Rise of the Militant Environmentalists

• Email
• Share
• Print

Quick: When you think of hydrogen fuel cells, which companies spring to mind?

Ballard Power (Nasdaq: BLDP), perhaps? Plug Power (Nasdaq: PLUG), Millennium Cell (Nasdaq: MCEL), and, of course, Fuel Cell (Nasdaq: FCEL), I'll bet. Maybe even DTE Energy (NYSE: DTE), which owns a piece of Plug. All of the above have the reputation of being pioneers in the anti-internal combustion consensus, as well as firms working towards a greener world.

But here are two companies I bet don't even figure in your investing equation: defense contractor United Technologies (NYSE: UTX) and Teutonic tech titan Siemens (NYSE: SI). In addition to being bigger than any of the pioneers, their more diversified operations help to keep these two profitable. Most important of all, they're both on the cutting edge of a new type of military propulsion system that seems likely to earn more and more profits over the years to come.

Move over, Greenie. Meet Commodore Meanie.
On Wednesday, United Tech (UTC) announced that it had won a contract from Spanish shipbuilder Navantia to develop a new form of propulsion for the Spanish Navy's S-80 submarine class. Although financial terms were not disclosed, UTC did let slip that this was "one of the largest single contracts" its UTC Power subsidiary has ever received. Based on proton exchange membrane (PEM) technology, the design for UTC's new fuel cell power system has already been approved. All that remains now is to build the contraption and see how well it works -- at which point Navantia and the Spanish Navy will decide whether to put this design into serial production.

Go ahead. Ask.
I know what you're thinking. You're wondering: "Why?" It's not like the Spanish Navy is a big polluter on the world stage, so why is it spending money to develop a "green" technology like fuel cells for its fleet? The answer is that from a military perspective, the environmental tint of the technology is beside the point. Like other non-nuclear, mainly coastal navies, Spain is looking for two things in its subs: stealth and underwater endurance.

Fuel cells deliver on both sides of the equation. In contrast to their noisier nuclear neighbors, which are built for long cruises around the globe, European navies tend to favor diesel-electric subs. While not as well suited for long and distant tours of duty, these conventional submarines work really well in coastal defense roles, and they have the added advantage of being ultra-stealthy when running on battery power. Russia's Kilo-class sub, for example, has a new variant that is so quiet, Western antagonists dub it "The Black Hole."

Diesel-electrics do, however, have an Achilles' heel not shared with their nuclear brethren. Burning diesel to power their batteries requires combustion, and combustion requires -- you guessed it -- air. Diesel-electric subs have to surface for air periodically, and when surfaced, they're vulnerable to surface attack.

Green light for a new technology
Powering electric boats with fuel cells gets around the "breached whale" problem, because PEM technology can generate power without the need for combustion, or the air that fuels combustion. As such, it's a technology very attractive to current, non-nuclear sub fleets. Germany, for example, already has four PEM fuel cell-powered U-Boats (Type 212 and 212A) for which Siemens built the engine. Italy has two more Type 212As. And Russia's new Lada class submarine -- the next generation, designed to replace the Kilo class -- also runs on fuel cell power.

Foolish takeaway
Russia's Kilo class enjoys great popularity around the globe. These warships serve in the fleets of not only Russia, but also Poland and Romania, China and Indonesia, Libya and Iran. Considering the advantages that the new fuel-cell technology brings to electric boats, I expect we'll see similar and rising popularity accrue to designs like the Type 212A and Lada -- and now Spain's S-80. That can mean only good things for companies like UTC and Siemens, which make this power a possibility -- and, unlike their higher-profile fuel-cell counterparts, earn a profit in the process.