Author: Gary Simon
It appears the world has its first profitable fuel cell company. Smart Fuel Cell in Germany (F3C.DE) basically reached breakeven in Q2 08 and as revenues grow should show positive earnings in Q3 and Q4. Smart makes a direct methanol fuel cell, using a similar PEM membrane as the hydrogen-only fuel cells. Smart has reported its fuel cells are only 11% efficient, but are improving. How much they are improving has not been mentioned. Smart shows a trailing 12 month revenue of $23 million—not bad at all. Their results seem to show that indeed customers like a fuel cell with an easy-to-carry, compact and relatively easy-to-find liquid fuel, even if the efficiency is low. This stands in contrast to the hydrogen-fueled PEMs where finding the fuel is still a chore. Once a company in a new technology area begins generating positive cash flow, it has a war chest to erect barriers preventing others from entering its market. It will be interesting to see how Smart does on this score.
There are several direct methanol fuel cell companies with more efficient, maybe even better, technology. The question will be whether that matters in the face of a blocking move from a profitable competitor. Oorja Protonics (private) unveiled its direct methanol kw-class power pack for forklifts in the past quarter, and Mechanical Technology (MKTY) continues progress on its small methanol unit for portable devices. CMR Fuel Cells (CMF.L) in the UK similarly is continuing work on its 25 watt methanol unit.
A good example of a profitable business will likely lift the fortunes of other fuel cell companies and that could improve valuations. However, nothing will improve valuations like a good exit—early investors getting extravagantly rewarded through a popular public share or acquisition. The bubble in 2000 made some fuel cell company investors immediately wealthy, but that opportunity came crashing down when reality came no where near the hype. If there is to be another surge, it will have to be based on real results—from at least some companies. Hydrogenics (HYGS) and private company Altergy may be coming close to profitability soon. Altergy (hydrogen PEM fuel cells for telecom backup) is rumored to be preparing for an IPO next year. Maybe they will provide that big exit that will attract attention.
Unfortunately, another dramatic milestone was reached in Q2 08: The cumulative (multi-year) losses from the public fuel cell companies exceeded $4 billion. All the usual suspects continue to bleed cash—Fuel Cell Energy (FCEL), Ballard Power (BLDP) and Plug Power (PLUG). Those losses continue to put a damper on investor interest in the sector. FCEL’s results for Q2 08 were worse than expected, with a loss of $26 million and more importantly a ratio of cost to sale price of 1.68, actually up from 1.61 in Q1. Recall that a big question looming for FCEL is whether its success in sales (revenues doubled over last year) will bring them closer to or farther from breakeven. This quarter’s results showed worse than expected margins on increased sales.
It is still very likely there will be a significant shake-out in the next year. There are seven public and private companies currently officially in collapse—some through Chapter 11, some through liquidation, some through sale. Perhaps the most surprising to some was the announcement by Siemens-Westinghouse that its solid oxide fuel cell business was for sale. S-W probably spent hundreds of millions to develop this technology and probably the US Department of Energy tossed in hundreds more. This follows the move in the Spring of 2007 by General Electric to shutter its major solid oxide fuel cell shop in Torrance, California. While GE continues some technology research at its corporate R&D center in New York, it backed away from creating a commercial product. Maybe all this says is that the big-company approach to fuel cells isn’t working so well. Start-ups like Smart Fuel Cells show there is another way, especially by starting small with its 50 to 250 watt size systems.
United Technologies through its UTC Power unit is still one big company pursuing large fuel cells. It recently announced an award to supply 12 fuel cells of 400 kW each for the World Trade Center in Manhattan. This is the new unit slated to replace the 200 kW PC 25. UTC has sold over 270 of the PC 25 units to date, probably the most kWs of fuel cells sold in the world. However, UTC has not reported that the fuel cell division is profitable. The conventional wisdom is that the new 400 kW unit is UTC’s move to try to bring the division to profitability. That creates an interesting contrast to the “small is better” approach.
Gary Simon is a venture partner with Velocity Venture Capital in Folsom, CA. He is the CEO of Acumentrics and a board member of Jadoo Power. Both companies are deeply involved in commercializing fuel cells. Gary is also an advisor to Camino Energy.