Ever heard of Energy Conversion Devices (Nasdaq: ENER)? Odds are you haven't, unless you read Tom Jacobs' column last week, participated in the recent Rule Breaker seminar, or have a thing for alternative energy research. This is a fascinating company, mostly because, like Ulysses, it has so much going on that it is nigh incomprehensible. Let's try to digest it as a snake would -- slowly, piece by piece, savoring every flavor.

Energy Conversion Devices (ECD) has formed its business around Ovonics, a technology that creates alloys and new materials by engineering at the atomic level. Through joint ventures, ECD is applying Ovonics to six industries:

  • rewriteable optical memory (CD-RW, DVD)
  • nickel metal hydride (NiMH) batteries
  • photovoltaics
  • regenerative fuel cells
  • solid hydrogen storage (to power fuel cells)
  • advanced computer memory (to replace DRAM, FLASH, and field-programmable gate arrays)

Consumer products already exist in three of theses areas: optical memory, NiMH batteries, and photovoltaics. The other three are still in the development stage. Kicking off our look at ECD, Tom talked about rewriteable optical memory. I'm going to take on NiMH batteries today.

Recharge it
You may well have a NiMH near you right now. Nokia (NYSE: NOK) offers them for its cell phone. IBM (NYSE: IBM) has them for laptop computers. They're available for the Palm (Nasdaq: PALM) Pilot. Almost 1 billion NiMH batteries are manufactured per year, as they seek to replace nickel cadmium (NiCd) rechargeable batteries. And Ovonic Battery, a subsidiary of ECD, holds the patents on the technology, which it licenses to manufacturers.

When they were introduced in the early 1990s, NiMH batteries were the answer. They had higher energy density than NiCd batteries and they had less cyclical memory buildup, which meant that they did not have to be depleted completely before recharging. NiMH batteries grabbed 25% market share in mobile applications in 1999, representing about $437 million in sales.

Show me the money
It's hard to figure exactly what ECD made on those 1999 sales, but total battery license fees came to $4.6 million, battery royalties were $2.7 million, and electrode sales were $3.1 million. That's it. Twenty-five percent market share in mobile battery application, and it brought in $10.6 million in revenue.

What's more, that figure fell to $7.8 million in 2000. Market research firm Frost & Sullivan predicts that NiMH's market share will shrink to 13%, or $284 million in sales, by 2005. This is not a booming revenue story. Considering the cost of development, it's not even a meaningful revenue story.

That's the sticking point with ECD. Its two proprietary technologies that you can find around the house, NiMH batteries and rewriteable CDs, earned $6.4 million and $140,000, respectively, in royalty and licensing revenue in 2000. That's not many simoleons. ECD still makes significantly more from product development agreements than it does from its existing proprietary technologies.

Electric and hybrid cars emerging?
The automotive market is where Ovonic Battery hopes to make real money. In 1994, Ovonic Battery formed a joint venture with General Motors (NYSE: GM) called GM Ovonic. Its purpose is to develop and manufacture NiMH batteries for the electric and hybrid vehicle market.

Electric cars have had a decent run at the commercial market, but they have never found traction. After three years in the electric car business, Honda Motor Company (NYSE: HMC) exited it in 1999 with only 330 cars manufactured. The problem was lack of demand, probably due in part to short battery life.

Honda's hybrid offering, which blends an electric and gas-powered motor, has found much greater acceptance from the general public. Honda has sold 4,100 Insights over 14 months in the U.S. Toyota (NYSE: TM) has sold more than 50,000 units of its hybrid Prius worldwide and 4,600 in the U.S. Both use NiMH batteries.

Opportunity for Ovonics -- not
So this is an opportunity for GM Ovonic, right? Not really. While the hybrid may be here to stay, Toyota and Honda are supplied by Panasonic EV Energy (PEVE) in Kosai City, Japan. PEVE also supplies Ford (NYSE: F) with batteries for its EV cars. If Ovonic is getting anything from the success of hybrids, it's included in the revenue quoted above, which, as we said, is essentially bupkas.

It gets worse. GM Ovonic's main -- if not sole -- customer, GM itself, recently pulled out of the joint venture. Its place will be taken by Texaco (NYSE: TX), which shares two other joint ventures with ECD. GM now has no vested interest in the operation, leaving the one customer free to choose among competitive producers and technologies, though it tapped Ovonic for its latest Precept design.

To add insult to injury, it's unclear how long the NiMH battery can maintain its lead in electric and hybrid vehicles. The Department of Energy's Office of Transportation Technology is focused on lithium ion and lithium polymer batteries as the long-term battery solution for electric and hybrid cars. It is working with a French company called SAFT that manufactures both NiMH and lithium batteries. DaimlerChrysler (NYSE: DCX), working with SAFT, has introduced a hybrid car that uses a lithium ion battery. 

[NB: Hours after this report was published -- ain't that a coincidence? -- ECD announced that it would file suit against Matsushita Battery, Toyota, PEVE, and others for infringement of NiMH patents. The focus of the suit was batteries made for electric and hybrid vehicles. It may be that there is more revenue in this segment than has yet manifested itself. At least, it's clear that the vehicle segment is Ovonic Battery's number one priority.]

Batteries are a bust, but the game's not over
The development of the NiMH battery was a significant step forward in rechargeable technology. ECD is to be applauded for its innovation. Unfortunately, royalties and licenses for commercial NiMH batteries don't amount to significant revenue, and the manufacture of NiMH batteries for automobiles at GM Ovonic does not look promising. It seems that ECD missed or gave away the opportunity to make money with this proprietary technology.

That's not to say that there isn't potential value at ECD. Even if batteries or, as far as I can tell, rewriteable optical memory don't amount to much, there are still photovoltaics, solid hydrogen storage, regenerative fuel cells, and advanced computer memory. We'll look further at these technologies in the weeks to come.

Fool on!

P.S. The Motley Fool Money-Making, Life-Changing Special is making the rounds of public television stations around the country. To see the Tom & Dave Show for yourself, check for your local station on the airing schedule. And give generously to PBS -- they do great work.

Brian Lund has found his bliss, and it is dentistry -- not being a dentist, but being a patient. As of this writing, he owned none of the stocks mentioned in this article. To see his holdings, visit his profile. The Motley Fool is investors writing for investors.