Battery Manufacturers, Burger Joints and Secret Sauce
In September I received an e-mail from France Innovation Scientifique & Transfert SA advertising their new IP Overview of Lithium Metal Phosphate Batteries - 2010/04. While I don't usually pay attention to e-mail pitches for costly reports, the FIST solicitation caught my eye because the abstract explained that roughly 1,100 patent applications have been filed for lithium metal phosphate chemistry since Dr. Goodenough's key patent issued in 1996. It's enough to give a guy a whole new perspective on this T-shirt from EV World.
It also raises a couple critical issues that many battery investors don't understand. There are only a few ways to make a lithium-ion battery and the basic manufacturing technology has been in the public domain for decades. That means manufacturers who trumpet their gee-whiz technologies are invariably talking about their particular recipes for the standard chemical coatings they put on the standard aluminum and copper foils that are used as current collectors in all lithium-ion batteries. So while there are differences between the LiFePO4 batteries made by A123 Systems (AONE), Valence Technologies (VLNC), BYD (BYDDY.PK) and others, the differences are kissing cousins of the secret sauce recipes flogged by competing burger joints. This cartoon from Hugh McLeod says it better than I ever could.
The unpleasant truth does not change with different flavors of lithium-ion chemistry. There are five basic anode coatings, seven basic cathode coatings and a variety of organic electrolytes. Once a manufacturer chooses his preferred combination and develops his secret recipe, the differences in manufacturing steps, equipment and device performance are, in most cases, inconsequential. The same is true for lead-acid batteries and there's not really much difference between batteries made by Enersys (ENS), Exide Technologies (XIDE) and Johnson Controls (JCI). Everybody does things a little differently to better serve the needs of their target markets and everybody talks about his unique technology, but in the final analysis the ability to efficiently manufacture a consistent, high-quality product that meets the required specifications is the only thing that matters.
In a presentation at this week's The Battery Show in San Jose, Quallion's president Paul Beach reportedly put everything into perspective when he explained that lithium-ion battery development is all about optimization and incremental gains, rather than quantum leaps. He emphasized, "There is no Moore's law for batteries" and said if we want exponential performance gains or cost savings, we'll need to "go to an asteroid and come back with some new materials." Batteries will continue to improve slowly, but the big gains will come from generational changes in chemistry and in manufacturing methods, rather than secret sauce refinements.
In June 2009 I wrote "Understanding the Development Path for Li-ion Battery Technologies," an article that focused on an unpublished "pre-decisional draft" of a DOE report titled National Battery Collaborative (NBC) Roadmap, December 9, 2008. The roadmap was a high-level white paper that discussed the merits, risks and expected costs of an eight-year plan to foster the development and commercialization of lithium-ion batteries. While the roadmap was created during the waning days of the Bush administration and has not been released or for that matter sanctioned by the DOE, it bears an uncanny resemblance to policy initiatives implemented by the Obama administration. For investors who are cautious about walking down dark alleys, the roadmap is sobering. After all, who wants an investment that will be obsolete before it becomes profitable?
While most energy storage devices are me-too products and most energy storage investments are manufacturing plays rather than technology plays, there are a couple of exceptions.
Beacon Power (BCON) is deploying a frequency regulation system for utilities that uses high-speed flywheels to store modest amounts of power for brief periods and return that power to the grid in milliseconds. Active Power (ACPW) is commercializing a similar system for computer datacenters that uses low speed flywheels to ensure consistent power quality. The systems can't keep the lights on for days or even hours, but they can smooth out the minute-to-minute variability that plays havoc with electronics and highly automated manufacturing. They're also based on physics rather than chemistry, which leaves open the possibility that performance can be doubled and redoubled as the technologies mature.
Beacon faces a number of daunting challenges including a feeble balance sheet and the need for substantial additional capital to continue the implementation of its merchant power business model, but when it finishes the installation of 60 MW of planned facilities and emerges from the development stage, it should have a dominant intellectual property position in an important grid stabilization market.
I was hard on Beacon when I started writing this blog in the summer of 2008. At the time its stock was trading in the $1.50 range and it was easy to foresee the hard times. Today Beacon's stock is trading in the $0.30 range and it's had remarkable success obtaining government guaranteed project financing and grants for its planned facilities, and negotiating reasonable utility tariffs for an entirely new class of grid stabilization service. While substantial challenges remain it's getting easier to foresee a time when Beacon will turn the corner financially and represent a solid investment value. Beacon's market capitalization of approximately $60 million includes $36 million of hard net worth and only $26 million of intangible premium for the $95 million of research and development costs it expensed in prior periods.
Axion Power International (AXPW.OB) is developing a third generation lead-acid battery technology that uses carbon electrode assemblies to replace the lead-based negative electrodes used in flooded and sealed lead-acid batteries. The resulting PbC® battery is a battery-supercapacitor hybrid that lasts several times longer and charges several times faster than flooded or sealed lead-acid batteries. It also offers higher power and can stand up to repetitive deep discharge cycling without battery damage. The PbC is not a silver bullet solution for all energy storage requirements, but it has substantial potential in a variety of emerging energy storage applications ranging from renewable power integration, to hybrid railroad locomotives and automotive stop-start systems.
Since inception, Axion's biggest challenge has been the industrial engineering associated with developing a manufacturing process for an entirely new class of battery product. There was no established art and most subcomponents of the electrode assemblies didn't have commercial analogs. The process has been difficult and time consuming, and complicated by fact that several first tier manufacturers who are very demanding when it comes to consistency, quality control and performance are considering the PbC for use in mass market products. So instead of starting out as a young company and growing to adulthood over a period of several years, Axion is being forced to achieve levels of maturity and excellence that are not typically expected from young companies that are introducing a new technology.
Axion has a strong intellectual property position and seems to be responding well to the demands of its potential customers. It's finishing work on a second-generation electrode fabrication line that will be in production by the first quarter of next year and is expected to satisfy the consistency, quality control and performance standards of its potential customers. Substantial challenges remain, but the bulk of the hard work is in the past rather than the future. Like Beacon, Axion's market capitalization of approximately $50 million includes roughly $22 million of hard net worth and about $27 million of intangible premium for the $22 million of research and development costs it expensed in prior periods.
Once you get beyond Beacon, Active Power and Axion, everybody else in the energy storage sector is or will be making a commodity product with modest to insignificant technological and performance differentiation.
Energy storage is hard-core heavy manufacturing at its best and worst, but it's not a technology business like the ones we came to know and love during the information and communications technology revolution. Investors who do not understand this reality are doomed to pay premium prices for secret sauce.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its common stock.