EV credit factory: the perfect startup business to get a foot in the door?

The next best thing compared to legally printing one’s own money may be in electric trucks in the U.S.

As this frequently happens, particularly attractive opportunities can arise when the laws of the market get a little bit “rigged” – even if this is for a good cause!

In the present case, this comes at the intersection, or even better said, at the convergence of 2 phenomena in the commercial vehicles area:

- The strong, although possibly short-lived, existence of incentives for ZEV in certain jurisdictions,

- The longer-lasting, although ultimately of vanishing effect, existence of ZEV minimum sales requirements and ZEV credits in a subset of these jurisdictions.

Regarding minimum sales requirements and existence of ZEV credits, to make things simpler to describe and to illustrate, let’s focus on California, and the case of OEMs with more than the 500 trucks annual sales threshold.

-?Starting 2024, these OEMs’ mix of sales of straight trucks Class 4-8 will need to include at least 9% ZEV; this progressively evolves to 50% by 2030.

-?Regarding tractors Class 7-8, the required proportion of ZEV is 5% in 2024, going onto 30% in 2030. The same rule incidentally applies to Class 2b-3

As you can note, the challenge is much greater for straight trucks than tractors.

The interesting part of the credit mechanism comes into play if or when an OEM does meet the requirements on its own: in such as case, credits can be purchased from whoever is able to generate them, whether a small or large player.

Credits logically parallel the environmental benefits of ZEV, with examples of credit multipliers such as 0.8 x for Class 2b-3, 1.5 x for straight trucks Class 6-7, 2.0 x for straight trucks Class 8, and 2.5 x for tractors Class 7-8.

As you can note, the credit system – very logically – favors Class 8 trucks.

Also, the legislator has been smart enough to watertight and separate credits generated / used for Class 7-8 tractors from credits generated / used for Class 2b-8 straight trucks: in clearer terms, tractor deficits can exclusively be balanced with tractor credits; and likewise, straight truck deficits can only be offset with straight truck credits. A possible justification is that the volume of Heavy Duty tractors is predominant compared to Medium Duty and Light Duty straight trucks, so in order to avoid the temptation of playing with spillover effect, this rule aims at ensuring that each segment is contributing on its own.

Now all this does not ensure that the basic requirements of producing ZEV are met… This is where incentives can help.

At present, the HVIP program in California provides the following incentives on new vehicles;

- Class 4-5: $60,000

- Class 6-7: $85,000

- Class 8: $120,000

Incentives are available while supply lasts, they can run out before the end of the applicable year.

As you can note, the incentives system favors Class 8 trucks (repetition makes perfect…).

Where does this take us? Well, the answer was wired, three home runs and we’re in: besides the intrinsic potential operational merits of a straight truck Class 8 ZEV, in terms of offering and bringing to the market a ZEV, straight Class 8 ZEV may be at present on a road less travel but this road certain appears to be the closest thing to the legendary yellow brick road. And not merely just leading to Emerald City (which obviously is the greenest among the green ones, the crème de la crème of electrolytes), but moreover as a bridge to opportunistically expand or move to other segments when appropriate. There is safety in numbers, and one certainly does not want to remain confined to a niche forever.

Here is the way I would spec the truck to get the most bang out of my bucks.

Keep it minimalistic but functional, IKA-style: target a least-cost Class 8 for Heavy Distribution with a good look

Initial assumption: GVW 34,000 lbs.

Energy consumption based on this weight and utilization <= 1.2 kWh per mile

Range based on this utilization <= 175 miles

Hence battery capacity, assuming depletion 80% to account for aging = 200 x 1.2 / 0.80 = 260 kWh

Battery weight going with LFP 175 Wh / kg to cut cost = 3,250 lbs.

Stretched Class 7 ICE-like truck chassis with van box curb weight = 12,250 lbs.

Becoming Class 8 BEV with curb weight = 12,250 + 3,250 -1,500 = 14,000 lbs.

Marketable payload = 20,000 lbs., anything less would lack credibility

Gross vehicle weight = 14,000 + 20,000 = 34,000 lbs. hence effectively a Class 8, bingo!

Front axle load limit = 14,000 lbs. for good steerability

Rear axle load limit = 20,000 lbs. which is the limit for single axle in most states, including California

Et voilà!

Now just find a catchy name for the startup promoting this truck, preferably with reminiscences of a physicist pioneer in electromagnetism; we must do our best to find the perfect balance between something people can immediately relate to as being an EV, conveys the power of a household name, and is yet subtly distinct enough so it implies a superiority of some sort – and with that package, we are off to a good start.

OK, I hear you (this is my friend Pascal as usual), this is correct we will still need to come up with a good product as well as an innovative commercialization strategy: in this respect, it could be attractive to look at ways to remove the fear-of- the-unknown factor from potential customers with flexible, almost non-committal or possibly better said short-term agreements; just overemphasize the benefits of such flexibility when talking to customers, while downplaying the effective shifting of risks and the volatility that this implies in the IPO prospectus.

So now the whole seems, at least on paper as well as in board-like .pptx, well-designed. One may will still need to do some kitchen table calculations to double check that this can effectively fly and weather turbulences; to be upfront, I have not done such calculations, but believe that those who know me may trust that it should not really be rocket science. A suggested starting point would be to check whether the sphere of influence of ARB-minded states – those included in the renowned MoU, adjusted for potential upcoming additions / exits – is large enough and can snowball enough to support the size of the needed operations. A sub-answer to this could be whether such U.S. operations would have to stand on their own, or could conversely be an add-on bolted to already existing operations somewhere else – in Asia, Europe, etc. – and hence could benefit from marginal costs. If supported from operations in Asia, the volume base would probably have already reached a comfortable scale, and the challenge could reside in considering properly the specifics of the U.S. market, one may remember that the need for chanje has at times been underestimated; while in the case of support coming from Europe, the initial scale may be smaller and really benefit from if not altogether require the U.S. addition, almost illustrating the proverbial case of the tail wagging the dog.

I would suspect that some of the smartest commercial vehicles EV startups have already been counting on this boon to navigate more easily the always very difficult and critical early years of their development, rather than picking seemingly at random as some seem to do a segment because “they believe in it”. Pending deeper analysis, Class 8 straight trucks EV seem in this sense to be the perfect way to get a foot in the door of commercial vehicles EV in the U.S. for a new player: in particular, there is this built-in anti-fragility mechanism linked to the fact that when incentives will vanish to offset some of the near-prototype cost of the vehicles, these startups would still be able to count on some support from the credit system – isn’t it something that Tesla has historically leveraged too?

And, one may wonder: so, all these providential monies that are now promised in the recent Inflation Reduction Act, doesn't it also matter in this analysis? In particular, how about the $10 billion investment tax credit to build clean technology manufacturing?facilities – from electric vehicles to wind turbines and solar panels – provided under the Energy Security and Climate Change Investments of this Inflation Reduction Act of 2022??

Well, for sure it does matter:

-?one hand, this support will effectively go to anybody who will manufacture EV, regardless of the segment - so it has this aspect of "a rising tide lifts all boats" that appears at first to be fairly segment-agnostic,

- but on the other hand, this is a tax credit ... and taxes are only paid so far on profits, hence the interest to select a juicy segment!

- it would in fact be wise that the select a design - equipment, layout, overall sizes - of the "EV credit and tax credit" factory that would be flexible enough so it could, on due time, elegantly (meaning at a minimal cost) accompany and support the transition from a niche product to a mix more appropriate to tend to the opportunities of the moment,

In the end, the whole idea can be boiled down to being selective enough to have the ability to build up that cushion and war chest of high, preserved profit for a period of time long enough - maybe something like 5 years - to not secure the basic financial health of this start up, a noble goal in itself; but much more importantly, to leverage this health "exponentially" through the message that this sends to the market as at this point, we would have already been IPOed: WOW, an EV startup already profitable after a couple of years, this is really a blue elephant or a pink unicorn: let's get an ocean of funds flow effortlessly to it!

The moment of truth will come when all major OEMs will be able to meet on their own the minimum ZEV sales requirements: at that juncture, either these startups – some of them – will have built a sustainable-enough position in the market to secure their future; this will have required tremendous efforts and a healthy dose of inspiration and creativity to leverage the starting point of straight Class 8 EV, a task not for the faint of heart; use of TRIZ – as much and possibly even more for product selection, design of services, and crafting of business model than for technical aspects – more than first principles comes to mind; and also a favorite: constraint theory, and its evaporative clouds. Apply effectuation liberally.

As for the others, if not benefiting from a takeover from a competitor as it could be the case if they possess in earnest a competitive advantage, technical or not, we will just keep the memory of their shiny IPO, and the smell of the dollars gone in CO2-free smoke.

In the end, all will have positively contributed to the decarbonization of the world, a noble endeavor (an epilogue that somehow sums it up follows in case that the present content would appear too light, and short in conveying compelling thoughts in comparison to the expectations that may have been created through the title).

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EPILOGUE

A strategy is what one devises and executes to reach specific objectives.

For a startup, the objective can genuinely be “to make it” in the implementation of a specific idea with a specific purpose; for some, this can fit in the broader context of a vison, and support a mission.

There is conversely, as it has always been, a business more dedicated to the fabrication of startups; in this case, the objective can simply be to take the startup to a point where one can “cash in” – financially, emotionally, intellectually, whatever; effectively bailing out, with much fewer preoccupations for what the future of this startup may hold.

For startups of “the first kind’ – like there are Bessel functions of the first kind, and close encounters of the third kind – the few ideas presented in terms of segment, commercial approach, transition plan, etc. would, I acknowledge it wholeheartedly, make for a fairly lame strategy; at best, together these ideas may make for one of the many legs that make a real strategy. And a strategy does not have to be complicated to be effective, example Tesla’s Master Plan, Part [number written in French]. Well, OK, in this example there was really a vision too.

As for startups of the “second kind”, the same set of ideas just mentioned may conversely suffice. The analogy that could be drawn here would be a little bit like having the ability to choose the most favorable “terrain” for a battle, thus conferring to whatever strategy is used a relatively secondary role in the outcome; an illustration would be to take a downhill battle as opposed to an uphill battle; or just to let a truck running effortlessly on a slope whether motorized or not, compared to conquering Pikes Peak, whether with thst truck fully loaded at 80,000 lbs., or just with the 20,000 lbs. tractor itself.

In the end, the ill-defined intent of this writing was to reveal and shine a few things that one is exposed to when crossing the path of a whole gamut of startups: some thst have great ideas, a few that are just clinging without any substance to fancy buzzwords, and many that are somewhere in-between. As it makes sense, the dispersion is much more limited as we move to established companies. And no, I will not answer the question; “and how about consultants and consulting firms?”!

On our journey, between half- serious and half-joking statements, we went through a limited catalog of elements, trying to illustrate that a strategy is more than a random collage of bits and pieces, even if tagged “thought leadership”; the elements do not have to just fit together – one with the other – but more importantly, they must feed one another. Other elements to consider, for example to enhance robustness whenever this is a critical attribute would involve healthy redundancies, and complete absence of correlation between most elements.

Oh, just one more thing (yes, I did own a Peugeot in an earlier part of my life, but it was a 404, not a 403 convertible): never leave home your “baloney detection kit” as it is called by Sagan. Good luck!