Meet Daimler Trucks
As consumer attention sharpens on inefficient passenger cars as the villain of climate change and Tesla as the hero, we overlook a different culprit: heavy-duty trucks, the vehicle category that constitutes 5% of wheels on the road, but accounts for 20% of vehicle emissions .
Daimler Trucks (“DT”) is establishing itself as an alternative hero in this overlooked category through technical innovation, but the road is long, and more progress is needed, particularly in R&D investments and realizing network efficiencies through technology.
Climate pressures on a complex system
DT is a powerhouse in trucking, supplying 40%+ of heavy-duty trucks in the US . Through a capital-intensive manufacturing process involving 86,000+ global employees, DT transforms raw materials and parts from thousands of suppliers into 500,000+ of the most sophisticated trucks in the world every year . This complex global operating model is vulnerable to climate change effects on a variety of dimensions.
At the simplest level, DT is heavily exposed to regulatory risk resulting from climate change pressures, particularly newly legislated emissions targets in the US. These pressures necessitate changes in R&D and DT’s innovation engine that will strain budgets and margins.
In August 2016, the US EPA passed legislation requiring improvements in fuel efficiency projected to yield 1.1 billion metrics tons in CO2 reduction through 2027, and $230 billion in “net benefits to society” . DT will be forced to incorporate expensive technologies into its trucks to meet these targets, and also to ramp up its innovation capabilities to meet future, more stringent targets. In practice this will mean an expansion of its already robust $1.44 billion R&D budget , additional PP&E investments, and development of new types of human capital and production processes.
Less obvious are the ramifications of exogenous changes such as extreme weather and political instability on the environment in which the DT supply chain operates. Both extreme weather and political instability can be interpreted as additional sources of variability in a complex and lean production system. DT factories and offices are located around the world and in many emerging markets (e.g. Brazil, India) , and the diaspora of their supply chain actors – suppliers, distributors – is even greater. Extreme weather events and political unrest that starve the system of components and introduce variability have the same ramifications in the DT supply chain as they do in a factory line: reduced output and increased unit costs.
Innovating the problem away?
Not one to sit on its laurels, DT is embracing the challenges posed by climate change through R&D investment and technology innovation. In July 2016, DT unveiled “Mercedes-Benz Urban eTruck”, the first working prototype of an all-electric big rig in the world, just one year after developing the “Inspiration” a self-driving Freightliner truck [5,6]. Taken together, these innovations hold the potential to leapfrog existing regulatory requirements and to make trucking networks vastly more efficient, but they are years or decades from commercial viability. In the nearer term, DT regularly develops product improvements that result in efficiency gains such as improved drive trains and body designs. Importantly, while innovation and R&D may be the answer to climate change regulation for DT, that is a direct result of the premium margins they’ve been able to sustain through their success to date, and not every OEM will be able to fund the R&D journey needed to address climate change with technology.
A more generalizable solution to climate-change-induced supply chain challenges is DT’s moves towards reducing coordination costs between supply chain actors, and enforcing sustainable practices in the operations of its partners through “Supplier Sustainability Standards”. A major strategic pillar of DT’s sustainability strategy is to increase local procurement – for example from 60% to 80% local content in Beijing . Operationally, this reduces reliance on single suppliers that can be “taken down” by exogenous events such as extreme weather or political unrest, decreasing the risk in the system.
Hitting the gas pedal
DT is at a crossroads, and to succeed, it needs to accelerate its current technology bets, and expand its role beyond a traditional OEM. While DT’s technical innovations in electric and self-driving trucks are impressive, they are far from commercialization. To embrace a future of zero-emission trucks, DT needs to make a Tesla-Gigafactory-sized bet and invest to commercialize these products. It also needs to think more broadly about how it can make the entire trucking ecosystem more sustainable – for example, by backing innovative startups like FR8 Revolution, which is using algorithms to more effectively load and route trucks, leading to lower costs and emissions for trucking companies .
Climate change looms large, and a truckload of change is needed to address it – but DT is ready for the challenge.
 The New York Times, New Rules Require Heavy Duty Trucks to Reduce Emissions by 25%, August 17, 2016, http://www.nytimes.com/2016/08/17/business/energy-environment/epa-truck-emission-standards.html?_r=0
 Statista, Class 8 Truck Manufacturers Market Share in the United States as of July 2016, https://www.statista.com/statistics/274937/market-share-of-truck-manufacturers-in-the-united-states/
 Daimler, Daimler Trucks at a Glance Edition 2016, March 2016, https://www.daimler.com/documents/company/business-units/daimler-trucks-ataglance-2016-en.pdf
 Environmental Protection Agency, EPA and DOT Finalize Greenhouse Gas and Fuel Efficiency Standards for Heavy Duty Trucks, August 16, 2016, https://www.epa.gov/newsreleases/heavydutyaug162016
 TechCrunch, Mercedes-Benz Shows Off The First Fully Eletric Heavy Urban Transport Truck, July 27, 2016, https://techcrunch.com/2016/07/27/mercedes-benz-shows-off-the-first-fully-electric-heavy-urban-transport-truck/
 Bloomberg Businessweek, Daimler Veers Into Maximum Overdrive, May 14, 2015, http://www.bloomberg.com/news/articles/2015-05-14/daimler-s-freightliner-tests-self-driving-truck-in-nevada
 Daimler, Sustainability Report 2015, https://www.daimler.com/documents/sustainability/other/daimler-sustainability-report-2015.pdf
 The Wall Street Journal, Funding Snapshot: Trucking Software Startup FR8 Revolution Raises $8.5m Series A, http://www.wsj.com/articles/funding-snapshot-trucking-software-startup-fr8-revolution-raises-8-5m-series-a-1464713857
Images courtesy of Mercedes-Benz and FirstPost