Patrick Smith's  Instablog

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).  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.