The Fuse

Interview: CEO of Smith Electric on Battery Technology, Strategic Growth, and IPO Opportunities

by Leslie Hayward | June 07, 2016

Smith Electric is the leading manufacturer of electric trucks in the United States, with over 800 vehicles on the road. CEO John Dixon took the time to speak with The Fuse about the electric truck market, and the company’s growth strategy.

Hayward: Most people think of electric delivery trucks as a new technology, but Smith Electric has been in the business for decades. Tell us about the company’s history.

Dixon: The advantages of using an electric delivery truck were explored by Smith Electric in the 1950s, when the company was producing electric milk floats. These trucks were widely used in the U.K. for milk deliveries at 3 or 4 in the morning, when the last thing you want is a noisy diesel engine rolling down the street. The company is 96 years old—it was originally founded by the Smith family, who owned a tea business and still do to this day. They imported tea from India, and part of the development was looking at alternative delivery methods, leading to the creation of the electric delivery trucks. The business began with milk floats, and we also developed electric airport handling vehicles. The company was bought in the early-mid 2000s by the Tanfield Group, a publicly traded business.

Has this long history proved advantageous more recently?

Thanks to our team’s trial and error, many parts and features that worked well from the original truck design are incorporated in the current model.

This history has undoubtedly given us a strong foundation, as we had a knowledge base that was developed over decades rather than starting from blank paper. The Smith Electric that we know now became an American corporation in 2011, and inherited some veterans from the previous businesses, some of whom had over 20 years of experience. That knowledge was instrumental in developing something that was new but based on previous experience, like the current Newton truck. Thanks to our team’s trial and error, many parts and features that worked well from the original truck design are incorporated in the current model.

Smith Electric is the leading manufacturer of electric delivery trucks in the U.S. right now. What is motivating businesses to go electric with their delivery trucks, especially when gasoline and diesel are inexpensive at the moment?

We have over 800 trucks currently on the road, and we have exceeded 14.5 million miles of usage in the vehicles, which we can pinpoint with great accuracy because of the telemetry installed in the vehicles. We can tell you where the vehicle is, what the charge is, the speed, where it was yesterday, whether it was plugged in overnight… our trucks are mobile computers. We have massive data, and in terms of the truck world, we have unprecedented data. We can speak to customers about routes that will and won’t work, and find the sweet spots on distance and coverage. The data is reaching a point where we can do predictive maintenance on the battery cells, which is a huge advantage that we offer.

Customers should think about the battery as the fuel that you pay for up front, while with diesel you pay daily or weekly over the life of the vehicle.

There are many other benefits. If you look at maintenance itself—an EV only requires 25 percent of the total maintenance of a diesel vehicle. Meanwhile, battery prices have come down significantly, and continue to fall, while oil is likely to go back up. Battery manufacturing is becoming commodified and it is highly competitive, price sensitive, and based on volume. Customers should think about the battery as the fuel that you pay for up front, while with diesel you pay daily or weekly over the life of the vehicle. New leasing programs for our batteries and vehicles put our trucks on cost parity with diesel, but with the lower maintenance costs, and greater reliability.

Some of our customers have told us that they have had to develop systems where they allocate the electric trucks in advance, to avoid competition over who gets the electric trucks in the morning.

There are also huge advantages for the drivers. Consider someone’s day-to-day job… if they are operating a diesel truck they have to deal with a lot of noise and vibration. They are constantly walking to the back of a truck and standing in the exhaust while grabbing the delivery goods. Diesel truck drivers often get home after a day at work and their faces are covered with exhaust, but that’s not a problem with an electric delivery vehicle—the drivers go home cleaner, and they prefer to drive electric. Some of our customers have told us that they have had to develop systems where they allocate the electric trucks in advance, to avoid competition over who gets the electric trucks in the morning. It’s a big selling point for drivers, which means that it helps companies with recruiting.

Finally, all these benefits are in addition to the positive environmental impact, and the reduction in urban smog and air pollution. There’s still some public education that needs to happen on this front, but the percentage of people and companies who care is growing.

Let’s also be realistic about the challenges facing electric delivery trucks—what are the top 3-5 biggest obstacles the industry is facing?

Overall, I think the education of companies and consumers is the biggest issue. In well-established larger fleets, there is so much history of doing the same thing, we really have to chip away to break the mold.

When EV initiatives first came around in late 2007-2009, a lot of people were inclined to look into the new technology. At the time, they found EVs to be too expensive, but things have changed.

You’ve probably also got to break down a price perception, which might be historically biased. When EV initiatives first came around in late 2007-2009, a lot of people were inclined to look into the new technology. At the time, they found EVs to be too expensive. But things have changed… battery costs have come down so much since then—the early days of the industry might not have been a good time for all that attention, because some of the publicity was counteracted by the high costs of entry. There’s an important reeducation taking place at the moment around the technology and the pricing.

How are you trying to address that?

We aren’t a large company with a huge marketing budget, so we do it by focusing on individual customers, and winning them over one by one. We have new orders in Italy, Finland, Sweden, and each one of those has been based on a one-on-one meeting. We also don’t have the capacity to bring on huge orders overnight, so we are selective in our sales, and try and built up their fleets over time.

Even if you are selective about your customers and have a targeted growth strategy, how do you address your manufacturing needs as you expand rapidly?

Very simply, we are managing our growth specifically based on our cash availability. Historically, the business churned through a lot of cash, and that is one of the things that a new board of directors and management team has needed to address. We’ve had to convince our investors that we have a plan for sustainable growth—they’ve demonstrated their acceptance of this plan, because we have been raising our first internal investor fundraising in 3 years. Many are coming back to the table because they see a sustainable strategy, based on managing the business through funding that is available rather than continuing to ask for further funding.

At the moment, we are in a controlled growth period using the 800 trucks as our foundation. In 1-2 years, we can see ourselves popping into profitability, at which point we will consider much larger opportunities.

We occasionally consider very large deals, and we always have to consider if it works for us with our budget, our management, and our growth opportunities. We may, after another 1.5 years or so, feel solid and stable enough to be able to look at ways that we can fund to take on larger growth. But at the moment, we are in a controlled growth period using the 800 trucks as our foundation. In 1-2 years, we can see ourselves popping into profitability, at which point we will consider much larger opportunities.

You’ve had a few truck models—the Edison in the past and now the Newton. Why has the Newton emerged as your main priority?

The Newton is effectively the only electric truck available in the 7.5 to 12 ton range. While we have this unique position, we are putting all our efforts into emerging as the only player in trucks of that size—we will focus on other vehicles after we have developed traction with the Newton.

Currently, the Newton is used by companies like Frito-Lay, FedEx—lots of larger businesses, and we have some very small companies using our trucks as well. In some ways we would like to continue to have a split. There are thousands of electrical contractors in the U.S. that would benefit just the same from an electric truck.

Smith Electric was considering an IPO at the end of 2011 which didn’t work out at the time—is that on the horizon again?

People are noticing that Smith is becoming more prominent and reengaged in recent months, so we have been approached by banks for an IPO, and also received offers from the private sector to continue with private financing.

We have an open mind. People are noticing that Smith is becoming more prominent and reengaged in recent months, so we have been approached by banks for an IPO, and also received offers from the private sector to continue with private financing. We have great options and flexibility. We’re bringing in new finance from existing shareholders, with very promising uptake that will see us funded through next 1.5 years, and we will consider our options during that time.

Returning to challenges for the industry: What are your thoughts on the battery market? How does current battery technology limit where you can take the business?

We have a battery management system which is proprietary and agnostic, but with a view that the marketplace could change quickly because it’s evolutionary. It would be difficult to pick one supplier now and assume in a year’s time that they are still the best. We’ve had talks with multiple companies developing cheaper batteries—this space is highly competitive, so we can continue to look for the best value. I can say that our battery costs have dropped by about 50 percent since 2009-2010, which is very promising.

What about competition from CNG trucks in the space?

CNG and electric trucks share many advantages—they are both cleaner, they are certainly quieter. EVs also have the convenience of being able to put in charging stations just about anywhere, at low cost and quite quickly, while CNG needs much more additional infrastructure in the form of tanks and filling stations, which adds both time and cost. They also both have range limitations, which is one of the key considerations for most people when they are moving towards new technology. We believe we still have the advantage there. We are mid-way through a negotiation with a U.S. garbage truck manufacturer who compared both electric and CNG options, and has chosen to partner with us and go for an EV solution based on range and cost of maintenance.

You are a global business, but given your approach towards strategic growth, what are the policies and conditions that make you interested in a geographic area for expansion?

In Europe, we are focused mostly on the UK, Scandinavia, and the Netherlands. That’s where the strongest EV takeup is happening. Some were spurred by incentives, which aren’t likely to be permanent, but non-financial incentives such as parking benefits can also be powerful. Our second main marketplace is in the U.S.—we are focusing on California, which is where more than half of our vehicles are now, and it’s where we go for our servicing and warranty work. Just like Europe, we will build from there as we increase our market penetration.

The rest of the world is a big place and we don’t have the funding to set up shop everywhere—we will be using licensing models in places like South America, Asia, and Africa. But we won’t be pushing that for another 1-1.5 years.

What’s your read on autonomous vehicle technology? Are you looking to incorporate these features?

The Newton is already a mobile computer—quite frankly with some software changes there’s nothing to stop the Newton from being an autonomous vehicle.

The Newton is already a mobile computer—quite frankly with some software changes there’s nothing to stop the Newton from being an autonomous vehicle. As we have already seen with cars, there has been a lot of testing is going on, and that’s true of larger trucks as well. We aren’t having conversations about incorporating autonomous technology today, but I would be very surprised to make that statement in a year’s time.

Finally, what have been the biggest lessons for Smith Electric in the period since 2011?

We have done a lot of things very well—we took an established business, which had moved into an AIM-listed PLC, and developed it into the 800 trucks we currently have on the road. One of the things we didn’t do well in recent history was remain focused, and we had meetings in Asia and South America, which pushed us to take our eye off the ball. We are presently at the forefront of EV truck technology when measured by units on the road and cumulative distance covered. We see this as our foundation or base from where we intend to develop Smith as the go-to brand for EV trucks globally.

 

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