59: Scania CEO Christian Levin: EU CO2 rules are a bigger threat than China

Hello, I'm Will Shires and this is Talking Drugs. For this episode I'm joined by one of the most influential figures in the global commercial vehicle industry, Christian Levin, President and CEO of Scania and CEO of the Treating Group. Christian was in the UK for the opening of Scania UK's new Learning Academy and we called it up over a very plush breakfast which explains some of the background noise you'll hear during our conversation. It was a great opportunity to talk to him about electromobility, Brussels and the potential threat from Chinese truck makers. Welcome Christian. Thank you Will. Good morning. Morning. Now, you'll hear the Open Scania's new Learning Academy, part of more than a hundred million hours being invested into the UK service network. Why invest so heavily at the time when manufacturers have under so much pressure to control costs? So I think we have to get one level up and think about what is Scania's success reciting upon and clearly it's the modular system, you know, invented in the early 40s, bringing tailor-making and scale to our customers, right? Secondly, it's got a production system where we learned from Toyota early 90s that, you know, we had to change the way we think around quality, wrong productivity. And thirdly, and that is perhaps a part we talked less about, but since the early 90s, we started also to go more captive and the frontline eye we started to acquire workshops, dealerships, importers and have created, I would say, a world-class network, including the non-captive, of course, where we work according to the same standards and we really bring that Scania family feeling into our customers. And doing the investments in the UK that we're doing now, including the learning's interest to make sure that we preserve the quality in the frontline, Scania family feeling with our customers and really show that it's all throughout the value chain that it's equal importance, not just product, it's really as much services or perhaps in the future even more. Okay? Great, great, great. Now, at IAA where we had a brief chat, you appeared alongside the other six, a SEA commercial vehicle CEOs in an unprecedented show of unity. You were calling for a three-year delay to the 2030 CO2 timetable. For listeners who may not know what that's about, could you tell us why you were asking for the delay? Yes, of course. So obviously, the electromability and they have a commercial vehicle sector in Europe is not taking off or at least it's not increasing at the speed that we have been investing for and that Europe has planned for something needs to be done. Everyone is looking to us and saying, bring the vehicles, I think we as an industry have already developed them. You've done that. You know, they're not prototypes, they're being delivered to customers, they are in serious production. So job done on our side. Agreed. What else is needed? Well, there needs to be a business case. There needs to be a buyer with a rationale to say better business, right? That's very much a policy maker responsibility. You have two, in a very simple words, make these are more expensive. I know a lot of your listeners, our listeners don't want to hear that, but bake electricity or energy for electric vehicles cheaper. Bring that together with a lot of other incentives that you can put into place and the investment into battery electric vehicle must be cheaper, right? And secondly, of course, there needs to be a charging infrastructure. If these things are not in place, it doesn't matter how good vehicles we bring to the market, they will not take off. That's what happening. That would have been OK unless there was on top a law, a European law, which forces to pay fines as from theoretically 2030 if we're not reaching a certain level of which is for transport to three percent reduction. Yes. I'll see you too. So which will not happen? That would require 35% roundabout of battery life being registered in 2030. And we want 2.4% now, I think. We're here today 2.4. We were lost here 2%, so I mean, there is not even a beginning of an S curve here. So it's very unlikely, or we are even saying it's impossible, it will not happen, just to build up the infrastructure needed. It cannot happen. You know, industry doesn't have the capability to supply them with the chargers. So something has to be done about the fines, something has to be done about speeding up the enabling conditions, at least to a maximum. That was to call out, and we all are in 100% agreement. So what happens to Scania if it misses its targets? Well, it's quite dramatic. At the press conference, it was our current chairman of Asia, I spoke out, Karen Rhodes from Daimler. She made the example that in her case, missing the target with, for instance, 10% would mean a 1.2 billion euro penalty, which would erase the entire profit of Mercedes-Benz worldwide. That is dramatic, because that money, or large part of that money, would typically flow into research and development, and actually continue to make world-class vehicles. Yeah. Absolutely same in our case. Cannot happen. Must not happen. It's a bigger threat to Europe's industry than what many, many talk about Chinese threat. I talk about the threat from Brussels. This is a threat from Brussels, that we're having hanging over our heads and it is absurd. Yeah, it strikes me because, of course, the Chinese aren't affected by these fines. No. We're not opening the door for them. We're laying out the red carpet as well. Absolutely. And bringing us down into trade policies, I think we're also there, or at least I can speak for the trading group, level playing field is what we're asking for. We're not afraid of competition, we're not afraid of the Chinese. They are welcome, of course. But it should be on equal terms. And this is just one example of where equal terms are not to be found. Yeah. Yeah. So one of the other things that came up in the press conference was additional weight. So for instance, in the UK, a six-axle electric truck still is kept at 44 tons. Are you lobbying for additional weights and what about individual, actual weight limits? Do they need to increase as well? Yeah. But both would of course be helpful. I mean, we're now into how can you make the battery life more competitive, right? Without having to fiddle with a decent price, for instance. And yes, payload is a very, very good example. It does not affect every customer, but any customer that is loading fully there, their vehicle would benefit because there is a penalty. We see somewhere from two up to potentially even five tons of payload penalty. So can you compensate that? Yes, you could, and you should. So in Europe, we have gotten two tons on a normal four by two. In UK, so for nothing. So I think UK could be the good example and show the way. We have shown also the years that we could also make vehicles in general heavier and longer. We just need to spread that over more axles. UK already widely used the three-axle for tractors, brilliant. With battery electric vehicles, it's not only the total weight as you're into oil, but it's also, we need room for the batteries. So to increase axle distance helps a lot to also have the space for the batteries. Using them on, and you get a problem with payload distribution. Right. And that you could address also by looking into, okay, what is now allowed as a front axle load, for instance, throughout Europe. So presumably you're losing money on every electric truck you sell. You must be. I'm sure that goes for the whole industry, and the biggest reason for that is the under-absorption. So we at Scania, for instance, we had invested for a 50% uptake by 2030. And now we see a 1% uptake or 2% uptake means that we have a lot of production equipment and a lot of, some call it stranded acid. I wouldn't say stranded because I still think and plan for them being useful, but of course they're underutilized heavily. And in a normal diesel production facility, you say, well, you need to be 78% to break even and start making money. We are the few percent. So obviously we're losing money on every single vehicle. Yes. Of course, now in the past you've told me that Trayton would not be going down the hydrogen route, prefer in battery electric, but at Hanover there was an announcement that Scania would put 40 trucks, I think powered by Toyota fuel cells, into customer operations. Is that a U-turn? Not at all. We pursue the thinking that, first of all, we need to be agnostic to technology, right? That's what we demand from policymakers and we need to think same. Or that's what our research kind of shows, right? So we're thinking about hydrogen like it will be most probably far too expensive because of the transitional losses when you produce it's not going to be available because it's going to be used by industries who has much more use for it, green-spent, green steel, whatever, chemical industry. But there might be niches, and I mean in general we could also be wrong about our assumptions about the pricing of hydrogen, etc. So we keep a two in the water, that's what we do. So we have a very small team, we put very little money, we find collaborations and we have in this case, customers are like, please bring us, you know, we have the splendid model system, cannot bring us vehicles. And then we do that. And a small scale experiment like this one, it's not the first, it's not even the second, it's not even the third, it's the first time around and we have vehicles rolling in many countries in Europe, conclusion unfortunately, it's the same, it's far too expensive to operate. So we do not believe that that's the pathway. And from a European policymaker standpoint, I'm also personally afraid that a lot of investments are not flowing into the hydrogen transport economy where it will give no returns whatsoever. So if we say, let's not focus on enabling condition, get the charging infrastructure in place. for battery electric vehicles, and then we end by saying, and don't forget about hydrogen. We confuse, we confuse the public, we confuse our customers, and worse, we confuse the policy makers. Yes, absolutely. And what happens is, we're through in good public money after bad, you know, so let's go for battery electric. That is what's going to dominate the market in the coming 10, 15 years. Yeah. So that's our view on hydrogen. I mean, the fuel cell technology is brilliant. I mean, I love it, but it shouldn't be if trucks. Yeah. Yeah. Thank you. Thank you. Something else I want to briefly ask you about, because I read that you said, it's a lag behind China when it comes to autonomous trucks. Why is that? So I say, I mean, there are probably several answers to that question. I see two main reasons. One is the legislative landscape that China is extremely forgiving, and allowing a lot of dangerous, you could argue from European standpoint, but trial on road, right? You can go driver out with not so many redundancy systems, et cetera. So it allows for scaling up technology faster, right? That's, I think, is perhaps the main reason. The other is that China is largely driving the whole, at least transport economy, I think big parts of the economy in general, on standardized IT platforms. So the digital landscape is the same for everyone, which means integration of different systems, faster and cheaper. These two advantages makes China now leading the world in terms of autonomous, but we shouldn't forget about the United States. I mean, the tech community there has also been very successful in bringing these technologies into trucks, and that's where we today spend most of our money, actually. So we have pivoted away from Europe where we see this is far too slow, far too complicated, and raw the spoundless resources bringing our sister around the international motors up and running together with partners. I see. Keeping on the subject of China, I mean, walking around that IAA transportation show this year, I was staggered, and they're not just tucked away in the corner either. They're stands at the same size as the established European truck manufacturer brands. So we've all seen what's happened with passenger cars in Europe, especially in the UK. Do we think it's going to be any different with trucks? So you know being lonely on this business almost as long as I am that trucks and cars may look the same to the public, but there is huge differences. You know, a truck, first of all, you buy to make a return on it. It's a piece of machinery, and you could think about it as a stone crusher or a compressor or a paper-pulled machine, whatever. It happens to go on rubber. That's the only similarity, basically, with past cars. So what our customers are buying is a systematic solution to a transportation need, right? To be done at maximum up-time, low-spossible cost. That's what they're buying, and that's, of course, what we compete on. To do that, you need, of course, a good product, but it's not enough to have a good product and have a cheap product. You have to have all the services available along the lifetime of the vehicle, and that's the challenge for anyone establishing himself orself in a new market, and we face that challenge in many markets where we go in for the first time and the first challenges the service network. To find it, to get up and running, to make it profitable, to make it professional, to have all the spare parts flowing in exactly when they're needed, and we can go on. I mean, you know what about this, right? You also need the financial services in place, I mean, leasing, of course, is the majority of our customers choose leasing product, and perhaps most important, and what it's too little talked about, I think, is how do you get the second-hand value? Because you can be very cheap up front, but if you don't have a good second-hand value after five, four, five, six, seven, maybe seven years for a better electric vehicle, it's still not a good deal, right? And how do you give that certainty to the customer that the product will have a second-hand value? You can guarantee that through an RV, right? Industry is doing that, but you cannot do that large scale without knowing what it actually is. Your auditors will be all over you and you will have to adjust your bookkeeping, if you're too aggressive, right? Then I think we've all been in the history of being down that road and learned that less on the hard way. So what I'm trying to say is it's, you know, yes, you can come with a very good product, cheap product, but it will take many years for you in our industry to go beyond the already established trust and all the shops of the customer and all the services that are needed in order to be a reliable player and a reliable partner. Of course, it's a good occasion to go when there's a technology shift, because customers are anyway kind of looking for new solutions. So I think it's wisely taken time, but Chinese, they come in with a technology where they have a better level. We are, as you know, present in China, and we see that their combustion engine vehicles are not at all of the level as to your pins, whereas the electrics are, meaning that they have a good product offering. But again, let's see, in a couple of years or five years, perhaps, how many of them? And I'm sure there are a few, and we should absolutely respect that, and we're very close to them, that will survive, but not what you saw at IAO with, was it 15, was it 20, trying their wings in Europe, one, they won't fall. Should there be subject to the tariffs? I'm, well, first of all, coming from Sweden, free trade, small country, standing for Europe, but I think free trade is what we always, and the success of global European companies resided upon, we want a level playing field. We were into that in the beginning of the interview, so if we are allowed to compete with the same mechanism, so with the same conditions, we are all fine, wherever we are in the world, you has to think very carefully here about tariffs, tariffs are so easy, they will then they will be tariffs the other way, we see that with the United States, it's certainly not helping our industry in the United States, just creating problems. So you have to have talks about reciprocity, and if you talk specifically about China, I mean, there are many mechanisms for China to keep out or make life difficult for western struck manufacturers, we have taken the big bat, invested heavily into China, that means that we're now inside, that's all fine, but of course, that's not openly available, there's still joint venture roles in place, there are input duties in place, well, then of course, Europe has to look to, how do we make that equal, then there are things you cannot equalize, you cannot equalize 60 hours work week or salary levels, but that's also why global trade is good right, everyone does what they do best, right, and that's how goods and services gradually get cheaper and cheaper for the general public, and that's how we're building wealth in the world. So it's a thin line between destroying the good value of globalization or going into trade wars, which is just creating losers on all sides, not easy to be a policy maker today. No, absolutely not. So you're actually manufacturing in China, are we ever going to see Chinese built Scandinians being sold in Europe, that is not the plan, that was not the plan, we're learning a lot in China, but our plan wasn't is to supply scorn attracts to the Chinese market, the biggest in the world, to export out of China to the markets in the areas, predominantly Asia, but we will move into the Pacific, Middle East, Africa probably, and it just like today we're using our huge facility in Brazil to balance capacity with Europe and use landed cost as a way to optimize. So there's been many markets like South Africa where we sometimes take production from Europe, sometimes from Brazil. Now we get the third leg to optimize from, say, well, it might be China that has, well, the cheaper production cost or the lower logistic cost, or actually at all access to certain markets such as currently what is happening in the Middle East, there are Chinese shippers actually transport our trucks into Saudi, it's very hard from Europe. So that's still the plan, partly export, partly China, and then we invented this new brand next era, which is the China for China product, and that one we are really using to go head to head with the Chinese and try to compete so far so good, it's very early, we launched February this year. But that one is also developed in China, so with Chinese partners, Chinese engineers, and really tapping into the digital platforms I was talking about, and we are doing a lot of great learnings there. I was very well learning from them. Exactly. And the biggest learning, which is huge, and this is a shift in industry. It's just as big as when Toyota brought the machine that changed the world, right? And they taught all of us how to increase quality and productivity dramatically. Chinese are not, and then not after that, it is all about bringing new technology to market fast. It's speed. That's what China is today teaching the world. If you're not learning from that, I'm sure you're going to be absolutely relevant in the future. So I see also our investment over there as a strategic bet to really tap into industrialization China speed. Not all can be brought back to Europe, but a lot can and have to be brought back to Europe, otherwise we will not be competitive on a global scale in the future. Okay. And finally, I just wanted to talk to you about the commonality within the trading group. You were sharing more and more components now, especially as far as the drive lines are concerned across the group. What about CABs? Yeah. So. The way the world is going with more and more legislation, more and more barriers, means for industry, whatever industry you're in, scale and the possibility to share development costs are becoming increasingly important. Yes, so to share driveland components, as we have done, makes a lot of sense. You need to careful, of course, craft your product around which performance goes into which customer category. And there, on a driveland, it's very easy to think around. Most powers are more importantly torque in our industry, gear shifting, logics, tailoring to what this customer group needs, et cetera, et cetera. Cab so far, we have refrained, but I think it's inevitable that you have to look to the cab structure. You have to look to the chassis. But the most important, the biggest cost driver in our industry after the drivelines is the electric architecture and the software. So where we struggle and also work very, very hard now and put more resources than in any other area, that is to make sure we come over on a on-common electric architecture for all our five brands and a common, as we call tool chain, but common software is in order to develop all of this. Because that's is and will continue as we move towards software defined vehicles to be the biggest cost driver in the industry. Won't necessarily be seen by the customer. It was very easy to have a graphic user interface that is slightly different, but behind that interface, you have to have a common machine. Otherwise costs are just going to get out of hands. Of course. But what has to remain distinctly uniquely skinnier? Oh, yeah, that's something we had on as a theme on our top management meeting here in June, where we gather the top 350 scone x-axis from around the world and really discuss them. 2035, you know, what is premium? There's no doubt that we have every ambition to be the premium player, the prize leader in the market, not for prizes such, but because we need to deliver more value than the others and get recognized for that. So what is done that? Well, I think energy consumption will continue to be an as it is today, where we have the best fuel economy and we have also our battery electric vehicles, the lowest energy consumption. That will remain. Drivers will be there and drivers, you know how it is. The only two categories of drivers, the one driving scone us and the one dreaming of driving us, why is that right? Well, because we invest a lot around, especially around economics and the feeling that the driver is in total control of the vehicle, right? That will remain, but then the question comes, okay, but if a lot of other stuff on the vehicle will be the same or similar and it's not only within a group, but also towards competition, you have to work on your service offering and services will just be more and more and more important, to seamlessly bring the customer into your family, make them feel really at home there and make everything really easy, you know, having easy systems to integrate with. I was talking autonomous vehicles, easily integrated into the logistics system of the customers. That's going to be the premium journey. So in a way, it's like a lot of the historical stuff, but you're also taking a step into the new world where services will play a huge role. And that kind of takes us back to where we started. The investments we're doing in our training centre here in the UK, our dealerships here in the UK to reinforce the front line, because that's where you always deliver the service, right? Yes. That, to me, makes a lot of sense, just as much sense as investing into the product platforms. Christian, thank you very much for that. I really appreciate your time. Thank you. Sorry for the chewing. [Music]