Lead-acid Batteries and How Cheap Beat Cool at Google
Stephen Shankland of CNET took the following rear-view photo of a Google server. The lead-acid battery is the small box on the lower right with the red and black leads. Similar batteries are readily available on the Internet for about $20.
Google's motivations for building backup batteries into its servers are obvious; reliability, cost-effectiveness and energy efficiency. Those same motivations drove the choice of valve regulated lead-acid batteries over a more exotic and expensive battery chemistry. I think Google's choice of lead acid batteries to support their mission critical server network provides a great backdrop for a reality check.
First, batteries are boring and as a user I just want them to work. Unfortunately, the only battery I've ever owned that delivered exactly what it promised was a Sears Die Hard I bought in the early '70s. I'm the first to admit that my cell phone and laptop batteries have improved a lot over the last 20 years, but my satisfaction to frustration index is still pretty close to even.
Second, batteries are stupid and the only thing they can do is store electricity in chemical form for future use. If the future use of the stored electricity is valuable to me, so is the battery. If the future use has limited value to me, so does the battery. In the final analysis, any discussion of battery value that is divorced from the specific needs of a particular user is meaningless. It's the usefulness of the electricity that creates the value, not the battery technology.
Third, batteries are fungible commodities that rarely inspire brand awareness, much less loyalty. I have no idea who made the batteries in my car, cell phone and laptop. I'll give long odds that you don't either. Since usefulness for a specific purpose is the only thing that matters to most users, the lowest cost producer of a competitive product will always establish the price.
Fourth, different ways of making the same type of battery are not critical intellectual properties. If several manufacturers make a comparable lead-acid, NiCd, NiMH, Li-cobalt, Li-manganese, Li-phosphate or Li-titanate battery, then nobody enjoys a meaningful technological advantage and the process patents are merely window dressing.
Fifth, small companies that try to run before they learn how to crawl invariably stumble, fall and get crushed by their customers. This is particularly true when a small company's target customers are giants. Bluster, trash talk, hype and drama may be appropriate as prelude to a WWE Championship, but they are deadly in business.
Sixth, energy storage needs do not fit neatly into a few cubby-holes and there are no universal solutions. So instead of a future where a few dominant competitors survive and the rest fall by the wayside, we are more likely to see dozens of strong competitors thrive by selling different technological solutions to discrete billion-dollar market segments.
In my third Seeking Alpha article I wrote:
"For better or worse, the world changed while most of us were busy making other plans. When waste was cheaper than conservation, waste ruled. Now that waste is getting painfully expensive and global energy demand is growing far more rapidly than supplies, we have a serious problem with no easy solution."
That dynamic is still the driving force behind energy storage decisions. Since reliable service is critical to its mission, Google needed to ensure that its servers would not go down in the event of a power failure. One could easily argue that reliability is so important to Google that backup power is priceless. But Google is well known for spending wisely and while any number of energy storage technologies could have served its purposes, Google picked the most affordable and environmentally friendly battery technology over several cooler technologies.
The energy storage sector can be very confusing for investors because of the political appeal of and media hype over plans to use Li-ion batteries in a new generation of plug-in electric vehicles. In an effort to milk the current irrational exuberance for all it's worth, many Li-ion battery developers swan around like minor princes gossiping about the king's impending illness and waxing prophetic on how marvelous things will be once they get government guaranteed loans to build U.S. factories, magically slash their production costs, find customers that aren't bankrupt or teetering on the brink of the abyss and triumphantly ascend to the throne. Since the politicians and press don't know any better, and the environmentalists are eager to embrace any feeble reed that might reduce carbon emissions, the meaningless forecasts of future victories are accepted as fait accompli despite the fact that the king is in fine shape and the minor princes have not shown any ability to lead, much less rule.
Batteries are a not a cause or a crusade, they're a business. Unfortunately for many investors, that message has been lost in the hype and created some incredible market distortions. If you compare market capitalizations, Ener1 (HEV) is almost as valuable as Enersys (ENS). If you compare financial statements, however, you'll find that Ener1 wouldn't qualify as a rounding error if it was part of Enersys. The distortions are every bit as striking if you make the same comparisons between Valence Technology (VLNC) and Exide Technologies (XIDE). Comparable distortions are obvious for late stage technology development companies like Altair Nanotechnologies (ALTI) and Axion Power International (AXPW.OB).
The realities of the battery industry are such that every survivor will prosper and have more business than it can say grace over, but it will take years if not decades for Li-ion developers to grow their businesses to the point where their fundamentals justify their market values. So while the currently unloved lead-acid battery companies are growing their businesses and increasing shareholder value, the minor princes are more likely to stagnate, stumble and fall.
When it came to a mission critical buying decision, cheap beat cool at Google. Does anybody really believe American consumers will act differently when it comes to their own money?
Disclosure: Author is a former director and executive officer of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He also holds small long positions in Exide Technologies (XIDE) and Enersys (ENS).
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. (AXPW.OB) a small public company involved in advanced lead-carbon battery research and development.