Power System Component Companies Prepare for Their Close-Ups

Easy as A123

That is the hope of current investors in a select few publicly traded automotive component makers, as they prepare for the spotlight this week. The widely watched and almost certainly explosive A123 IPO (no Li-Ion battery pun intended, honestly) is focusing attention on a select group of companies that supply similar or auxiliary technology. Primary among these companies, which are likely to garner at least a sympathetic examination by would-be investors in A123 (AONE), are Enerdel (HEV), Valence Technology (VLNC) and Quantum Fuel Cell Technologies (QTWW).

Guilty as Charged

It says something about the general state of the industry, that you can't find a drop of profit among these companies. Enerdel comes the closest, with an offshore subsidiary that produces an "inferior" (and cheaper) Lithium product that does manage to have a positive gross margin. Otherwise, you find some really exciting products that are at the cutting edge of tomorrow's automotive technology needs that are offered on the market at prices below their true cost of manufacture.

You also find the kind of wildly exorbitant R&D budgets and deep-pocketed private investors that recall Howard Hughes' Spruce Goose, Columbian Drug Lord Submarines, and Russian Oligarch, well, Automotive Component Companies. Finally, one cannot fail to mention the presence of established competitors like Johnson Controls (JCI) and LG Chem., with existing commercial bases and diversified income streams. There's also A123 to consider, of course.

So, is reliance on deep-pocketed private investors with personal agendas, lack of an immediate foreseeable profit potential, and established competitors in an industry with monstrous barriers to entry, necessarily bad things? Well, my sock puppet says yes.

Alternating Current

Something has got to give. Actually, a lot of things have given already, judging by the collapse of the old guard automotive royal families. GM and Ford (F) will no longer set the automotive development agenda, as they once did. Nor will Toyota (TM), Daimler (DAI) or Nissan, clearly. Plainly, we are currently entering into a new economic and technological era, the Green Industrial Age. Yes, we've all heard that kind of prediction before, and somehow AOL did not take over the world (just Time Warner (TWX)). There are some compelling projections to recall, however.

One million electric vehicles in the US by 2015, for instance, as outlined by President Obama, and backed up by billions in grants and loans. That number will likely be dwarfed by programs in Europe, where alternative energy is already a staple of public life. Emerging automotive markets in China, India and Eastern Europe are arriving in a climate of carbon reduction offsets and easily foreseeable oil supply disruption events. Are they likely to blindly accept dependence on liquid carbon-based fuels? Even oil-producing states and companies are looking to alternatives, like nuclear, wind and solar power. Until a better idea comes around, better batteries and more fuel efficient vehicles seem to be the future, regardless of the shocking prices (pun intended this time) for the components.

Shocking Conclusion

Enerdel, Valence and Quantum Fuel Cell Technologies are just the sort of investments our financial advisers warned us about. They are risky, impetuous and lack the kind of gut level understanding that the Oracle of Omaha would demand. Never underestimate the power of a churning juggernaut of under-informed media frenzy, however. Whether or not these companies emerge as this century's blue chip saviors, they will see a lot more attention in the next 3-5 years, and look in the near term, poised to top off their batteries in the glow of A123's IPO.

Disclosure: Long HEV.

Comments

[jerrydd:]

Valence makes a terrible battery which fails often so I wouldn't invest in them.

A123 is a great battery and they have orders.

Fuel cells are not likely to go anywhere as they are too costly, short lives, need fuel which is going up. Vs batteries which are far more eff, cost effective.

I like EV's and build custom ones and drive them every day but car companies hate them so there will not be that many, certainly not 1million in the US. The first big time builders will probably be Nissan and A Better Place, to sell/service them are the best bets now.

Others are dragging their feet.

Sep 24 10:11 AM

[ArtM72:]

Comparing Enertech's Li-ion batteries for cell phones, computers et al to EnerDel's automotive grade batteries is like comparing an automobile to a locomotive. I wouldn't characterize automotive technology as "inferior".

Citing 'not a dime's profit' has been made in the development of the new Li-ion technology and then comparing those batteries to Howard Hughes' Spruce Goose might be more apt. But I bet you could come up with a few examples of where capital investment in R&D did make a dime or two.

With respect to the suggestion above that electric vehicles might never catch on, that too is a possibility. But electric drive trains are far more reliable and far more efficient than their IC cousins. (Not likely a lot of service bay time, 80+% v 20-%) What electric drives have needed to prosper in the auto sector was a competent cost efficient battery. It appears that battery is here today.

With Chu at the DOE funding Fiskar, HEV has a guaranteed customer and the 'big three' or the oil giants won't be able to deep six the technology. And if you think the Th!nk City is a little corny, and the Fiskar Karma too flashy, then check out what Volvo is doing with EnerDel batteries. Of course you can also drop an EnerDel into a Prius and significantly boost its fuel economy.

I join everyone in looking forward to the cost and gross margins at HEV.

Sep 24 11:42 AM

[Advill:]

Sorry, Valence batts are pretty much the same batt A123 has...it lacks the beauty, nor A123 or any other Lithium technology will succed unless they deliver energy under $250 /Kw and that is not attainable with today´s technology

VLNC has been in the market for 10 years, 4 different families of products...they are stupid belive me, but they are not so stupid after 20 years.

Regards.

On Sep 24 10:11 AM jerrydd wrote:

>
> Valence makes a terrible battery which fails often so I wouldn't
> invest in them.
>
> A123 is a great battery and they have orders.
>
> Fuel cells are not likely to go anywhere as they are too costly,
> short lives, need fuel which is going up. Vs batteries which are
> far more eff, cost effective.
>
> I like EV's and build custom ones and drive them every day but car
> companies hate them so there will not be that many, certainly not
> 1million in the US. The first big time builders will probably be
> Nissan and A Better Place, to sell/service them are the best bets
> now.
>
> Others are dragging their feet.

Sep 24 12:54 PM

[lauzanito:]

Watch out Swiss company Leclanche (quoted on the Swiss stock exchange) another Lithium ion company poised for tremendous growth....

Sep 29 05:29 PM

[levsade1:]

I suggest things are not so simple as you describe.
When I check an investment there are a lot of facts that leads to a believe, checking all those facts is what bring up confidence in your investment.We are talking evolution and evolution is always matter of time but can never be stropped.President of QTWW is well connected to government.Fisker whose reputation is well known on the business chose QTWW as is partner.Mistake done in the past (Like Tescar) were corrected.Huge Chinese automotive company has an agreement with Quantum.The same goes with India. Government loan will push the company to a new level.time will tell, we will meet in few years and read your article, to see how much you are wrong and not possible to predict what is really coming. good luck in other investments where you can go confident.

Sep 30 05:01 AM

[einstein p ...:]

All the alternative fuel plays are speculative in nature, so it's good to diversify your bets. Hit RTK at 50 cents a share and diversified some of the profits into QTWW and SYNM. AONE is the hot ticket this week, but it's a very crowded trade.

Most likely the best bet for the lithium battery revolution is SQM --- hard to make lithium batteries without lithium.

Oct 04 02:15 PM

[einstein p ...:]

QTWW continues to interest me. The designer of Fisker Automotive was also the designer for the Austin Martin. Electric car + Austin Martin? Okay. Bought a ton of shares at 1.13 today, averaging up. All I want to do is make enough to buy one of the cars. If you haven't checked it out, it's one sweet looking "green" ride.

qtww.com

Nov 05 06:47 PM