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Are Lithium-Ion Batteries Dangerous to Investors?

Dell (Nasdaq: DELL  ) announced today that it is recalling 4.1 million lithium-ion batteries used in certain notebook computers because of the potential that the batteries could be a fire hazard. Although Dell officials were quick to state that they didn't believe the recall would have a negative effect on its operations, financial position, or cash flow, the announcement could have serious ramifications for the manufacturers of the batteries.

Lithium-ion batteries are capable of storing a tremendous amount of energy in a small space for a long period of time, but they are somewhat fragile because of their chemistry and because they require advanced circuitry to control their voltage. If the circuits overheat, the chemicals can cause an explosion.

Of the millions of lithium-ion batteries in existence, the overwhelming majority are performing well -- and relatively safely. According to the Consumer Product Safety Commission, only 339 cases of lithium and lithium-ion batteries overheating, emitting smoke, or exploding have been reported since 2003.

Obviously, "only" is a relative term, and Dell had enough incidents on hand to issue a recall. I will be very surprised if other major users of lithium-ion batteries, including Hewlett-Packard (NYSE: HPQ  ) and Apple (Nasdaq: APPL  ) don't also decide to follow Dell's lead and recall some of their batteries. After all, who wants to be on the hook for knowing that a problem, however small, existed yet doing nothing about it? Can you say "lawsuit"?

The problem, for now, will be dumped squarely in the lap of the manufacturers of these batteries. In the case of Dell's batteries, a unit of Sony (NYSE: SNE  ) is the manufacturer and will bear the brunt of the costs associated with the recall.

The other problem here -- and, to my mind, the far greater one -- exists for the smaller manufacturers of lithium-ion batteries, such as Altair Nanotechnologies (Nasdaq: ALTI  ) and Ultralife Batteries (Nasdaq: ULBI  ) , who are seeking to supply lithium-ion batteries for the electric- and hybrid-automobile markets.

The problem has little to nothing to do with the technology itself. To my knowledge, none of the aforementioned companies has experienced problems with its lithium-ion battery technology. In fact, I am sure these companies are doing their utmost to make the technology as safe as possible.

Rather, the problem here is one of perception. According to a report in The Wall Street Journal yesterday, government officials are thinking about restricting lithium-ion batteries on board airliners. This discussion could lead to a perception that these batteries -- whether they are used in laptops, cell phones, or cars -- are more dangerous than they actually are. And as longtime investors know, even if a technology is wonderfully effective, it doesn't matter as long as the public's perception is otherwise. Manufacturers are not going to embrace a technology if they think their consumers have reservations about its safety.

Now, I am not predicting that this will necessarily happen with lithium-ion batteries, but if you are investing in a company that manufacturers these batteries, it is something you should consider. At a minimum, I recommend holding off on investing in any lithium-ion battery manufacturer until the recall has played itself out and the government has issued a ruling on whether it intends to allow these batteries on board airliners.

Oh, dear, Dell!

Dell is a recommendation of two of our investing newsletters --Stock AdvisorandInside Value. Feel free to try them out, or any of our other newsletter services, free for 30 days.

Fool contributor Jack Uldrich has never had a computer explode on him, although he has wanted to destroy his computer on an occasion or two. He does not own stock in any of the companies mentioned in this article. The Fool has a strict disclosure policy.

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