A123 Increases IPO Price Range

This morning, A123 Systems Inc. (AONE) amended its registration statement to increase the price range for its proposed IPO to $10.00 to $11.50. I take this as an indicator that their IPO road show has been well received and the offering will go to market in a timely manner.

While I've avoided commenting on A123's prospectus, business or financing plans, there is one point that deserves some attention. Their prospectus summary says:

According to A.T. Kearney, the global lithium-ion battery market for automotive application in HEVs, PHEVs, and EVs is estimated to be $31.9 million in 2009. A.T. Kearney projects that this market will grow to approximately $21.8 billion by 2015 and $74.1 billion by 2020, based on a moderate drive for change influenced by increasing governmental regulation, emerging powertrain technology, changing consumer demand and OEM product strategies toward more fuel efficient vehicles.

After spending several weeks thinking about that statement, it finally dawned on me that the only way to reconcile A123's market size forecast with its anticipated product cost was with an assumption that lithium-ion batteries would completely displace lead-acid batteries in the automotive market over the next 10 years. With that assumption as a given, a battery cost of $750 per vehicle and a 100 million vehicle per year market would actually work out to about $75 billion in potential battery sales.

While I wish A123 well and hope its offering is very successful, I feel compelled to point out that the lead-acid battery industry is not likely to take such a challenge lying down. As long-term readers know, I believe the new PbC battery that Axion Power International (AXPW.OB) plans to commercialize in cooperation with Exide Technologies (XIDE), together with other emerging lead-carbon battery solutions, are likely to dominate the stop-start and mild hybrid markets because they will offer comparable performance in stop-start and mild hybrids for one third of the cost of lithium-ion.

In the real world of paychecks and budgets, cost is important and the choice of technology always obeys the laws of economic gravity.

Upgrading from a $150 valve regulated lead-acid battery to a $250 PbC battery is not likely to give rise to substantial resistance from automakers who are actively seeking a more robust and reliable battery technology that will stand up to the demands of stop-start applications.

Upgrading from a $150 valve regulated lead-acid battery to a $750 lithium ion battery is a different story altogether, particularly when none of the automakers has any history using lithium-ion batteries which have a less than stellar track record under the harsh operating conditions that have made lead-acid batteries the technology of choice for automotive starting, lighting and ignition worldwide.

In a way it's comforting to know that like me, A123 believes that stop-start systems and other mild hybrid technologies will become standard equipment over the next decade. I still think it's far too early to claim victory in a technology race that hasn't been called to the starting gates. Under the circumstances, I think A123 investors might want to take a hard look at the emerging lead-carbon battery technologies and consider hedging their bets.

Disclosure: Author has a large long position in Axion Power International (AXPW.OB) and a small long position in Exide Technologies (XIDE).

Comments

[Fred W:]

Wouldn't flywheels be tough to compete with? -- "A123 is pursuing are frequency regulation and end user power"...O&M, replacement costs, and of course high front end costs?


On Sep 23 09:37 AM John Petersen wrote:

> Airboss, the roadshow presentation makes it clear that the only grid
> markets A123 is pursuing are frequency regulation and end user power
> quality, markets that have relatively high value but represent less
> than 10% of the total storage pie. There will undoubtedly be good
> markets for A123s grid-based systems, but they'll never be cheap
> enough for a solar or wind farm near you.
>
> Battman, I've always believed that a rising tide will lift the one-foot
> gunwales of a dinghy by six feet while it will only lift the 100
> foot gunwales of a super-yacht by 6%. I suppose the next few months
> will tell whether that theory is accurate.
>
> Notrunner, I learned most of what I know about the energy storage
> sector during a five year stint as legal counsel for and as a director
> of Axion. I own a big pile of its stock and have high expectations,
> but you need to consider the source on that one. I've also bought
> ACPW, ENS, XIDE and ZBB. The only one that hasn't already had a pretty
> big run is ZBB, which is commercializing an impressive flow battery
> system and partnered with some big names. Another battery related
> stock that my friend Jack Lifton likes a whole lot is Great Western
> Minerals (seekingalpha.com/symbo...) a Canadian mining
> company that has substantial promise in the rare earth metals that
> are needed for NiMH batteries and permanent magnet motors.

Sep 23 11:36 AM

[nakedjaybird:]

John - Amen on the L1, VW's diesel hybrid, where a 2 person payload of 300+ pounds approaches 25% of curb gross weight (moving only 3 lbs of vehicle for each pound of people instead of 6+lbs of vehicle for most other EV's).

Sep 23 11:47 AM

[Jet6330:]

Blogs like this fascinate me, seven words in two separate phrases:

Economies of scale
Long term technological development

Just as in the day many pundits thought the computer would be the size of rooms forever (1970's) and those that thought the telephone would never catch on. So too we have those that undermine our future technologies that we know will become the norm. I am sure at one point in time, people believed Lead-acid batteries would never be used due to their 'sophisticated' technology.

It would be nice to read something that is a little less bias towards an aging technology from yester-year. I know lithium is not the be all and end all of powering our cars of tomorrow, but just as Lead-acid batteries were, they will be an important step to the technology of tomorrow. Rather than continue to undermine it at every turn, embrace it and hope that we will all survive to see these wonders of the future.

Sep 23 11:53 AM

[John Petersen:]

Fred, I think it's hard to predict a winner in the frequency regulation market because of differences in performance requirements. Some applications will need supercapacitors, others will need flywheels and still others will need batteries. It gets even more complex when you consider that even long-discharge batteries like sodium sulphur and zinc bromine can make a significant contribution. These markets are all brand new and are still not well defined. The one thing that nobody should do is assume that any single technology will be the best fit. I have several pairs of shoes that I change frequently depending on my planned activity. Storage will be the same.

Jet6330, over 70% of the cost of a battery is materials and unless we find a natural resource fairy those costs are not going to decline. If economies of scale meant anything, the big lithium-ion producers like Sony and Sanyo would have already achieved them on their way to $7 billion in global lithium ion battery sales. The economies of scale line is comforting but meaningless in a materials intensive business like batteries. Likewise, there is no Moore's Law for chemistry like there was for physics. If you remove active materials you store less energy.

Lead-acid may well be an "aging technology from yesteryear" but the new lead-carbon variants improve cycle life by over 4x and improve power output and recharge times by up to 10x. The advances of the last few years are astounding, but the world's been spending so much time listening to the PR hype that sounds of science have been masked.

I've been a Mac user since 1988 because I'm absolutely convinced that it's the finest OS ever created. For the first couple decades of Apple's existence, however, it was an investment black hole because the ultra-cool solutions were too expensive for 95% of the potential market. Lithium ion batteries may have huge potential in the 2020s, but they'll be investment black holes for the next ten years.

Sep 23 12:25 PM

[User 484348:]

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The are a direct competitor of A123.
LI-ION TITANATE' FOR AUTOS , TRUCKS,
BUSES . EXCELLENT AT EXTREME TEMPERATURES.
Involved with Navy, Wind, Solar and Grid.
www.altairnano.com

Sep 23 01:17 PM

[Don Harmon:]

John you wrote: "Lead-acid may well be an "aging technology from yesteryear" but the new lead-carbon variants improve cycle life by over 4x and improve power output and recharge times by up to 10x. The advances of the last few years are astounding, but the world's been spending so much time listening to the PR hype that sounds of science have been masked."

I would take issue that the sounds of science have been masked. The only masking that's being done is by these very new lead-carbon battery defelopers themselves. The Lithium princes have been shouting their own praises from the hill tops for the past few years, A123 being among the loudest of them all!

Don Harmon

Sep 23 01:24 PM

[John Petersen:]

Don, with due respect I'm just about the only voice that even talks about lead carbon and my writing is more about providing reality check for the lithium-ion hype. We both understand that there are a world of potential energy storage applications and each one is going to require a different solution. Some planned applications like consumer electronics, PHEVs and EVs can't settle for anything less than the size and weight of lithium. Once you get past those few narrowly defined markets and begin looking at energy storage as a business, users are going to pick the technology that does the grunt work of storing the required energy in the most cost-effective manner. In cases where wasting energy is cheaper than storing it, waste will continue to rule the day.

Sep 23 01:44 PM

[Jet6330:]

How many commercially produced vehicles are currently on the road using Lithium Ion battery packs compared to that of Lead acid?

That in itself should indicate the demand imbalance between the two technologies. Agreed batteries are very material intensive but so too do the costs of said inputs decline with the systematic increase in the usage of these material inputs in the production process as well as the continued development in more efficient means to use them. Furthermore, one would not need a "resource fairy" as you so eloquently put, to reduce the cost of material inputs. As with any industry, technological advancements are to a large degree unaccounted for when factoring in future prices due to the uncertainty behind them. If the past is anything to go by, we should see a dramatic decline in input costs as demand for more efficient battery systems grows - when the electrification of vehicles actually happens!

John, it is great that you landed a large position in axion, a lead acid battery producer and have continued to load your portfolio with the industry leaders in this field. I feel your blog is rather bias towards this one form of energy storage technology. I feel you are trying to push the positive virtues of this technology to boost your own portfolio by creating a false sense of hope that this archaic form of battery technology is the future thereby increasing their respective share prices, as is the case with all analysts. While doing this you continually voice only the negative aspects of Lithium Ion. Hence the reason this is a blog and not a published journal!

As an Energy Economist I am compelled to look at all forms of energy storage, I do see long term use for lead acid batteries, I am certain of this! However, this technology will gradually become less and less prominent as more efficient, lighter and soon to be more cost effective on a per KWh basis, technologies take centre stage. Just as coal has and will always play a part as a source energy however, as wind, geothermal and solar (amongst others) become more prominent coal will begin to decrease in terms of its % share of total energy supply. No hard feelings John, I am not here to personally offend you or the like. I am simply here to advise you and everyone else that one cannot put all their eggs in one basket (as they say) in terms of energy supply and storage as well as one should always remain objective and fair towards all technologies, even those in their infant stages of development and use. Trust me $7 billion in sales is a drop in the ocean compared to what they and others will achieve once Lithium battery packs are used in vehicles! Good day.

Sep 23 02:53 PM

[Ed Man:]

Mayascribe,
Another REE company is CMRZF, Commerce Resources Corp, also of Canada. Its is at 55cents now.


On Sep 23 09:48 AM Mayascribe wrote:

> Great Western Minerals, for us state-siders is (seekingalpha.com/symbo...).
> I see this stock as the long term best play on batteries, cell phones,
> flat screens, cars, puters. Glad that no one knows about REE's, yet.
>
>
> But they will. They...being the insitutionals.

Sep 23 03:24 PM

[MRTTF:]

Economies of scale are meaningless. Sanyo, Sony, and Matsushita/Panasonic produce tens of millions of cells monthly and the cost is not going to go down any further than already at the cell level. Larger format cells will see a drop in price with larger volumes, but not the rapid order of magnitude drop that some are touting.

As for battery level costs, there is a lot of room for those to drop since currently a majority of the processes are still done manually.

On Sep 23 11:53 AM Jet6330 wrote:

> Blogs like this fascinate me, seven words in two separate phrases:
>
>
> Economies of scale
> Long term technological development
>
> Just as in the day many pundits thought the computer would be the
> size of rooms forever (1970's) and those that thought the telephone
> would never catch on. So too we have those that undermine our future
> technologies that we know will become the norm. I am sure at one
> point in time, people believed Lead-acid batteries would never be
> used due to their 'sophisticated' technology.
>
> It would be nice to read something that is a little less bias towards
> an aging technology from yester-year. I know lithium is not the be
> all and end all of powering our cars of tomorrow, but just as Lead-acid
> batteries were, they will be an important step to the technology
> of tomorrow. Rather than continue to undermine it at every turn,
> embrace it and hope that we will all survive to see these wonders
> of the future.

Sep 23 03:40 PM

[John Petersen:]

Jet6330, the answer to your first question would be close enough to zero for both lead-acid and lithium ion batteries that the difference isn't worth discussing. I would note, however, that well over 90% of the electric vehicles currently on the road use lead-acid batteries instead of something cooler and lighter.

Lithium-ion batteries are already a $7 billion annual business and the sector is growing at rates approaching 10% per year. Some of the best manufacturers on the planet have done everything in their power to wring out every possible economy of scale out of the process. The suggestion that new demand from the automotive sector is going to lead to cost reductions on the resource inputs is contrary to fundamental laws of economics and diametrically opposed to the informed opinions of natural resource experts. If anything, the lithium-ion battery sector is heading fast freight into a tremendous material supply bottleneck because the lithium miners are not ready for substantial increases in demand and they don't have the capital required to easily increase production.

According to the DOE, the process of making lithium-ion batteries a cost-effective automotive option will require three generations of improvement in chemistry and two generations of improvement in manufacturing technology. Under optimal conditions the process will take six to eight years and cost $5 billion. Given the way research works in the real world, I think it's probably safe to double the time and cost forecasts. If you want the details, the complete discussion is available in an unpublished "pre-decisional draft" of a DOE report titled National Battery Collaborative (NBC) Roadmap, December 9, 2008 that you can download from here:

files.me.com/john.pete...

My blog focuses on the entire energy storage sector, rather than a single discrete element. I've never suggested that PHEVs or EVs (except for pickup, SUV and van conversions) should be powered by anything other than lithium-ion or NiMH. I even understand that NiMH won't work because of critical shortages of essential rare earth metals. So while I believe that lithium-ion batteries are the only solution that may work in PHEVs and EVs, I have a really hard time getting past the fundamental economics of any vehicle that uses 15 or 25 kWh of batteries to power 3,000 pounds of steel at highway speed. Any way you slice and dice the economics, using 15 kWh of batteries to manufacture one PHEV that will save 400 gallons of gas per year cannot hold a candle to using 15 kWh of batteries to manufacture 10 HEVs that will save 160 gallons per year each, or 1,600 gallons in the aggregate.

You think me overly harsh on the short-term potential of lithium-ion batteries. I think myself a pragmatist who is concerned with the question of which technology is able to serve our needs today, as opposed to which may be able to serve our needs in a decade. Lithium-ion is an important technology that must be developed. The developers have to do a far better job of being forthright about the challenges that lie before them and the timelines and risks associated with those challenges. I have no doubt that somebody will eventually solve the problems, but I think there's a good chance I'll be retired before that happens. I'm young enough that I still buy green bananas, but I have no interest in developing a new banana plantation. The simple fact is the world needs a solution that it can begin to implement today, not a solution that may be ready in 2020.

We come from different perspectives but I don't necessarily think our long-term visions are all that different. I'm a cynic because I've had too much life experience to believe the scientific process or human nature will change overnight. You're more optimistic that the technical and economic challenges I see can be swiftly and easily overcome. The solutions we have today suck (that's a legal term). The solutions people are working on today are a step in the right direction. Our real hope for the future is the genius laboring in his garage and a population that finally comes to realize that it must change its wasteful ways.

I see an energy storage future where the developers of every technology we know about and many that we don't know about will have far more business than they can possibly handle. But my training as an accountant and as a lawyer makes it impossible for me to assume away resource constraints and technical challenges until the constraints are eliminated and the challenges solved.

Sep 23 03:52 PM

[John Petersen:]

MRTTF, thanks for chiming into the economic argument with the opinion of a PhD chemist who is actively working in lithium-ion development. Sometimes readers like Jet6330 are reluctant to accept my view of things.

Sep 23 03:55 PM

[Don Harmon:]

John wrote- "Our real hope for the future is the genius laboring in his garage and a population that finally comes to realize that it must change its wasteful ways."

I say wrong - the solution is here now and any garage inventor will have to spend money he can't possibly come by. People need to know that Lithium- ion companies exist and are shipping product right now that works just fine. We are not talking about PR, John, we are talking actual working product and OEM's are testing and evaluating these products as we speak!

You somehow portray all this as a "not ready for prime time" technology and I strongly disagree (except on the price issues).

Don Harmon

Sep 23 04:35 PM

[John Petersen:]

Don, we've agreed before that different people can look at the same set of facts and reach opposite opinions; which is why jury trials are such a terrible way to find out what the facts were. I'm just happy to agree with you more often than I disagree with you. That doesn't make either of us right or wrong, just different.

Sep 23 04:47 PM

[Jet6330:]

John,

Thanks for the reply, I appreciate your extensive clarification into this topic and your stance regarding it. I hope that everyone reading this knows we are all in this together. The fact that we are debating this very topic gives me great hope for the future.

This has been enlightening, lets all keep the discussion flowing ... I am firmly of the opinoin (as I now know you are too) that we will have a energy storage mix rather than one single form of storage.

Good day and looking forward to the next topic of discussion.

Sep 23 04:53 PM

[Don Harmon:]

John, all is good , but I do want to see the Axion group start to do a little bit of PR on their advanced lead-carbon battery! Otherwise, I am like you skeptical of whatever they claim to have, and like my friend @ Sandia Laboratories feel it's just not ready to compete with Lithium even with a bargain basement price tag.

Maybe your previous tenure there could put a bug in their ear to speed up or start a PR effort on their behalf. I know you always defend the "stealth mode" but soon people will start putting Axion in the same basket with Eestor unless they actually start promoting their new tech.

Sep 23 05:21 PM

[EVNow:]

LOL 100 million cars per year. Should I say missing the big picture ?

Where's the oil for 100 million new cars a year ?

The numbers look too big, though. 21B in 2015 assumes around 2 million electic cars with $10K worth of batteries. $74B in 2020 would be some 14 Million EVs @ $5K per car.

Too optimistic ... but that would also depend on whether what Jeff Rubin predictions of $7/gallon gas materializes soon.

Sep 24 12:33 AM

[John Petersen:]

Jet6330, I truly enjoy commenters like you who understand the business and want to drill down into the details instead of settling for sound bytes. I can be an opinionated cuss at times, but I only have the freedom to do so when I know there will be smart people standing by to take the other side and argue it capably. We live in a sound byte world where people are not often asked to question or challenge their own or somebody else's assumptions. The path we take now will have more future impacts than I could ever begin to explore and it's important to consider the practicalities and costs in addition to the benefits.

Don, I have mixed feelings about PR. I would like to see Axion publish some detailed white papers explaining the work they've done and the results they've achieved. There's a new presentation in the investor section of their website that provides some data, but I think more detail is probably required. Ultimately I suspect the big drivers of restraint are Axion's manufacturing partners. Exide has all the OEM relationships a company like Axion could ever need and those customers are invariably looking for a competitive edge. So Axion's PR team has to look and sound a lot more like Exide's and treat OEM testing and production planning as ordinary course of business work involving confidential customer relationships.

Before we go too far down the EEstor path, I'd remind you that the ARRA battery grants include $34.3 million for Exide to build batteries using Axion's technology and another $34.2 million for East Penn to build batteries using the Ultrabattery technology. These lead-carbon technologies may be operating in stealth mode as far as the stock market is concerned, but I can point to any number of far more talkative battery developers that didn't make the DOEs final award list.

Exide's new plant will have the capacity to produce 1.5 million units per year with a combined storage capacity of about 1,500 mWh. If we assume that East Penn will do the same, the combined new capacity at Exide and East Penn alone will be roughly equivalent to the total capacity that A123 plans to have on line in 2012. Granted they'll be producing simpler and cheaper products, but the efficiency of capital deployment is hard to overlook.

Sep 24 12:42 AM

[Mayascribe:]

John: A while back, in one of your columns, I wrote, "Less said. Best said." Axion, obviously does not need hype. The fathers there know what they have, know what's coming, and are not begging the world to pay attention to what they are doing.

I see that as classy.

Lithium types, like HEV, are whoring themselves out. Nevada is the only place I would invest in whores.

Sep 24 01:01 AM

[John Petersen:]

Mayascribe, it will be great to have a brightline standard like A123 Systems that investors can use to evaluate the relative merits and risks of both established energy storage device manufacturers and emerging developers of new technologies. I look forward to adding A123 Systems to my list of pure play energy storage companies and covering its progress in detail.

Sep 24 01:49 AM