As major trucking companies decarbonize their fleets, they are currently prioritizing lower-carbon fuels such as natural gas and biofuels over zero-emission trucks. Adopting these fuels marks a positive step toward sustainable commercial mobility but represents only an intermediate step toward zero-emission mobility in the commercial sector. Meanwhile, true zero-emission mobility in the form of electric or hydrogen-based trucking appears to be stuck in traffic as massive challenges delay adoption.
The transition to zero-emission trucks involves more than just replacing a powertrain. Disruptions will occur across the ecosystem: OEMs are devoting substantial development, production, and sales resources to developing new powertrains and higher degrees of digitization. A multibillion-dollar infrastructure challenge is on the horizon, and utility companies face a wave of new demand on their grids. In addition to those supply-side issues, fleets hesitate to commit to the transition in the face of challenges ranging from stretched capital expenditure budgets to unwieldy business cases to operational hurdles.
Hitting regulatory targets: What would it take?
The transition to zero-emission powertrains is largely driven by regulatory interventions and supported by decarbonization efforts across industries. Medium- and heavy-duty trucks (MHDTs) must become emission-free to decarbonize the transportation sector in line with long-term targets. To make this shift happen, regulators in the European Union and North America are following a two-pronged approach: first, they are pushing truck OEMs to decarbonize their product portfolios, and second, they are creating subsidy programs to bridge gaps in total cost of ownership (TCO) and ease capital expenditure burdens in infrastructure deployment.
Regulations and incentives
The European Union has some of the toughest emissions regulations worldwide, with reductions of 43 percent required in sales for new medium- and heavy-duty trucks by 2030 and 90 percent by 2040, enforced by hefty fines for noncompliance.1 Additional regulations focus on infrastructure build-out (AFIR),2 proposed exceptions to vehicle dimension standards for zero-emission trucks, and discounts on distance-based road tolls aimed at facilitating the transition.3 These are complemented by subsidy programs, such as a German initiative that covers up to 40 percent of charging infrastructure costs, encouraging the deployment of zero-emission trucks.4
In the United States, national-level targets proposed by the Environmental Protection Agency require a slower yet still significant deployment of zero-emission trucks by 2030.5 Depending on the truck segment, zero-emission powertrains are expected to account for 25 to 60 percent of new annual sales by 2032.6 However, the State of California and other states7 that have adopted the California Air Resources Board’s Advanced Clean Trucks regulation aim for stricter targets of 30 to 50 percent by 2030.8 In addition, the federal Inflation Reduction Act provides tax credits to manufacturers and fleet operators for zero-emission truck sales, batteries, charging infrastructure, and hydrogen production and distribution.9
These incentives are particularly critical for encouraging fleet operators in both the United States and the European Union to decarbonize their operations. Operators face increased pressure from regulators, freight buyers, and investors to decarbonize their fleets while seeing a clear lack of willingness on the customer side to pay for the transition. For example, starting in 2024, the Advanced Clean Fleets regulation in California sets zero-emission vehicle requirements for priority fleets such as drayage operations as well as fleet operators with more than 50 vehicles.10 In the European Union, Germany has introduced a CO2–based toll on combustion-engine trucks equivalent to €200 per metric ton of carbon dioxide emitted.11 The European Union is also set to launch the EU Emissions Trading System 2 in 2027. The carbon-trading scheme covers emissions from fuel suppliers for buildings, road transport, and other sectors such as small industries. The system is intended to help EU member states meet their emission-reduction targets and achieve climate neutrality by 2050.
These developments indicate that regulatory pressure, especially on OEMs, is intensifying, and public announcements of powertrain and R&D focus shifts can be interpreted as signs that the industry is embracing the regulatory goals (Exhibit 1). But what would have to happen for the ecosystem to achieve these ambitious targets?
To meet regulatory targets, McKinsey estimates that well over a third of new MHDT trucks sold in the United States and the European Union would have to run on zero-emission powertrains by 2030. This sales increase will translate into zero-emission parc shares that exceed 10 percent after 2035. This appears to be a daunting task, given that zero-emission trucks—battery electric vehicles (BEVs) and fuel-cell electric vehicles (FCEVs)—account for less than 2 percent12 of new MHDT sales in the United States and the European Union, with the largest sales numbers in use cases focused on regional and urban applications for heavy-duty trucks.13
Pure regulatory pressure is highly unlikely to successfully steer a complex ecosystem of very different players to achieve such high ambitions. As one author once wrote,14 “You don’t rise to the level of your ambitions; you fall to the level of your systems.” While ambitions are high, the systems in question do not always work in the needed ways.
Ultimately, what is required is a functioning market and an ecosystem that does not rely on regulatory enforcement or subsidies. Fleet owners must want to buy zero-emission trucks, not be forced to buy them because no alternatives exist or because subsidies drive the decision. To achieve this, the ecosystem must improve on the two main buying criteria for fleet owners: the reliability of the “infrastructure vehicle system,” and TCO parity versus current powertrain alternatives.
What will it take to realize zero-emission trucks at scale?
Making the anticipated rapid transition to zero-emission trucks will require the entire ecosystem to act in concert, with unprecedented efforts from each player to address multiple challenges simultaneously (Exhibit 2). However, in its current form, the market for zero-emission trucks is not working properly, leading to delays in the transition.
OEMs and suppliers
OEMs and suppliers have a tough task ahead. They need to create a comprehensive zero-emission-vehicle (ZEV) portfolio, build a new supply chain catering to this portfolio, scale up production capacities, and drive a real step change in product cost.
Develop products and solutions. OEMs must rethink product designs and develop new lines of products and solutions optimized for the zero-emission-truck market. They should include new platform strategies featuring prioritized powertrain offerings and specifications (for example, power ranges, battery sizes, and payload). OEMs must balance the offering of a new competitive product portfolio across relevant market segments against keeping development costs and operational complexity under control.
Reduce product costs. Today, McKinsey analysis shows that zero-emission trucks have a TCO disadvantage of up to 40 percent, especially in the heavy-duty long-haul segment. Subsidies and use cases that better fit the electric vehicle (EV) powertrain (such as short-haul and medium-duty) can reduce this difference, but product cost reduction will be the key to driving adoption. The race to achieve major cost improvements for key powertrain components will intensify over the next several years: for battery packs, McKinsey analysis reveals that a cost reduction to about $105 per kilowatt-hour or less will be needed to offer competitive products in long-haul segments. To make this happen, further scale in volumes and improved packaging will be required. McKinsey estimates that cost reductions of more than 50 percent will be required for fuel-cell systems to achieve TCO parity. A mix of scale, synergies, and effective collaboration with key suppliers and other partners will be key to success.
Scale up production. Current ZEV production systems cannot capture the same scale effects as those generated by traditional powertrain architectures. Only scaling up production to new volume levels will enable manufacturing cost reductions to line up with product cost reductions as outlined above.
Shift supply chains to new champions. The powertrain supplier landscape faces major disruption as demand shifts away from combustion-engine components and toward new, high-value components such as batteries and fuel cells that require completely different capabilities. New points of differentiation and a different supplier landscape will require a new sourcing strategy for OEMs.
Drive the transition from product to solution. New go-to-market models are required to support customers in the transition to zero-emission trucks. The goal is to provide tailored ecosystem services (for example, financing, insurance, and charging infrastructure) and reduce uptime risk and residual-value risk for fleet operators. As OEMs move beyond vehicle sales, new partnerships will be required to offer a full suite of services.
Get ready for new competitors. New competition will enter the mix in the form of attacking OEMs from overseas markets such as China and Korea as well as e-truck-only start-ups. McKinsey analysis suggests that new entrants have captured a large share of the early market for zero-emission trucks; incumbents need to drive market positioning to compete successfully.
All of the above must be optimized in a highly uncertain environment of changing regulatory and subsidy landscapes, a volatile battery market, and technologies (such as batteries and fuel-cell systems) that are still maturing and thus prone to technological disruptions. At the same time, the diesel powertrain portfolio requires further development to meet the new Euro-7 standards.15 Hence, OEMs need a new, resilient approach to capital expenditures, portfolio planning, and component sourcing to react effectively to technology disruptions and unexpected changes in demand.
The key ingredients of a successful strategy are agile product renewal cycles that allow for quick reactions to customer feedback and competitive products, a resilient supply chain with a balanced supplier portfolio across geographies, a clear path toward product cost reductions, and an upgraded go-to-market approach that includes digital services and turnkey solutions for fleet operators. The speed of product renewal will be especially crucial for players to stay ahead of the game: as innovation cycles get shorter, model cycles need to follow for products to stay competitive, because customers are highly willing to switch brands for a better cost position.
Charging and hydrogen refueling infrastructure players
Charging infrastructure and hydrogen refueling infrastructure are required for a zero-emission-truck rollout at scale, but McKinsey research estimates that charging infrastructure alone will require investments across the United States and Europe of $30 billion by 2035 and $60 billion by 2040.16 Only a fraction of that has been committed. These investments must be committed now despite the low adoption of corresponding vehicles, requiring a calculated risk-taking approach and commitment to the market.
For BEV trucks, our research suggests that urban and regional distribution routes will be the first to electrify via private depot charging stations. However, public high-speed charging infrastructure is required to electrify long-haul routes across Europe and the United States.
Drive the deployment of charging in the public space. Investors face a chicken-or-egg dilemma during the initial years of infrastructure rollout: too many chargers and not enough zero-emission trucks, or the reverse. At the same time, rapid technology and market developments—such as megawatt charging system standards and liquid versus compressed hydrogen—make business cases challenging, especially considering the increased costs of capital. Hence, infrastructure players need to engage in partnership models with large transportation providers to find anchor customers to act as safeguards against part of the utilization risk.
Pave the way for faster grid upgrades. Early practical experience suggests substantial challenges exist in upgrading grids to allow for private charging at scale. Infrastructure providers must invest in their networks to enable these use cases because they offer the biggest opportunity for electrification at scale without relying on a public charging network buildup. Incentive schemes shifted toward these network improvements can act as a transformation accelerator.
Customers
Small fleets, with fewer than 50 trucks each, dominate the European market.17 Only a few large fleets exist, and large logistics companies often outsource significant portions of their business to retain the benefits of being asset-light operations and to enable quick responses to changes in demand. While larger logistics players face some pressure from shareholders to decarbonize their operations and have access to funding that would allow them to procure zero-emission trucks, small-fleet operators typically lack both incentives. In addition, freight buyers have shown limited willingness to pay for green logistics, leaving little incentive for small-fleet operators to transition to zero-emission trucks at this point.
As a result, fleet operators hesitate to move to zero-emission trucks because of significant concerns and uncertainties about cost, reliability, and operational fit. Based on a McKinsey survey of fleet operators,18 the main pain points with BEVs are range anxiety and practicality, while costs and availability are among the main concerns about FCEVs (Exhibit 3). But customers can become part of the solution by employing the following key changes:
Cut through the powertrain clutter. Powertrain options available to truck fleets have proliferated significantly, and strong evidence suggests that optimal powertrains for many use cases exist today. For example, FCEVs are unlikely to be relevant in medium-duty truck fleets or short-haul-focused applications but make sense in long-haul situations, while BEVs are less competitive in heavy-duty long-haul applications but can work well in local fixed-route applications. Therefore, fleets should assess their driving patterns to see where the best technology choices are possible today.
Don’t plan for the worst case: vehicle considerations. Electrified fleets require a more targeted approach and assessment than diesel fleets, in which vehicles are very much “one size fits all” in terms of range, although driving cycles vary significantly across use cases. Fleet operators and consumers today tend to fall into similar traps, basing vehicle choices on the extreme 1 percent use case (such as long-distance winter driving in mountainous regions), driving vehicle technology costs up, and TCO parity out. Fleet owners need to break down their operations profiles into distinctive use cases and actively capture the opportunity to tailor their vehicle fleets to their true needs rather than employing a one-size-fits-all approach.
Don’t plan for the worst case: infrastructure considerations. A similar fallacy is seen in infrastructure planning. Fleet operators rarely examine vehicle use and charging patterns, leading to large and costly implicit buffers in their estimated charger and charging-power requirements. Energy demands are overstated, resulting in even longer timelines and slower scale-up of vehicles toward zero-emission trucks. As with vehicles, fleet operators need to assess their expected use case patterns for charging infrastructure and find the sweet spot between a sufficient capacity buffer and low capital expenditures.
Pilot to test, but plan to scale. Most corporate commercial fleets today operate at least a handful of zero-emission trucks to test their performance in live operations. Firsthand experience cannot be replaced. However, too few fleets accompany the small-scale pilots with a structured assessment of their overall vehicle fleets, infrastructure requirements, and corresponding transition path to both inform vehicle purchase selections and address potential grid upgrade requirements early in the process.
Embrace new models of cooperation and partnership. Harmonizing vehicle specifications and adopting buying-coalition approaches can help reduce up-front costs and create win–win situations for customers and OEMs alike. Several initiatives are already being piloted in Europe and the United States. At the same time, new financial business models are emerging that reduce the capital expenditure barrier to zero-emission trucks by providing transportation as a service (TaaS) models and creating mini-ecosystems among financing players, road freight forwarders, and carrier subcontractors. Similar arrangements should begin to emerge for infrastructure, with networks attempting to build capacity tailored to the demand of larger players and then filling up with zero-emission trucks. Embracing these existing models outside of direct truck purchases can help attenuate the challenges within the transition.
Continue driving the commercialization of green transport. On the ecosystem level, a lack of commercial models related to green transportation is a key issue. As long as green transportation does not generate demand or willingness to pay, adoption will fully rely on TCO parity and reliability. Of course, willingness to pay can’t be forced, but commercialization efforts today are still nascent, and more tailored models (for example, through feature bundling and other strategies) need to be tested to optimize customer willingness to pay.
The rules of the game are changing: Capturing value in the zero-emission truck world
Zero-emission trucks are expected to reshape the rules of the industry. Higher vehicle capital expenditures and lower operating expenditures compared with diesel trucks will lead to an even stronger focus on financing and asset utilization challenges, with control points shifting from mechanical components to chemicals, electronics, and data. McKinsey's proprietary Commercial Vehicle Value and Profit Pools model suggests the following outcomes as zero-emission trucks begin to take over:
- By 2035, truck industry value pools in the United States and the European Union will surpass $680 billion (Exhibit 4). Zero-emission trucks could account for roughly 20 percent of truck-related value and profit pools by 2035, resulting in up to $140 billion in market size.
- In a zero-emission world, new truck sales and diesel fuel retailing will no longer be growth drivers for industry profits. Diesel retail will come under pressure because of decreasing demand in a world with growing zero-emission powertrain uptake. The profit pool share of legacy energy carriers will decrease from almost 40 percent of profit pools to only about 20 percent in 2035.
- ICE sales market share could decrease by as much as 40 percent by 2035, but new zero-emission truck sales can compensate in terms of value given their higher vehicle prices. However, zero-emission trucks will be sold at lower margins compared with ICE trucks due to product maturity and scale. Consequently, the loss in the profit pool from lower ICE sales cannot be offset by zero-emission trucks. The new-vehicle profit pool will thus remain between $3 billion and $4 billion.
Incumbent OEMs and suppliers will face pressure on multiple fronts
OEMs and suppliers need to redesign their product portfolios, go-to-market approaches, and sourcing strategies at the same time while keeping up profitability across both ICE and zero-emission product lines.
Manage the zero-emission truck margin challenge. Regulatory targets assume a fast ramp-up of zero-emission truck sales, enforced with hefty fines for noncompliance. If the build-out of corresponding infrastructure is slower than required or OEMs cannot bring down product costs quickly enough, low or negative profitability of the zero-emission trucks portfolio will likely result, at least in the near term.
Oversee ICE profit erosion. OEMs will also see the profits of their longtime core ICE businesses erode. With a higher share of zero-emission trucks in new sales, fewer diesel vehicles with robust margins will be sold. McKinsey research notes that new-truck sales will likely lose two to three percentage points of share in profit pools—equaling $1 billion in profit—over the next ten years (Exhibit 5).
Handle aftermarket growth. The aftermarket will experience some growth, mainly driven by an increase in overall parc. Zero-emission trucks will partly compensate for the lower maintenance effort they require with the higher value of the spare parts needed. McKinsey's proprietary Truck Value and Profit Pools model suggests that the aftermarket profit pool may reach $17 billion to $18 billion by 2035.
Develop sunsetting strategies. As the market potential for internal combustion engines declines, players must prepare sunsetting strategies for their ICE programs. Although ICE technology will still play a role in a global context both in niche applications and in markets that are electrifying more slowly, OEMs and suppliers must find ways to uphold profitability at a lower scale.
Reassess vehicle components. At the same time, there should be a fundamental shift in the supplier landscape. The value of zero-emission powertrain-related components is likely to more than double, according to McKinsey research. However, this increase in value is driven by batteries or fuel-cell systems, whereas the market for electric powertrains will be much smaller than today's market for diesel powertrains. Given the limited overlap with traditional ICE control points, existing suppliers do not necessarily have a right to win in these new components. As a result, we will likely see continued consolidation in the supplier space among players holding major shares in ICE-related component groups while new supply chains for batteries and fuel-cell system components are shaping up, with new suppliers entering the space.
Among zero-emission truck components, OEMs will have to develop new sourcing strategies or in-house capabilities. For example, the market for truck batteries is expected to reach $13 billion by 2035, according to the McKinsey model, a large fraction of which will be captured by battery cell manufacturers. Similarly, the model also suggests that the hydrogen tank and fuel-cell systems market will reach $7 billion, opening a door to new component suppliers that master these new technologies.
Fuel players need to develop solutions for charging and hydrogen
Players active in fuel production and retailing need to refocus on a set of new energy carriers and retail formats. Diesel-fuel-related profit pools are expected to decline by up to 40 percent by 2035, according to McKinsey analysis. While dampened by a growing total vehicle parc, the decline is expected to continue as zero-emission vehicles gain market share.
Prepare for changes in fuel retail and service. Because zero-emission powertrains will have different refueling patterns, the fuel retail footprint and service formats will likely have to change. Electric trucks are expected to charge up primarily in fleet hubs, while hydrogen truck operations are expected to focus on long-distance routes on highways.
Find a new balance point. These trends translate into declining business for classic fuel retail outside of larger hubs and major corridors. For on-highway locations, a well-balanced offering of hydrogen, fast charging, and overnight charging along with corresponding ancillary services will be key to success. But incumbent fuel retailers are not alone in this space; utilities and pure-play charging or hydrogen refueling players are advancing into the market. In serving the remaining ICE fleet on the road, alternative fuels can help sustain fuel retail sales for longer.
New opportunities emerge in services
While industry value pools are growing, global profit pools will likely stay flat over the next ten years. Because sales of new vehicles, traditional aftermarket products and services, and fuels won’t be major profit growth drivers anymore, players need to focus on verticals relevant to zero-emission trucks (Exhibit 6). McKinsey research suggests new opportunities will arise with the transition to zero-emission trucks, including financial services, data-enabled services, and charging and energy, which will likely emerge as major profit pools by 2035.
Focus on financing. The higher up-front costs of zero-emission trucks will increase the demand for and the value of financing and leasing offerings. Captive OEM financial-services offerings will gain in importance, with OEMs holding an important control point, but major banking and leasing players and infrastructure investment funds will have growth opportunities as well.
Reexamine insurance. The large ICE parc makes up the bulk of the profit pool, but zero-emission trucks will push the value at stake given higher insurance rate pricing because of their higher up-front costs, more expensive replacement parts, and complex technology.
Proliferate ZEV charging and energy. The procurement and installation of charging infrastructure (private depot and public on-highway charging) as well as increases in the ZEV parc will drive new energy demand. This is a completely new business for the industry and will trigger new business relationships and active players in the market that were formerly active in the energy, utility, and industrial space.
Pursue data-enabled services. Business models and ecosystems will focus on data-enabled services, which are the key enablers for the successful uptake of zero-emission trucks. With the increasing digitization of vehicles, digital solutions related to vehicle data need to address customer concerns regarding vehicle range and charging (for example, advanced route planning with in-route charging management). Captive OEM solutions will compete with third-party offerings.
Capture recurring life cycle services. By 2035, up to 75 percent of OEM profits could come from recurring life cycle services, according to McKinsey’s proprietary Truck Value and Profit Pools model. Overall, industry players will focus on capturing these recurring profits in competition with OEMs. The value in new ZEV-related opportunities and services could be distributed among competitors.
Consequently, players need to navigate the upcoming value chain shifts and be very strategic about their positioning across the value chain steps. Potential moves could include new cooperative links, partnerships, M&A, and especially new business building (for example, TaaS).
Cooperation across the industry ecosystem is needed to drive the transformation
Scaling up zero-emission-truck sales at the speed required by current regulatory targets is a very ambitious goal and poses a wide variety of challenges. While none of these challenges is unsolvable on its own, the short timeline for the required ramp-up will push industry players fighting on their own to their limits and beyond.
Given how intertwined the challenges in infrastructure and vehicles are and how many different players, from regulators to consumers, must bring their capabilities to the table to resolve them, cooperative efforts appear to be the only way to work toward a resolution. Fortunately, these cooperative efforts are emerging on global, regional, and local levels, driving different types of conversations and progress.
Global. Some of the major challenges require collaboration on a global scale. Technological improvements and cost reductions of key components such as batteries and fuel-cell systems can be best addressed by bringing together engineers from different companies and across the globe. Several battery factories are already being built in partnerships. Similarly, solving the huge financing challenge for zero-emission trucks, charging infrastructure, and hydrogen refueling networks requires multinational collaboration among infrastructure investors, OEMs, and logistics players. The goal is to jointly develop new financing and ownership approaches, some of which are already being tested on the market.
Regional. On the regional level, the predictability of regulatory targets and incentive schemes is paramount to allow players to plan the transition to zero-emission road transport. At the same time, consistency in regulations and incentives across neighboring markets is key for multinational operations to develop consistent fleet and powertrain strategies. Industry cooperation will be pivotal in driving adoption and addressing the real constraints in the market. Pushing infrastructure buildup along key freight corridors will help increase expected reliability and confidence in the technology for longer-haul applications across more than one country. If enough fleet buyers get together and share requirements, charging capacity buildup can be funneled to the most important areas. Fleet electrification coalitions are forming across Europe and driving toward such ecosystem-level impact.
Local. Some of the required challenges can also be addressed on the local level. Bringing charging capacity to each fleet hub will put a strain on infrastructure resources, but public charging along main corridors will be insufficient to cover more local use cases best suited for electrification. In areas with multiple existing logistics sites (such as the center of Germany and ports in the United States), cooperation in building shared charging infrastructure can be a solution to this problem, but it will require a form of “coopetition” among competing entities for the greater good. Also, local cooperation with authorities can have a major impact; a great example can be found in the case of a European OEM’s finished-vehicle logistics. By working with local authorities, its electric trucks were exempted from certain length restrictions, allowing them to transport one additional vehicle per trip, thereby entirely erasing the trucks’ TCO disadvantage on paper.
The traffic jam holding back progress in reaching zero emissions in the truck industry is complex, with many participants and moving parts. While industry players have created a strong buzz around the use of lower-carbon fuels, the drive toward true zero-emission trucks is stalling due to a lack of sufficient cooperation among stakeholders. Furthermore, the trucking ecosystem faces an imbalance in incentives. OEMs are the only players that fully bear the risk of not complying with regulatory CO2 emission reduction targets. The fines they face could threaten their survival if they fail to meet CO2 targets.
All other elements of the system, including fleets, infrastructure, and financing, have weaker incentives and more time to wait. For example, the main challenge facing fleet operators is uncertainty regarding how zero-emission trucks will fit into their business models. Infrastructure players seek assurances that their investments in fueling and charging stations will pay off, while energy providers contemplate smaller profit pools than in the past. And the finance and insurance industries face new challenges that may force them out of their comfort zones.
Governments are eager to move forward but need to recognize the limited power of emissions regulations such as those imposed on OEMs to create a thriving zero-emission-truck ecosystem. While the issues facing this extended ecosystem call for an integrated response, each group of players often seems resolved to go it alone. Increased cooperation, partnerships, and collaboration across industries, sectors, and regions can provide a compelling way to make zero-emission trucking a reality much sooner than expected.
