Last Friday I received my copy of the presentations from September’s European Lead Battery Conference in Istanbul. Most of the presentations were written for a technically astute audience and don’t offer much in the way of concrete guidance for investors, but an overview presentation from Ricardo PLC, a global leader in engineering solutions for low carbon, fuel-efficient transportation, included three slides that merit serious investor consideration and show why I’m convinced cheap will beat cool for the next decade of vehicle electrification. I’ve posted a copy of the Ricardo presentation here.
The first slide is a simple timeline that answers the eternal question “When are the technological wonders we read about on a daily basis likely to become profitable business reality?”
Lead-acid batteries have been the dominant energy storage technology for the last century and the global manufacturing footprint is immense. As vehicle electrification becomes more commonplace and energy storage requirements increase, leading lead-acid battery manufacturers including Johnson Controls (JCI), Exide Technologies (XIDE) and Enersys (ENS) are seeing a pronounced shift in demand patterns. Users who once bought inexpensive first-generation flooded batteries are now buying premium second-generation AGM batteries. Concurrently, lead-acid technology innovators like Axion Power International (AXPW.OB) are finishing development and testing of third-generation devices that will bring the power and cycle-life of lead-acid batteries up to a level that’s comparable with NiMH batteries at a reasonable cost. The bottom line for investors is that lead-acid battery technology is rapidly improving and barring a seismic technological shift, manufacturers can only get more profitable over the next decade as global demand for cost-effective mass-market energy storage products surges.
Nickel Metal Hydride, or NiMH, has been the battery chemistry of choice for HEVs since Toyota (TM) introduced the Prius in 1997. Over the last decade HEVs have earned an enviable reputation for efficiency and reliability. Unfortunately, the “M” in NiMH batteries is the rare earth metal lanthanum, which is only produced in small quantities and primarily mined in China. While material supply constraints have not limited NiMH battery production in the past, China has recently announced plans to limit rare earth metal exports in the future. Therefore looming supply constraints will limit the scalability of current HEV technology and most observers believe future HEVs will have to accommodate a lateral substitution of advanced lead-acid batteries and accept a slight weight penalty, or accommodate an upgrade substitution of lithium-ion batteries and suffer a substantial cost penalty.
For several years, dreamers, politicians and environmental activists have shamelessly portrayed lithium-ion batteries as a silver bullet solution to the planet’s energy storage needs. From Ricardo’s perspective, however, large-format lithium-ion batteries are just beginning to emerge from the prototype stage and enter the early commercialization and demonstration stage. Nissan (NSANY.PK) and General Motors (GM) have recently introduced the Leaf and the Volt and publicized ambitious plans to expand EV production. Those plans, however, will depend on mass-market acceptance of expensive products that haven’t been adequately tested under real world conditions by people who just want reliable transportation. I’ve always believed the ramp rate for plug-in vehicles would be slower than the historical ramp rate for HEVs because users will inevitably have problems with dead batteries, range limitations and other performance issues. As the problem stories spread through the grapevine, the only possible outcome is reduced demand. Ricardo believes it will take at least six years before EVs begin to make the transition from the bleeding edge of early commercialization and demonstration to the leading edge of mass production. I think ten years is more likely.
The second slide compares the energy and power requirements of various vehicle electrification technologies with the energy and power characteristics of today’s leading battery technologies.
There’s no question that plug-in vehicles will need the energy and power of lithium ion batteries if they hope to penetrate the mass-market. Nevertheless, HEVs have built an enviable track record over the last decade using NiMH batteries that were only slightly more powerful than first- and second-generation lead-acid batteries. Since third-generation lead-acid battery technologies promise far higher power and tremendous cycling capacity, I tend to believe that lithium-ion will be viewed as overkill for all but the most demanding HEV applications.
The most intriguing slide from the Ricardo presentation is a simple table that shows the economic performance of their HyTrans micro-hybrid in commercial door-to-door delivery cycles using a variety of energy storage solutions. The table excludes the mechanical elements and control electronics, so it doesn’t reflect total system cost. It does, however, highlight the striking economic differences that arise from a decision to use an objectively cool technology to do the work when an objectively cheap technology can do the same work for less money.
For the average consumer the only reason to consider vehicle electrification alternatives is to save money. The Ricardo table leaves little room for doubt on the question of which energy storage technology wins the cost efficiency crown.
What It Means For Investors
Over the last few years a slick, carefully coordinated and beautifully executed PR program from the lithium-ion battery sector has convinced many wishful thinkers that the IT model will carry over to electro-chemistry; that economies of scale will conquer all despite the fact that material and component costs for lithium-ion batteries are four times greater than comparable costs for lead-acid batteries; and that modest size and weight differences will somehow dictate the design and performance of a 3,000 pound car.
As a result lithium-ion battery stocks sell at substantial premiums to their lead-acid peers.
If Ricardo is right, most lithium-ion battery developers can plan on another six to ten years of losses before they turn the corner to profitability. In my experience that’s not a healthy business dynamic for investors who worry about details lik
e capital preservation. On the other hand it’s equally clear that the next decade will be very good for both lead-acid battery manufacturers and lead-acid technology innovators who are certain to be the first major beneficiaries of the trend toward increasing vehicle electrification.
In another decade, the business dynamic may be different if lithium-ion battery developers can meet their aggressive cost reduction goals and prove a compelling value proposition for plug-in vehicles. Until that happens, however, the safest energy storage investments for investors who want superior portfolio performance are in lead-acid batteries.
I frequently remind readers that I’ve been a Mac user since 1988 and always believed Apple had superior technology. My opinion didn’t change the fact that compared to Microsoft; Apple was a poor market performer until 2000. It only goes to prove that in the gritty world of investments, being right too early is no better than being wrong.
Over the last year the four lithium-ion battery stocks I track have lost an average of 22.2% of their value while the three lead-acid battery stocks I track have gained an average of 15.1%. I don’t expect that dynamic to change any time soon.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock.