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A123 Bites the Dust Because They Forgot Their ABCs

October 16, 2012

By Mark P. Mills

It’s a sad day for enthusiasts of electric cars and the idea of government-sponsored industrial policy. A123 [NASDAQ:AONE], the storied MIT-spinout and lithium battery maker filed for bankruptcy today.

Set aside the political fallout from this failure, yet another Solyndra-type embarrassment for the Obama Department of Energy. Hey, you win some, you lose some. But not to wax too political, when you lose with private money at least taxpayers aren’t left holding the bag. A123 got about $400 million in government grants and loans. If it had all worked out, instead of angst, there’d be high-fives in the Forrestal Building (DOE’s DC HQ). What happened to this bright light on the green technology horizon? Well, two things. One is rooted in physics, the other in recognizing market realities instead of wishful forecasting.

First, the physics. Storing electricity is hard. At least storing it in meaningful quantities is hard. And the quantities that society uses are truly enormous. In oil-equivalent terms, we consume nearly 20 million barrels per day of electrons. Ideally, you’d like to store some of that. And that’s exactly what we do with all other commodities.

Storing commodities is important for stabilizing price and ensuring reliability. That’s why, at any given moment, there is about two to three months of annual demand in storage for natural gas, coal, oil and agricultural commodities such as wheat. But even if we included every car and laptop battery and connected them all to the grid, we couldn’t store even minutes of annual electric consumption. Electricity, at the level of national energy needs, is produced the instant it is used. This is really weird when you think about it. The reason? As I said, storing electricity is hard. Or to put it another way; any device that could store a lot of electricity in a tiny space would be of enormous interest to the Defense Department as a weapon.

The battery that runs your laptop on a cross-country flight has enough electricity to drive your car 100 feet. If you try to cram a lot of electrons into the same place they want to repel each other, unlike say oil molecules, which attract each other. So, typically, electricity isn’t stored as electricity, but in some intermediate and embarrassingly inefficient form – like lithium ions in an A123, or Sanyo, or BYD battery. Or as water. Hydro dams can be reversed and pump water uphill so that the next day, when gravity pulls the water back down, the turbines spin to make electricity. In this case you store electricity as the potential gravitational energy in the weight of water. Turns out that this works real well because it’s really cheap. But it’s not so convenient for powering your laptop or your Prius.

Engineers have been puzzling over how to make better electricity storing devices since the dawn of electricity. The venerable and ridiculously cheap lead-acid battery that starts your car every time with stunning reliability should tell you something. It’s been around for 150 years for a reason: like the wheel itself, it’s not so easy to replace at anything resembling a reasonable price. (Looking to make a long bet on venerable lead-tech storage, look at EnerSys [NYSE:ENS].)

Then along came cell phones which need lots of electricity, relatively speaking, to power their energy-hungry radio connections. A lead-acid battery the size of the lithium battery in your iPhone would give you about 30 minutes of energy. Not very useful. Lithium-ion battery technology, (invented by the way by an Exxon researcher in the 1980s, then commercialized by Sony) was one of the key inventions that unleashed the era of cell phones. For the convenience of hours of energy from your (almost certainly Chinese-fabricated) lithium battery, you happily pay 500 percent more per kilowatt-hour than you would for your car’s starter battery – or for gasoline.

Which brings us to the second A123 failure; their focus on the vision of an all-electric car. For this deeply goofy vision – and my apologies since there is no other word but "goofy" – start with a basic fact of physics. Fill a tank with 100 pounds of gasoline, and a car will haul you 400 miles before stopping for a 10-minute refill. The same 100 pounds of lithium yields 40 miles, maybe, and then a 10-hour refill. And for the battery, even if the electricity is free, the fuel ’tank’ (the battery) is ridiculously expensive. For those who say technology will make it cheaper – of course. But start with this underlying fact: the cost of the raw materials alone necessary to make the battery is higher than the cost of gasoline. Never mind the additional expense to manufacture a battery and its control systems.

Gasoline and diesel fuel are spectacularly efficient in energy and economic terms. But they’re not so useful for powering a smart phone. Thus, the real opportunity for lithium battery companies resides with the latter.

As markets migrate to ever faster wireless connections which — physics again — requires more energy, and to ever brighter displays (again, more energy), the inexorable chase for better batteries for billions of smart phones is a monster market. And it’s one where people willingly pay a ridiculous premium, in cost per unit of energy. The company that can make a radically better smart phone battery will own that market. This was not the market A123 chased.

Yes, I know A123 also pursued the smart grid market to provide utility-scale storage. That’s a subject for another day, and to be sure, it was and remains a viable and largely untapped market for storage. But that wasn’t the epi-center of A123’s "value proposition" – nor what animated its stratospheric initial $2 billion market valuation. And in any case, the kinds of battery chemistry one uses for cars and the grids are different. A123’s was optimized for cars. (Trust me, chemistry is weird.) Just FYI for the cognoscenti; the grid-scale electronics systems side of A123’s business is (was) very nice; someone else will doubtless buy that in the split-up and sale.

Johnson Controls [NYSE:JCI] is buying the vehicle side of the A123 battery business, and my bet is that they’ll use that very nice technology for a genuinely valuable application in cars: hybridization which will continue to take over all drive trains. Wrapping silicon controls and lithium batteries around oil-powered engines is a winner. But the automotive commodity business is a brutal place for a new ’green’ tech business. And regardless, analysts would have taken a zero off the number for the market demand if A123 had said they were chasing hybrid lithium not "goofy" lithium. In the end, the market took a couple more zeros off of A123’s value.

All this was knowable when A123 went public, and when the U.S. Department of Energy marched down the electric-car path. But dreams, even goofy ones, die hard. RIP A123.

Original Source:



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