John Petersen
Writing an investment blog on hype-riddled sectors like vehicle
electrification and energy storage is tough because the topic is
emotionally charged and expectations are often based on
political promises, issue advocacy, press releases and mainstream
media stories that never tell the complete truth. As a result I spend a
huge amount of time debunking
popular mythology that’s
180 degrees out of sync with business realities and responding
to commenters who refuse to believe cars with plugs will be:
- Five to six
times less efficient than HEVs when it comes to
reducing national gasoline consumption; - Nine to twelve
times less efficient than HEVs when it comes to
reducing national CO2 emissions; - Subject to short-term
supply constraints because of their
reliance on scarce raw materials; - Experimental concepts that require
years of testing before they’re ready for prime time; - Beyond the price range of all but the most affluent consumers; and
- Wholly unacceptable to consumers that expect a three to five year
payback on the cost premium.
The risk and the opportunity for investors is that distorted
perceptions of commercialization timelines have led to unreasonably
high expectations for lithium-ion
battery developers that may experience huge revenue growth in the
second
half of
the decade and unreasonably low expectations for lead-acid battery
manufacturers that are certain to experience huge revenue growth over
the next five years. As the revenue impact of current automotive
production decisions becomes more clear and the wide gulf between
expectations and
reality narrows, I believe that the equities of objectively cheap
lead-acid battery manufacturers will surge
while the equities of objectively expensive lithium-ion battery
developers underperform.
Press Releases
For better or worse the markets are emotional creatures that can’t
help but react to press releases and news stories designed to fire the
imagination and
inspire “wouldn’t it be great if …?” thinking. Some of the more
inspirational examples of the
unrelenting electric vehicle hype we’ve seen over the last few months
include:
- Tesla Motors’ production of its thousandth
electric
Roadster in time for the 2010 Detroit Auto
Show; - Fisker Automotive’s planned production of the Karma
plug-in
hybrid on the strength of a 1,300 unit order book; - Th!nk
Global’s
rescue
from
bankruptcy on the strength of a 2,300 unit
order book; - Toyota Motors’ (TM)
planned
demonstration fleet of 500
plug-in
hybrids
based
on their Prius HEV platform; - General Motors’ planned production of the Volt
plug-in
hybrid at a rate of 8,000 to
10,000 vehicles annually; - Mitsubishi Motors’ (MMTOF.PK) planned
production of the MiEV electric car
at a rate of 8,500 vehicles annually; - Nissan Motors (NSANY)
planned
production of the Leaf
electric
car at a rate of up to 20,000 vehicles
annually; and - President Obama’s audacious goal of a million
plug-ins on the road by 2015.
If one just reads the press releases and news stories, it seems like
the whole
world is going electric and the days of sunshine, lollipops and roses
along Electric
Avenue are just around the corner. Perhaps it’s my skeptical
nature, but plans alone don’t impress me because I’ve seen so many
ill-conceived plans fail. I also remember that:
- DeLorean
Motor
Company produced and sold 9,000 cars in 1981 and 1982 before its
CEO decided that he needed to boost revenue by importing high value
refined agricultural products; - Ferrari sells approximately
7,000 vehicles per year; - The Bentley division of Volkswagen sells 8,000
to
10,000
vehicles per year; and - Toyota Motors (TM) sold its
millionth Prius in 2008 and is gearing up to produce 1,000,000
HEVs
annually
by
2011.
In isolation, the press releases and news stories seem impressive. In
the context
of an industry that sold
10.5
million
vehicles
in 2009 during the worst recession
since the 1930s, the planned introduction of cars with plugs is
inconsequential. These are PR stunts, not credible products. While cars
with plugs may become credible by 2020 if they can earn consumer
confidence at rates that are
comparable to HEVs, I believe their growth potential over the next five
years is
modest at best.
The
following graph comes from www.hybridcars.com
and shows annual domestic HEV sales over the last
decade. In light of high cost, limited flexibility and
unresolved consumer acceptance, performance and safety issues, I have
to believe the ramp rate for cars with plugs will be far slower than
the ramp rate for HEVs, which took
nine years to hit the million vehicle mark.
The eco-religious will strenuously disagree with my admittedly
conservative
view that a goal of “one million plug-ins by 2015″ is sheer
presidential fantasy, but differences of opinion are what
make horse races and investments interesting.
Production Decisions
Once you back away from the wishful thinking and start looking at
automakers’ real-time production decisions, a different picture
emerges. Instead of trying to leap tall buildings with a single bound,
the automakers know that a journey of a thousand miles begins with a
single step and they’ve started on the journey because their customers
demand it. The technologies that are going into production, however,
are rational incremental steps to improve efficiency without
reinventing the industry. The step that is most important for energy
storage investors is the rapid implementation of idle
elimination technologies, which are typically referred to as either
micro-hybrids or stop-start systems.
There are few ideas that are more sensible than idle elimination.
Instead of burning gasoline and spewing emissions while you’re stuck at
a stoplight, turn the engine off until the light turns green.
Stop-start systems have little value for a drive in the country, but
they can reduce fuel consumption in congested city driving by 6% to 10%
for an outlay of a few hundred dollars. After several years of testing,
automated stop-start systems have proven themselves to the point where
the entire industry is adopting them as standard equipment. A few
examples of major stop-start production decisions include:
- Mercedes
Benz, which will introduce stop-start systems throughout its entire
passenger car line; - BMW,
which has already implemented stop-start systems on all Series 1 and 3
vehicles with manual transmissions; - Volkswagen,
a stop-start pioneer that is implementing the technology throughout its
passenger car line; - Toyota, which has already impemented stop-start systems in its Auris
and Yaris
lines; and - Ford,
which plans to introduce stop-start systems throughout its entire
passenger car line.
In short, the widespread implementation of stop-start technology is not
something that might happen on some fine day in the vaguely defined
future. It is happening today in factories around the world and while
the future of cars with plugs is unclear, it is virtually certain that
stop-start technology will be standard equipment within a few years
because it’s a cheap and proven way to improve fuel economy and reduce
emissions. The following graph comes from a 2008 Frost & Sullivan
presentation and summarizes their forecast of global hybrid vehicle
sales over the next five years, broken down by technology type. The
blue sections of each column represent stop-start systems.
Micro hybrids with stop-start technology are already saving about a
hundred million gallons of gasoline per year. By 2015 they’ll be saving
well over a billion gallons of gasoline per year, which compares favorably to the 400 million gallons that could be saved if the
presidential goal of a million plug-ins by 2015 was remotely possible.
Once again, sensible action by private enterprise has trumped central
planning by delivering vastly superior results for far less money.
The major challenge with stop-start technology is that it’s very hard
on starter batteries because instead of starting the car once per trip,
a stop-start system will stop and restart the engine at every
stoplight. The current approach is to use premium lead-acid batteries
instead of the lower quality batteries the auto-industry historically
used as original equipment. The long-term solutions that are currently
in final stages of development include:
- Using a combination of batteries and supercapacitors to satisfy
the intense demands of stop-start systems, an approach that’s being
developed by Maxwell Technologies (MXWL)
and Continental AG (CON.DE). - Using lead-carbon batteries that combine battery and
supercapacitor characteristics in a single device, an approach that’s
being developed by Exide Technologies (XIDE),
Axion Power International (AXPW.OB)
and East Penn Manufacturing.
While the numbers were eclipsed by the headline awards to lithium-ion
battery developers and largely ignored by investors, President
Obama’s August 2009 announcement of the recipients of $1.2 billion in
ARRA battery manufacturing grants included:
- $34.3 million to Exide Technologies with Axion Power for the
production of advanced lead-acid batteries using lead-carbon electrodes
for micro and mild hybrid applications; and - $32.5 million to East Penn Manufacturing for production of the
Ultrabattery (lead-acid battery with a carbon supercapacitor
combination) for micro and mild hybrid applications.
In other words, these are real technologies that are being built into
real production model vehicles and being sold to real customers today.
There’s no wishful thinking involved. The wave of change has hit the
shore and will wash through the entire industry over the next few years.
The Hype Cycle
Professional investors understand that all emerging technologies are
subject to a phenomenon the Gartner Group calls “the hype-cycle” and
they time their investments accordingly. Venture capital types
typically buy before the technology trigger point and sell at the peak
of inflated expectations. Value investors frequently wait for the
trough
of disillusionment before they buy for the long term. The only
professional investors that are active during the peak of inflated
expectations are traders. TIAX LLC
offered the following overview of emerging vehicle technologies and
the hype cycle at the Plug-in
2008
Conference.
The big problem with graphs like this one is that they don’t provide
specific guidance to investors on where individual companies stand.
Since I’ve never been one to avoid controversy and experience has
proven that my opinions don’t impact the markets I’ve decided to bite
the bullet and offer one man’s views of where the pure-play energy
storage companies are located on the hype cycle curve.
A123 Systems (AONE) had
a tremendously successful IPO in September and is currently trading at
132% of the offering price. It finished 2009 in solid financial
condition and has done a great job of managing short-term expectations.
All things considered, I’d peg A123 somewhere along the upward slope
between the technology trigger and the peak of inflated expectations.
While I expect A123′s focus on cars with plugs to eventually result in
significant disillusionment, the day of reckoning is probably 18 to 24
months off.
Ener1 (HEV) has
been a centerfold darling of the cars with plugs set for several years
and may well be past its peak of inflated expectations. Ener1 finished
2009 in dreadful financial condition and will require massive capital
infusions to stay afloat and provide matching funds for the ARRA
battery manufacturing grant it received last August. Ener1 recently
filed a Form 8-K to disclose the presentation materials it’s currently
using in discussions with private investors. Given current market
conditions and the huge hits that other companies have taken in recent
down-round financings, my sense is that Ener1 is headed into the trough
of disillusionment unless management can pull off a major miracle.
Maxwell Technologies (MXWL)
has done a very effective job of publicizing its work on stop-start
solutions and explaining the potential to investors. As a result, its
stock has gone from a low of $4.50 to a closing price of $17.23 on
Friday. I’ve toured Maxwell’s supercapacitor plant in Rossens,
Switzerland and believe their Boostcap technology has an important role
to play as the micro-hybrid market develops. My sense is that Maxwell
has already passed through its trough of disillusionment and is now
working its way up the slope of enlightenment.
Exide Technologies (XIDE)
has done a terrible job of publicizing its work on stop-start solutions
because it already sells a couple billion dollars of batteries into the
automotive market every year. So unlike the new kids on the block,
Exide doesn’t need to attract new customers. It just needs to visit
existing customers and show how the new lead-carbon product will better
serve the customer’s needs. The same dynamic exists at East Penn
Manufacturing, which couldn’t care less about PR because it’s privately
held and already has a massive automotive OEM customer base. I believe
that Exide is out on the plateau of productivity and rapidly
approaching a new technology trigger point with the lead-carbon
solutions for the micro-hybrid market. With a stock price that only
equates to 24% of trailing sales, I think Exide has tremendous
potential as customer testing of its new products matures into
substantial purchase orders over the next year.
Axion Power International (AXPW.OB)
is my old home team and I’m far from unbiased because I’ve watched the
PbC technology mature from laboratory experiment through commercial
prototype and am proud of the time I served as board chairman. Axion
has always been a public relations oddity because it partnered with
East Penn in 2004 and Exide in 2008, which means it’s always had to
behave like a mature manufacturer instead of taking some of the
liberties one would normally expect from a technology start-up. As a
result of its existing partnerships with two of the three largest
automotive battery manufacturers in the world Axion doesn’t need to
attract its own customers because its partners already have them.
Axion’s stock price took a bit of a beating in December when it
completed a $26 million down-round financing with some very high
quality institutional investors, but when its partners start signing
high-volume supply contracts with their existing customers, I expect a
technology trigger response that bodes well for Axion’s future stock
price.
Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and holds a substantial long position in its stock. He also holds a
small long position in Exide Technologies (XIDE).