It appears that some trading has been going on based on rumors that have been passed around about commoditization of certain parts of the battery separator market that may be overblown.
How would I know?
As those who have read my bio know, I am an executive at Dreamweaver International, a startup company that is making battery separators using a technology platform that has never been used before. As such, this summer I have traveled the US, Europe, Israel, China and Korea visiting several dozen battery manufacturers, about half of which we have active development programs with. This gives me a unique viewpoint which could be helpful in evaluating investments in Polypore (NYSE:PPO), Asahi Kasei, Toray, SK Chemicals, DuPont (DD), Ube Industries, Glatfelter (NYSE:GLT) and other participants in the battery separator market, and Tesla (NASDAQ:TSLA), Toyota (NYSE:TM), Ford (NYSE:F), Nissan and General Motors (NYSE:GM) as end-user participants.
This article will report the understanding that I have from the market as to the segments of the market that are being commoditized, and where there is value to be found.
Commoditized Markets and Products
Equipment manufacturers (example: Bruekner) and startups are bringing low-cost knock off products to the battery separator market, and this is having an effect on both the pricing power and the market position of established players in some segments of the markets.
Commoditized Products: The commoditized products are both off patent and "easy" to make--noting that nothing in this market is truly easy to make. This is primarily monolayers thicker than 20 microns.
Commoditized Market Segments: Because of the time it takes to qualify a material, there are no segments which are truly commoditized yet. However, those that are likely to be commoditized are low cost batteries designed for low cost cell phones and other portable electronics, and low cost cylindrical cells. These products do not have the highest energy density or the highest power density, and so will find themselves only in free cell phones, low cost phones for second and third world markets, and bottom end laptops.
While many of these segments involve low cost, low- or non-profitable battery segments, several battery manufacturers are trying to couple these low-cost separators with their battery technology to produce high value battery products. This will always involve limitations and the most performance oriented battery manufacturers will continue to buy premium products.
High Value Markets and Products
Most of the rest of the products and market segments have not been commoditized and still command a premium market price and deliver differentiated performance. These include the segments below:
High Temperature Resistance: Batteries for automotive and grid applications are being designed for robustness that has not been required in the initial lithium ion battery segments. They need to last for 10s of years, 1000s of cycles, and at temperature extremes that go from unheated Alaska cabins to Arizona tarmac. In most commodity batteries, the separator is the least thermally stable component, and this has required innovation to make them suitable. Most innovations include ceramic either inside the separator, as with Porous Power's material, or as a coating, as described in Polypore's patent. Polypore has taken the interesting strategy of not providing coated separator, but rather selling their bare separator to companies and allowing them to do their own coating. I have heard of some battery companies trying to source inexpensive commodity separator to coat with ceramic, but they will not be able to sell these cells, battery packs, or even vehicles in the US, Canada, China or Europe without violating Polypore's patent. Polypore's Celgard unit has already shown that they intend to enforce this patent worldwide through the filing of a patent infringement case against Sumitomo.
Super Thin Products: While making a 25 micron thick separator has been commoditized, the additional difficulty to reduce this to 20, then to 16, 14, 12 and even 10 microns is exponential, (this I can personally attest to.) These thin products are absolutely required to get the highest energy densities required for the Galaxies, iPhones, iPads, Nooks, ultra-books, and other high value portable electronics. These will pay as much as twice the price of commodity products to achieve the energy density designed in these ultra-thin devices.
High Power Devices: High power is required for hybrid vehicles and for power tools, and may be required for certain segments of the grid storage market. This high power cannot be delivered with commodity products, whose thickness inhibits the flow of ions. In general, the materials for high power devices either require high porosity which is more difficult to manufacture, or thinner materials which allow increased flow of ions.
How this affects the stocks mentioned
Polypore: As the manufacturer that owns the patent on ceramic technology, Polypore will continue to own a unique, defensible position in the high temperature segment. While new technologies are coming on to compete with this, the qualification time should give them several years of enviable profits, especially in the automotive market. In addition, they share a position with the other incumbents in ultra thin separators, albeit not nearly as strong. Should another high temperature separator begin to compete with them, their market position may begin to erode.
Asahi Kasei, SK Chemicals, Ube Industries, Toray: These are the incumbent manufacturers of the ultra-thin materials, and they control the portable electronics market for the time being. Their primary defense is the difficulty to manufacture a competitive product, and so this will erode over time. However, their protection is their own advancement of their technology, and the long qualification time. For those who trade Asian stocks, this market should be considered to have at least moderate defense.
DuPont: DuPont has launched their Energain battery separator, that has industry leading thermal stability. Reports are that it is also the highest priced separator on the market, and this has inhibited market acceptance. Should they get their arms around what the market will pay for the product, they may be able to erode Polypore's position in the high thermal stability segment. Because of the size of the company, though, it may be a long time before this product line has a significant effect on the DuPont financials.
Glatfelter: Glatfelter has partnered with Dreamweaver (my company) to manufacture battery separators based on Dreamweaver's nanofiber/microfiber technology. While this technology is a flexible platform that is capable of participating in all of the described segments, the long qualification time will again keep this from having an immediate effect on Glatfelter's financials. Should the partnership be successful, though, it could grow into a significant business segment over the next decade.
Toyota, Ford, Nissan, GM: It is certain that the cost of batteries is going to continue to come down at record rates, and that the performance will continue to increase, and the changing separator market will contribute toward this. For this reason, the electric vehicle portion of their portfolios will grow more and more important. These four are the early leaders in electric vehicles, and that is unlikely to change.
Tesla: Tesla has a unique position because of the size of the batteries in their vehicles, which is over 4 times the nearest competitor. They have the most to gain from increased competitiveness in the battery separator segment of their supply chain. Because they buy about $50 million in batteries per month, they also have an early volume advantage over their competitors. They will leverage this to make sure they are the first to market with new technologies and use batteries to augment their competitive advantage. They have the most to gain from competition in the battery component markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: My company Dreamweaver is in development relationship with several of the end-users mentioned here, and we also have a relationship with Glatfelter, as described in the article.