November 2017

On November 16, Tesla unveiled its long-anticipated foray into the $726 billion world of trucking: A heavy-duty, all-electric rig aptly named “Semi.” The truck itself is wildly impressive in our opinion—a 500-mile range, projected fuel savings of $200,000, and the industry’s most advanced levels of automation—but what excites me the most, really, is the opportunity this truck signifies: The start, as I see it, of a once-in-a-lifetime radical shift in our trillion-dollar transportation economy.

As I have written about before, we are currently entering a period of a rapid change in our transportation systems. And as I see it, it’s the innovator’s dilemma playing out in the wild:  Incumbents like General Motors are moving too slowly to adapt to an all-electric future—wasting billions of dollars on stock buybacks—while upstarts like Tesla, unencumbered by legacy business models, are forging a path into a clean, fully-electric, fully-autonomous future. (GM has spent almost $17 billion in the last several years buying back its stock, three times what Tesla has spent building Gigafactories—but I digress.)

Until this point, of the emphasis of electric and autonomous disruption has been focused on consumer cars, but trucking—and long-haul transportation systems in general—is a fascinating industry in its own right for investors looking for new ideas and themes. Noël Perry, a transportation economist, says the shift to autonomous trucking is “the most powerful thing to hit us since the building of the superhighways in the 1950s.”

Perry, the principal of his own transportation consulting company, Transportation Futures, has tracked the trucking industry as an economist for more than 40 years. And he’s also currently writing a book titled “Trucking 2030: A Radical Departure.”

Among many predictions and insights into the future of trucking, Perry generally believes within about 15 years—through autonomous driving—the industry will double its productivity rates and cut travel times in half. And when this happens, it will have profound trickle-down effects on brick and mortar retail. After all, what’s the point of going to a store if you can have pretty much any product delivered to your home immediately? “That’s why it’s so radical,” Perry says.

I spoke with Perry at length recently regarding Tesla’s ambitions and challenges, the future of transportation, and his macro perspective on the innovation taking place right now in the trucking ecosystem. Below is an edited transcript of our conversation.  (Full disclosure: Nightview Capital is long Tesla and all views are Perry’s alone.)

Nightview Capital: This week, we’re seeing Tesla come out with their Semi, and clearly Elon Musk has talked about creating an all-electric, autonomous future. So, existentially, what does this mean for the trucking industry over the next 10, 15, 20 years? How do you see it evolving from what it is today to what it will be in the future?

Noël Perry:  Well, “existential” is perhaps a useful word. A trucker wouldn’t necessarily understand it, but what we’re talking about is the biggest change in supply chain practice; maybe the biggest economic change since the invention of the steam engine back in 1810. This is a very big deal for transportation. It’s probably at least as big for the economy as a whole, but we know for sure that it will turn the transportation business upside down.

Nightview Capital: What do you mean by that exactly?

Noël Perry:  Okay. Well, I’ll give you an example. Right now, the average over-the-road truck is moving about eight hours per day. The rest of the 24 hours, that truck is waiting for something; either for the driver to sleep, or eat, or use the bathroom, or it’s waiting to load… So we’re getting eight out of the 24 hours in terms of useful work; that’s when the truck doesn’t move, right?

Well, if we eliminate the driver, we don’t eliminate the loading issues, but we sure eliminate that sleeping business; which is 10 hours a day. So, you can double the productivity of the asset; not to mention that there’s a whole bunch of other things which suggests that you would eliminate some of the slack time. And not only do you double the productivity, but you halve the transit time.

So, three things happen; I’ll just sum them up. One is that the cost of trucking falls by at least 50%, if not more. No driver, double the passive productivity, and in essence, you eliminate most of the safety problems. And by the way, if you apply this [autonomous] technology, many of the concerns we have from a safety standpoint about large trucks go away and you can make the trucks bigger. So, the costs fall at least in half. Transit time falls at half too, because you’re not waiting.

If you have automated trucks and automated delivery vehicles, you can get second afternoon or second morning delivery to any place in the 48 states by truck, with a 10 o’clock cutoff the previous day.

So, if I’m making an order today, it can go from a single inventory holding point, anywhere in the country, and be delivered two days later. If you expand that inventory coverage to three locations, I can deliver an order that I make at 9:59pm tonight, tomorrow morning.

Because you’re running at 70 miles an hour, and you have automated picking at the distribution point, the automated delivery truck goes straight out. And so, what we’re talking about is a revolution in inventory holding, number one, and also a very substantial adding to the retail revolution that’s happening anyway.

Nightview Capital: Fascinating. And how would you characterize how the trucking industry is responding to these changes? How are the companies responding to the changes in technology?

Noel Perry:  Well, I’ll give you the macro answer, and there are two astounding macro answers. I started in trucking in 1976, which was prior to deregulation. Prior to 1980, trucks had to have a license to go anywhere. And their ability to price was constrained by the Interstate Commerce Commission. I kept a log, prior to 1980, of the top-50 truckload carriers. I was one of the few people that really looked at the truckload business end.

And of those 50 top companies, there are three left. That change, which was a fairly dramatic commercial change, has a fraction of the revolutionary power that this one does—and it eliminated 93 percent of the existing competitors.

Now, some were acquired, etc. but the fact is that they aren’t here anymore.

This change is way more radical, and so what it says is that nine out of ten of the existing companies will not be in business 15 years from now. It’s certainly happening on the retail side. I mean, how many of the businesses that we go and walk in their doors today will be in existence ten years from now?

Let’s look at it from a technical standpoint. There are two competencies that keep trucking firms alive. The first one is their ability to match demand and supply; which is very important, and the second is their ability to manage drivers. There’s a modest competency with respect to equipment, but it’s not that important.

Well, in the first place, if you if you eliminate the drivers, you eliminate half of the value-added that the trucker provides. And second, if you go to integrated big data, the business of matching capacity to demand becomes much easier. So, what it does is it either eliminates, or dramatically changes the principal competencies of whatever we call this entity which we now call “trucker” provides to the marketplace. So it’s big, big changes.

Nightview Capital:  What’s the timeline on all of this in your view? At what point do you actually predict we’ll start seeing self-driving trucks?

Noël Perry:  Okay. So, there are two perspectives here; and they are in parallel. First off, the driving force has got nothing to do with trucking. It has to do with passenger cars. The issue with passenger cars is safety. And we all know, from personal experience, that human beings are lousy drivers. And there are some classes of us: the old, the young, and the people that like to work on their smartphones, who are particularly dangerous.

Well, at some point over the next 15 years, the public is going to tumble to the fact that if they mandate automatic operations in vehicles, their daughter, for instance, might not have been killed by a drunk driver last night.  So, what’s going to happen is that the public will progressively require automation and when it does, of course, it will require automation of trucks too. So, that’s the one perspective.

And so how long will it take? I think less than 15 years. It’ll certainly happen first on freeways; particular freeways at particular times a day. And automatic vehicle operations substantially increase highway capacity. So, we get free capacity on the highways.

The other thing of course is as we automate all this delivery, the needs for me to be driving around town is reduced and so we get capacity—and we get free time out of this whole thing. And the big advantage, by the way, is in pickup and delivery work, because that’s what we spend most of our time doing; commuting and going to the store. So, if that gets automated, I’ll make my orders online, and that’ll be automatically delivered. Once a day, the local stores will send down a drone somehow to my house; and it’ll make five stops.

Now, as we look at trucking, there are three phases to this whole thing. The first phase is principally safety, and it’s already happening. We have now automated majority of the long haul operation of the truck; automatic transmission; cruise control; automatic braking. The fleets are already stocking Lane Departure Warning and the only thing left is Lane Holding Technology; which of course cars already have, if you want to buy it.

So, that’s happening.  And the last thing for trucking is automatic backup and if you look carefully at Ford F-150 advertisements, after football games, you will see that there’s a little vignette of somebody automatically backing up this boat. If you can get some idiot with a bunch of beer in his belly backing up his boat automatically, you can back up a trailer. It’s a trivial geometric problem. And by the way, there are prototypes in the marketplace now for automatic trailer backup.

Nightview Capital: Wow. So the technology is closer to the marketplace than most people realize.

Noël Perry:  Yeah. So, within five years, the best fleets will be specing that stuff too. We already know, by the way, that they are doing so for economic reasons and the paybacks are sufficient to do it. Anecdotally, people are talking about 80 percent reduction in rear-end collisions. And there is the technology, already in the prototype stage to measure traction on the highway. So, that’ll be integrated within 10 years, maybe five.

Now, here’s the second phase, and it’s an interim phase. And the issue is, if you automate everything, and the driver simply becomes a monitor who, by the way, from a safety standpoint, has no benefit. If you just think about it practically, if the damn thing fails at a critical moment, you have to recognize it, you have to then diagnose it, and then you have to respond, all in a matter of what? Seconds? And the crash has already happened.

Right now, a truck driver’s job is about as difficult a blue-collar job as there is. Because we trust these guys to move 80 thousand pounds on highways they share with us—and to deal with bad weather and bad drivers. We won’t need that anymore and we won’t need that coordination nor that judgment that we pay for now.

So, even though the law may require that driver to be in the seat for another 12 to 15 years, that driver isn’t gonna be the professional we see there now. How the companies will react to that, I’m not sure.

And then finally we get into the automatic stage, and you know, that starts again with the long-haul portion. It will start very quickly in closed loading and unloading areas where the owner controls the operation of the situation.

Nightview: The last question I really had; I made a note of your quote in the New York Times from a couple of days ago, where you said, “This is the most powerful thing to hit us since the building of the superhighways in the 1950s”. Could you just explain on that a little bit? What do you mean by that and what’s the sort of big level picture that you would want to communicate?

Noël Perry:  Well, let me just give you an example. How long do you figure it would get you from New York to Miami in 1950? Like four days.  There were single-lane highways all way. So you would be lucky to go down there and come back in a week And a train would take you twice as long. Nowadays, how long will it take to get from New York to Miami? It’s about 14 hours of driving.

So, in other words, this thing doubled productivity or more and it halved travel time. Well, we’re going to do that again. That’s why it’s so radical. And at the same time, of course, we are changing everything about supply-chain. The world suburbanized in the 50s and that changed supply-chain somewhat, but still, you went to a store and you bought stuff from the store; that was unchanged. Well, you know, that demand side of this equation is changed just as radically as the supply side

The solution that we get out of this would be unrecognizable to you and I in our 2017 vision; it’s so radical. Trucking is so ubiquitous and it is such an extraordinarily important part of our economy. If you don’t have transportation, you don’t have an economy.