Lion Electric: Building Scale with Blue Bird
Written by Sammy Fleisher and Aryan Paliwal
Electrifying Bus-iness
In the United States and Canada, more than 26 million students are transported, by school bus, everyday. The 600,000 school buses that carry them comprise North America’s largest mass transportation system. Currently, over 95 percent of these buses run on diesel fuel, contributing over 5 million tons of greenhouse gas emissions annually. With only 1 percent of school buses running on electric batteries, there has been a growing push by government and advocacy groups to consider the adoption of sustainable alternatives.
Sparking Interest in Electric Buses
Electric vehicles (EVs) are not only cleaner and quieter than their diesel counterparts, but they can be cheaper to operate in the long-term. Relative to diesel alternatives, annual savings from using an electric school bus is an estimated $4,000 to $11,000 per vehicle. These cost savings originate from maintenance costs, which are 60 percent lower than diesel buses. Electric buses eliminate the need for oil changes, emission controls maintenance, or combustion engine parts such as spark plugs and ignition. Additionally, the costs of operating electric buses are less sensitive to oil price shocks and have the potential to reduce energy costs by up to 80 percent. These benefits cater well to the needs of school boards who have been searching for cost saving options following pandemic-related funding issues.
Driving Adoption
Despite the potential cost savings and clear environmental benefits of these electric models, uptake has been hindered by capital costs that significantly outpace those of conventional diesel buses. Currently, a 40-foot electric bus costs $770,000, double that of a comparable diesel bus. There is hope however, a recent surge in legislative support for bus electrification has driven significant capital investment into the sector, and might change this adoption challenge. In the United States, the federal government has pledged $5 billion over the next five years to replace existing school buses with clean-energy fuel alternatives and zero emission models. An additional $7.5 billion has also been committed for the deployment of electric vehicle (EV) charging infrastructure. Through the American Jobs Plan, President Biden has set a goal to convert at least 20 percent of the U.S. school bus fleet to zero-emission alternatives and completely electrify it by 2030. Subsidy programs have also been created to provide school boards with the necessary capital to purchase electric school buses. In Canada, the government has pledged C$2.75 billion over five years via the Zero Emission Transit Fund, which includes funding for the electrification of public transit and school bus fleets. Quebec, New York City, and several other jurisdictions have implemented similar measures.
With decarbonization entering the mainstream discourse, significant investments have also been made in the private sector. In 2020 alone, global automakers have invested a combined $225 billion in EV capital expenditure and R&D, including battery technologies. This has enabled companies to improve production and technological capabilities to achieve economies of scale. Between 2015 and 2020, the average cost of lithium-ion battery packs dropped from $600/kWh to $150/kWh, with further decreases by up to 60 percent expected within the next coming decade. Since batteries constitute 40 percent of the cost of an electric bus, decreasing battery costs should drive the adoption rate of electric buses going forward.
King of the Jungle
Based out of Saint-Jérôme, Quebec, Lion Electric (Lion) is an innovative manufacturer of zero-emission vehicles. Founded in 2011, Lion specializes directly in the design, development, manufacturing, and distribution of all-electric buses and trucks. They are a vertically-integrated manufacturer with over 10 years of research and development in the EV ecosystem.
Lion has approximately 550 commercial vehicles on the road with more than nine million miles driven in total. Moreover, its proven R&D expertise has helped the company solidify and build its EV fleet.
Internal Com-bus-tion
With the large influx of government investment and a demand increase for a new fleet of electric school buses by school boards, Lion seeks to capitalize on this growing opportunity. Yet despite its cutting edge technology, Lion lacks the automobile manufacturing expertise and capabilities to scale production in-line with market demand. Lion currently records 2,024 all-electric bus orders reflecting more than $500 million in future short term revenue. However, as of Q4 of 2021, only 71 vehicles were produced in Q4 of 2021, illustrating a deficit in manufacturing capabilities. Lion has since begun to invest heavily in their future, opening a new 900,000 square foot facility in Joliet, Illinois. This new facility seeks to take advantage of funding for “Made in America” EVs with the plant having an expected final capacity of 20,000 vehicles per year.
However with the plant only rolling out its first production vehicle in the latter half of 2022 and the facility unlikely to reach its annual capacity of 20,000 buses for at least a few years, meeting the immediate short term backlog of 2,024 remains a pressing concern. Insufficient production and disappointing delivery figures have deterred short-term investors, reflected in the share price dropping by over 50 percent. Lion is in need of a positive catalyst to help change investor sentiment and raise future funding through equity for growth, ultimately shortening the learning curve from a manufacturing perspective.
From Flocks to Fleets
Across the border, Blue Bird offers a complete line of school buses in a variety of options and configurations. Founded in 1927, Blue Bird has a mature and well-developed platform with more than 1,500 employees, Georgia-based manufacturing facilities, and an extensive network of Dealers and Parts & Service facilities throughout North America. Moreover, they have a global presence with sales in more than 60 countries throughout North America, Africa, Asia, the Caribbean, Latin America, Europe, and the Middle East.
Blue Bird is currently the leader in alternative power school buses, holding the top market position in both propane and electric markets. As a pure-play school bus company, Blue Bird is leading the charge away from diesel with more than 50 percent of current sales coming from alternative-powered buses. Comparatively, competitors ICBus and Thomas Built lag behind at only 10 to 20 percent. While these figures largely represent propane-powered buses, it is a clear reflection of Blue Bird’s leadership and initiative within the industry and their focus on alternative power.
In June last year, Blue Bird announced 500 electric school buses delivered or on order. The company has repurposed approximately 40,000 square feet of their existing manufacturing facility for dedicated EV assembly, preparing to grow annual capacity to 4,000 by 2024. All of this is working to address the replacement cycle within the industry which is creating a significant degree of pent-up demand for EVs. With over 150,000 buses in North America needing replacement, in addition to the incentives surrounding electric school bus purchases, Blue Bird expects strong demand for electric school buses over the next decade.
While Lion struggles with their manufacturing capabilities, Blue Bird is currently struggling with their supply chain model. As Blue Bird sources most of their parts from third-party manufacturers such as Cummins for their buses, the switch to electrical components like the transmission, driveshaft, axles, wheels, could present a large hurdle for Blue Bird. While diesel combustion drivetrains are a well-understood and commoditized technology, EV drivetrains are in early stages of development. Furthermore, much of the technology is proprietary and should yield competitive advantages to companies which possess these advancements. Therefore, Blue Bird’s ability to find success as a mere final assembler of parts into buses will not be easily replicated in the EV era. Blue Bird is presented with two alternatives to achieve their goal of breaking into the e-bus space: either develop their own electric drivetrains or merge with an existing company that is already vertically integrated that could provide the technical expertise to meet Blue Bird’s goals.
A Suitable A-lion-ce
A Lion Electric-Blue Bird merger would resolve the current operational challenges facing both businesses. From Lion’s manufacturing deficiencies to Blue Bird’s weak R&D capabilities, the merger would create a company capable of capitalizing on the expected surge in EV demand.
Examples across the automotive industry show that technological advancements do not necessarily translate into manufacturing expertise. Tesla, for example, has been on the forefront of EV software and hardware innovations and yet was plagued with lackluster production output. Similarly, luxury EV manufacturer Lucid Motors cut 2022 production expectations in early March of this year. To avoid following the same path, a merger with Blue Bird would enable Lion to access efficient bus production lines (with some already configured for electric buses), as well as nearly a century of bus manufacturing expertise. Blue Bird’s existing manufacturing capacity could immediately be used to relieve Lion’s backlog, providing a much-needed boost to investor confidence.
In addition, Blue Bird currently has a network of 50 dedicated dealerships and over 250 service centers across North America. While Lion has worked to develop some of these industry relationships with fleet distributors and school districts, it is not nearly as entrenched in the industry where connections and relationships are key to winning contracts. A strategic acquisition surrounding the EV school bus segment would help Lion consolidate its competitive position and early mover advantage in an industry with clear outlays for electric adoption.
Blue Bird’s shift towards e-buses showcases the flaws within their fragmented supply chain. In order to combat these flaws and the growing industry trend of reliance on proprietary technology, the merger would seek to add Lion’s existing and expanding R&D infrastructure to the joint venture. In doing so, the combined entity would be one that is fully vertically integrated and heavily reliant on in-house R&D, solving Blue Bird’s existing supply chain issues. This should position the merged entity to be one that would produce its own buses at scale to keep up with the cyclical nature of an aging fleet in the future. Furthermore, the firm should be able to lower the overall cost of their vehicles as a result of the vertical integration giving way to faster adoption rates within the market.
The combined entity would therefore be poised for not only short-term gains from being able to meet fluctuating demand for the near future but would also be established to produce lower-cost, higher quality vehicles to meet recurring orders in the long term.
F-Lion Away with Blue Bird
As the electric vehicle market and electric school bus subsector evolve with new policy and economic considerations, a partnership between Lion Electric and Blue Bird would position the combined companies for a new age of electric transportation.
