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Li-ion Battery Manufacturers – The Bleeding Edge of Energy Storage Technology

As a lawyer, I’ve had the privilege of working with some of the finest scientific minds in the world. They all started with brilliant concepts and impressive laboratory results, but a substantial majority failed to create a viable business. After countless clients that started well and ended up mired in a swamp, I’ve come to understand that technology is a two-edged sword. On the leading edge, developers of low cost technologies can build fortunes. On the bleeding edge, developers that can’t control their costs and manufacture competitive products often morph into the financial equivalent of a black hole. Sadly, I believe most current developers of advanced Li-ion batteries are on the bleeding edge of energy storage technology and are doomed to spend years if not decades hemorrhaging cash.

I frequently feel like Cassandra, the Greek princess who was given the gift of prophecy and then cursed so that no one would believe her. When I read reports about how an MIT researcher has developed a new material that will allow Li-ion batteries to recharge in seconds or how Japan’s national alternative energy development agency has targeted a 50% reduction in Li-ion battery costs over the next year, I don’t get excited over the mirage of progress. Instead, I start asking buzz kill questions like “How much will these new materials add to the cost of a battery?” and “How can anybody reasonably target a 50% price reduction over the next year when the average has been 5% for the last 20 years?” The answers, of course, are “plenty” and “they can’t.” The stories are cheerleading and hype, not rigorous analysis; and we all know what happens when optimistic forecasts collide with immutable economic laws.

The fact is that everyone, including me, wants an easy, quick and painless solution to our growing energy dilemma. However wishes, hopes, dreams and desires can’t change the fact that until somebody overcomes the cost, performance, abuse tolerance and cycle-life issues that the DOE has analyzed in depth and I’ve discussed in earlier blogs, there will be no Li-ion solution for the average consumer’s energy storage needs. Progress is being made, but it’s an uphill battle where the goal is measured in miles and the progress is measured in feet.

Every time I mention the elephant in the living room, I’m inundated with comments suggesting that the data I’ve cited is old or unreliable. The contrary authority invariably says something like “Lyons said that most estimates put the near-future cost for battery manufacturing at $250-300 per kWh once economies of scale are ramped up” or points me to a Chinese website. The only response I can offer is balderdash! With annual revenues of several billion dollars, the Li-ion battery sector already has plenty of scale. What it lacks are meaningful potential economies.

Economies of scale are modest savings that can reduce per unit cost as a profitable business grows. They arise from factors like discounts on raw materials purchases, greater worker specialization, lower financing costs and reduced spending on ancillary items like research and development. For a more detailed discussion of the topic, see “What Are Economies of Scale? An estimated 75% of the cost of a battery goes for raw materials. So unless you insist on believing in a commodity fairy that will slash raw materials costs despite rapidly escalating global demand, you can’t honestly believe that vaguely defined economies of scale will make insanely expensive products affordable. Even the happy talk articles like the most recent one from Japan merely serve to prove the point:

“NEDO also analyzed battery cost (not a cell but a battery pack) as of March 2009. It estimates that the cost is about ¥200,000/kWh (approx US$2,016/kWh) for both types of batteries.”

In January I published a comparative breakeven analysis for an EV-40 and an EV 100 using the $1,333 per kWh value for Li-ion batteries that I took from a July 2008 Sandia Laboratories report on its Solar Energy Grid Integration Systems – Energy Storage Program. That analysis showed that an EV-40 could not break even at gas prices of less than $3.70 and an EV-100 could not break even at gas prices of less than $9.20. Even if I use the latest happy-talk target out of Japan and give effect to the vainly anticipated battery price collapse, the breakeven points work out to $3.02 for an EV-40 and $7.54 for an EV-100. At those prices, there are only two classes of buyers, the emotionally committed and the mathematically challenged. This is not encouraging news in a recession.

When evaluating any company, the first thing I want to know is whether it can sell a product and earn a reasonable gross margin on the sale because without gross income net income is impossible. In general, high gross margins are wonderful things and low gross margins are very bad things.

The universe of publicly traded Li-ion battery manufacturers is small so there are not a large number of reliable data points. Nevertheless, I was able to do some digging through SEC filings and cobble together the following table that compares historical product sales, gross profit and gross margin data for five active Li-ion battery manufacturers (Click on the table for a PDF version).


From both a revenue growth and gross margin perspective, Advanced Battery (ABAT) has been an impressive performer and seems to be on the leading edge of Li-ion technologies. At the other end of the spectrum, Valence Technology (VLNC) and A123 Systems seem to be stuck on the bleeding edge. While Ener1 (HEV) and China BAK Battery (CBAK) have modest gross margins, their performance falls far short of leading edge; in fact, they’d be poor performers among the conventional battery manufacturers that I’ve identified in the following table.


Over the course of my career I’ve had substantial experience with both leading edge and bleeding edge companies. As a lawyer, I try to discourage potential clients from starting down a road that has a low chance of commercial success because life is short and dealing with disappointed investors is never pleasant. Once a project begins I carefully watch for signs that a client is tending away from the leading edge and toward the bleeding edge because an early failure is invariably easier to cope with than a client that lives on the bleeding edge for years. Factors I view as warning flags that a company is approaching the bleeding edge include:

Countertrend revenues

When companies like Ener1’s Korean subsidiary report revenue declines while their peers are reporting substantial revenue increases, I see yellow and orange flags.

Gross margins

High gross margins are usually a reliable indicator of a superior product and small gross margins can be tolerable in high volume industries, but negative margins are a red flag.

Debt financing

In the absence of a long and well-established earnings history, substantial debt is toxic and leading edge companies don’t have substantial liabilities to anyone.

Related party debt

A heavy reliance on insider financing is normal during the formative years, but when the insiders of public companies like Valence and Ener1 purchase secured debt instead of straight equity the risk to common stockholders skyrockets.

Idle factories

In the absence of a cogent explanation, idle factories are a red flag that the owner cannot manufacture and sell a commercially viable product. There are always opportunities for viable products and a manufacturer like Ener1 that can’t harvest the low hanging fruit will rarely succeed with more sophisticated customers.

Operating expenses

Leading edge companies like Advanced Battery aggressively control operating expenses at all levels, which permits them to take over 70% of their gross margin to the bottom line. Profligate spenders like Ener1, Valence and A123 are far closer to the bleeding edge.

Nosebleed valuations

When a market leader like Advanced Battery trades at 6.8 times earnings and has a market capitalization of $110 million, no reasonable investor can justify market capitalizations of $193 million or $483 million, respectively, for companies like Valence and Ener1 that have never even come close to reporting a profit.

PR perspective

Leading edge companies talk about events while bleeding edge companies publicize goals. What will happen if the DOE reviews A123’s $1.8 billion loan request or Ener1’s $480 million loan request and decides the requests don’t meet regulatory requirements?

Veiled hubris

New entrants in a technological field are almost never better at manufacturing and marketing than their entrenched competitors who offer comparable products. Li-titanate batteries from Ener1 may compete with Toshiba’s SCiB line, but they are unlikely to be demonstrably better or cheaper. Likewise Li-phosphate batteries from Valence and A123 may compete with products from BYD, but assuming competitive superiority without demonstrable proof is the pinnacle of veiled hubris.

On August 15, 2008, when the Dow (^DJI) was at 11,660 and the Ardour Global Index (^AGIGL) was at 3,370; I offered a short-list of pure play energy storage companies that were likely to benefit from an unprecedented surge in demand for manufactured energy storage devices that will be driven by cleantech, the sixth industrial revolution.

The intervening eight months have been a tough time as the Dow has collapsed to 7,401, a shocking 36.5% decline; and the Ardour Index has plummeted to 1,285, a breathtaking 62% plunge. As a group, my short list of pure play energy storage companies has tracked the Ardour Index and fallen an average of 60%. The following chart compares closing prices of those companies on August 15, 2008 with their closing prices on March 19, 2009.


Combined, the short list companies have a current market capitalization of $2.1 billion. As I previously reported, Federal grants for advanced battery manufacturing will inject $2 billion in new capital into the battery industry over the next two years and grants for electricity delivery and reliability projects are likely to bump that total by another $1 to $1.5 billion. Moreover, effectively unlimited debt financing will be available through an alphabet soup of DOE guaranteed loan programs. In combination, the likely impact on the energy storage sector is mind-boggling.

If one assumes that the DOE does not understand the difference between the leading edge and the bleeding edge and it decides to treat all applicants equally, there is a remote chance that the bleeding edge battery manufacturing companies will have sufficient resources to justify their current market capitalizations when the dust settles, but those market capitalizations are not likely to increase significantly from current nosebleed levels. Instead, the market performance is likely to come from companies that focus on their accomplishments rather than their goals.

At heart I’m an incurable optimist and I firmly believe that “In America we get up in the morning, we go to work and we solve our problems.” (From The Lost Constitution by William Martin). But our problems are not going to be solved by airbrushed centerfolds that thrive on the bleeding edge and promise simple and economically implausible solutions to incredibly complex problems.

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.



was posted on AltEnergyStocks.com.


       

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Comments

John,

I enjoy reading your articles, here and at seeking alpha. Regarding your previous articles that compare breakeven points with the EV-40 and EV-100, did you consider the tax credits consumers would get now and possibly get in the future? For example, there is federal tax credit up to $7,500 right now for advanced electric vehicles (EV's and PHEV's). Also, here in Oregon, we're expecting a new State tax credit upwards of $5,000 for the purchase of EVs/PHEVs. And now I'm hearing more about this cash for clunkers program under consideration. I would gladly accept a $4,000 voucher to scrap my old '93 4-Runner SUV to buy a fuel efficient car. Assuming one were to realize the maximum tax credits and voucher, that would come to a $16,500 reduction off the purchase price of an EV/PHEV. That seems significant to me and should be considered in your analysis, at least as a sensitivity test.

-BJD (Portland, OR)

BJD,

I am aware of the tax credits but avoid discussing them because of local variations like the ones you mentioned. The $7,500 is actually a base credit of $2,500 for the first 5 kWh of battery capacity plus $417 for each additional kWh of battery capacity, up to a maximum of $7,500 per vehicle. Miraculously, it reaches the $7,500 level at the 16 kWh battery capacity of a Chevy Volt.

I think the credits and support payments are going to be very important to early adopters and give EVs an important early boost. But over the long-haul the economics have to work without credits and while I'll certainly consider them if I'm shopping for an EV, it's hard to view them as anything other than short-term help when planning a battery manufacturing business.

So, in a hypothetical situation, let's say I go to buy the Chevy Volt in 2010 in Oregon, I get a $7,500 federal tax credit, a $5,000 state tax credit, and a $4,000 voucher for turning in my old gas guzzling SUV, I'd essentially be getting $16,500 off of the purchase price, which I heard is now teetering around $35,000 for the Volt. How would this hypothetical situation for an PHEV-40 like the Volt pan out with your calc's for a break-even gas price?

I can understand your concern about incentives, as am I, but they are incentives which any rational person would consider when purchasing a vehicle. Besides the Feds recently bumped up their fed tax credit to the first 500,000 vehicles. That seems significant considering there were over 300,000 hybrids sold in the U.S. last year and it took a while to ramp those kinds of numbers up.

My point here is that if there are enough carrots being dangled in front of the consumer, the consumer will buy.

On the other end of the sprectrum are the incentives now being put in place for those battery companies like Ener1, Valence, and A123 to start building large manufacturing facilities. Won't these grants, loan guarantees, and other incentives help these companies lower their per unit production costs more quickly?

My prediction, watch for the next chip to fall when the feds and local governments begin ordering massive quantities of PHEV's and EV's to replace their fleets of ICE vehicles. Wouldn't this jump-start demand even more, allowing these batteries companies to produce in higher volumes to gain "economies of scale"?

Sorry if I'm slightly off-topic, but all this stuff is interconnected, and in my personal opinion, it seems that the new administration, auto companies, and nascent battery companies are gearing up for mainstreaming domestic production of Li-Ion.

Thanks,
BJD

BJD,

I agree that the incentives will make a huge difference to consumers and boost battery sales until the money faucet runs dry. But the incentives won't change the economics of making batteries.

We have all gotten spoiled over the last 30 years as Moore's law did its magic in the IT world by doubling performance every couple years. The problem is that Moore's law does not apply to chemistry and we simply will not see the same kinds of performance gains and cost reductions. Absent a truly disruptive new technology (something far more than a variant of an existing chemistry) the best we can hope for is incremental gains of about 5% a year.

In the battery world "economies of scale" are fairy tales. Commodity prices are based on global demand. There are 6 billion people that want the lifestyle 500 million of us enjoy. Since 75% of battery cost is materials, the only thing that can possibly generate significant "economies of scale" is a "Commodity Price Fairy" that solves raw materials price issues with a wave of her magic wand.

The grants and loans will help companies build factories more quickly, but they won't do anything to reduce costs. Cost reductions come from leading edge companies trying to increase their profits. They don't come from bleeding edge companies who expect somebody else to pay the freight.

Honda is taking the sensible route with its 2010 hybrid, which will come with a 0.6 KHW battery. Why doesn't GM introduce a version of the Volt with a similarly small battery? Surely a hybrid would sell better at $20K than $40K. Heck, it might even make economic sense for the buyer.

Dan,

You've made a critical point that most folks miss in all the noise – hybrids can be very cost effective and when the cheerleading ends, even the DOE believes that hybrids with no plugs and small batteries will be the dominant technology.

Last December I did an article for Seeking Alpha that has a DOE chart that projects the number of mild hybrids, full hybrids, plug in hybrids and EVs in 2015, 2020 and 2030. Even in 2030, the number of cars with plugs is projected to be less than 0.5 million while the number of mild and full hybrids will be closer to 7.5 million. See:

http://seekingalpha.com/article/112295-alternative-energy-storage-it-s-all-about-price-vs-performance

Thanks John,

Points very well taken.

-BJD

Hello!
Very Interesting post! Thank you for such interesting resource!
PS: Sorry for my bad english, I'v just started to learn this language ;)
See you!
Your, Raiul Baztepo

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