If you have been following Ballard Power Systems for the past two decades, you know that this company has been through a good deal. The stock chart looks like a Six Flags thrill ride, as the company went from a high flyer in the early 2000s – hitting a high of $115 on the anticipation of a fuel cell revolution in transportation – to a low of 59 cents in late 2012. Recently, though, the stock has seen a bit of a resurgence.
Earlier this month, I spoke with Stephen Karaffa, Ballard’s Vice President and Chief Operating Officer, and Guy McAree, Director of Marketing and Investor Relations to find out what the company is up to.
Karaffa was very frank in acknowleding past expectations and disappointments, while expressing optimism for the company’s current path. The biggest difference today is that the company has transitioned from an engineering company to one focused on developing products that are commercially viable. This re-shaping required internal realignment, which is essentially complete.
"We are putting in organizational structures now that can accommodate more rapid growth in the business because the technology is ready and there is a vast interest in the technology. Once we get the economic variables right, you have a viable alternative to traditional energy resources."
McAree harkens back to the early part of the decade and the hype, noting that the industry had over-promised and under-delivered around fuel cell cars.
"Here we are 15 years later, and large-scale fuel cell car production is still at least a few years away. The earlier hype was premature. What’s happened in the last seven or eight years is that we have been moving from an R&D model, to become a real commercial business, with real products for real needs in the marketplace. We have a number of markets in which we have products that work, are reliable and have highly competitive value propositions."
This shift away from R&D has been noted by observers covering the intellectual technology space. The Clean Energy Patent Growth Index 2013 Year in Review commented “Ballard, easily in the top ten (in Clean Energy patents) until recent years, fell to 14th place. It was only a matter of time, though; Ballard hasn't received a Clean Energy patent since 2009, and only 7 since 2007."
That doesn’t mean that Ballard has given up on new technology: with the company’s acquisition of the United Technologies fuel cell business, it picked up a large amount of new IP.
The basic technology works as follows: hydrogen and ambient air flow across a proton exchange membrane (PEM) fuel cell, and an electrochemical reaction occurs. The result is that electricity, a small amount of heat, and a limited amount of water are produced (the hydrogen interacts with the oxygen in the air to create water). Although the quantities of heat and water are small, effectively dealing with them has represented a technical challenge.
PEM fuel cell technology is somewhat different than that utilized by Fuel Cell Energy (molten carbonate) or Bloom (solid oxide), and it is highly adaptable to a variety of stationary and motive applications.
Currently, the company is focusing on several product applications. One main area of focus is in providing backup power for wireless telecommunications companies. Karaffa states that the telecom business has been growing rapidly with a product that is “economically and technically viable.” The telecoms sector is a high value and clear choice for Ballard’s product. Relative to the alternative of losing power or using lead-acid batteries or diesel generators to generate backup power, fuel cells can economically provide energy for extended periods of time. Ballard’s systems were deployed in the Bahamas prior to Hurricane Sandy. When the grid went down, fuel cells supported the telecommunications system for five days at some sites until power was restored.
Karaffa comments that diesel is a soft target in the developing world.
"Diesel fuel is valuable. There’s a lot of leakage of diesel fuel in the supply chain. It’s harder to have other uses for methanol. Nobody has an incentive to steal the methanol, or the fuel cell for that matter. They walk by our cell and don’t even know what they are walking by. The cells are quiet. Compare that to a diesel generators, which once you crank it up, everybody knows it is there."
Ballard are not the only ones eyeing the telecoms space, though. In some areas, flow battery companies such as Imergy (with two years of extended testing in harsh environments in northern India) and Enervault will be looking at a heat map similar to Ballard’s. Of course, the potential market is enormous, and opportunities and economics will vary. Nonetheless, it appears likely that fuel cell and batteries will overlap in this space.
Karaffa indicates that telecom is only one sector of several sectors showing promise.
"We also work in material handling, providing fuel cell stacks for Plug Power’s business of powering forklift trucks. Plug recently announced a contract to supply over 1700 of its GenDrive fuel cell systems to WalMart for six distribution centers over the next two years. We also have a bus power module business – we are still working through limited trials with bus manufacturers and transit agencies in the U.S. and Europe, and last year completed a licensing deal for assembly of these modules in China. And, of course, we provide Engineering Services to a number of automotive OEMs."
McAree comments that the automotive work now has a vastly different focus than a decade ago. It is about making money today.
"Ballard did a lot of work with Daimler and Ford in earlier days, fundamental research and development work which Ballard partially funded, and that didn’t really make much sense. Today we provide Engineering Services to automotive companies, such as Volkswagen, and are paid good margins for that work. It’s a different business model today. If the car market develops, as it may very well, we will be well positioned."
Karaffa observes that Ballard is involved in the classic substitution game. In telecoms, the company competes with diesel gensets. With buses, it’s diesel fuel. And with forklifts, the incumbent competition is the lead acid battery. So, in a sense, Ballard is fighting the technology substitution war on multiple fronts. In each case, Karaffa is clear:
"We need to have a very compelling value proposition. We love the fact that these will make a better future for us, but we are realistic enough to know you that have to make it financially attractive."
That value proposition is abundantly clear in the forklift market. Ballard sells fuel cell stacks to a systems integrator – predominantly Plug Power – which then manufactures the a complete fuel cell system. Karaffa cites the case of WalMart and Plug Power.
"They are buying because a fuel cell forklift can move more products on a per-hour basis than an a battery powered truck. They cost less to maintain as well, so it just makes financial sense. Other buyers include Sysco Foods, Central Grocers, and Whole Foods. We are seeing some nice growth in that market. It’s a big global market but the focus right now is in North America."
McAree indicates that the fuel cell bus market is a somewhat less mature market and more difficult to predict. Ballard is therefore cautiously realistic about the opportunity.
"We don’t think of it as a commercial market, because it’s dependent on government subsidies, which of course are not entirely predictable. But it’s a business with good margins. Last year we powered 12 new buses and we just put a bid in Europe for another 25 buses."
Finally, the company sells Engineering Services to customers that include a number of automotive OEMs (such as its contract with VW) – and also licenses its intellectual property portfolio. The latter business line holds significant potential, in part because of the intellectual property acquired when Ballard bought United Technologies’ PEM fuel cell portfolio a month ago.
"The UTC deal was a treasure trove of IP for us. It brings to us around 800 patents which makes us by far the leader in the industry. With the services we sell, that makes us the know-how king in the industry with PEM technology. We can manufacture some products, but then we are a small company in a market we believe will explode quickly, so we will look at licensing in some cases. We are excited about the portfolio we just acquired. And we will apply the technology in places they (UTC) didn’t, because fuel cells are our main focus."
The Ballard team believes that – after so many years of fuel cell hype – the new pragmatic strategy is about to pay off. McAree comments that Ballard is one of the companies in the industry that is, for the first time, talking about becoming profitable, expecting to break even at the EBITDA level in 2014. That will be an important inflection point for the Company.
Looking forward, Karaffa is optimistic,
"We think the catalysts for future growth will be off-grid continuous power, distributed generation, and zero emission transportation. We believe we are in the right spot, with the right technology focused on the right problems, with the right resources that we can actually execute on the plan. It’s not inconceivable we will be multiples of our size five years from now."