Wednesday, December 20, 2017

Tesla ups the ante once again

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David Nahass David Nahass

Financial Edge, December 2017: Here at the Financial Edge, we always try to stay one step ahead of the news. Last month’s column on locomotive leasing means that an article discussing GE’s sale of its locomotive group will come at another time. Never fear! Interesting issues in rail will always abound.

On Nov. 17, Tesla made a big announcement introducing an electric tractor-trailer truck. The proposed vehicle has a range of 500 miles on a single charge and is equipped with Tesla’s semi-autonomous driving technology. It also has an added technology that would help to facilitate truck platooning—meaning we could see convoys of these vehicles rolling down the interstates.

It is an interesting time in intermodal service on the rails. As often described in this space and elsewhere, intermodal continues to be a huge source of hope and opportunity for railroad growth. However, intermodal expert Larry Gross (President of Gross Transportation Consulting) pointed out in the Journal of Commerce (“A Domestic Container Capacity Crunch Rears its Head,” Nov. 7, 2017) that as a result of decreasing velocity and a difficult hurricane season, among other factors, “domestic container fleet capacity will be exerting a downward effect on domestic intermodal numbers, and some potential volume could be left on the highway.”

Potentially increasing highway loads is not what a railroad market hoping to grow and expand wants to hear (though decreasing velocity is music to the ears of equipment owners).

Which brings us to Elon Musk. There is a lot of salesmanship in Musk’s presentation of the Tesla Semi Truck (which you can see at https://www.youtube.com/watch?v=s_8ToNr6p6o). Tesla hits low-hanging items in the world of diesel trucking by offering better tractive effort (towing strength), faster acceleration (on level road and on grades), individual wheel motors to prevent jackknifing, “lifetime” brake pads and semi-autonomous lane assist driving technology. All the high-tech do-dads are great (and certainly more safety is better any and every day), but what grabs attention is the fuel consumption savings that Tesla is advertising.

Musk goes to great length to discuss the savings of the Tesla Semi vs. $2.50 per gallon price of diesel. The anticipated benefit, “From day one having a Tesla Semi will beat a diesel truck on economics,” does not sound like a bluff. When he moves into his discussion of the platooning capabilities of the Tesla Semi Truck, Musk goes on the offensive against the railroads. He says, “One truck … considered by itself, beats a diesel truck, but what if you have a convoy?” Industry watchers have been tracking truck platooning and its potential impact on rail for some time. It represents the first step along the pathway to autonomous trucking.

On the strength of the convoy capabilities of the Tesla Semi, Musk states that the technology behind creating a convoy of Tesla Semis makes a truck driver “more like a train driver.” Disregarding Musk’s ignorance of locomotive operation, Musk goes on about the economic benefit of convoy trucking, attacking both the railroads and the trucking industry: “It’s not just economic suicide to use one diesel truck, it’s economic suicide for rail. This beats rail. That’s really quite profound.”

Profound indeed! It does not matter if you agree with Musk’s technological boasts. There are two really important takeaways here: One: Rail is being targeted by companies promoting technology in order to take business off the rails. Two: Musk views the rail industry as being vulnerable.

Tesla is not the only producer of an electric semi truck. Other companies are targeting rail business and using platooning (and soon autonomous technology) to take business away from the railroads. However, Tesla may be the only one of those companies getting daily front-page coverage in The Wall Street Journal. (How many knew Cummins unveiled a 100-mile-range electronic powertrain truck this year?) Before shifting to his new roadster, Musk (the man with the ax) closed, “Defeats rail in a convoy scenario. Production begins in 2019. Order now and get the truck in two years.”

Other companies listening to Tesla were Wal-Mart and J.B. Hunt, who announced they placed orders for the Tesla Semi (in very limited quantities). Ryder Systems has also announced its plan to kick the tires. This may be Tesla showmanship, but the target was clear. Railroads need intermodal volume and profit growth. Instead, more challenges seem headed their way. Naysayers can dismiss the technology or economic claims, but if Tesla is ready to go “all in” versus rail, perhaps other companies might quickly find their way to the playing table.

Now, those are some high stakes.

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