A combination of societal pressure and economic sense are pushing delivery businesses towards zero-tailpipe emission vehicles
Last mile delivery is the final, and often most complex, leg of the supply chain. It has become a key focus for many businesses, particularly those that are B2C-facing. The onset of the Covid-19 pandemic led to what has proved to be a sustained growth in demand for distribution to support online sales, with online retail sales making up nearly 7% more of the proportion of total retail sales in the UK than at the start of the pandemic. The consequential demand to provide quick, efficient and effective shipping has drawn significant attention to last mile delivery as an industry, and it is now thought to be worth around $40 billion in the US alone.
This increase in volume of demand for last mile delivery has coincided with the twin revolutions that are currently transforming the automotive industry:
- an Electric Revolution, as the industry transitions from internal combustion engine (ICE) vehicles to zero-tailpipe emission vehicles (ZEVs) as part of the wider global decarbonisation agenda; and
- a Digital Revolution, particularly as the connected software stack in the vehicle (and increasingly in the cloud) becomes as important as the mechanical ICE used to be.
These revolutions shape the wider automotive industry, so shipping and logistics companies, for reasons examined below, are also transforming their approach to last mile delivery. In particular, the adoption of battery electric vehicles (BEVs) and other ZEVs for a fleet of last mile delivery vehicles is becoming increasingly common on both sides of the Atlantic, with a recent study indicating that 85% of fleet owners consider decarbonisation of their fleets to be a top priority. In the summer of 2022, Amazon began utilising some of the 100,000 electric vans that it announced in 2020 that it was purchasing from Rivian, while Wal-Mart and DHL have both placed large orders for electric vans from US start-up Canoo and Ford, respectively, that are due to be in operation by the end of this year. Indeed, some distributors are looking to use electrification to open new horizons in the classic perception of what a hub-and-spoke model of distribution entails: Volta Trucks and Cake are undertaking a trial in Paris in which a Volta truck will act as a mobile 'hub' from which electric bicycles perform individual deliveries.
Examined below are three broad grounds through which companies that are engaged in last mile delivery will be incentivised to consider adopting ZEVs in their delivery fleet: the Economic Drivers for adoption, considering the immediate economic benefits of transitioning to ZEV fleets; ESG Demands on businesses, which are becoming ever more pertinent; and the Regulatory Environment in which these fleets will operate around the world, with governments increasingly promoting the adoption and use of ZEVs (and disincentivising the use of ICE vehicles).
Last mile delivery presents something of a paradox for suppliers and logistics companies. Despite constituting the shortest part of the journey that a product takes from its place of origin to the customer, it is the most expensive part of the process (accounting for over half of the overall shipping costs). Due to the necessarily targeted nature of the final shipment, the economies of scale found in bulk transport are not available. However, particularly in B2C transactions, customers increasingly demand efficient, but free or very low-cost, shipping as part of their online shopping experience. Hence the paradox: how to sustain profits and improve efficiency while increasingly taking the financial hit for the most expensive side of the shipping process?
While the efficiency of the fleet utilised, both in terms of its intensity of use and its cost of use, is only one factor in the economics of last mile delivery (alongside driver costs, efficiency of the wider logistics processes and other operational inefficiencies, such as traffic and delivery itself), ESG and regulatory factors (as outlined in this article, below) mean that fleet efficiency is fast becoming the most important one. It will increasingly become untenable (and will, ultimately, become impossible) to rely on an existing ICE fleet for last mile deliveries.
However, before we turn to look at these more systemic factors, it is worth looking at the economic benefits in their own right of moving to a connected, ZEV fleet.
The rise in vehicle connectivity as part of the Digital Revolution has the capacity to improve the efficiency of larger fleets. Telematics systems have long been used in fleets of vehicles, but the development of the utility of the technology, such that it can now provide near-instantaneous feedback on a number of a vehicle's metrics, means that it can become a significant source of cost-savings (once the capital cost of this new technology reduces and is amortised). As well as the route and other GPS-related information, advanced telematics systems can utilise a cloud-based management platform to provide near-instant feedback on a variety of data points, such as vehicle fuel level and usage, vehicle health and driver behaviour. The monitoring of such behaviour in real time will allow controllers to remotely direct drivers to, for instance, take different routes or to prioritise certain stops. By way of example, UPS has utilised this technology in the US to plan routes for its drivers that utilise as few left-hand turns at intersections as possible, after studies had shown that crashes occurred more than 20 times more frequently at left- rather than right-hand turns. It may also drive a more proactive approach to fleet management which allows vehicles to be utilised for more of their usable life, using vehicle health data to pre-empt and prevent more serious failures or breakdowns.
A shift to the adoption of ZEVs is also likely to reduce costs. Unlike traditional modes of transport, a well-managed ZEV fleet can be more extensively utilised, lowering its per mile and/or per delivery capital cost even before the benefits of the lower fuel prices, more efficient fuel use and lower maintenance costs.
In the short term though there are, admittedly, high overheads of the ZEV transition, underpinned by the price of the vehicles themselves and the cost of implementing the necessary infrastructure. However, in the medium to long term, the International Council on Clean Transportation believes that the lower operating costs of ZEV fleets mean that their Total Cost of Ownership will be lower than that of diesel-powered fleets in most European cities by the end of the decade (albeit an estimate premised on the falling cost of lithium ion batteries which is happening more slowly than predicted). This timeline to cost parity could be further truncated by the implementation of government incentive plans. Financial incentives and subsidies for the purchase of BEVs exist in the US, China, Germany, France, Italy and the UK (for vans) amongst other countries, and these incentives sit alongside favourable tax regimes for ZEVs. Continued implementation of such policies would further contribute to the economic appeal of adopting ZEVs in last-mile fleets.
Parties may also be able to offset or otherwise manage some of the infrastructure expenses underpinning a lower or zero emissions fleet by entering into strategic partnerships with land owners, property companies, energy providers, fleet operators and e-commerce/retail providers. We expect to see these entities forming alliances, joint ventures or other similar initiatives to establish out of town lower carbon or green fuelling sites to ultimately facilitate this last mile delivery.
As well as demanding cheaper and more efficient service, consumers and other stakeholders are increasingly conscious of the environmental impact of deliveries. This is not without good reason: one case study in Mexico found that inefficient responses to consumer demand for short delivery windows were responsible for a rise in CO2 emissions in the delivery process by 15%.
With the rise in e-commerce demand set to continue to grow, the necessary adoption of more last mile delivery vehicles and/or more delivery trips to accommodate this demand would cause increased carbon emissions. Therefore, in addition to being more economically viable in the long term, suppliers will increasingly need to adopt ZEV fleets to boost their ESG credentials. This will be important to meet the expectations and needs of consumers and, by extension, businesses contracting with suppliers for last mile delivery services. Other stakeholders, including employees and investors, are similarly expecting suppliers to be able to demonstrate their climate-related strategies and how they will remain resilient as the world transitions to a lower carbon economy. Therefore, being able to present a more environmentally-friendly and conscientious approach to last mile delivery is, and will increasingly be, an important element of a company's marketing proposition.
How companies approach this goal can have wider economic benefits than simply the positive brand perception that comes with being ESG-conscious. For example, in implementing its strategy of becoming emission-free by 2040, Uber (whose services cover both package and food delivery) is working with OEMs in the design of smaller, slower, cheaper electric vehicles for use in cities which are better-suited to urban last mile delivery (and passenger) operations. By influencing the design and specification of vehicles – particularly away from large and heavy batteries – fleet costs can be reduced (both purchase/hire costs and operational costs), while simultaneously contributing to a reduced environmental footprint. Vehicle design improvements aimed at helping drivers (both driving and unloading) will also deliver social benefits.
This is a clear area in which the last mile delivery sector, particularly in urban areas, is and will continue to wield influence over the automotive industry.
Over and above the economic drivers and ESG considerations in moving to a ZEV fleet, operators will need to consider the near-term adoption of such a fleet as a means of addressing or mitigating regulatory intervention. In many countries, including the UK, a number of national or local government initiatives have been introduced, or are in the pipeline, that financially target carbon- and NO2-emitting vehicles, with the goal of reducing their wider use. Many of these will be of particular relevance to last mile delivery firms.
Examples include the UK's Low Emission Zones and Ultra Low Emission Zones (LEZs), which directly affect the final stage of shipping. In London, drivers of certain highly polluting vehicles are charged up to £100 to drive in LEZs, with large carbon-emitting vehicles, such as lorries, charged at the upper limit of this range.
In other parts of the world, a trial LEZ was established in Santa Monica, California, in 2022, the first of its kind in the US, and an LEZ has been in operation in Beijing since 2017. In France, a 'Crit-Air' sticker system that classifies vehicles on the basis of their emission standards has been introduced in certain cities. More polluting vehicles, as identified by their stickers, have limited access, if any, to certain areas of the city under this scheme, underpinned by fines for breach. It is becoming clear that, driven by these regulations, companies will need to adopt low-emission vehicles for their last mile delivery processes at least in major cities to ensure that they are continuing to operate in the most cost-effective manner. However, with many of these same jurisdictions planning to ban the sale of new ICE passenger and light commercial vehicles outright from 2030 to 2040, those that transition early to seek to benefit from the above factors will also future-proof their fleets for that time.
Beyond purchasing or leasing a ZEV fleet, it is critical for the fleet operator to have access to the infrastructure available to support the vehicles. In particular, in addition to charge points with secure connection to the electricity grid and, potentially, increased distribution centres in urban areas (in order to maximise the efficiency of the hub-and-spoke model), distributors will want to maximise the efficiency of their network. Fast charging is important for the efficiency of the model, demonstrated recently by the news that Amazon is installing charging points in its European delivery hubs that can charge its delivery fleets in around two hours. Overnight depot charging facilities are also important, in order to seek to minimise or eliminate the use of mid-route charging stations and minimise a vehicle's "down time". Dedicated grid offtake arrangements, ideally using dedicated green electricity, 'vehicle-to-grid' smart charging and a potential back-up supply of stationary batteries to boost recharging time and reduce costs during peak hours will also bring operational and economic efficiencies.
The installation of charging infrastructure is being incentivised in many countries through tax benefits, particularly via deductions for capital allowances for the installation of charging points.
Moving Forward Together
It is becoming clear that it is a question of when, rather than if, last mile delivery companies will transition to fully-ZEV fleets in much of the developed and urbanised world. The cost inefficiencies of continuing to use traditional ICE vehicles in a business model that is already low margin will damage companies' ability to be competitive, increasingly meet with vocal customer and other stakeholder opposition on ESG grounds before becoming entirely unviable.
The process of transition is not easy: capital costs remain stubbornly high and the supporting infrastructure for wide implementation of a ZEV fleet is still only developing. However, the importance of beginning this transition now is manifest. Demand fed by consumers' increasing moves to online retail shopping and the regulatory, and moral, disincentives for using fully ICE vehicles will increasingly be felt by those who fail to transition.
There is scope for a closer relationship between the last mile delivery sector and the automotive industry in delivering these changes. Increasing adoption of sophisticated connected technology in ZEVs and improving battery performance are two examples of ways in which last mile delivery companies that make the transition will benefit; by embracing and collaborating with OEMs, they will have the ability to influence design and implement specifications to better meet their own requirements. In turn, mass adoption of BEV or ZEV fleets by household name companies with a high degree of visibility on our roads will help promote wider BEV ownership in the private sector and drive and help to make economically viable the much-needed improvements in the infrastructure supporting it.
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