June of 2020 was a thrilling month for Nikola, a manufacturer of zero-emission semis that rely on hydrogen fuel cells. Soon after going public, shares of the company shot up to around $65, and the market cap grew to $23 billion, pretty close to the valuation of Ford. And all this happened before the Nikola Two, the company’s signature offering, has even gone into production.
What’s making investors so excited about the company?
Hydrogen fuel cells can store three times as much energy as batteries given the same volume. Fuel cells can also store that energy indefinitely, whereas batteries gradually lose their charge. For these reasons, hydrogen fuel cells are thought to hold a lot of promise for future developments, and they’re also why Nikola is already touting longer ranges based on shorter charge times: 500 miles after 15 or 20 minutes vs Tesla’s 400 miles after 30 minutes. (The Nikola Two is marketed as having a potential 750-mile maximum range, compared to Tesla’s 500.)
Another factor behind Nikola’s sudden popularity is new legislation in California mandating that trucks achieve zero-emission status by 2035. In late June, the Clean Trucks Rule passed into law, and while stocks in electric vehicles didn’t immediately go up—Covid-19 numbers were on the rise—analysts say interest in these companies was piqued. (As of July 6th, Tesla’s stock, for instance, had gone up 20%.)
The Better Deal?
As things currently stand, the energy that goes into charging a fuel cell can be much more efficiently used to charge a battery directly. The energy cost of battery-powered vehicles will likely be much lower than that of vehicles powered by fuel cells for some time. According to one analysis, 38% of the energy generated for hydrogen fuel cells makes it to the drive train of a vehicle, while something like 80% makes it to the drive train of a battery-powered vehicle.
This is important because Nikola is entering a market with some heavy hitters, Tesla among them. While Tesla likewise has yet to begin production on its own battery-powered electric semis, the company is already profitable, and there are recharging stations for its cars all over the country.
Another potentially major disadvantage for Nikola is pricing: the company is going to offer its trucks, not for sale but for lease. For $665,000, freight haulers can get a Nikola semi for 7 years or 700,000 miles. That includes repairs, maintenance, and even the hydrogen fuel that powers the vehicle. Since all the expenses are covered, this price point seems like a good deal—even if you don’t own the truck at the end of the lease.
However, to get 700,000 miles out of a Tesla semi, a trucking company would only need to spend $376,000—and would keep the truck afterward. That number includes estimated costs of maintenance and recharging. This is one of the reasons why analysts are skeptical of Nikola’s prospects. Basically, for the company to outcompete Tesla (not to mention all the others in the electric vehicle market), they’ll need to develop some as-of-yet-unknown innovation that cuts operating costs—or gives their trucks some other advantage.
Larger Visions
Another main differentiator is that Tesla is developing its own autonomous driving technology, both the hardware and the software. Nikola, meanwhile, is equipping its semis with hardware for self-driving systems but is leaving the software up to third parties to develop. This partnering with third parties is part of Nikola’s strategy for getting to market as quickly as possible. Even their engines will be manufactured by another company, Bosch.
The vision for Nikola is to not only be first to market with a viable hydrogen fuel cell truck, but to establish the nation-wide infrastructure for refueling these vehicles. The company’s charismatic CEO Trevor Milton appears to be betting big on hydrogen, anticipating major breakthroughs that will make the technology more efficient and better able to compete with battery-powered vehicles.
Whether this is a good bet or not—i.e. whether those technological breakthroughs will be forthcoming—is impossible to foresee. But most analysts seem to think the era of hydrogen, if it ever dawns, is still well over the horizon.
Elon Musk’s vision for Tesla seems at once grander and more realistic. For instance, Tesla’s focus on self-driving technology, though possibly just as challenging to bring to fruition as Nikola’s fuel-cell technology, addresses some of the main issues faced by the trucking industry much more directly. So, apart from being more viable in the near term, Tesla’s investments could pay off even bigger in the long term.
The Autonomous Advantage
It’s possible that Nikola, with the help of its partners, will come up with a workable self-driving system before Tesla does. It’s also possible Nikola’s autonomous systems will be better in some way. These eventualities are unlikely, though, because the main challenge for the company now is figuring out a way to make hydrogen fuel cells more efficient than putting energy directly into batteries.
Tesla, on the other hand, is already deep into the development of self-driving technologies, and if the company can take advantage of this head start, its trucks will be huge assets for fleets. One of the major headwinds facing the trucking industry today is a shortage of drivers, so obviously vehicles that don’t need drivers will be an attractive solution.
Another huge challenge for freight haulers is the cost of insurance. With nuclear verdicts on the rise—that’s verdicts of $10 million or more—insurance providers are ever more wary of trucking companies. If a company can even find an insurer willing to work with them, the rates it will have to pay for coverage will seldom be affordable. Costs per mile have gone up 17% since 2013. That’s why 795 trucking companies closed up shop in 2019 alone, resulting in 24,000 trucks sitting idle.
Autonomous vehicles will likely have far better safety records than human drivers sometime in next decade, maybe within the next four years. That’s because machines don’t get distracted or zone out the way humans often do. Fewer accidents translates into fewer settlements, which translates into lower insurance premiums. (Machine learning programs are already being used to improve safety records through telematics-based training.)
Autonomous trucks also won’t get tired the way human drivers do. That will likely mean that the FMCSA will agree to give companies exemptions from its hours of service rules for self-driving trucks, because those rules were put in place to reduce the number of accidents caused by driver fatigue. So, while Nikola trucks may have a longer range in theory, Tesla trucks may soon be outpacing them nonetheless.
For now, the smart money appears to be on Tesla (and others in the electric vehicle market that are simultaneously working on self-driving technologies). But the wonderful thing about watching the advancement of these technologies is that nobody really knows what the outcome will be. One completely safe bet, however, is that the transportation industry is going to look a lot different not a lot of time from now.
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