Fleet decarbonization: How an expanding value chain could reshape freight

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Commercial transport is on the cusp of a transformation, with zero-emissions vehicles set to catalyze new operating models and value pools that could reshape the competitive landscape. Across the freight industry, stakeholders are challenged to analyze potential outcomes and consider how they can achieve the most upside from new technologies and ways of working.

As discussed in previous articles in this series, commercial vehicles are responsible for about a third of transportation emissions but are trailing passenger vehicles on decarbonization. In large part, this is due to the technical challenges of electrifying larger vehicles that travel long distances.1Getting to carbon-free commercial fleets,” McKinsey, December 13, 2022; “Fleet decarbonization: Operationalizing the transition,” McKinsey, December 20, 2022; “Why the economics of electrification make this decarbonization transition different,” McKinsey, January 30, 2023. Still, among the industry’s decision makers, there is a growing realization that electrification at scale would insulate them against regulatory dynamics and lay the groundwork for longer-term cost advantages. Indeed, most decarbonization use cases are projected to reach total cost of ownership parity with internal-combustion-engine (ICE) vehicles by 2030, well within the horizon for capital allocation.

Perhaps the strongest business argument for accelerated decarbonization is that new propulsion technologies are likely to have tangential impacts: companies are likely to require a range of services, including electrification planning, depot upgrades, energy optimization advisory (estimated to be worth $4 million to $5 million in the United States alone by 20302Charging electric-vehicle fleets: How to seize the emerging opportunity,” McKinsey, March 10, 2020.”), telematics, and analytics (Exhibit 1). These needs can be served from outside the industry but also within—if operators are able to scale their capabilities quickly.

The transition to battery-electric-vehicle commercial fleets brings an expansion in value pools and new business opportunities.

To pursue decarbonization successfully, companies should provide services that both capture revenue streams and create positive momentum among sustainability-conscious customers. For now, the door remains open for companies to establish their propositions and pick up market share. Moreover, the old “rules” on market ownership will not apply to the new opportunities. For example, OEMs will be able to freely compete with fleet telematics and services companies for downstream charging business. Equally, regional utilities and fleet management service (FMS) providers may see opportunities in the same space. The result is likely to be a highly dynamic ecosystem in which vertical and horizontal players compete.

There is a growing realization that electrification at scale would insulate the freight industry against regulatory dynamics and lay the groundwork for longer-term cost advantages.

In the context of this opportunity, players need to make significant decisions. Primarily, they should formulate plans for decarbonization that both minimize risk and maximize opportunity. Pertinent questions might include: Do I have a right to win in this new value pool, against both similar businesses and others, as well as their future incarnations and alliances? If I choose to expand and build a new business, what capabilities do I need to develop internally, and what are the risks? Should I approach expansion through internal capabilities and organic scaling or through acquiring or partnering?

To estimate the potential evolution of the value chain, we have addressed these questions from the point of view of six major industry segments: OEMs, FMS providers, charging providers, oil and gas companies, utilities, and dealer maintenance and repair servicers. The analysis shows that the two major battlegrounds of the future will be fueling services and battery recycling, and that the majority of players have a plausible path to engagement (Exhibit 2).

There are significant opportunities in electrification planning, energy management, and battery recycling.

Charging services. The opportunity in charging-station operations is still in flux. In Europe, many charging stations are owned by utilities, while in the United States most are controlled by private charging businesses or OEMs. In both geographies, there is much to play for. In the United States, the Bipartisan Infrastructure Law alone will provide $7.5 billion of funding,3 suggesting companies across industry segments should consider the potential benefits of getting more involved:

  • OEMs could deepen customer relationships and boost retention by building privately operated charging networks. Customers could incur switching costs if they moved to a new manufacturer.
  • FMS providers could leverage economies of scale by including charging in their service offerings.
  • Oil and gas companies have ICE depot networks that could be retrofitted/upgraded to incorporate charging technologies. They also have the engineering, procurement, and construction capabilities to plan and build new charging depots quickly and efficiently.
  • Utilities are experienced in grid construction and expansion and could add charging station construction to their plans. Additionally, with many fleet operators lacking experience in electrified transport, there is potential to sell consulting/advisory services.

On the front end, fleet operators will need help with forecasting power requirements for their vehicles and use cases (fleet depots are projected to deliver more than 25 percent of all electricity consumed by electric vehicles in the United States by 20304Building the electric-vehicle charging infrastructure America needs,” McKinsey, April 18, 2022. ). Fleet ecosystem players have the data and capabilities to advise in this area. On the back end, operators may need advice on managing intraday electricity price fluctuations, amid demand for services in activities such as peak shaving, charging optimization, and bidirectional charging.

Battery recycling. The recycling market is currently characterized by supply chain constraints and raw-material shortages. Still, the market is expected to grow to $13 billion in the United States by 2040.5 The life span of commercial application batteries can be up to 12 years,6 after which they can be repurposed as charging infrastructure or grid storage. This offers an incentive for players with access to vehicles and batteries to move downstream into recycling, and for players that have access to second-life batteries to move upstream:

  • OEMs are already closely involved in servicing the aftermarket. They can leverage relationships with fleet customers to access aging batteries.
  • FMS providers commonly handle maintenance, servicing, and end-of-life decommissioning. Thus, they have a consistent supply of used batteries that could feed a recycling business.
  • Dealers are positioned similarly to OEMs (in fact, they often partner with OEMs), so they could participate in battery recycling.
  • Charging providers could offer incentives to fleets, including discounts on power consumption in exchange for used batteries. This would positively reinforce charging providers’ core businesses, with second-life batteries redeployed at charging stations.
  • Utilities are similar to charging providers in that used vehicle batteries can provide static storage on their grids. However, they will need to develop their industry relationships, potentially through expansion into fueling service value pools.

A key success factor for any new entrant will be the ability to stand up expensive production environments and develop the know-how to run the complex operation of pyrometallurgy, the most common recycling technique.

Of the various players serving the commercial fleet market, three stand out as having strong right-to-win propositions through vertical integration.

OEMs. Vehicle manufacturers are established in both the front and back ends of the value chain. While fueling services and battery recycling are not core areas of expertise, they bring competencies around the manufacturing processes, supply chain management, and efficient production capabilities. Indeed, OEMs including Tesla, Ford, Toyota, and GM have announced plans to build out battery production capacity, while Volkswagen has said it will bring the entire battery life cycle in-house.7 That said, OEMs will need to fill critical gaps in their current capabilities, including:

  • Standing up turnkey charging service business requirements, including charging station construction, on-site facilities operation, and energy billing and payment management.
  • Transitioning from a centralized maintenance and service model (supported by dealers) to a distributed, mobile-maintenance model, with staff able to travel out to depots.
  • Hiring and developing skilled labor to manage and operate battery recycling operations.

FMS providers. FMS providers are uniquely positioned because they have control of a vast number of vehicles. This gives them access to significant data on fueling patterns and routing, which they can use to determine charging locations and depots, as well as to optimize utilization. To execute, they should:

  • Form partnerships with engineering and construction firms to build out their charging networks at scale.
  • Train and upskill the labor force to run charging depot day-to-day operations.

Utilities. Utilities have the operational knowledge to build out charging station networks and to develop the smart-grid software that can support applications including real-time monitoring, energy optimization, and fault detection. These, coupled with a wealth of consumption data, could enable them to deliver excellent energy advisory services. However, while utilities see themselves as the natural owners of fleet charging, they are often limited to specific territories, especially in the United States. This may constrict their scaling potential. To succeed, they should focus on:

  • Acquiring manufacturing and production expertise to run battery recycling operations.
  • Building out marketing, sales, and business development capabilities focused on the commercial fleet market, which could help them develop relationships and partnerships.

As new markets across fueling services and fleet disposal grow, commercial vehicle players must be strategic in how they position themselves. New value pools will be captured mainly by companies with holistic capabilities, including OEMs or FMS providers, contingent on effective business building. Alternatively, powerful new partnerships may emerge. In both cases, the future of freight is set to see a marked departure from the past, creating an imperative for decision makers to adopt a strategic lens on how and where they want to play.

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