Stop-Start Realities and EV Fantasies
Last week Johnson Controls (JCI) released the results of a nationwide survey that found that 97 percent of Americans are ready for micro-hybrids with stop-start idle elimination, the most sensible automotive innovation in years. A micro-hybrid turns the engine off to save fuel and eliminate exhaust emissions when it's stopped in traffic and automatically restarts the engine when necessary. While the overwhelmingly positive consumer response didn't surprise me, JCI's short-term growth forecast for micro-hybrids did.
I've been writing about the rapidly evolving micro-hybrid space since 2008 and during that time the market penetration forecasts have built quietly like a tsunami in the open ocean.
- In October 2008, Frost & Sullivan predicted that global micro-hybrid sales would ramp to 8 million vehicles a year by 2015 while EVs would remain an inconsequential niche.
- In April 2010, the EPA and NHTSA predicted that stop-start systems would be standard equipment on 39% of new cars sold in the U.S. by 2016 while EVs would remain an inconsequential niche.
- In June 2011, JCI predicted that up to 22 million vehicles a year would be sold with stop-start systems by 2015 while EVs would remain an inconsequential niche.
- In February of this year, Lux Research forecast micro-hybrid sales of 25 million vehicles a year by 2015 and 39 million vehicles a year by 2017 while EVs would remain an inconsequential niche.
- Last week JCI upped the ante once again with a new forecast that 35 million vehicles a year will be equipped with stop-start systems by 2015.
A basic stop-start system will add about $300 to the price of a car and save its owner 5% on his fuel consumption. For 35 million vehicles worldwide, the incremental cost will be about $10 billion and the annual fuel savings will be 700 million gallons. To put those numbers into perspective, my favorite toymaker Tesla Motors (TSLA) hopes to ramp its production to 20,000 EVs a year if it can find that many mathematically challenged buyers. The electric drive systems in those EVs will cost at least $800 million, but they'll only save eight million gallons of gas per year.
When you turn the crank on the fuel efficiency numbers, it costs $14 to save a gallon of gas per year with stop-start while it costs $100 to save the same gallon of gas with electric drive. I'm sure the eco-royalty won't mind a paying a 600% premium for flashy fuel savings as long as smarmy politicians are willing to squander public funds on direct and indirect subsidies and give them special perks like HOV lane access. When you look past the hype, however, it’s clear that real companies that deliver real, sensible and affordable value to the mass market will generate the business earnings.
Two publicly held battery manufacturers, JCI and Exide Technologies (XIDE), will be the first to benefit from the rapid global implementation of stop-start technology. They'll each see their per vehicle revenue double while their per vehicle margin triples. In JCI's case, the incremental revenue and margin from stop-start batteries will just make a good company better. In Exide's case, the incremental revenue and margin should turn a long string of losses and disappointments into a healthy stream of future profits.
At Friday's close, JCI was trading at 48% of sales and a 200% premium to its March 2009 lows. In contrast, Exide was trading at 6% of sales and within pennies of its March 2009 lows. There's no doubt that rapid implementation of stop-start technology will lift both boats. Given the big differences between their relative valuations, the percentage impact on Exide's stock price should be several times greater than the percentage impact on JCI's stock price.
While JCI and Exide will be early leaders in the stop-start battery space, there is a persuasive and growing body of proof that conventional lead-acid batteries, including the "enhanced flooded" and AGM batteries both companies are touting as stop-start solutions, aren't durable or robust enough to succeed in the long term.
The basic problem is that a car equipped with a stop-start system needs a battery that can carry the accessory and starter loads when the engine turns itself off in traffic, and then recharge quickly in preparation for the next engine off event. In city driving conditions, conventional lead-acid batteries can't charge fast enough and a few months rapid cycling leads to an unavoidable decline in battery performance that quickly renders the mechanical components inoperable.
The following graph from Axion Power International (AXPW.OB) highlights the dynamic acceptance issue by comparing the performance a high quality AGM battery with the performance of its serially patented PbC® battery, a third generation device that replaces the lead-based negative electrodes in a conventional AGM battery with carbon electrode assemblies.
In both graphs, the grey line represents dynamic charge acceptance measured in amps. While dynamic charge acceptance of the AGM battery plummets from 50 amps to 5 amps within a couple months, the PbC can accept charging currents of 100 amps for five years before its performance begins to degrade. The black lines represent the time needed for the battery to recover from an engine off event. While both batteries start out with a charge recovery time in the 30 second range, the recovery time for the AGM battery increases to about 4 minutes after six months while the PbC stays in the 30 to 50 second range through eight years of use. Additional advanced energy storage solutions that are targeted at the particular performance requirements of stop-start vehicles include a lithium-ion starter battery from A123 Systems (AONE) and a hybrid system that pairs an AGM battery with a supercapacitor module from Maxwell Technologies (MXWL).
The stock market doesn't understand that several billion dollars of incremental revenue from stop-start batteries is already baked into the cake for 2015. It doesn't understand that two established battery manufacturers are the only companies that have enough manufacturing capacity to respond to the demand. It doesn't understand that a handful of advanced technology developers will be nipping at the big boy's heels with energy storage systems that are better suited to the needs of stop-start systems, or that each one percent of market penetration can represent $100 million of incremental revenue.
The die is already cast. The market for high performance stop-start batteries is going to be a free-for-all where unlimited demand chases limited supply from a small number of established manufacturers and emerging energy storage technology developers. Every company that brings a cost-effective energy storage solution to the stop-start market over the next three years will have more customer demand than it can possibly satisfy. Patient investors who position themselves in front of this rapidly developing tidal wave of demand for high-margin energy storage systems are in for a fun ride.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and owns a substantial long position in its common stock.