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Why Lithium-ion Batteries are Like Hippos in Pink Tutus

John Petersen In recent years lithium-ion batteries have been portrayed as glamorous, sleek, sexy and hot – the stuff of adolescent fantasy and mid-life crisis. Reality is more like a cynical remake of the Dance of the Hours scene from Fantasia where hippos in pink tutus gossip about overweight dancing elephants. Let's face it folks, there are no cheetahs in this ballet. While lithium-ion battery packs are smaller and lighter than their lead-acid counterparts, both types of batteries are ridiculously heavy substitutes for a fuel tank. The sad part is that whispers from the hippos in pink tutus have convinced investors that energy is a more valuable battery characteristic than power while diverting attention from the inconvenient truth that no current battery technology is cheap enough or light enough to make electric drive competitive with internal combustion. Reduced to basics energy is a measure of the amount of electricity a battery can store while power is a measure of how quickly the battery can deliver its stored electricity to an application. While energy applications usually cycle a battery once or twice per day, power applications usually cycle a battery several times per day. Once you accept the idea that each charge-discharge cycle has a fixed value, it's easy to see why the payback from power applications will always exceed the payback from energy applications and all the energy gossip is self-serving and disingenuous. Hippos in pink tutus want us to believe a new age of electric drive is just around the corner. But at last December's United Nations Climate Change Conference in Cancun, Secretary of Energy Steven Chu offered an entirely different and uncharacteristically blunt assessment: "And what would it take to be competitive? It will take a battery, first that can last for 15 years of deep discharges. You need about five as a minimum, but really six- or seven-times higher storage capacity and you need to bring the price down by about a factor of three. And then all of a sudden you have a comparably performing car; let's say a mid-sized car which has a comparable acceleration and a comparable range." In the simplest of terms, electric drive can't be competitive with internal combustion until somebody invents and commercializes an entirely new class of battery. In the meantime, the market will remain profoundly confused by snake oil suggestions that the cleantech revolution will mirror the progress that information and communications technology made over the last four decades. It's just not going to happen! The miracle of the iPad is not the result of better batteries. It's the result of better electronics that do more work and use a tiny fraction of the energy that older technologies required. The eco-religious and hopium pushers in our midst do not like these truths, but they're truths nonetheless. In November of 2008 I created list of 13 pure play storage companies and promised to track their performance over time. Since then I've added five companies to the list and broken it down into peer groups to improve comparability. My basic premise was that investors who want market-beating performance should invest in companies that make objectively cheap energy storage products and avoid hippos in pink tutus. Since today is the 201st article in this series , it seems like a good time to take a look at how my premise has held up over the last 2-1/2 years. The price performance of the companies in my original list and my subsequent additions is summarized below. Prices have been adjusted for reverse splits where appropriate. The starting price for A123 Systems is its September 2009 IPO price. The starting price for New Energy Systems is the first reported closing price after its July 2009 reverse merger. Since trading in China Ritar Power is currently suspended, I've reported that stock as a total loss. 14-Nov-08 05-May-11 Percentage Cool Emerging Symbol Close Close Gain (loss) Ener1 HEV $6.75 $2.13 (68.44%) Valence Technology VLNC $1.88 $1.26 (32.98%) Altair Nanotech ALTI $3.48 $1.43 (58.91%) Beacon Power BCON $8.20 $1.59 (80.61%)   Group average (60.24%) Cool Sustainable A123 Systems AONE $13.50 $5.68 (57.93%) Maxwell Technologies MXWL $6.50 $16.12 148.00% Ultralife Batteries ULBI $9.08 $3.97 (56.28%)   Group average 11.26% Cheap Emerging Axion Power AXPW $1.30 $0.77 (40.77%) ZBB Power ZBB $0.93 $1.13 21.51%   Group average (9.63%) Cheap Sustainable Johnson Controls JCI $15.36 $39.47 156.97% Enersys ENS $6.86 $35.54 418.08% Exide Technologies XIDE $3.38 $9.59 183.73% C&D Technologies CHHP $49.36 $7.60 (84.60%) Active Power ACPW $0.40 $2.16 440.00%   Group average 222.84% Chinese Companies Advanced Battery ABAT $2.13 $1.45 (31.92%) China BAK CBAK $1.99 $1.49 (25.13%) China Ritar Power CRTP $1.65 $0.00 (100.00%) Highpower International HPJ $3.50 $2.60 (25.71%) New Energy Systems NEWN $2.00 $3.22 61.00%   Group average (24.35%) Overall my tracking categories have performed about the way I expected they would. The Chinese companies have suffered from widely held fear over deficient accounting and reporting practices that seem to originate with short-sellers, but I have to believe they can't all be as bad as innuendo and conjecture would have us believe. Since I don't have the time or the inclination to do the kind of detailed on-the-ground investigations I'd need before jumping into the middle of the dogfight, I'll be content to watch the drama unfold from the sidelines. My only bad pick was C&D Technologies, which reported an unexpected intangible asset impairment late last year and was forced into a restructuring that converted most of its debt to equity. Based on its recent earnings report it looks like C&D is well on the road to recovery and should outperform its peer group on a go-forward basis. While Axion Power has also fared poorly terms of its market price, I believe the poor performance is due primarily to supply and demand dynamics. In November 2008, Axion was an unknown company that traded by appointment. In late 2009 it closed on a huge private placement transaction that more than doubled the number of outstanding shares. As the private placement purchasers sold their shares into the market, the price fell. For the twelve-month periods ended April 30, 2009, 2010 and 2011, the reported trading volumes were 3.5 million, 8.2 million and 50.3 million shares, respectively. In my experience, no small company can sustain that kind of selling pressure and volume ramp without at least a little suffering along the way. Notwithstanding the painful market consolidation of the last couple years, my confidence in Axion has never been higher. Its disclosed relationships with first tier competitors in the battery, automotive and rail transport industries are very unusual for an OTC company. Recent references to a newly forged partnership with a giant US automaker leave me convinced that 2011 will be a year of important developments as Axion completes validation testing for its products and manufacturing systems and launches commercial production and sale of PbC batteries. As these great expectations become visible in the rear-view mirror, I think everyone will be pleased by Axion's performance. I've recently suggested that the decline in A123's market price is probably overdone and there should be some short-term upside in the stock. I also believe Beacon is about as close to the bottom as I'd care to call. While I’d like to see more meat on the bones, I think ZBB’s upside potential is far greater than its downside risk. I continue to believe the other hippos in pink tutus should be avoided. Disclosure: Author is a former director of Axion Power International ( AXPW ) and holds a substantial long position in its common stock.
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