What the down turn means for batterymen

What a difference a year makes. Only three hundred some-odd days ago, BEST was was reporting that all things alternative energy looked ‘good to go’ after decades of static growth. Thanks in large part to a burst of investment and advancements in electric automotive technologies, the storage industry had achieved centre stage presence at auto shows, where batteries drew the spotlight to a host of innovative EVs inching to production and show rooms. By spring, BEST was writing about a dozen car makers well on their way to bringing viable EV or HEV vehicles to market within the year. 

Leading lady status in the automotive theater parlayed into centerfold status across the media that translated into new public awareness of the battery’s role in the ongoing crusade for global energy independence. Promises of tens of millions of dollars in investment from governments in the EU and North America as well as venture capital funds toward battery research and development, seemed set to launch serious gains in the storage industry that would only build over the next decade.

Since then, of course, all has changed: world financial markets have collapsed, and credit has dried up. Shares of alternative energy companies have tanked even more sharply than the rest of the stock market in recent months, and the near collapse of banking institutions the world over has raised fears that investment capital for big renewable energy projects is likely to get much tighter. The effects on manufacturing, as we all know, have been devastating as companies around the world reduce spending, lay off workers and pull back on extraneous expenses, including research, development and expansion. 

Oh the irony… that just as the entire range of alternative energy technologies finally achieves not only investment capital but governmental support and public enthusiasm, the threat to jobs, profits and tax revenues bodes even greater dependence on subsidies and funding that governments, overwhelmed by economic woes, can ill afford to offer. 

Ditto for the private sector. Investment analysts say initial and secondary stock offerings by clean energy companies across global markets have slowed to a crawl since the spring. Worldwide project financings for new construction of wind, solar, biofuels and other alternative energy projects this year fell to US$17.8 billion in the third quarter from US$23.2 billion in the second quarter, according to New Energy Finance, a research firm in London that expected the slide to sharpen in the fourth quarter and into 2009. In the United States, financing for new projects and venture capital and private equity investments in renewable energy in 2008 might still top last year’s results because so much money was in the pipeline at the beginning of the year, but they have slowed sharply. By mid-autumn 2008, amid reports of considerable backpedaling in at least near-term commitments, it became clear that no matter the political or commercial will, the economic underpinnings necessary to support an assertive emissions control strategy and associated technologies were crumbling beneath the rubble of collapsing financial markets. 

Before we slit our throats… it is worth noting for the sake of context that venture capital funds operate on a different timeline than the rest of the economy. Many venture investment firms had already raised a significant amount of capital in 2006, 2007 and the first half of 2008. Because they have to put it somewhere, they will continue to fund startups. The money spigot may not be turned up on high anymore, but VC millions will still find their way to the market – for a while. Three years from now, however, when new startups will need another infusion of capital, a good portion of these existing funds may well have been used and limited partners may still feel conservative. 

Securing cash could be tougher, but several factors could mitigate or change the pattern. Unlike the dotcom crash, many energy startups are being propelled by federal regulation and subsidies, now certain under plans offered by several governments. Too, plummeting oil prices may once again, as they did in the 1970s, stall investment in the RE business.

The central questions facing any sector in renewable energy now, experts say, are how long credit will be tight and how low oil and natural gas prices will fall. Some economists expect further declines in oil and gas prices as the economy weakens. Others say green technology companies, which began feeling the effects of the world credit crisis even before the third quarter ended with postings of record-breaking amounts of capital investment, will face continued shortages.

Bad news, yes, but let’s not forget that renewable energy has become a big business worldwide, with total investment increasing to US$148.4 billion last year from US$33.4 billion in 2004, by New Energy Finance’s reckoning. Upward momentum may have stalled; total investment this year is likely to be lower than last. But it is not going away. 

By year’s end, however, leaders in the UK, US, EU and China began to affirm their belief that while investing in reducing emission is more difficult to do in times of economic downturn, promoting new green jobs, even with heavy government subsidies, will drive economic growth, and reverse recession. Within weeks of each other, nearly every major economy had announced sizable spending packages to combat the worst economic crisis since the 1930s. American president Barack Obama pledged to save or create 2.5 million jobs with new spending estimated at US$700 billion to US$800 billion; the European nations announced stimulus measures worth some US$260 billion; the Japanese US$250 billion; the Chinese US$500 billion – all toward rebuilding of infrastructure, education and training, business loans, health care and unemployment subsidies in their respective countries.

Many battery makers hope that Obama’s election may help kick-start the industry and domestic production. “Up until this time I feel like I’ve been trying to build this company with a massive headwind,” Charles Gassenheimer, head of Ener1, recently told the New York Times. “In an Obama administration, that headwind becomes a massive tailwind.” With a plant in Indiana, Ener1 would like to see more batteries manufactured domestically, rather than in Asia. “We have the technology, but we don’t have the manufacturing base.” 

Certainly for most storage related businesses, particularly those already facing fundamental threats (American automakers and their suppliers), the current economic downturn will mean hard times, at least in the short term. Just how manufacturers get through this, opines Mo DesMaris of Battery Council International, will depend on several factors, chiefly where they sell their product – whether they work in a niche market selling to locomotive clients, concentrate on motive power, sell to marine batteries for boats, or diversify.

“Most of our members are geared to providing to distributors batteries that will go into existing automobiles rather than new automobiles,” he told BEST in November. “Certainly for those whose product line is geared to new auto sales, the effect of any Detroit bankruptcy could be catastrophic. On the other hand, a major slowdown will force everyone to become more creative. Ideally, they’ll move their research along so they will have a product to deliver. I think we’ll see more mergers and acquisitions, as well as diversification, to cushion the blow.” 

(At this writing, Panasonic is trying to buy a majority stake in Sanyo, Warren Buffett has bought a ten percent stake in BYD, China’s primo HEV maker, Samsung and Robert Bosch plan to enter into a joint venture to make lithium-ion automotive batteries, and former Intel CEO Andy Grove is advocating for Intel to get into the car battery business.)

He anticipates some manufacturing moving back to the US, as we’ve already seen happen with Crown Battery. “Cheap shipping is no longer possible, and now that the cost of Chinese labor and production has gone up so dramatically, the cost advantage of outsourcing manufacturing just isn’t there,” he says. “So I think manufacturing will come back home, but we will not see the same levels, or the same incomes we saw in the post-war decades.”

The concept of “creative destruction” has been floating back into common parlance again lately, and not without good cause. First popularized by economist Joseph Schumpeter in 1942, the term describes the process of transformation that results from radical innovation: entrepreneurial innovation initiates and sustains long-term economic growth, even as it destroys the value of established companies that had long enjoyed some degree of monopolistic power.

Though no one seems to have discovered a definitive way to cheat industrial death, a few notable businesses have managed to do so through perseverance, creativity, innovation, versatility and luck. Some abandoned their original products entirely; others endured by changing little but their marketing. Some – bicycle and watch makers come to mind – survived by refining and repositioning the product. Some found new markets: radio went from broadcasting news and soap operas to pop music. Some applied well-honed skill sets elsewhere; Toyota made looms for textiles before it made cars, Nokia made paper before cell phones, and Corning made ceramics before fiber optics. Some companies have tried to diversify and failed, like Hewlett Packard; on the other hand IBM has reinvented itself successfully several times. Survivors stayed attuned to trends as new customers emerged with different needs. 

The storage industry, for many reasons (serious work on EVs not least among them), has made tremendous progress in the last couple of years. Not only have we seen a staggering spectrum of new and wildly innovative products, but savvy public relations and education efforts that have paid off handsomely in serious traction in the media and the public’s consciousness. Both have led to an increase of investment capital, and means of expansion. 

At the time of this writing – and despite the downturn – a number of companies have announced funding and solid plans toward viable product development and manufacturing.

� Saft and ABB have developed the world’s first high voltage Li-ion battery system designed to improve the stability of power distribution grids. 

� EnerlI has purchased a Korean lithium battery maker, and announced a cooperative partnership among EnerDel, Ener1’s lithium-ion battery subsidiary, and the Department of Energy, to develop high-energy batteries for hybrid bus and heavy duty vehicle markets. 

� East Penn has entered into an exclusive agreement with the Japanese Furukawa Battery Co. to manufacture the UltraBattery technology in North America.

� Ice Energy, has closed USUS$33 million in funding to make hybrid air conditioners that store cheaper electrical power at night for daytime cooling. 

� GE has upped its investment in lithium-ion maker A123 Systems with another US$30 million. GE is working with A123 Systems on integrating its batteries into the all-electric Think town car and a hybrid bus platform, and on developing storage for power grid operators. 

� Energizer will soon unveil their new Zinc Air Prismatic battery, touted to offer OEMs the highest energy density of any consumer portable power solution (either disposable or rechargeable) with up to three times more runtime compared to similarly sized alkaline or lithium-ion batteries.

� Atraverda has secured US$34 million from global investors in order to commercialise its Ebonex technology, and is currently working with eight global battery producers, including East Penn in the US and Exide Industries in India.

For Atraverda’s CEO Michael Gilchrist, the downtown holds nothing but hidden potential for the company’s innovative Ebonex product line. “Technology, in general, needs to be developed more than ever to be ready and favorably positioned when the upturn comes,” he told BEST early in December. “We will, obviously, continue to be very conscious of our cash management with the aim to successfully weather the economically uncertain period we are now in. But we will also continue to focus on the things we need to do to make our technology move to commercialization.”

And that may come sooner than we think, according to a recent report issued by the Darnell Group. Titled “Vehicle Electrification: Market Forces and Demand Characteristics,” the study, which analyzes data collected from over 300 companies and organizations, renders some heartening conclusions – chiefly that the market for hybrid vehicles will move forward in the new year, thus accelerating demand for emerging HEV and PHEV electric propulsion technologies, along with the battery chemistries used with them. It also includes a detailed cost analysis of HEV power electronics and some of the issues related to infrastructure development for PHEVs in particular.

Darnell’s analysts foresee the greatest near-term growth opportunities in the HEV market occurring outside the passenger vehicle sector, and that HEV sales will grow faster in Europe than in North America. Though passenger cars get a lot of the press related to these vehicles, senior analyst Linnea Brush sees some of the better opportunities in the short-run will be found in commercial, off-road and small, task-oriented vehicles. “Systems integration capabilities will serve as a differentiator in these markets,” she says. “Heavy hybrid vehicles will require lightweight and simplified power electronics that can be easily integrated into heavy hybrid approaches and systems.” Small-volume power electronics with higher durability and reliability in particular, will be needed to control components like voltage, frequency and switching timing, and to manage system power outputs from the prime mover, electric motors and auxiliary power units.

Certainly major electrification of drive trains in US-made vehicles would promote not just major investment but explosive growth in the domestic battery business. Toward that end, leading American auto battery developers and materials suppliers are now forming, via a new government funded project, a new coalition for the purpose of manufacturing advanced lithium ion battery cells for future electric cars and military vehicles. Long over-shadowed by Japanese automakers’ government-funded battery research, US automakers have had to rely largely on foreign suppliers for the battery packs used in hybrid and electric vehicles. The group plans to develop manufacturing and prototype development centers that will ultimately manufacture advanced battery cells. They anticipate that initial investment of one to two billion dollars over five years will come mainly from the federal government. The alliance aims to ensure the most effective use of government resources by allowing members to share in the use of a large ultra-modern manufacturing facility.

Successful development of advanced battery technologies, then, will play a crucial role in the production of next-generation HEVs and PHEVs, and beyond. Government incentives could help, especially in the US, where Obama’s election has raised hopes for more support for renewables and storage. Funding could spur momentum there, but until the new administration reveals just exactly how it intends to revitalize the energy production industry, American companies will most likely continue in stasis for a time.

Tom Hund, of Sandia Labs in New Mexico, doesn’t see any major initiatives happening for at least a year. “Certainly our own budgets look to remain flat until well into 2009,” he told BEST in December. “But in addition to funding, the entire movement needs coherent government leadership, and that we’ve not had in twenty years. The new administration seems set to launch some good policies – subsidies, tax breaks, funding and the like. But it will take them some time to get up to speed.”

Obama’s team could learn a lot from the Japanese, who endured a recession through the 1990s that lasted well into the new century. Yet despite a poor economy, the government committed vast amounts of funding toward the development of solar energy technology. The result has been that Japan now produces almost 50% of the world’s total solar cell power, and Japanese manufacturers dominate the global industry, exporting about 30% of what they produce. 

Ditto for battery technology, case in point NGK, which began researching the massive sodium-sulfur battery in 1983. “And now NGK is really the only company making the large sodium sulfur batteries now being used around by utilities around world to store wind and solar energy,” Hund points out. The Japanese have indicated they plan to expand investment in PV and storage technology and manufacturing. The recession may slow that down, Hund suspects, but not for long. “The time is right, and the potential market for batteries huge.”

In fact, batteries could represent a US$50 billion market if only 10% of wind-power plants installed them, according to a recent report from Lux Research Inc., though some predict an even stronger market. Premium Power Corp., a Massachusetts battery maker, envisions a day in the not-too-distant future when large-scale batteries and other forms of energy storage are ubiquitous. “In 10 years, you’ll see every renewable-energy source be tightly integrated with an energy-storage system and be controlled by the grid,” Bic Stevens, senior vice president of business development at Premium Power, told the Wall Street Journal in November.

From all reports, it seems that most governments, particularly the new administration in the U.S., seem poised to do whatever it takes to stimulate the global economy – when possible through the clean energy sector. President Obama, from all reports, seems to understand the lessons of Japan’s “lost decade,” when too much restraint in government spending led to deepening waves of economic loss. Promising to put one million plug-in hybrids on the road by 2015, he has nonetheless made it clear to the country’s Big Three automakers that they will not get continued federal help without clear commitments to produce them.

GM’s innovative Volt technology may hold much promise, but so do the promising vehicles we’ve been writing about for years, made by startups all around the world. As of this writing, 23 electric vehicles have now achieved sufficient technical viability to warrant not only auto show debuts, but funding toward production. Unlike Ford, GM and Chrysler, European automakers lack not buyers but financing for production of some very promising EVs already tooled for manufacture. Norwegian electric car maker Think Global, has temporarily laid off half of its 200 employees until the end of January, pending the raising of additional fresh capital to produce their winning Th!nk City EV. Should they get it, the small, gutsy company plans to double its annual production capacity to 10,000 vehicles and conquer new markets in 2009. 

Mercedes says it will begin manufacturing fully electric versions of its A and B-Class passenger cars from 2012. Renault Nissan announced in December that they plan to forge infrastructure partnerships with government entities worldwide, even as they accelerate plans to launch a true 100-mile lithium-ion pure battery car in Japan and the US in 2010, with world sales and mass market penetration in 2012. 

And as of December 15th, China entered the EV sweepstakes when BYD Auto, backed by American investment wizard Warren Buffet, launched its first mass-produced hybrid electric car in Chinese markets. The F3DM is also the world’s first mass-produced plug-in hybrid car, meaning owners can charge it from power points at home for the first time, as well as in specialised electric car charging stations, according to BYD.

Just how this latest exercise in creative destruction will play out for the storage sector is, in the end, really up to the players themselves – us. Certainly the need for leadership, corporate and governmental, that can understand and optimize the dynamics of industrial change – the transition from a competitive to a monopolistic markets and back again – has never been more urgent. For years Detroit automakers, insisting they were only making the cars people wanted, failed to understand that successful companies make products people don’t know they want – until they can have them. A portable radio/cassette player was fine until you tried your first iPod. 

Key to all this, as the ever effusive energy guru/author Thomas Friedman points out in one of his many rants in the New York Times, is a recognition that in today’s integrated and digitized global market, where knowledge and innovation tools know no borders, whatever can be done, will be done. “The only question is will it be done by you or to you,” he wrote in December. “Just don’t think it won’t be done. If you have an idea in Detroit or Tennessee, promise me that you’ll pursue it, because someone in Denmark or Tel Aviv will do so a second later.” 

Long considered an old-tech backwater, the US$71 billion battery market has become, in only a short time, a hothouse for innovation, and potential economic powerhouse. 

The flow of American venture-capital dollars alone into battery development has grown from US$4.3 million in 2002 to more than US$200 million this year, according to Dow Jones VentureSource, with major players like General Electric and ExxonMobil now investing in battery technology. 

Despite some considerable innovation in recent years, U.S. battery makers still lag behind globally, largely because Detroit automakers opted not to pursue HEV and EV technologies. Toyota and Honda’s dominance in the hybrid market has thus resulted in Asia leading the world in advanced-battery production for both cars and gadgets. 

That the hybrid and electric car battery market is on pace to grow nearly fivefold by 2015, to US$3.7 billion, according to consultant Menahem Anderman, bodes very well for American makers, however. “The U.S. missed out on a great deal of the advanced-battery business over the last 10 years,” A123’s CEO, Dave Vieau told Newsweek earlier this month. “The next 10 years will see a significant increase in battery use, and it would be a mistake for us not to participate in that

Right now, the entire global economy is experiencing tremendous, unprecedented losses. But loss is never the end of the story; it is a starting point. It’s what happens next that’s important. And “next” is already well under way as awareness that batteries are indispensable to economic competitiveness and recovery as well as to energy independence, builds on its already considerable momentum. 

Though Franklin Roosevelt’s oft-quoted inaugural dictum that “the only thing we need to fear, is fear itself” has been wearing a bit thin, lately, it nonetheless plays as truly today as it did 76 years ago. “If I had a wish list for the new year, confidence would top it,” says DesMaris. “If we could restore some kind of confidence in the whole process, it would make such a significant difference in the future of this industry and all manufacturing.”

Crown Battery’s Hal Hawk isn’t waiting around for inspiration. Like countless others, he’s setting the pace. “We choose not to participate in any economic slowdown,” he told BEST early in December. “Someone, somewhere is doing something, or buying something, we just have to find those folks – typically, taking twice to three times the effort. It is achievable, perhaps over simplified, but that is how we are handling it. We only worry about the stuff we can control.” 

It’s said that a crisis is a terrible thing to waste. Let’s not.