Plug Power (PLUG +11.62%), a leader in fuel-cell solutions, recently announced the signing of a memorandum of understanding with two Chinese companies to pursue the development of fuel-cell solutions for electric vehicles (EV).
Operating primarily in material handling equipment, Plug Power's interest in the EV market represents a change in direction; however, management recognizes a significant opportunity. According to Andy Marsh, Plug Power's CEO, "China has made hydrogen and fuel cell vehicles a key component of the country's Energy Revolution Program, which includes over $100 billion in investment and runs through 2030."
Image source: Getty Images.
What's the big deal
Along with Zhangjiagang Furui Special Equipment Co., LTD (Furui) and a leading Chinese industrial vehicle manufacturer, Plug Power will work to "develop new fuel cell applications and fueling solutions to be utilized in the large and expanding industrial electric vehicle market in China" according to its press release.
By March 2017, the three companies expect to deliver two industrial delivery truck prototypes, which feature Plug Power's ProGen fuel cell engines. After the prototypes, the collaboration is expected to produce more than 500 vehicles and a fueling station network to be deployed in the Shanxi province over the following year. Should this prove successful, the three companies plan on deploying 13,500 commercial fuel cell vehicles over three years with a widespread fueling station network.
Forging a new path
Plug Power's new collaboration in China is commendable, but it inadequately addresses the area which has plagued the company in the past: getting its cost structure in line.
PLUG Revenue (Annual) data by YCharts.
On one hand the company has reported impressive revenue growth of nearly 268% from fiscal year 2011 to fiscal year 2015; however, its success is tempered by the fact that it has continuously sold its products and services at a loss. For example, according to its 10-K, the company reported negative gross margins of 42.3%, 7.6%, and 9.6% for fiscal years 2013, 2014, and 2015, respectively.
Andy Marsh during a trip to China in September. Image source: Plug Power corporate website.
The picture becomes even bleaker when considering the operating margin, which totaled negative 57.1% in fiscal 2015.
The company's endeavors in China will certainly not do anything in the immediate future to remedy these problems. If all goes according to plan, the company will have 13,500 vehicles and a fueling station network deployed by 2020. Although this will provide a bump in the company's top line, it's unlikely that the company will have achieved any economies of scale in the new market, suggesting more negative margins are on the horizon.
Another hydrogen hopeful
Plug Power isn't the only fuel-cell specialist looking to seize the burgeoning opportunity in China. In September, Ballard Power Systems (BLDP +2.02%) announced the commissioning and deployment of 12 fuel cell-powered buses in the city of Foshan, in the Province of Guangdong, China. According to Ballard, this is the initial deployment of a planned 300 fuel cell-powered buses.
Having begun its work earlier than Plug Power, Ballard acknowledges that its successes in China over the past year transcend the initial bus deployment. According to a recent press release, they include a variety of accomplishments: the localization of Ballard-designed fuel cell engines, establishment of a fuel cell bus manufacturing facility, local procurement activities, development of systems integration capabilities, national permitting of a fuel cell bus platform, preparations for hydrogen refueling infrastructure and development of our China service team.
Although its focus is different than that of Plug Power -- which remains focused on delivery trucks -- Ballard's endeavor illustrates how the Chinese government's fuel-cell initiative will attract many companies, some of which may pose a material threat to Plug Power's success.
The takeaway
Plug Power's interest in the Chinese market should come as no surprise. While the U.S. government's support of the fuel-cell industry remains tenuous at best, the opportunity in China seems ample, and the government seems enthusiastic about facilitating the development of hydrogen power solutions.
Unfortunately, this should not translate to profits anytime soon for Plug Power, and investors must temper any optimism with plenty of skepticism. This development in and of itself is by no means reason enough to base an investment. Instead, the wisest approach for investors who find this development compelling is to wait and see if the company achieves the initial goals of the collaboration in the coming year: the delivery truck prototypes, the additional 500 trucks, and the fueling station network.
