Cleantech, Optimism Squared and the Family Reunion Investment Test
It is remarkably different this time!
Last weekend, I re-read the Milunovich report and spent several hours pondering the fundamental forces that drove the technological revolutions identified in the following table.
||The "British Industrial
||The Age of Steam and Railways
||The Age of Steel, Electricity
and Heavy Engineering
||The Age of Oil, the Automobile
and Mass Production
||The Age of Information and
||The Age of Cleantech and Biotech
I'm not an avid historian, but I recall that the popular reactions to the first five technological revolutions ranged from violent resistance to innovations that threatened job security (e.g. Luddites in England and saboteurs in France) to polite disdain or outright derision of innovations that were not seen as threats (e.g. Fulton's Folly). I still cringe when I remember college boy conversations where I taunted classmates with questions like "You may be able to buy a home computer in ten years but why would anybody ever want one?" The point is we didn't understand how important the innovations were until we viewed them in 20/20 hindsight. This dynamic gave important technologies time to evolve naturally, establish their value and then change the world in ways we couldn't have imagined. The process invariably took decades.
Where the first five revolutions were driven by the individual desire to do something better, faster and cheaper, it seems that cleantech is driven by a different dynamic. We collectively know that water, food, energy and commodities are not resources we can waste with impunity. We collectively understand that 6.2 billion people know how the rest of us live and each of the have-nots wants a fair share of the dream. We collectively fear a tipping point where unrestrained consumption of fossil fuels will irreparably damage our planet. We collectively worry that the world we pass to our children will face catastrophic conflict and horrific environmental consequences because of decisions that were made in a different era by our grandparents, our parents and us. So instead of viewing cleantech developments with a healthy dose of skepticism and requiring inventors to prove their worth, we collectively grasp at the latest research results and grossly overestimate their real value. A great example of this phenomenon are widely circulated stories about an MIT research project that would make it possible to recharge a GM Volt in less than five minutes by plugging it into the nearest available 125,000 watt power source.
Our problems are grave and almost everyone recognizes the desperate need for relevant scale solutions to persistent shortages of water, food, energy and commodities. But instead of acting like adults, accepting personal responsibility and doing the little things like home weatherization that could help alleviate the problems, we demand profound changes without considering whether the changes are enduring solutions or simple band-aids. We then compound the foolishness with the insane delusion that technological development is instantaneous and success is certain.
My favorite story of unbridled optimism is about a straight-laced father who thinks his son is overly optimistic and decides to teach the boy a lesson by telling him that a load of garden manure is his birthday gift. The manure is delivered and dumped in the driveway and the father puts a big red bow on top of the pile. When the son gets home from school, he promptly dives head-first into the manure pile and starts digging. When the surprised father asks what's going on, the boy replies, "There has to be a pony in here somewhere!"
It's a crazy world and an infantile time, but once the tantrum phase passes, we'll do what adults have always done. We'll get up in the morning, we'll go to work and we'll solve our problems. The first casualty will be unbridled optimism. The second will be waste in all its pernicious forms. Ultimately, rational cost-benefit analysis will prevail and we'll begin to find enduring solutions to critical problems.
Unlike many financial bloggers, I know my opinions and outlook are far from mainstream. To compensate for that deficit, I've developed a simple technique I call the "family reunion test" to evaluate cleantech investments. It all boils down to a simple question: "How many of the people who attended our last family reunion are likely to buy this product or service at today's price?" If I conclude that most of my extended family members would be likely buyers, then it's probably a good investment. If I find myself all alone in the likely buyer class, then it's probably a good investment to avoid. Rigorously applied, the family reunion test is an amazingly accurate forecasting tool.
The battery industry is in a state of turmoil because none of the technologies we've relied on in the past are able to satisfy the extreme demands of a cleantech future. At $250 a kWh, lead-acid batteries are cheap and reliable, but they have weight, power and cycle life limitations that make them sub-optimal for plug-in vehicles. Li-ion batteries have exceptional weight, power and cycle life performance, but at $1,000 a kWh they're just too expensive for most cleantech applications. The net result is a race to the middle as lead-acid battery manufacturers work feverishly to improve performance while Li-ion battery developers work feverishly to reduce costs.
In the swamps of Degoba, Yoda told Luke Skywalker "Do or do not ... there is no try." The same wisdom holds in the battery industry. Don't talk about your plans ... talk about your accomplishments! In the meantime, investors would do well to remember that optimistic forecasts from interested parties are every bit as meaningful as the trash talk, hype and drama that precede every WWE championship.
Over the last several months I've delved into several arcane technical aspects of the battery industry. While the detail is useful for technophiles, it can be mind-numbing detail for the average reader. As penance for my past sins, I've prepared the following table that provides a simple summary overview of the differences between lead-acid battery manufacturers and Li-ion battery developers.
$250 per kWh of useful capacity
$1,000 per kWh of useful capacity
|Efficient factories already
exist and capacity can be rapidly and cheaply expanded.
||Substantially all existing
capacity is located in Asia and billions will need to be spent on new
factories that will take years to build and equip.
|Efficient sales, distribution and customer support networks already exist.||Billions will need to be spent
on sales, distribution and customer support networks.
|Nationwide recycling capacity
already exists, over 98% of lead-acid batteries are currently recycled
and the recovered materials can be used to make new batteries.
||Recycling techniques are in the
R&D stage, there are no large-scale recycling facilities and the
recovered materials are not pure enough to use in new batteries.
|Improve energy density, power
and cycle life; goals that appear reasonable in light of
several recent advances I've discussed in prior articles.
||Slash manufacturing costs by at
least 50% in the short-term; a goal that is patently unreasonable for
an industry that has
historically achieved savings of less than 5% per year.
|All essential raw materials are
available in adequate quantities from domestic sources.
||Essential raw materials are
imported and there are important unanswered questions about future
availability and price.
|The principal U.S. manufacturers
are well financed and able to attract additional capital
||The principal U.S. developers
are effectively bankrupt and cannot expand (survive?) without loans and
grants from the government.
|Experienced manufacturers are
trading for a small fraction of per share sales.
||Developers with limited
manufacturing history are trading at several times forecasted sales.
We are in the early stages of a technological revolution that is unlike anything the mind of man remembers. Instead of being opportunity driven, cleantech will be constraint driven. Instead of giving important technologies adequate time to evolve naturally, establish their value and then change the world, we're trying to avoid technical Darwinism, pick a winner based on theory, conjecture and public relations, and then force decades of technical progress into a couple of years. Experience tells me that the most likely outcome is catastrophic failure.
Ultimately, it boils down to your personal goals. If you want a long-term investment that will grow over time and derive immense benefit from the coming cleantech revolution, then the low-profile lead-acid battery manufacturers including Exide (XIDE) Enersys (ENS) and C&D Technologies (CHP) are probably the best choices for your portfolio. If you want a low-cost speculation on an advanced lead-carbon technology in the final development stages, then Axion Power International (AXPW.OB) may be a good choice. If you're more interested in fast paced trading in volatile markets then the high-profile Li-ion battery developers like Ener1 (HEV), Valence Technology (VLNC) and Altair Nanotechnologies (ALTI) may be best for you. In any event you should do your own research and understand what you're investing in before you place an order. My favorite place for reliable current information is the SEC's Edgar Website, which contains detailed disclosure from all of the companies I've mentioned.
I don't believe that Li-ion technology is doomed to fail. In fact I believe it has tremendous potential in a variety of markets where size and weight are mission critical constraints. However I can say without reservation that the challenges facing lead-acid manufacturers pale in comparison to the challenges facing Li-ion developers even if they get all the government support they could possibly want. To paraphrase a December 2008 note in the Wall Street Journal, Li-ion developers may well secure a place in a new electric-car industry. But at current prices, investors are being asked not just to dream, but to take success for granted.
Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).
John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.