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All the upgrade button does is make the depot build a new vehicle, and once that's ready, send the upgrading vehicle to the depot where it is scrapped and the new vehicle released. It also copies all assignments the old vehicle had to the new one.
So basically, it saves you time and clicks. With upgrade, you just click a button. Without, you select the depot, task it with building a new vehicle, select an old vehicle, task it with going to get scrapped. And if the old one has any assignments, like if it's a coal excavator, you have to manually add the new excavator to the mine control tower again. A lot of clicks you can save and a lot of attention you can invest elsewhere.