David: We're joined by Firoz Rasul, the chairman and CEO of Ballard Power Systems. Ballard develops, manufactures, and markets fuel-cell technology for use in transportation, electricity generation, and portable power products. Partners -- in fact a few of these are co-owners -- include Daimler-Chrysler, Ford, Honda, and Hyundai. Mr. Rasul, a pleasure to have you on the The Motley Fool Radio Show.
Rasul: Thank you. It's my pleasure.
David: Let me begin by asking you what we think of as our "Uncle Ed" question. My Uncle Ed is sitting next to you on a train. "What is a fuel cell, and why will it change the world?" asks Uncle Ed. What's your answer?
Rasul: My answer would be: The fuel cell is a power generator. It makes electricity. It makes energy very cleanly, very efficiently, because it uses the amount of energy we have in a way that extracts the most out of it and wastes as little as possible. It's done in a way that does not degrade the environment. It is modular, it's quiet, there is no vibration, there are no moving parts and, because of this, it will completely change the way we think about electricity and how and where we use electricity.
David: A lot of us do have batteries in our cars, and a lot of us have batteries in other things. I'm still wondering, how is a fuel cell different from just a conventional battery, like the one that already exists in my car right now?
Rasul: Very simply, a battery is a storage device. You have to make the electricity elsewhere. So, you buy a battery that is already charged and, if it's not rechargeable, you throw it away. And, if you've got a cell phone or a laptop, it's a rechargeable battery; once you use up the electricity in it, you plug it into the wall, and you replenish the power.
A fuel cell makes electricity. It could recharge a battery, for instance. But, it makes electricity on demand. It does not store it. Therefore, it's a generator as opposed to a storage device, which is what a battery is.
Tom: If there's so much power to the new technology, one question on a community member's mind at Fool.com is: Why has it not yet been deployed?
Rasul: I think there are really three reasons. One is, we are very conservative when it comes to power. And, if you think about the power technologies we have today, the internal combustion engine has been around for 110 years; the battery has been around for about 150 years. So, you see, we are very conservative about changing power. We have to make sure that the new source of power, the fuel cell, is going to work in different conditions, in different applications, in different sizes, and we have to establish its reliability, dependability, safety... all of those things. We are going through this certification and validation right now.
The second reason is we have to get the cost down. This is a little bit "chicken and egg." You can't get the cost down until you have the volume, and you won't get people buying until you get the cost down. So, we are now working with our partners, such as Daimler-Chrysler, and Ford, and others, to get out of this vicious circle -- introducing vehicles and working with the government who will subsidize it, so people can adopt it, and we can start to build volume that way.
David: I'm wondering, when will most individuals first get a glimpse of a car powered by fuel cells? What are your projections, after you overcome what you are talking about needing to overcome?
Rasul: Well, I think the California zero-emission vehicle regulations mandate that, in 2003, auto companies that sell cars in California above a certain number are going to be required to provide zero-emission vehicles to consumers. So, based on the public announcements by about a half-dozen auto companies, I would say we are looking at the 2003-2005 window when one of your listeners can actually go into a showroom and drive away with a fuel-cell vehicle.
David: Do you really rely on the government to mandate this, or do you believe that there is a strong consumer demand?
Rasul: I think it has to take both. I think, initially, the government has brought about technologies that make it possible to have zero-emission vehicles that are practical, and that work for consumers in terms of their lifestyles. This has been the problem with battery-powered vehicles. They haven't met the consumer lifestyle requirement. A fuel cell meets that, and the mandate helps to drive the technology and the cost in a way that we wouldn't have otherwise.
But, at some point in time, it has to be the market forces that drive it. And, we believe people will buy fuel-cell vehicles not only because they are cleaner -- certainly that's the beginning -- but because they provide so much more than an internal combustion engine vehicle.
Tom: I'm wondering what you think an investor should use as a metric, a measurement for Ballard's success? How can I tell at this point, let's say over the next year, that Ballard is being successful meeting and exceeding its goals?
Rasul: This is a question that people have had since we did our public offering in 1993. So, what we have started to do in our annual report since that time (for the last seven years) is publish our goals for the year -- the 10 most-important things we have to do that move the company forward towards commercialization.
That may be getting demonstration vehicles on the road, it may be moving the technology forward, getting the costs down, it may be getting units into field trials like stationary power units or signing up a key strategic partner or supplier.
So, we provide that to our shareholders each year, and we get a scorecard. We give ourselves a scorecard but, more importantly, the analysts give us a scorecard. There are about 10 analysts that follow the company. So they review the goals when they're published, and then they review progress against those goals, and I think that's probably a meaningful way to gauge how far and how fast we're moving.
David: Mr. Rasul, based on your projections -- and I'm sure you've had these conversations with analysts as well -- when do you see Ballard becoming profitable?
Rasul: Our goal is to break even in the 2003-2004 timeframe, when we see the volume start to build. That's not just for portable power units, which we are hoping to bring out next year with our friends at Coleman Powermate, but also engines for buses and stationary power plants beginning in 2002-2003, and looking forward to the vehicles in 2004 -- that's when we see our revenues start to catch up with our R&D spending and start to create positive margins and give us the ability to start to turn a profit.
David: What do you see as the longer-term gross margin or maybe the net profit margin of the company? Let's just talk in big-picture terms, say 25 years from now?
Rasul: A lot of the analyst models we have reviewed, and I think that we have similar thoughts or views on that, tell us that the gross margin numbers would be starting in the mid-30s and go up to the mid-40s, because this is a proprietary technology that can demand that type of pricing. Also, that's the type of pricing you need, and the margin you need, to continue to develop, to invest in R&D, to drive forward. On a net basis, we expect that it will be in the 20s, 25 years from now.
Tom: I want to, as an investor, again put Ballard Power in its present form in context for myself. If I were to assign a numerical ranking right now to Ballard Power as an investment based on risk -- if 1 was not risky at all and 5 was risky -- where do you stack the company up for small investors thinking about making an investment in a Rule Breaker-type company like this?
Rasul: Well, I would say first that these are long-term investments. If people are looking for short-term gains, then Ballard is probably not the stock for them. Their investment horizon has to match our commercialization horizon, and it's a long-term play. We're getting into early markets now, there are many, many markets that this technology is useable in or applicable to, but there are also a number of challenges we have to overcome. We have to get the costs down, and we have to get the fuel and the fuel infrastructure in place, which is what we're doing right now.
We also have to make sure that the consumers start to understand a whole new technology. The car sounds different, it feels different. The portable generator in your home that gives you backup power is different from an internal combustion engine that you can't get in your home. So, there's going to be an adjustment period. These are the challenges we have to overcome in making sure that the people understand and the awareness is there.
So, I would say that obviously there's a lot of risk in there. I would certainly buy the stock for me as a personal investment, if I wasn't working at Ballard. I would say that if the least risky is 1 and the most risky is 5, for me it would be below 3.
David: Final question. A Fool community member of ours asks, "What percentage of cars will be powered by fuel cells in 2010?" Just your quick take.
Rasul: That's a tough question, but I'll tell you the interesting thing. General Motors has said publicly that they expect 10% of the vehicles to be powered by fuel cells; Daimler-Chrysler has said, by 2020, 25% of the vehicles will be fueled with Ballard.
There's another indication for your community that they can look at: the adoption of the jet engine over the propeller engine in the commercial aircraft industry. There was a similar change in the new design of the aircraft unit -- a new fueling infrastructure -- and it took 15 years to go from 0% to 75% adoption.
David: Thank you very much, Mr. Firoz Rasul, chairman and CEO of Ballard Power Systems.
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