Last week, an article in Green Car Congress summarized a market forecast that Dr. Menahem Anderman presented at this month's Advanced Automotive Battery Conference in Long Beach, California. In his presentation, Dr. Anderman evaluated the market for HEVs in 2011, projected a $1,230 million market for automotive NiMH batteries, and projected a $320 million market for automotive Li-ion batteries. The following graph comes from Green Car Congress, is based on data from Dr. Anderman's AABC presentation, and shows both unit sales and market value of the Li-ion batteries that will be used in HEVs by 2011 (click on the graph for a larger image).
It's sobering if not downright depressing when you get to the middle of the article and read about Dr. Anderman's analysis of the gasoline prices required for HEVs to make economic sense.
Based on a five-year net present value analysis, Dr. Anderman concluded that:
- Stop-start hybrids make economic sense in the $5 per gallon range;
- Mild and strong hybrids require a gasoline price of roughly $7 per gallon; and
- PHEVs and full EVs require a gasoline price of about $10 per gallon.
When he performed an eight-year present value analysis, Dr. Anderman concluded that:
- Stop-start hybrids make sense in the $3 per gallon range;
- Mild and strong hybrids make sense in the $5 per gallon range;
- PHEVs require a gasoline price of roughly $7 per gallon; and
- Full EVs still require a gasoline price of about $10 per gallon.
I know very few people that can perform a net present value analysis. I know even fewer who go looking for a new car with the idea that they're going to drive it for five to eight years. Given the dismal economics of mild and strong hybrids and the ghastly economics of cars with plugs, I believe the high-end market for the next several years will be limited to the image conscious affluent who are willing and able to pay big premiums to make a statement. While Dr. Anderman's forecast of 40,000 Li-ion powered HEVs in two years strikes me as a very ambitious target, I'm willing to set aside my reservations for purposes of this article and assume that manufacturers of automotive Li-ion batteries will be guaranteed revenues of $320 million in 2011.
While most would agree that $320 million of total revenue by 2011 sounds impressive, it loses a bit of luster when you consider that advanced lead-acid battery manufacturers can expect $900 million to $1.8 billion of incremental revenue by 2011 from the widespread implementation of stop-start technology as standard equipment.
I've used the following graph from an October 2008 Frost & Sullivan presentation in a couple of recent articles, but it bears repeating because the law of large numbers is the fundamental reason that short term revenue growth in the automotive battery market favors lead-acid by 6 to 1 over Li-ion. The long blue segments represent the stop-start market that will be dominated by advanced lead-acid batteries because they can do the required work, they cost 60% to 75% less than NiMH and Li-ion alternatives, and they are the only batteries that can be manufactured in sufficient numbers to serve the short-term needs of automakers. The red, green and violet segments represent the high priced "centerfold" alternatives favored by EV advocates, reporters, politicians and public relations managers who would rather sell a sweet dream than grapple with economic reality.
In How Short-Term Supply Constraints Will Impact Booming HEV Markets , I explained that Frost & Sullivan based their original forecast on European CO2 emission standards but did not account for President Obama's subsequent acceleration of domestic CAFE standards. That change alone will push growth that would normally have occurred between 2015 and 2020 into earlier years and could easily double the growth rates Frost & Sullivan expected last fall. So with that background in mind, let's run the numbers.
Currently automakers spend between $50 and $100 for the commodity lead-acid batteries they use for starting, lighting, ignition and accessories; call it an average of $60. Since stop-start hybrids put far more stress on the battery, the advanced lead-acid batteries needed for stop-start vehicles will probably cost the automakers $250 to $300 per vehicle; call it an average of $260. That means the battery cost increment for a stop-start vehicle will be in the $200 range.
A quick eyeball of the Frost & Sullivan graph shows forecasted sales of 4.5 million stop-start vehicles by 2011, which works out to about $900 million in incremental revenue for lead-acid battery manufacturers, or roughly three times Dr. Anderman's forecast for Li-ion. If accelerated CAFE standards double global demand for stop-start vehicles, the incremental revenue for lead-acid battery manufacturers will be closer to $1.8 billion, or roughly six times Dr. Anderman's forecast for Li-ion.
Li-ion battery developers Altair Nanotechnologies (ALTI), Ener1 (HEV) and Valence Technologies (VLNC) have a combined market capitalization of $935 million and will be vying with a host of established domestic, European and Asian competitors for a piece of $320 million in total revenue.
In comparison, lead-acid battery manufacturers Exide Technologies (XIDE), C&D Technologies (CHP) and Axion Power International (AXPW.OB) have a combined market capitalization of $340 million and will be vying with their traditional competitors for a share of $1.8 billion of incremental revenue.
Benjamin Graham said, "In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine." The voting is based on hopes, dreams and expectations. The weighing is based on revenue growth, earnings and other business fundamentals. Any time I can identify one industry sub-sector that trades at one-third of the market value of its more glamorous cousin but is likely to enjoy three to six times the short-term revenue gains, I have to believe the undervalued sector will reward investors handsomely as the weighing machine returns to balance.