In late September I had the pleasure of giving a keynote presentation for the 13th European Lead Battery Conference in Paris. While my presentation focused on the macro-economic, regulatory, supply chain and environmental issues that are driving fundamental change in the battery industry, most of the presenters focused on the auto industry's unprecedented adoption of micro-hybrid technology in response to increasingly stringent CO2 emissions and fuel economy standards.
While global automakers only built 5 million micro-hybrids in 2011, Lux Research predicts that micro-hybrid production will exceed 25 million cars a year by 2015 and Johnson Controls (NYSE:JCI) has pegged that number at 35 million cars a year. Consensus holds that micro-hybrid technology will be standard equipment on all internal combustion engines by the end of the decade.
The one thing all micro-hybrids must have is a better battery that will generate more revenue and higher profit margins for its manufacturer. For industry leaders like Johnson Controls and Exide Technologies (XIDE), it's like shooting fish in a barrel and the short- to medium-term revenue and profit impacts should be substantial.
The idea behind micro-hybrid technology is elegantly simple - turn the engine off while a car is stopped in traffic and restart the engine when the driver takes his foot off the brake. While the theory is simple, implementation is challenging because operating accessories during engine off intervals and then restarting the engine after each interval puts immense strain on the battery. In a typical 16-mile commute with one engine off event per mile, a micro-hybrid battery will have to deliver and recover 54,600 amp-seconds of energy while a conventional starter battery would only have to deliver and recover 600 amp-seconds.
The flooded lead-acid batteries we've used for decades simply aren't good enough and that reality has battery manufacturers scrambling to improve their Dynamic Charge Acceptance, or DCA; the ability of a battery to quickly recover the energy used during an engine off interval in preparation for the next engine off opportunity.
The DCA problem was first identified by Dr. Eckhard Karden of Ford Powertrain Research, Europe, who noted that new lead-acid batteries could recover from an engine off interval in about 30 seconds but after a couple months of service the same batteries took several minutes to recover. Since micro-hybrids only save fuel when the engine is off, and all micro-hybrids disable the stop-start function until the battery recovers, rapid DCA degradation translates directly to a rapid loss of fuel efficiency. After Dr. Karden's conclusions were presented to the battery industry at the 12th ELBC in 2010, the race was on to develop improved lead-acid batteries with better DCA.
In this year's presentation at a DCA Workshop on the afternoon before the opening session, Dr. Karden used this graph to summarize the progress made by the battery industry over the last two years.
He noted that the progress was significant as AGM batteries improved stabilized DCA from 0.05 amps per amp-hour of capacity to 0.2 amps, while some enhanced flooded batteries took stabilized DCA up another notch to 0.3 amps. Then he explained that the current performance of lead-acid batteries was a far cry from the 2.0 amps or more the auto industry needs for future micro-hybrid systems. In a private conversation after the DCA Workshop Dr. Karden told me he wasn't optimistic that conventional lead-acid batteries would overcome all their inherent DCA limitations, but he "didn't want to discourage" manufacturers who were working on the problem.
In their ELBC presentations, Johnson Controls and Exide both showed how their new enhanced flooded and AGM battery technologies offered far better DCA performance than their conventional products. Both presentations showed gains in the same range as Dr. Karden's generic presentation for the DCA Workshop. The only ELBC presentation that reported better DCA performance than the auto industry needs came from Axion Power International (NASDAQ:AXPW) which showed how its PbC® battery maintained stabilized DCA of 2.0 amps per amp-hour through five years of simulated use and didn't fall off to 1.0 amp per amp-hour until the 10th year. Dr. Enders Dickenson, Axion's director of research and development used this graph to illustrate the performance differences.
Since the two graphs show remarkably different performance, a brief explanation may be helpful. On both graphs the grey shading shows the charge amperage the battery could accept as it aged. Where the AGM battery started at 50 amps and fell to 5 amps within a few months, Axion's PbC started at 100 amps and remained stable for five years before gradually tapering off to 50 amps by the end of the tenth year. Similarly, the black shading on both graphs represents the amount of time the battery needed to recover from an engine off event. While the AGM battery started with a 30-second recovery time that increased to more than 10-minutes within a few months, Axion's PbC started with a 30 second recovery time that remained stable for five years before gradually increasing to 1-minute by the end of the tenth year.
These are not small differences. In fact they're extraordinary advances in an industry where incremental progress of 5% a year is the norm and anything over 50% is heralded as game changing innovation. Axion is still a relatively unknown and illiquid penny stock, but with several first tier automakers conducting advanced testing for micro-hybrid applications and one railroad buying batteries for an electric switching locomotive, Axion's days of obscurity are rapidly coming to a close.
Lead-acid batteries and Axion's PbC are not the only contenders in the battle for micro-hybrid battery dominance. In 2010, Maxwell Technologies (NASDAQ:MXWL) and Continental AG introduced a dual-device system that paired supercapacitors from Maxwell with an AGM battery from Continental. While the supercapacitors apparently do a fine job of ensuring a reliable engine restart for diesel passenger cars from Peugeot-Citröen, the AGM battery remains a weak link because of its inherent DCA limitations. More recently, Japan's Denso Corporation (DZNOF.PK) announced plans to offer lithium-ion battery packs for micro-hybrid applications. In its presentation at this year's ELBC, BMW reported on preliminary testing they conducted on a dual-device system that pairs lithium-ion batteries with supercapacitors.
While investors often like to think in terms of "killer apps" and "silver bullet solutions," it's increasingly clear that the micro-hybrid battery space will provide more than ample opportunities for a variety of solutions ranging from enhanced flooded and AGM batteries at the lower end of the spectrum to advanced PbC, lithium-ion and dual device solutions at the high end. There will be competition and it may well be bloody, but in a market where each 1% market share can represent $20 to $100 million in incremental revenue, there's plenty of room for several successful companies ranging from established manufacturers to advanced technology upstarts. From my perspective, the greatest challenge facing all contenders in the micro-hybrid battery battle will be ramping production capacity fast enough to meet soaring demand.
Additional disclosure: Author is a former director of Axion Power International (AXPW) and holds a substantial long position in its common stock.