Why Businesses Win by Investing in Hybrid Vehicles
Fuel prices are rising again, and as they go up, they tend to slow economic growth by increasing costs for businesses and eating away at household discretionary budgets. Today, consumers have a wider range of options than ever for buying hybrid, plug-in or full electric vehicles to help reduce their fuel costs. However, businesses are far behind consumers in their adoption rate of hybrid and electric vehicles. The good news is that high fuel prices create conditions in which hybrids - especially lower up-front cost, charge-sustaining hybrids - become sound business investments. Businesses that take action now will outperform their competitors.
Excluding long-haul tractor trailers and passenger cars, there are more than 10 million vehicles used for transport in commercial fleets in the U.S., comprised mostly of delivery trucks, cargo vans and pickups. Due in part to a lack of government regulation of commercial vehicle fuel economy standards (at least until President Obama’s new regulations go into effect in 2014), most of these vehicles have a combined fuel economy well below 15 mpg. Many Fortune 1000 businesses operate hundreds or even thousands of vehicles in their fleets and watch helplessly as rising fuel costs eat their profit margins. Still, the commercial vehicle segment has been slow to adopt hybrid powertrains, even though fuel savings for each vehicle can range from $2,000 to more than $4,000 per year at current fuel costs.
Businesses need proven ROI
Businesses use their vehicles as tools to deliver goods or services. Managers have been reluctant to pay more for efficient vehicles, such as hybrid trucks, unless they can justify the higher investment based on the fuel savings. In the past, many hybrid powertrains were designed and priced to capture subsidies, and during periods of lower fuel prices, these options were uneconomic.
Higher fuel prices, improved technology and a redesign of commercial hybrid powertrains at lower price points have created the right conditions to spur large-scale adoption. Charge-sustaining hybrid commercial vehicles are now viable for a large percentage of fleet managers for some or all of their fleet, and the purchase of hybrids can provide a return on investment exceeding corporate hurdle rates.
Fuel savings provide short payback
To understand the benefit of commercial hybrid vehicles today, let’s review the decision many fleet managers face in buying a hybrid model. A typical delivery truck operating in and around a major city may average 8 mpg. If the truck averages 25,000 miles per year (mpy), which is quite common, the vehicle consumes (25,000 mpy / 8 mpg) 3,125 gallons of fuel per year. At $4 per gallon (a reasonable average number for a 10-year vehicle life), the average annual fuel cost of this truck is $12,500.
Hybrid trucks often boost fuel economy by 25 percent for urban and suburban routes, so in this example, a hybrid delivery truck would average 10 mpg. Using the same scenario as above, a hybrid truck consumes (25,000 mpy / 10 mpg) 2,500 gallons per year at a cost of $10,000. This represents a reduction of 625 gallons per year, or an annual savings of $2,500. Many delivery trucks drive even more miles annually and some conventional models have even lower fuel economy, creating the opportunity for greater fuel savings from hybrids.
Furthermore, hybrid trucks can reduce brake replacement costs by up to 50 percent over the life of the vehicle by extending the interval between replacements. Brake maintenance savings can range from $150 to $750 annually depending on the size and annual mileage of the vehicle, and should be accounted for in the investment decision.
Commercial hybrid powertrains are now available for $8,000 to $12,000 over the base price of conventional models in the commercial light duty segment (pickups, vans, shuttle buses). By replacing the least efficient and highest annual mileage vehicles in fleet service, the fuel savings can provide a justifiable payback of two and a half to five years, even without subsidies. For most fleet buyers, having payback under five years is critical to sell an initial project internally to management, and a 3 year payback is a common fleet buyer threshold to dramatically scale purchases.
Hybrid vehicles create a competitive edge
The above numbers show that small increases to a commercial truck’s fuel economy can provide real value to businesses. Fuel savings can be reinvested in additional hybrid purchases or services for the business to differentiate itself from competitors, such as lower prices for customers, enhanced customer service, better product warranty, longer service hours or expanded geographic coverage, to name a few. Businesses that do not take action will suffer from lower operating margins.
Furthermore, businesses that reduce fuel consumption reduce their company’s exposure to volatile fuel prices and reduce uncertainty about future fuel costs. While it may seem counterintuitive for managers to think about investing when fuel prices are rising, remember that all companies face the same prices at the pump and that companies that adopt efficient vehicles are in a position to invest fuel savings in growing the business, while competitors are sending additional money to oil companies.
Many hybrid vehicle models are cost-effective today. By deploying hybrids to replace the least efficient, highest mileage vehicles, businesses create strategic cost advantages over competitors who fail to act. Reducing fuel consumption is a great business strategy, and those who act today will reap the rewards.
Justin Ashton is the co-founder and vice president of business development for XL Hybrids. He leads market strategy and serves as the head of sales and marketing. In his spare time, Justin enjoys finding ways to take money away from oil companies. He holds a master’s degree in business administration from MIT. Find Justin on Twitter @justinbashton
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