GE's EV Purchases Could Be a Significant Boost to A123 Systems
Last week CEO Jeffrey Immelt indicated that GE ( GE ) would shortly be announcing the details of a purchase order for electric cars which will be in the 'tens of thousands'. The news comes amidst an interesting debate over the future of electric vehicles as we approach the roll-out of a hefty number of new electric vehicles [EV] and plug-in hybrid electric vehicles [PHEV] models over the next two years. Initial consumer adoption is obviously going to be critical to the further development of investment in this sector.
Doubts from unbelievers point particularly to order growth being held back due to 'sticker-shock' related to price comparables with equivalent standard conventional cars; consumer worries over resale values should the EV revolution fail; and most importantly 'range anxiety'. These issues are clearly important. However, there are also solid answers to these concerns:
- GE's announcement illustrates the potential for corporates, in responding to their responsibility to increasingly move towards sustainability in their operations, to make a significant contribution to underwriting early new production.
Secondly, much of the early sales to consumers will probably be on a lease basis - removing the residual value question from the consumer.
Deutsche Bank recently put out an interesting piece of research showing that once the lease pricing numbers announced for the Nissan (NSANY.PK) Leaf and Chevrolet Volt are combined with recharging and refueling costs in a comparison with the Nissan Sentra, the Leaf's monthly costs come to within $35 of the Sentra - with the Volt costing $70 more. This is not parity. However, for those of us who take our environmental responsibilities seriously, I believe that these numbers make sense.
Finally, range anxiety. This is undeniably a problem. However, arguably it will have its major impact on what kind of electric cars we buy rather than the overall demand for electrics. The Leaf is clearly only suitable as a City commuter. However, the Tesla roadster has a range of up to 300 miles. And perhaps more importantly, much of the coming production in the industry as a whole is likely to be in PHEVs such as the Volt. The Fisker Karma, due out next year, will provide 50 miles on electric alone and then an additional 250 miles on electric/gasoline power. Jaguar has announced that it is working on a similar concept with the C-X75 plug-in hybrid. No range anxiety here.
Whether these new upcoming models use a pure EV or a PHEV concept, they will all use Lithium battery technology. Consequently, it is perhaps a clearer bet to focus on Lithium battery makers. From this point of view, GE's association with A123 Systems ( AONE ) is perhaps interesting in the light of GE's coming announcement. GE owns 7.5% of AONE and has a high-performance battery venture with the company. It is perhaps not unreasonable to assume that GE's orders will be directed in such as way as to give at least some support to AONE's battery order book.
AONE's main customer is Fisker Automotive, due to go into production with the Karma early next year. It seems unlikely that GE will be purchasing a significant number of $80,000 luxury sedans for its employees. GE's plans could possibly include forward orders for the cheaper Fisker Nina. Other AONE customers include BMW (BAMXY.PK) and Shanghai Automotive. However, intriguingly, in analyst calls AONE is reported to have suggested that it has in place a production agreement with another large OEM. And equally intriguingly, GM executive Michael Bly spoke at the opening of AONE's Livonia plant recently.
There are therefore numerous routes via which GE could support AONE with these orders. Equally clearly, there is no way of being sure about the breakdown of GE's orders ahead of the coming announcement on the detail. However, assuming that AONE will be a beneficiary, how significant could this be in terms of revenues?
As well as suggesting that these orders would be in the area of 'tens of thousands' Jeffrey Immelt also suggested that eventually half of GE's sales force will be driving electric cars - that's a sales force currently of 45,000 employees. For the sake of running up some numbers, let's assume that GE orders 22,500 cars to be delivered over the next couple of years (perhaps fairly conservative given the 'tens of thousands' comment).
In terms of revenues, AONE receives $8,000 to $12,000 per lithium battery. Since these orders are unlikely to involve luxury sedans, let's assume that we are talking about 22,500 batteries at $8,000 per battery on average. That would be an order book of $180m in total value. We do not know how much of this could flow through to AONE or over how many years this will take place.
However, if AONE was to benefit from a good portion of these orders what would it mean to the company's projected revenues? This year AONE's revenues are likely to be only around $125m. However, since AONE is currently ramping up capacity this is not a relevant comparison. Of more interest, AONE has said that with the opening of the Livonia plant they should have 760 mw hours of capacity in place by late 2011, with associated annualized revenues of $450 - $550m. By 2013 they are talking about $1.5bn in revenues.
Importantly, at present only 35% of revenues come from the light vehicle area, with that number projected to rise to 50% by 2013. The rest comes from heavy vehicles and grid stabilization technology. Consequently, on current plans we could be talking about $200m of annualized revenues from light vehicle lithium battery production by the end of 2011 (say, 40% of $500m). Is this context, a total order of $180m for lithium batteries flowing from the GE EV purchases looks very significant, even split over two or three years.
If a good proportion of this was to flow through to AONE then clearly it would be a significant source of support in the early years as they ramp up production. And certainly it could help AONE meet expectations that they could be in a position to produce positive EPS in 2012.
There is no way of knowing what GE's final announcement will
entail. However, since CEO Jeffrey Immelt's comments last week,
AONE has not priced in any additional premium. In fact, its share
price is lower. As a result, this may be an opportunity. Sentiment
has suffered recently as concerns have grown that intense
competition from Panasonic (
) and Samsung (SSNLF.PK) may swamp the tiny AONE. The stock is down
60% this year. However, the result is that it now trades at 1.4
times book value - attractive for a 'disruptive technology' with
growth prospects. If GE is going to give AONE some support the
risk-reward looks interesting.
Disclosure: Long AONE
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