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The business case of Tesla’s Heavy Commercial Vehicles (HCV)

Discussion in 'TSLA Investor Discussions' started by Cankooo1, Aug 3, 2014.

  1. Cankooo1

    Cankooo1 Member

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    I have decided to post this in the investor section not in the future cars section because I believe it could be much more significant from an investors’ perspective.

    A few important considerations:
    Gigafactory
    Consider that after 2018 Tesla will have a Gigafactory up and running with a viable reduced cost of the batteries and potentially increased energy density and enormous battery output.
    The superchargers
    The second important assumption in my reasoning is that Tesla is continuing to expand the Supercharging stations worldwide and by 2020 they will become totally able to support large fleets. Also consider the nature of these segments where the heavy trucks are not allowed to enter most parts of the cities and are transporting goods mainly via highways and motorways exactly where Tesla superchargers are located. Additionally the drivers are obligated via regulations to take breaks and they have limits of their driving time which is also suitable for supercharging.

    Market summary
    Industry revenue is $242bn from 30 million vehicles annually
    1.png
    2.png

    Tesla advantages
    -Environmental regulations- OEMs are faced with constantly increasing environment standards and regulations.
    3.png

    Pressure on total cost of ownership
    4.png

    Fuel costs dominate the total cost of ownership in mature markets.
    The commercial vehicle business has always been characterized by an emphasis on
    total cost of ownership (TCO). As an investment asset, the acquisition and operating
    costs of a commercial vehicle naturally have a direct influence on the profit margins
    of truck operators. The typical TCO in a mature commercial vehicle market differs
    substantially from an emerging market. In the emerging markets of Asia in particular,
    the acquisition price still plays a dominant role in the TCO over the lifetime of a truck.
    Over the medium to long term, however, it is likely that the TCO model in emerging
    markets will develop along similar lines to mature markets, particularly with regard to
    rising fuel costs, as well as growing demand for service and repair.
    The reduction of the TCO by commercial vehicle manufacturers is crucial since it is
    virtually impossible for haulers to pass a rising TCO on to freight prices due to the
    intense competitive pressure. The largest TCO component that can be influenced in
    mature markets such as Western Europe is fuel costs (30 percent from the overall TCO).
    However, the reduction of TCO from the manufacturer’s side is not easy, as the most
    influential components of TCO are to do with the regulatory environment (ecological
    requirements, taxes and tolls), particularly in mature markets and increasingly in
    emerging markets as well. It is likely that these external factors will continue to grow
    in importance, weakening the ability of manufacturers to influence the TCO for the
    benefit of their customers.


    Customers’ perspective
    Customers are typically all-size businesses. From my professional contacts I can say that the profit margins in logistics are usually low in the range of 10-12% . The common practice in the field is purchasing new trucks using leasing and different financial services so it does not require a big upfront investment to replace old trucks with increasing depreciation costs and high fuel consumption. Old trucks are typically sold to smaller companies which provides operational cash for the company.
    5.png
    Replacing old fleet is an occasional process for businesses. It makes economic sense and it is naturally needed every 4-5 years.

    Disruptive Tesla effect
    Let’s assume that Tesla enters the HCV market with an Electric Heavy Commercial Vehicle on average market prices, combined with a Supercharging infrastructure where charging is not free but 50% cheaper than fuel costs (for example), fulfilling all of the environmental requirements at once.
    For the particular example of a European company with 30% fuel costs and profit margins of 12% this cost reduction will translate in doubling profit margins to 25-27%. This could be a dramatic improvement with almost no upfront cost using standard market practices of replacing old vehicles. Long term effect could be even more significant because inevitably some companies will translate partially the savings to the end price so it will provide a price advantage for their customers. Once this process starts to accelerate all other companies will have to shift to electric HCV otherwise they will not be competitive. I am excluding possible incentives and maintenance cost reductions which are highly possible.

    The Business case for Tesla
    If this business case is executed by Tesla Motors it will provide 3 main streams of revenue:
    •Entering a new vehicle segment
    •After sale market: maintenance, fleet management systems, telematics totally required from each HCV owner
    6.png

    Reselling the electricity from utilities trough superchargers to end customers which represents a constant revenue stream from each unit sold as long as it is operational.

    Typically each HCV in logistics travels from 7000 miles to 20 000 miles per month (depending on the number of drivers). Anyway, I strongly believe that this case will be particularly successful in Europe where fuel prices are really high (EU average $7,60 per gallon where up to 50% are taxes) and electricity is relatively cheap $0,2 per KW/h.

    An interesting reference here are the stationary storage packs. JB Straubel said that 5 packs with a total of 2 megawatt-hour are managing 10 percent of peak demand in the Fremont Tesla factory.
    7.png
    8.png

    I am making a totally speculative calculation. This may be too far from the optimal numbers but to have some starting point of my illustrational calculation I will assume that Tesla could use one 400KW battery pack in their Electric HCV with a maximum range of 1000 km (621 miles) - I believe this is a conservative number considering the technological improvement in energy density and scaled battery packs. With $0,2 per KWh the price in Europe for 1000km with potential Tesla E-HCV will be $80.

    To compare: the last Mercedes Actros from 2014 (one of the most efficient HCV’s on the market) has a consumption of 25,9 liters per 100 km (I believe 9 miles per gallon), according to Mercedes in perfect conditions. This consumption translates into a cost of approximately $500 per 1000 km in Europe (621 miles) with an average monthly mileage of 10 000 km (again a strongly conservative number) which translates into a $5 000 monthly cost -> $55 000 annual fuel costs, because each vehicle is only on the road for 11 out of 12 months (the remaining month is used for maintenance and inspections).

    If we follow the previous case with a 50% cost reduction for Electric HCV’s in European logistic companies (which in my opinion is a totally sufficient advantage for companies to switch to electricity) in this projection Tesla can charge $250 per 400KW of supercharging or even less. Assuming again 10 000 km per month per E-HCV, Tesla will get an annual average revenue of $27 500 only from supercharging each E-HCV sold.

    I will be happy to see other calculations from different geographical regions.
    My conclusion is that if Tesla keeps on its vision for transition to sustainable transportation they will have to produce E-HCV’s not because they could realize greater profits but because the current industry is among the main reasons for pollution.

    Tesla may also have a different approach, such as signing deal with Mercedes for example, since they are currently partners. After all, MB have 280 000 annual HCV sales.

    My professional interest and experience is based on fleet management solutions for logistic companies.
     
  2. pz1975

    pz1975 Member

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    Very nice case presentation. I agree this is a huge potential market for Tesla. One other big advantage is with more and more laws against diesel trucks idling (especially for trucks carrying frozen items this is important as the idling is necessary to keep things cold), a BEV truck would eliminate that as an issue altogether since the battery alone could lower the freezing/refrigeration onboard.
     
  3. DaveT

    DaveT Searcher of green pastures

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    Thanks for this post and background on the HCV market. It definitely looks like a decently compelling market to enter. However, the big question for Tesla is focus. Elon has mentioned that he doesn't want many vehicles in the Tesla lineup compared to other manufacturers so that Tesla can focus on less vehicles and continually make them better. By entering the HCV market, this diverts attention/focus. However, at some point Tesla could be ready to make the move into this market if they feel like they have enough focus/attention to spare and if they feel like they can make a significant impact in the HCV market.

    Another angle, is when you combine autopilot with an e-HCV then you've got a super-compelling transport vehicle that significantly is better than what's out there. Not only are fuel costs much cheaper with electricity, but also the driving experience will be much more pleasant as the driver can rely on autopilot for almost the entire trip. Considering Tesla is the leader in the EV space and aspires to be the leader in autopilot technology, then it's not too hard to see a Tesla e-HCV with autopilot and a network of HCV Superchargers. But again, my big/only reservation is focus.

    Tesla seems to be focused on Gen3, and Gen3 is going to require a ton of resources and they will be busy with new Superchargers and service centers to support the massive Gen3 rollout. If anything, it doesn't look likely that Tesla would entertain entering the HCV market until after 2020, at least.

    I'd be interested in finding out what % of pollution caused by vehicles is the result of HCVs? The higher the percentage, the more urgency/motivation Tesla has to enter that market.
     
  4. adiggs

    adiggs Active Member

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    I don't know one way or the other - I'm just asking a question to see if anybody actually knows. This particular assumption is a particularly large assumption and is foundational to the rest of the discussion. As a point of comparison, a ~80 kWh battery pack in the Model S is good for ~40% of the 621 miles (1000 km) of your assumption (.4 of 621 = ~250 miles). It gets us into a ballpark. One way of viewing the assumption you're making is that 5 Model S battery packs will get you 2.5x as far. So mileage / efficiency gets cut by half.

    My immediate thought is that rather than sounding conservative, this sounds awfully aggressive.

    Brief bit of research: This link (What is typical fuel mileage for older diesel semi tractor-trailer rigs on the highway) has a number of responses, with mileage between 4-8 mpg typically, with (as you said) especially well setup trucks getting to 9 or 10 mpg. These trucks typically carry 200 gallons of fuel (2x100 gal tank), so this is an important point of departure (that 400 kWh battery will have the energy equivalent of ~12 gallons of gas).

    Presumably that 400 kWh battery pack won't have an issue delivering electricity to 1 or more electric motors, and those motors will have plenty of torque (and hopefully some regen breaking) so that the rest of the electric driving experience we're accustomed to will work. I don't know if a transmission gets involved, or if the electric motor(s) would still have the torque to move the truck well using a single gear (nice bit of simplification though if there's no need for a transmission).

    At the core of your assumption is an assumption about mpge for one of these big rigs. Instead of 4-8, or upwards of 10 mpge (Miles per gallon gasoline equivalent - Wikipedia, the free encyclopedia), the electric truck will be getting 52 mpge (621 miles / (400 kWh / 33.7 kWh in a gallon of gas)). No mention on that website how much energy there is in a gallon of diesel, so we're going with a working assumption that a gallon of diesel and a gallon of gas have the same 33.7 kWh of energy.

    Now that I write this all out, and using only what I know about personal automobiles, the 52 mpge assumption is at least not outrageous. We see personal autos going from ~15-20 mpg to 89 mpge in the Model S. Then again, that's comparing a large luxury sedan transition from gas to electric. The 9-10 mpg tractor-trailers are tuned for fuel efficiency. That might means we'd be closer to 2-3x the efficiency as electric (40s or 50's fuel efficient car to a Leaf or Roadster). That'd still get you to ~25 or 30 mpge, but now you're driving a truck with a ~300 mile range and a 3 hour recharge using today's technology.


    But all of this is just supposition, guesswork, and assumptions on my part. I also appreciate you taking the time to post the details. Whether it happens sooner or later, I'm looking forward to seeing more and more forms of transportation and other uses of hydrocarbons be supplanted by batteries and electricity.

    The thing I'm personally looking forward to is the small farm tractor. It's at least a gadget where heavy is good, so hauling around a ~9 ton battery pack to drive the tracter means you don't need to add other sources of weight :) Whether that's enough for all day plowing and stuff, I sort of doubt.
     
  5. Clprenz

    Clprenz Member

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    I believe partnering with Mercedes to provide 60 or 85Kwh packs to make a hybrid is a better idea. Simply something like a Volt set-up, with a say V6 generator. I think if you put two Tesla motors, and a pack. you could boat MPG to say 20-30.
    Thoughts?
    I think for a large truck to be completely electric it would need almost a 1/2 a megawatt battery. AND density would probably need to be about 3 times more dense- weight is a big thing for these Semi's. My guess is that the tech wouldn't be there for Semi's till about 2025-2030, hybrids should happen now.
     
  6. NigelM

    NigelM Recovering Member

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    Sorry, the case falls apart right there. The current supercharger network is located in car parking areas almost exclusively inaccessible to large trucks. Tesla would need to build a whole second network of super chargers at truck stops to make your concept work; and unlike the car network the truck charging network would realistically have to be in place before a single truck could be sold.
     
  7. DaveT

    DaveT Searcher of green pastures

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    If Tesla deems the market opportunity large enough then they could roll out a dedicated set of Superchargers for HCVs. They could start with the most trafficked routes first and sell HCVs for those routes initially, and then expand from there. It's obviously a major investment but definitely could be worth it. IMO it's about timing and if/when Tesla feels like it's worth it for them to pursue that market. But again, I don't see it happening in the near future as Tesla is focused on Gen3 and a HCV would divert precious/limited focus/energy.

    - - - Updated - - -

    Can you clarify the market size for HCVs? You say that it's 30 million vehicles, which seems too high since the graph posted shows DongFeng with 10% of the market and selling 300k vehicles, which implies a 3 million HCV market.
     
  8. DaveT

    DaveT Searcher of green pastures

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    Here's a slide saying that the medium and heavy duty truck market is about 3M vehicles a year. China is by far the largest market.

    rb_1260691.jpg
     
  9. DaveT

    DaveT Searcher of green pastures

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    So I haven't done much research on this, but it's intriguing to me.

    1. Elon has said that every form of transport (with the exception of rockets) will go fully electric.
    2. Tesla currently has a competitive advantage in electric powertrain technology and batteries, and thus can pretty much lead any transport market it chooses to enter.
    3. Tesla has limited focus/energy and thus will choose to enter markets wisely (ie., large markets, high margin, big impact).

    Regarding the HCV market:
    1. It appears that semi trucks typically sell new for $100-150k (rough range).
    2. If Tesla can get cell costs to $100/kWh (within 8-9 years?), then a 500kWh battery pack would cost $50,000 in terms of cell cost (pack cost would add more).
    3. Tesla could roll out a HCV-dedicated network of Superchargers and charge access for them. This would provide a very interesting ongoing stream of revenue that would be very high margin since the Superchargers would use solar (but also would need extensive battery storage at each station). This ongoing stream of revenue could be significant and would be very compelling to investors.
    4. Perhaps Tesla could get started on this when cell costs reach $150/kWh or lower, so that a 500kWh battery pack would cost $75,000 in cell costs. Cost of truck might be $150-200k. But savings would be realized for customers via cheaper fuel costs via HCV-dedicated Supercharger network.
    5. Tesla could start in one region of the U.S. (or Europe, or China) to provide a limited HCV-dedicated Supercharger network and then expand from there.

    Overall, if Tesla can sell eventually 300,000 HCVs a year at $150,000 then that's $45 billion in revenue. If they can make a 12% profit margin, then that's $5.4 billion in profit. Give a 10x multiple and you add at least $54 billion in market cap to Tesla. Not bad. And this is not including the ongoing streaming revenue from the HCV Supercharger stations, which could result in significant revenue and very high margins. I don't have any figures on this, but it would add billions in market cap to Tesla as well.

    Overall the HCV market for Tesla appears intriguing because it seems like the market is large enough for Tesla to make some decent revenue/profit. In other words, it could be worth the effort. Further, there seems to be a case where Tesla could charge for HCV-dedicated Supercharger access and this could become a compelling revenue stream. I wouldn't be surprised if the HCV Supercharger profit would/could be larger than the profit they would make on the HCV vehicles themselves.
     
  10. bsd

    bsd Member

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    I read somewhere that much truck transport happens within a city. 300 miles / 480 km is plenty for this type of service. 3 hours overnight charging, or creating a custom supercharger in an industrial area wouldn't be out of line.

    Long haul should really be done by rail. The numbers I remember reading (but can't remember the source) said rail was ~3x more efficient.
     
  11. Yggdrasill

    Yggdrasill Active Member

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    I think Tesla should go into HCV if no one else does it. But I think using superchargers is problematic. Say you need to recharge 500 kWh in 20 minutes. That's 1.5 MW or about three times as much as an 8 bay SC draws.

    I think it would be better to have battery swapping for the HCV. This cuts down on labour costs related to waiting for a charge, and a company wouldn't care too much about which battery is in which truck. They might typically own 25 HCV and these vehicles would share something like 40 battery packs. As long as all the TCO calculations are favourable, it shouldn't be too difficult to get companies on board.

    I have done some calculations using costs here in Norway, and there should be sufficient savings on fuel costs to cover battery swapping stations, chargers and a good amount of battery packs.
     
  12. Cankooo1

    Cankooo1 Member

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    My mistake, I was using different reports collecting the information: over 30 million is the market for commercial vehicle across all segments (according to KPMG).

    Anyway $242bn in revenue is Global Heavy Duty Truck Manufacturing: Ibisworld Market Research Report.

    Also about the market size China is the largest by number of units sold but by revenue Europe is the biggest because China is not a mature, it’s dominated by local Manufacturers where the average price is 2-3 times lower than in North America and Europe and they are able to export only 5% of their production. Approaching Chinese market may require similar approach to passenger vehicles with Joint venture and local factory.




    I have checked randomly 10 superchargers in Germany (may be most important logistic corridor in Europe) and 9 out of 10 are located next to truck parking lots.
    http://www.teslamotors.com/supercharger/jettingen
    http://www.teslamotors.com/supercharger/gramschatzerwald
     
  13. Cankooo1

    Cankooo1 Member

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    #13 Cankooo1, Aug 4, 2014
    Last edited: Aug 4, 2014
    The point is that in EU and I believe there is similar regulations in the other countries as well that the limit of driving time is 9 hours and each driver is obligated to take a break at least for 45 min, so each Truck has more than 14 hours per day for charging
    9.png
    This is strictly tracked with special electronic equipment mandatory in each truck operating in EU - tachograph which record driving time for one month. If the driver deviate from driving time rules it has almost no way to hide it and the penalty is really high (in Switzerland for example it’s 4000EUR)
    The common understanding is that the driver is tired after 8 hours and he is dangerous for the others
     
  14. NigelM

    NigelM Recovering Member

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    #14 NigelM, Aug 4, 2014
    Last edited: Aug 4, 2014
    The incentive to make capital investments in trucks that are physically constrained to use only certain routes is going to be low; adoption will be incredibly hard.

    I'm not saying the concept is impossible, but a working charging network is a key factor from day one.

    - - - Updated - - -

    Those links show exactly what I said: the Superchargers are inaccessible to large trucks. Being next to a truck stop is useless if the truck can't get into the parking lot. Truck charging still requires a separate infrastructure.
     
  15. Yggdrasill

    Yggdrasill Active Member

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    #15 Yggdrasill, Aug 4, 2014
    Last edited: Aug 4, 2014
    There are the same rules here. Also, the speed limit is 80 km/h for HCVs, both here and in Germany, which limits the range to 360 km. Now the question is what would be a reasonable consumption per km for an electric HCV.

    A modern diesel 30-50 ton HCV will use in the area of 30-50 liters of diesel per 100 km (depending on terrain, weather, etc), and with an assumed 37.5% efficiency (large diesels can approach 50% peak efficiency), that would work out to 123-206 kWh of useful energy per 100 km. Assuming the electric drive train is 90% efficient, that increases the consumption to 137-229 kWh per 100 km. So for 360 km, a HCV will use in the area of 493-824 kWh. Now, let's assume that only 70% of the battery pack is used, when using SC (due to the ramp-down of charging, and durability consideration). That means one would need a battery pack in the area of 704 - 1177 kWh. Charging this battery pack from 0-70% in 45 minutes would take around 657-1099 kW (average). Peak power would be in the 1.1-1.9 MW range.

    So, in the best case, you're looking at around the same peak power draw as a 16 bay supercharger. And what if you want to charge more than one HCV at that location in that 45 minute period? Using the same model as the regular 8 bay supercharger for an 8 bay truck supercharger, the peak power draw should land somewhere in the 5-10 MW range. At those power levels, battery storage starts to make a lot of sense, and if you're looking at battery storage, you might as well be looking at battery swapping.
     
  16. Yggdrasill

    Yggdrasill Active Member

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    I tried checking my methodology for assessing the energy consumption of an electric HCV vs a fossil HCV by using the same methodology on an electric car vs a fossil car:

    Travelling at ~80 km/h, a diesel car will use in the area of 5-7 liters per 100 km. Assuming a 30% efficiency, that works out to 16.5-23.1 kWh per 100 km. Now factoring in losses in the drive line, that works out to 18.3-25.7 kWh per 100 km for an EV. Taking into consideration that more care is usually taken when designing EVs regarding aerodynamics and tires, which is wholely unrelated to the driveline, that seems quite accurate.
     
  17. CatB

    CatB Member

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    Given that China is the largest market, has 3 of the 4 largest manufacturers, has significant air pollution and now that tesla's patents are now open source, they may have incentive and oppty to beat Tesla to that market.
    if anybody gets an inkling of who may be considering that, I think a number of us would appreciate the stock tip.

    And @ Cankooo1 - very impressive research, thanks so much for that, one of the things I love about this forum is the insightful, thoughtful input.
     
  18. Cankooo1

    Cankooo1 Member

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    #18 Cankooo1, Aug 4, 2014
    Last edited: Aug 4, 2014
    I have some professional experience on this topic and will share it just to let you know where my information comes from. My company operates in fleet management solutions for companies with commercial vehicles. Currently our system is connected and operates with over 25 000 vehicles (including international partners using the system), where at least 10 000 are Heavy Commercial Vehicles. I also often talk with company owners and executives from the field and I am quite familiar with their problems, frameworks and priorities.

    Regardless of the technology powering each Heavy Commercial Vehicle (ICE or Battery) there are big restrictions regarding the allowed routes which a truck can use. There are specific logistic corridors which an HCV can use and they rarely deviate from them. Transporting goods with HCV's is usually between big hubs and logistic centers near big cities with good transport connections. When actual shipment needs to be delivered to a customer, the carrier usually delivers it to the hub with an HCV and redirects it for delivery with a Light Commercial Vehicle.
    I can export and show you real world GPS tracking information from trucks traveling across Europe everyday but at the moment I will use public information to illustrate the corridors :
    map-eu-ten-t-corridors-railwaygazette_01.jpg

    (more information about other corridors worldwide )

    I do not think Tesla will need to build an entirely new network. Instead, they could extend or upgrade existing stations and position new stations strategically.

    Some real world examples of why I believe logistic companies will be happy to move away from fuels, even excluding the direct savings from replacing fuel with electricity:

    • It’s not only about the high price of the fuel (particularly in EU ) but it’s also about the uncertainty. For example, the owner of one of the mid-size companies we work with (they have 120 trucks) told me how they nearly bankrupted a few years ago because the fuel prices had increased rapidly.(I have explained to him that they need to hedge with OIL futures) The effect fuel has for logistics in Europe is that strong.
    • Drivers stealing fuel is not a rare problem either. It may look like a minor problem but it’s often not.
    • There is a big difference between drivers. Driving skills can affect the efficiency of the vehicle and therefore affect the profit margin of the specific vehicle. Consequently, they are constantly investing in educating the drivers because in some cases an unexperienced driver can make a vehicle operate under the break even point.
    • Depreciation costs of ICE Trucks are very high and with time the fuel consumption increases. In the case of E-HCV's with a Battery, the range will decrease but the expenses will stay constant. This could also represent a potential stream of revenue for Tesla if they decide not to replace batteries for free; which would be in their style. Note that the average mileage of an HCV is 250 000 miles per year.

    .

    I think the biggest challenge is technical but if there is someone who can solve it, this is Tesla Motors and Elon Musk.
    I was also about to start making similar calculations but I find I do not have sufficient knowledge about it and also remember: “do not mistake power density with energy density”
     
  19. Robert.Boston

    Robert.Boston Model S VIN P01536

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    A side-note: many states require companies that sell electricity to register and be regulated as public utilities. This isn't an absolute barrier to setting up a nationwide pay-per-play HCV SC network, but it does add some cost and complexity (in an area that Tesla isn't particularly good).
     
  20. jhm

    jhm Active Member

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    Tesla may want to re-imagine the tractor-trailer configuration from the ground up. The best place for the battery may not be in the tractor, but underneath the trailer. Electrify the trailer first. The battery can be charged during loading, unloading and between trips. The driver need not be present. The size of the pack can be configured to optimize the route, load, and any additional power requirements such as refrigeration. The battery in the trailer can be combined with motors in the trailer so that most of the power needed to propel the trailer is derived from its own drive train. It can also recapture energy from regenerative braking. Electrified trailers can be integrated into conventional fleets. Diesel tractors could be fitted with controller so that the driver's use of accelerator, brake and clutch is translated to control the trailer's drivetrain. Basically, as the electrified trailers prove they can reduce total fuel cost, that "they can pull their own weight," then fleet operators will buy more of them. This could be a very nice backdoor into this market for Tesla. The next logical step then would be to electrify tractors too.
     

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