While the overall trend of the global shipping industry switching to natural gas as a way to reduce carbon emissions is in full swing in several regions, Vancouver’s Westport Fuel Systems Inc. (TSX:WPRT) is looking at one specific market to finally push the company to profitability.
Westport CEO David M. Johnson noted that companies like FortisBC (TSX:FTS) have pushed natural-gas trucking and shipping to new heights within British Columbia, but the overall North American market continues to be mired by regulations that keep truck companies from making the switch.
In turn, Westport is looking to three markets where government regulation is driving change in the trucking industry: Europe, China and India. And among those three, only one – China – offers the mass--market expansion opportunity that could solve Westport’s historic cash flow problems.
“The business of being an automotive supplier is about supplying at production volumes,” Johnson said. “Our current levels, especially for [commercial trucking], are rather low…. Doing things on a small scale really doesn’t achieve the environmental and economic impact that we want to have.”
Last year, Westport entered into a development-and-supply agreement with China’s Weichai Holding Group to bring truck engines with Westport’s HPDI 2.0 technology, which can be installed on conventional diesel truck engines to make them capable of running on natural gas, in late 2019. Weichai, one of China’s largest automotive equipment manufacturers, built 700,000 diesel truck engines last year.
When combined with Beijing’s directive to dramatically decrease carbon emissions and adhere to the quotas agreed to in the Paris accord, it makes the coming wave of natural-gas conversion in China a rare lucrative opportunity for Westport to achieve profitability.
Europe is seeing a similar political mandate to reduce emissions, with heavy-duty vehicles being required to reduce carbon dioxide emissions by 15% by 2025 in that market.
However, Johnson said, the structure of the shipping industry there makes it less likely for Westport to reach the scale of business it could see in China.
“In Europe, we sell to truck-engine makers who also make commercial trucks themselves,” Johnson said. “So basically, with our European customers, while we are very pleased with them, they are only selling to their own brands. The potential for mass adoption in Europe is somewhat limited by that, whereas in China with Weichai, they sell to every major truck company in China. And the Chinese truck market is about 40% of the world’s total truck market; it’s huge. So the ability to impact that market … is really, really exciting.”
In the company’s Q2 financial results announced earlier this month, Westport reported a positive cash flow from operations of $2.5 million, compared with a negative cash flow of $2 million from the same quarter last year. Revenue rose to $82.4 million on demand in markets like Europe, and Johnson said the cash flow picture is trending in the right direction (and could be further fostered by growing demand in China and Europe).
However, the company is still facing a number of challenges, including an ongoing investigation by the U.S. Securities and Exchange Commission into its joint venture with Weichai, and whether the agreement violated U.S. securities laws prohibiting firms from bribing foreign officials. Johnson declined to comment on the ongoing investigation.
Part of Westport’s improving financial picture is due to reductions in operational expenses. The company cut its loss from operations from $11.7 million in Q2 2018 to $5.9 million this year, but Johnson agrees that the company cannot cut its way to profitability.
That’s why the company, he said, is so high on the Weichai Chinese market possibilities. But Johnson also expressed frustration with the challenges of getting natural-gas shipping into key automotive markets like North America and Japan.
“People are talking right now, saying, ‘Wow, changes are happening so fast,’” he said. “I wish it were changing quicker than it actually is. I think we want change to happen fast, but it takes a long time to change things in transportation, given the investments are so large, the infrastructure is so significant and the system is so developed in terms of how we move freight.”
And while high diesel prices and government mandates are key driving factors for the adoption of natural-gas shipping in these markets, Johnson also noted another potentially crucial turning point – rising demand for electric-powered trucks.
Tesla Inc. (Nasdaq:TSLA), for example, is planning to release an all-electric Tesla Semi. The test vehicle was recently spotted in California undergoing trials, and Tesla has said it plans to sell 100,000 units by the end of 2023.
Some observers have touted the electrification of trucking as the next big step for the industry, citing reduced fuel costs and environmental impact. However, others have expressed concerns about the notoriously limited range of electric vehicles, the energy density of batteries required to haul cargo and the time needed to recharge.
For Johnson, the faster the trucking industry realizes a clear path towards fewer emissions, the better. And while he thinks options like hydrogen fuel cells may be the answer further down the line, he said he is skeptical about the economic and technical viability of entirely electrified trucking networks.
“I do think electric propulsion is confusing people,” he said. “At some juncture, you have to prove it. We’ve already proven it by having our products on the road in Europe and, soon, China. There are fleet customers who are driving it right now and saying how much they like it. You need these proof points; right now, with electrifying trucks, there is no proof point. You can’t go buy one; it’s a future promise. Frankly, the cost of those trucks will be exorbitant, and the capability of those trucks will be dramatically reduced. That will make it difficult for companies to use it.
“And perhaps at some future point, people will realized that this is what it is,” Johnson added. “That would change so much for us.” •