Investing in Fleet Electrification-as-a-Service

At least in ‘Murica, buying a manual transmission car acts as a theft deterrent. Violent car jackings recently doubled in Chiraq, a city in the State of Illinois that buys the least number of manual cars as a percentage – about 1.39% of all cars sold are manual. Since less than 18% of Americans can drive a stick these days, odds are whatever waste of oxygen decides to jack your ride won’t know how to drive it. And they probably won’t stick around long enough to figure it out.

While manual transmissions are quickly becoming a thing of the past, gas-powered automobiles will be around for a lot longer. That’s because outside the U.S., there are 193 other countries where gas-powered vehicles will be around for a very long time. Roam the streets of any large East-Asian metropolis to see why. Vehicles are absolutely run into the ground before they’re retired. It will take decades to replace all the gas-powered vehicles with electric vehicles. And that’s where the electrification thesis starts.

Electrification-as-a-Service

We’ve written a lot about electric vehicles, but we haven’t looked at the electrification-as-a-service thesis which proposes a turnkey method for making gas-powered vehicles either partially or fully electric, along with the servicing infrastructure to support them. If you’re the sort of person who can drive a manual, you probably smell a rat. It’s a lot more difficult a problem to solve than it sounds.

If you’re going to buy an electric vehicle, just buy one. Why would you buy a gas-powered vehicle and then sink $10,000 into enabling it with some electric capabilities? That’s the going cost these days according to Treehugger.com:

Basically, electric conversion involves removing the entire internal combustion engine from a vehicle, installing an electric motor in its place, and also adding a large bank of batteries. A conversion will cost you about $6000 in parts, and about $1000-$3000 for batteries and installation.

Think that will void the warranty? Try taking whatever that jalopy ends up being into your local mechanic and see how keen they are to fix whatever problems you’re having.

The electrification thesis isn’t about that. It’s about supplementing a gas-powered vehicle with electric capabilities so you can enjoy 25-50% better fuel efficiency (so sayeth the marketing collateral), and a lower total cost of ownership. This isn’t something you’d stick on your daily commuter, it’s about commercial fleet electrification.

Commercial Fleet Electrification

The bull case is pretty easy to make. There are plenty of commercial vehicles out there that could be equipped with electric capabilities so that the companies that own them can be better stewards of our planet.

Credit: XL Fleet

Many publicly-traded companies have large fleets of commercial vehicles along with an investor base that’s becoming increasingly conscious about ESG “values.” If you’re able to electrify your fleet and save some money on fuel while pacifying the Twitterati, everyone wins. If a solution can reduce the total cost of ownership over the life of a vehicle by a meaningful amount, adoption is a no-brainer.

Credit: XL Fleet

Given that the Americans have a new fearless leader coming on board who looks more favorably upon green technologies, it’s easy to understand why a company that offers electrification-as-a-service would be attracting attention. We’re more interested in looking at why this may not be a good idea

Electric Light Commercial Vehicles

When John Doe goes to the dealership to buy a car, the salesperson will often use the “four square method” seen below:

Credit: AxleAddict

When companies purchase a fleet of vehicles, they’re not interested in any of that rubbish. Purchasing decisions are made based on total cost of ownership (TCO) over a particular period of time. The below diagram shows a comparison of an electric van vs. a diesel van with a breakeven of around four years.

Credit: IDTechEx

While the new administration may be pro-green, we can’t say what the regulatory environment will look like in four years. That’s why you can have some MBA put together a sensitivity analysis that takes all factors into account so the company makes the best decision possible. But what about if you already own a fleet of vehicles and you’d like to electrify them?

Here’s where we believe the electrification-as-a-thesis runs into problems. Pretend you’re the person in charge of the fleet and your boss tells you about this company called XL Fleet that can electrify the gas vehicles in your fleet with some hybrid capabilities. You run the numbers and the TCO seems to make sense. So, you decide to equip your entire fleet with bolt-on electrification. This simply means you equip the vehicles with an electric motor that’s spliced into the driveline and which helps make the gas/diesel-powered motor more efficient. Auto blog describes the process which goes something like this:

Your fleet’s own mechanics do it, with a ship-through kit that XL says takes less than a day to install. It works with either two-wheel- or four-wheel-drive trucks and any cab or bed configuration. The upgrade includes a 15-kWh battery, a traction motor spliced into the driveline, regenerative braking and the technology to control it all.

This is where some people start to have some concerns about warranties. Do you really think that after all the modifications you’ve made to the vehicle that the Ford dealership is just going to gloss over that stuff when it comes time to make warranty claims? According to XL Fleet, the modification doesn’t void the OEM warranty. In fact, XL Fleet’s second-biggest customer is Sutton Ford – Chicago, an OEM dealership, which accounted for 10% of XL’s 2019 total revenue. What concerns us is their biggest customer. Farmbro Inc, a Canadian upfitter, accounted for 59% of XL’s total revenue in fiscal 2019. (Upfitters are specialists who take factory commercial vehicles and customize them to your personal needs.) Why was Farmbro their biggest customer in 2019 when their dog-and-pony show for investors implies otherwise?

XL Fleet’s long list of customers

XL Fleet Electrifies Investors

XL Fleet has been coming across the radar of retail investors as everyone’s favorite market oracle thinks we should all back up the hybrid truck and load up on shares.

Credit: CNBC

Even Citron Research, a firm we’ve seen make some good calls before, has suddenly become bullish about a SPAC after denouncing the likes of Nikola Motors. Given Citron is typically a short seller, so one might be tempted to think they’re going to trade it both ways. Would they really have the cojones to try and pull that off? If they’re truly long the stock, they must have a lot of faith in XL Fleet’s management team.

Click for company website

XL Fleet isn’t pre-revenue, but they’re also not enjoying the success that their glossy investor deck alludes to. Founded in 2008, Bahstun startup XL Fleet took in $45.7 million in funding from investors that included Ikea. All that money was put to use building an electrification-as-a-service platform. In 2012, Coca-Cola, which has one of the biggest private-sector fleets in the U.S., started piloting the solution. Said a May 2014 article about XL Fleet and Coca-Cola:

The actual mileage improvement of the upfitted GM vans was slightly less than advertised. “We saw anywhere from a 15 percent to 20 percent mileage improvement,” said Bruce Karas, vice president of environment and sustainability for Coca-Cola North America. And that was significant, even if there were no tax credits available. “The initial assessment is that over the life of a typical vehicle—about 10 years and 200,000 miles—the investment would pay for itself three times over,” said Karas. 

Credit: Slate

If that is indeed the case, where are all the revenues? It’s been nine years since the platform began deploying with customers, yet only now the triple-digit growth is arriving? Check out these lofty revenue growth estimates from XL Fleet’s pitch deck:

It’s strange that 2018 revenues weren’t mentioned. That’s probably because they would show that 2019 revenues dropped by 24.4%. XL Fleet explains, “The decrease was primarily due to supply chain disruptions for XL’s hybrid and plug-in hybrid batteries during 2019.” There were also several recalls in 2019, but let’s go with their explanation- revenues fell 24.4% in 2019 due to supply chain disruptions. Are we then to believe that in today’s challenging operating environment with The Rona, they won’t continue to have supply chain problems?

Then there’s the 2020E revenue estimate. As of last week, 2020 is done and dusted. In the first three quarters of 2020, XL Fleet had $9.47 million in revenues. In order to hit their estimate, Q4-2020 revenues will need to be over $11 million – that’s more than they brought in for the three quarters prior. Now, we know the instant gratification monkeys over at Robinhood won’t be paying any attention to trivial things like management’s ability to execute, but stuff like this matters.

Why We’re Not Buying It

We’re picking on XL Fleet a bit here, but that’s because according to the pundits, this is the company to buy if you believe in the electrification-as-a-service thesis. From Citron Research’s social media account:

If you’re going to purchase a new vehicle and immediately electrify it, just buy the hybrid in the first place. If your entire fleet of old vehicles needs electrification, do you really want to invest $10,000 per vehicle making it happen? You’re also solving a first-world problem with a first-world solution, something that won’t likely translate to places where it’s needed the most. Bangladeshi fleet managers could care less about how green you think they are.

We’ve heard the bull thesis and we’re not buying it. XL Fleet is just one of many companies coming out of the woodwork trying to sell an easy-to-digest electric vehicle thesis to the masses who will buy anything with the letters SPAC in it. Just look at some of the comments on Seeking Alpha to see how bad this thing has become.

Even with double-digit revenue growth, we still would have problems with this investment thesis. Any vehicle manufacturer can offer the same value proposition that XL Fleet does, and then you can avoid having to modify your vehicle fleet with third-party components. We’re not convinced that XL Fleet, or any other company with a similar value proposition, has the upside potential that merits the risk.

Conclusion

Similar to the fuel cell vehicle thesis, electrification-as-a-service sounds good on paper. For investors looking ahead a decade or so, it’s a stopgap solution that can easily be replicated by any auto manufacturer with the desire to. Most likely they’ll just skip that step and start building and delivering hybrid commercial vehicles, which is precisely what’s happening. We’re presently avoiding the hype-driven electric vehicle thesis, and electrification-as-a-service falls into that category as well.

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