A123 and Chrysler – Sprint or Marathon?

The equity markets love the public offering of A123 (AONE).   On the first day after being introduced to the market at $16.5 per share, 3 points above the IPO offering, the stock traded over 41 million shares that day to a high of over 20.  It is now hovering in the mid 20s and still trading millions of shares per day.  This is a pure Lithium ion battery play, hard to find outside of a corporate mixture.  The “green” funds should find the stock attractive until they balance out their portfolios.

But what does this have to do with Chrysler?  It has taken A123 several years to sprint from MIT labs to one of the leaders in the advanced battery market, largely buoyed by the Black & Decker/DeWalt hand tool application.  In the advanced technology battery business several years is a sprint.  A123 has had to sprint to find affordable applications with their brand of battery technology.  They have yet to produce a profit, but if A123 can hang on with enough marathon endurance to reach projected economies of scale and Chrysler sustained production, the big energy batteries and high volume of the plug-in vehicle market represent the pot of gold at the end of the rainbow.  In the automobile mass production business it takes about 35,000 units per year to be sustainable.

Yet, it will be more like a marathon.  For example, the Toyota Prius with a cumulative million cars sold in the US and another million in the rest of the world, was first available in the year 2000 and it took until 2004 before Toyota reached sustainable annual sales.  The Chrysler vehicles won’t be available for at least a year and any volume will take years longer.  With 1600 employees A123’s estimated annual expenses burn rate is $160 million.  That’s above their annual sales and their current markets are not exactly secure.  However, I’m cheering for A123; I even bought some of the stock, but there are risks.
It seems somewhat hypocritical that GM chose Korean LG Chem over the US A123 for the Volt battery.  It seems that GM valued energy density and a large company over A123 battery safety and being a domestic.  The Volt may not sell well because of the $40,000 Volt price tag and competition well under way.

Chrysler looks somewhat more committed with both a battery electric and a plug-in hybrid to be released in 2010.  The Dodge Sport car is pure EV. The Jeep SUV and Town & Country are PHEV.  The battery life will be a challenge because the dynamic SOC (State of Charge) range is different for BEV and PHEV.

Looking at the whole market and publicly stated release points:
·    Nissan BEV with 100 mile range – Fall 2010 with 1000s of vehicles
·    Ford BEV with 100 mile range – 2011
·    Smart BEV with 100 mile range – 2010 (Europe)
·    Ford Plug-in Hybrid  – 2012
·    Toyota Plug-in Prius with 12 mile all electric – 2010
·    Toyota BEV with 40 mile range – 2012

Another little known A123 vehicle market is the Magna pack.  Designed and produced in Europe, it took Magna over 2 years and over $2 million to get their A123 pack into a 2000 units per year production line.  It currently is used in the Mercedes hybrid that Magna builds for Daimler.  There is rumored to be another large European customer.

With the IPO capitalization returning over $300 million, a stimulus award of over $130 million and sales approaching the break even point, A123 probably has enough to cover their burn rate for 3 to 5 years, but let’s take another look the publicly reported customers. The other A123 reported markets may not be as big as they are hyped.  Can A123 supply price competitive high quality products?
·    The cordless hand tool market is very competitive and will at least have a downward pressure on any profit margins.
·    The BAE Systems customer is using the A123 battery pack for hybrid-electric buses.  The estimated price range is $5,000 to $10,000/pack with an estimated maximum of 400 buses per year.
·    In the utilities energy storage application, AES bought a semi-trailer full of A123 batteries to supply over 1 MWh of energy at a 1 MW power level.  Used in a prototype experiment the trailer is performing well in a controlled environment for a power frequency and voltage regulation application.  AES has two other trailers full of Altairnano batteries that are also performing well.  In another similar experiment, hybrid batteries are performing well.  Energy storage will be a sizable part of the new “smart grid”, but there are many forms of energy storage and the choice may be somewhat price sensitive.  The utility companies and suppliers are not in any hurry to rush out buy any more trailers full of batteries until the transportation applications reach economies of scale to make the price come down.
·    Smart meters and time of use pricing may make home price arbitrage attractive, but that is a long shot market and will undoubtedly be competitive.

Hooray for A123 and Chrysler!

Tom Bartley