavy duty "Freightliner eCascadia" range and their medium duty "eM2 106" range on the USA's roads. The world's largest truck company supplies about 40% of the heavy duty market in the USA, mainly out of its Portland factory. Its two new heavy duty e-trucks are said to have a range of 230 miles and 250 miles. Like Tesla, the company are enthusiastic on ideas of autonomy and bought a majority stake in U.S. company Torc Robotics to this end.

Volvo has an enviable drive towards an all-electric portfolio for their full range of vehicles around the world. They have been working closely with the Californian authorities and could be first out of the starting-gate for quantities on the road in the USA.

Tesla will always be a small player in the truck world compared to these behemoths.

There is also a range of new e-truck companies springing up. Nikola Corp. (NASDAQ:NKLA) is the most high profile of these. Nikola Corp. has, of course, recently been prominently in the news. They are mainly promoting the hydrogen fuel cell side of the coin. It should be emphasised that they are well behind in their original plans for hydrogen fuel cell stations across the USA and for actually having a physical product. They claim to have 14,000 specific orders in hand, and some suggest orders could be worth US$10 billion (but that seems a too high figure to me). They have talked about setting up 700 hydrogen stations across the USA for their 3 hydrogen cell models.

In addition, Nikola will soon be launching its "Badger" consumer truck in competition with Tesla's "Cybertruck". Consumer trucks are not the subject of this article. This company will either become one of the country's great success stories or one of its greatest flops.

Another new player coming onto the market will result from the planned merger and IPO of Hyliion with Tortoise Acquisition Corp. (SHLL). It is likely they will focus on offering a hybrid solution.

Other manufacturers are developing natural gas Class 8 trucks for specialised use in areas such as construction and mining.

It seems unlikely at present that Tesla will manufacture the Semi in either Shanghai or Berlin next year. It seems difficult to be cost competitive to ship Class 8 trucks from North America to Asia or Europe. There are however some orders from Europe in the pending orders list for the Semi. In his comments, Musk confirmed that the Semi powertrain and battery would be manufactured at the Nevada gigafactory. There are though new buildings coming up at the Shanghai complex. (This follows the known new buildings for Model Y manufacturing and the new battery facility). The purpose of the new buildings has not been declared, and there is some speculation that one of these new buildings could be for the Semi.

Tesla's competitors amongst the major truck groups are well-established in China. It would be uncompetitive to ship Class 8 trucks from Nevada to China. It is not known though if Musk wants to take on Asian truck players in their own back-yard. Tesla would be missing out on the world's largest truck market if it is not competitively placed for the Chinese market. FAW Group is the market leader in the country. Figures for March this year showed 113,000 heavy duty trucks sold in that month, down 24% year-on-year because of COVID-19. Last year saw growth in the market with 1.17 million heavy-duty trucks sold nationwide. Growth has been driven by government regulations to restrict older trucks. This is a big potential addressable market for the Tesla Semi.

A McKinsey report saw the Chinese "upper budget" segment as of particular interest and growth potential up to 2030. It reckoned this would need to be addressed by local manufacture rather than imports. It did however caution that profitability in the Chinese market was likely to be lower than profitability in the Western Europe and North American markets.

In addition, China is the market most advanced towards having autonomous trucks operating on a wide basis. This is something in which Tesla wants to be a core player. Tesla could have a partner here with its investor Tencent (OTCPK:TCEHY). This mega player in so many aspects of the Chinese economy is investing heavily in the auto industry. It has a strong division in self-driving algorithms, often developed on its computer simulation base.

As an example, in April Dongfeng Trucks and their partner Inception Technology were awarded Level 3 autonomous vehicle approval for their trucks. This is effectively the level of highest autonomy approval but which still requires human over-ride in the cab. Inception has pledged to set up a nationwide freight network around China using autonomous trucks.

Other recent autonomy developments include a joint venture between Shaanxi Heavy Duty Automobiles and Israeli company Innoviz Technologies to set up 600 port usage trucks using LIDAR systems, and 25 autonomous trucks up and running at Tianjin Port in a joint venture between Chinese companies SINOTRUK (OTCPK:SHKLY) and TrunkTech. Local company Didi Chuxing is another Chinese company at the forefront of autonomous driving in China. Their latest joint venture project with Nvidia (NASDAQ:NVDA) is for taxis in Shanghai.

When one calculates the huge number of battery cells that will be required for Semis, one can question whether Tesla will have the supply capacity and whether such supply capacity would be more profitably directed at cars. 10,000 Semi trucks might comprise 3% market share. Some calculations reckon that if there were orders for 700 Semis, this would represent the same battery requirement as 21,000 cars. Already Tesla has been supply constrained in the provision of cars and energy storage products. Would the battery volume required be more profitably and strategically directed at cars and consumer trucks and energy storage?

In marketing terms, it is arguable whether Tesla is wise to focus just on the biggest class of truck. As my article here on BYD Auto (OTCPK:BYDDF) last year pointed out, there is a huge market for e-trucks of all shapes and sizes. On commercial products such as trucks and buses (of which BYD has supplied over 50,000 so far), BYD will remain by far the market leader over the likes of Tesla and Rivian. BYD has its Class 8 Day Cab in the USA but is more focused on a whole range of smaller and specialist trucks. The company is far and away the world's largest supplier of electric commercial vehicles. This month, it signed a strategic co-operation agreement with Japanese company Hino Motors to develop electronic and hybrid trucks for the Chinese market. Sino has a long history in this market sector. The agreement suggests BYD is quite confident that e-trucks is a growth sector in China.

The Semi is likely to have technological advantages over competitor's offerings due to Tesla's battery lead over rivals. Daimler, which has put a lot of research into their "e-Cascadia" range, has emphasised that battery efficiency is the key issue.

For Tesla to differentiate itself from the competition which will have deeper standing relationships with customers, the company will need to:

Source: InterestingEngineering

80% of freight in the USA is on routes of less than 250 miles, so charging in depots rather than on the road would be widespread. Recent battery developments by Tesla should have increased the range. The market will await news from the company on that.

It may not be coincidental that the news on the Semi coincided with the announcement of a new 3-year battery deal with Panasonic (OTCPK:PCRFY) at the facility where the Semi will be built. Recent reports show that the Nevada factory is undergoing some expansion. This may well be in regard to new plans concerning Panasonic and concerning the Semi.

(Source: Voltly)

There were pictures in February of new Semi models (thought to be the 500 mile variant) winter testing in Canada and the Yukon:

Source: The Tesmanian

They appeared to be of slightly different design than others seen earlier. This is yet more evidence of the Semi programme being some way down the line and continuing to develop.

My article last year detailed the orders that Tesla had in hand and the possible value. To what extent these are all firm orders or only interest to purchase is hard to ascertain exactly. The product was first announced in November 2017. Delays are unlikely to have led to cancelled orders, as other suppliers and end-users are also at testing stages. For instance, Nikola and Daimler are both targeting 2022 as a time to have fleets on the road.

Some of the major players with reasonable quantity orders for the Semi include:

The range of orders is split between end-user manufacturers and haulage logistics companies.

A recent article gave details of what are considered firm orders at present. This calculated there are about 529 firm orders for trucks which would be priced at either US$150,000 or US$180,000. So, that would be worth about US$90 million. That is not a huge amount for a company which generated US$26.4 billion in revenues in the last fiscal year. Other tracking data suggest 658 firm orders worth US$112 million. Musk himself has previously claimed 2,000 orders which would be worth US$340 million. So, we have US$90 million or US$112 million or US$340 million in orders to be supplied, or perhaps some other figure.

Back at the time of the Q4 2019 earnings call, Elon Musk had stated that the Semi had been delayed because the company did not have sufficient battery cell production for the huge quantities the Semi would need.

New battery developments for the company indicate that they may have finally overcome supply constraints by the time the Semi gets supplied next year. This will be the single most important factor in the full launch of the product.

The time may have come now for the Semi. This is for both macro and in-company micro reasons. The trucking industry wants e-trucks, many companies want e-trucks, governments want e-trucks. Tesla may now have the battery capacity and performance to produce the product to scale. The company also need to decide on priorities for its new products centred around the Semi, the Cybertruck and the new Roadster. The company reportedly has 650,000 orders for the Cybertruck in competition with the F150 from Ford (NYSE:F) and the R1T from Rivian. This may make it a higher priority for Tesla's battery capacity and financial capacity than the Semi.

Unlike in cars, Tesla is not the market-leader. It will not be a case of other companies trying to become the so-called "Tesla Killers". Its vertical integration model will give it some advantages. Its updated technical specifications will be important to resolve if it really has significant advantages over the competition. It probably has, but it is not certain.

Before one can come to a definitive conclusion on the Semi, one needs an update on the full technical specs and on battery capacity. The market needs to know range, cost and full details on where the product will be made. It is too early to start whether the Semi will be another bull factor for Tesla and a further reason to buy the stock.

If Tesla can show a leading edge in Class 8 trucks as it has done in saloon cars, it can be a substantial revenue opportunity. However, for this business to be a real game-changer, the company may have to focus on Asia as well as North America.

This article was written by

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