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Could this be the technology that saves A123 Systems (Nasdaq: AONE ) ? Could a new battery that operates at higher temperatures and reduces the number of components needed to cool a battery change the landscape of electric vehicles?
The company sure thinks so, and it hopes that a higher adoption rate is just around the corner.
In an announcement made just this morning, A123 Systems unveiled its Nanophosphate EXT, a battery it says can change the game for electric vehicles and other applications. The technology will allow more extreme operating temperatures, reducing and possibly eliminating the need for cooling systems. According to testing performed at Ohio State University, the cells will retain more than 90% of their capacity after 2,000 full charges at 45 degrees Celsius (about 113 degrees Fahrenheit). In the announcement, CEO David Vieau said:
We believe Nanophosphate EXT is a game-changing breakthrough that overcomes one of the key limitations of lead acid, standard lithium ion and other advanced batteries. By delivering high power, energy and cycle life capabilities over a wider temperature range, we believe Nanophosphate EXT can reduce or even eliminate the need for costly thermal management systems, which we expect will dramatically enhance the business case for deploying A123's lithium ion battery solutions for a significant number of applications.
Investors bought into the hype early and have pushed shares 36% higher as I write this. The company's list of partners includes General Motors (NYSE: GM ) , Fisker, BMW, Land Rover, and John Deere, so the potential opportunity is enormous if vehicles are built with this technology and consumers adopt it on a widespread basis.
On a technological level this is a big step forward for A123 Systems, but it doesn't erase the company's challenges. Management delayed its prediction for breaking even on gross margin until 2013 and first-quarter revenue tumbled as customers had trouble ramping up production. A once-solid balance sheet has also been weakened, down to $116 million in cash and $144 million in long-term debt. The company has burned through millions in cash to build capacity, and up to now the sales rate of electric and hybrid electric vehicles hasn't kept pace.
The start of production from Fisker should help jump-start sales, but until demand from big players like GM, Tata, and BMW, as well as grid and commercial partners, picks up pace, the company will be fighting to survive. A new technology like this will take years to actually hit the streets, so I don't think the impact will be big in the near term.
Tesla Motors (Nasdaq: TSLA ) has shown that sales can be brisk for electric vehicles, but the partners A123 has landed haven't been nearly as efficient in bringing vehicles to the market. Fisker delayed production, causing a lot of pain for A123 investors, and companies like Tata and Geely are just getting off the ground. Ford (NYSE: F ) chose LG Chem as its battery partner, the Chevy Volt has been disappointing, and the Nissan Leaf has failed to live up to its potential. A better battery is great, but solving technological problems before consumers are ready to buy EVs isn't enough to pave a way to profitability.
I've focused on electric vehicles here, but Edison International (NYSE: EIX ) subsidiary Southern California Edison, Vestas, Satcon, AES, and many others are also working on grid storage solutions, which is a big opportunity. But again, the grid business isn't exactly fast to adopt new technology.
We've already seen A123's biggest competitor, Ener1, file for bankruptcy due to production delays by customers and financial trouble, and I think the risks for A123 are extremely high right now. This is a boom-or-bust investment that could either pay off in spades or leave you wondering where your money went. That's not something I would like to bet on until we at least reach breakeven on cash flow, and that won't be for another year.