Last week I made a keynote presentation at Batteries 2012, an important annual conference for developers and manufacturers of "advanced technology batteries" including Nickel Cadmium, Nickel Metal Hydride and Lithium-ion chemistry. On the first day of the conference, I learned that Dow Chemical (NYSE:DOW) had filed a Form 8-K to summarize its plans to record fourth-quarter charges of $500 million to $600 million for asset impairments, including "an impairment charge related to the write-down of Dow Kokam LLC's long-lived assets."
Since Dow Kokam was a headline award recipient in the DOE's "Electric Vehicle Battery and Component Manufacturing Initiative" that awarded $1.5 billion in Federal grants to 10 battery manufacturers in August 2009, I thought it might be worthwhile to review performance history and offer my subjective interim assessment of the individual grant awards.
The Johnson Controls (NYSE:JCI) lithium-ion battery plant in Holland, Michigan, is reportedly sitting idle while JCI's former joint venture partner, France's Saft Groupe, builds batteries for Mercedes and BMW hybrids. Recently, JCI partnered with Hitachi to sell small Hitachi-built battery packs to GM for the Buick LaCrosse. Hitachi then went on to extend that contract to the Chevy Malibu, apparently without JCI. Since JCI is pretty opaque when it comes to reporting on the operations of specific units within its Power Solutions group, the Holland plant may well remain a riddle wrapped in a mystery inside an enigma for years.
A123 Systems (AONE) filed a Chapter 11 petition in mid-October. It's immensely entertaining theatre where JCI assumed the stalking horse role because it desperately wanted to add another troubled battery plant to its collection, while China's Wanxiang Group fought JCI for the DIP lender role and reportedly prevailed. The post-election auction will probably yield a higher price than JCI's stalking horse bid of $125 million, but I'd be very surprised to see a sales price that's high enough to pay A123's creditors and bankruptcy costs, much less provide meaningful returns to speculators who've pushed A123's market capitalization into the $50 million range without understanding that there are currently 315 to 340 million shares issued and outstanding.
Dow's Form 8-K did not provide specifics on the magnitude of the asset impairment charge it would record in the fourth quarter. Since manufacturing facilities that are paid for with a combination of private equity and government grants are usually carried at the net amount invested by the owner, a 50% diminution in value would usually be required before any impairment charge was appropriate.
I've read several stories that the employees of Compact Power were working under the terms of a three-week on one-week off furlough. On October 18, WOOD TV in Grand Rapids, Michigan, aired an investigative report that employees were doing maintenance work, community outreach service and playing games instead of making products or preparing to make products.
Disappointment and Failure
While the bankruptcy of EnerDel's parent company Ener1 in February was catastrophic for its stockholders, it would be unfair to lay the blame on the DOE. Ener1 failed because it devoted too many financial resources to a vain attempt to rescue thrice-failed Th!nk Motors and the adverse consequences of that bad decision were more than Ener1 could bear. EnerDel has emerged from Chapter 11 and is now controlled by Boris Zingarevich, a Russian billionaire and the former principal stockholder of Ener1 who seems to have landed on his feet. EnerDel has recently entered into a strategic marketing alliance with battery powerhouse Altair Nanotechnologies (NASDAQ:ALTI), which sold a controlling interest to a Chinese investor last summer.
While the General Motors (NYSE:GM) Volt is slowly gaining acceptance, its market performance has been less than spectacular. GM sold 7,671 units in 2011 and is on track to sell over 20,000 units this year, but both numbers are a far cry from initial projections.
Saft America's plant has been built and is apparently shipping products. In the 2011 Annual Report, Saft reported that the plant had a capacity of $300 million per year and it was targeting total revenue of $200 million a year with a 15% EBITDA margin by 2015.
Exide Technologies with
Axion Power International
The Exide Technologies (XIDE) plants have been built and are apparently shipping batteries that aren't significantly different from or better than the batteries they're shipping from other plants. While the grant award specifically contemplated a strategic technical relationship with Axion Power International (NASDAQ:AXPW), that plan was abandoned when Axion proved it could stand on its own two feet and compete toe-to-toe for customers instead of being assimilated into Exide.
East Penn Manufacturing
To date it appears that the only ARRA battery manufacturing grant recipient that's doing what it was supposed to do is East Penn Manufacturing, which is continuing testing to prove the value of the Ultrabattery in mild-hybrid and renewable energy applications.
The Bottom Line
In its August 5, 2009 press release on the ARRA grant awards, the DOE said "These projects, selected through a highly competitive process by the Department of Energy, will accelerate the development of U.S. manufacturing capacity for batteries and electric drive components as well as the deployment of electric drive vehicles, helping to establish American leadership in creating the next generation of advanced vehicles."
In my view, a failure and disappointment rate of 97.5% is nothing to write home about.
I guess even the DOE in its hubris couldn't marshal the scientific and technical resources necessary to overcome the congenital birth defects that killed the EV1 and will almost certainly kill the latest generation of electric toys from Tesla Motors (NASDAQ:TSLA) and others.
It's not a question of desire, imagination or willpower. It's a fundamental flaw in the economics of using expensive batteries to replace a fuel tank for the dubious luxury of using coal and natural gas as transportation fuels instead of gasoline; a flaw that will cost investors billions before the electric car hype fades and the rotting corpse of a concept only Hollywood and Silicon Valley could love is once again buried with a silver stake through its undead heart.
Additional disclosure: Author is a former director of Axion Power International and holds a substantial long position in its common stock.