In this week's episode of Industry Focus, host Nick Sciple and Motley Fool contributor Tim Beyers take a deep dive into the battery industry -- where it is, where it's going, and what investors need to know to make smart buys in the budding sector.

Find out why there's so much buzz around lithium-ion batteries, why the cobalt market is heating up, how China got to be the lithium battery giant of the world and what that means for U.S. battery makers. Plus, is Tesla (NASDAQ:TSLA) worth investing in for battery exposure? Besides EV (electric vehicle) makers, who else will be buying these things? What are some of the most exciting battery companies for investors to add to their watch lists? What are some of the lowest-risk ways to buy in? Listen in to find out more.

A full transcript follows the video.

This video was recorded on Jan. 24, 2019.

Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, January 24th, and we're talking batteries. I'm your host, Nick Sciple, and today I'm joined by Motley Fool analyst Tim Beyers via Skype. How's it going, Tim?

Tim Beyers: I'm doing well, Nick! How are you?

Sciple: I'm doing great, Tim! I'm happy to have you on today to talk a little bit about batteries. On this show over the past few months, we've talked about a lot of trends that, at the end of the day, depend on batteries. We've talked about micromobility, we've talked about renewable energy, we've talked about electric vehicles. At the end of the day, all of those industries in one way or another are dependent on batteries, whether it's energy storage for renewable vehicles or batteries themselves, to go into the battery packs that power electric vehicles and those micromobility solutions.

Tim, off the bat, as we look at the way batteries are evolving and becoming an even more important part of our economy and the services that people want, what's your view on the role that batteries are going to play, as part of business in general, over the next five years or so?

Beyers: I think they're part of the picks and shovels of future business that's data-driven, electrified. The grid that we have five years from now probably is going to look materially different from the grid we have today. And a lot of that, let's just be honest, is driven by electrical vehicles. But the increasing demand for batteries and for the primary element in batteries that we're seeing today, which are called lithium-ion batteries -- essentially, that uses the element lithium to capture ions, capture electric particles, and turn them into usable power. For example, in a Tesla battery, you have lots of little lithium-ion batteries stitched together to make one big battery to move a car.

Over the course of the next five years, it does look like this is going to grow 10% to 15%. I think that's a sustainable number over the course of the next 10 years. But at least for the next five years, that's what we're looking at.

Then, in terms of where we're seeing this, there are different companies that are tying up and recognizing that batteries are very important. For example, in June, GM and Honda announced a partnership. Honda is going to buy battery modules from GM. They have some battery manufacturing, actually, in Michigan. They're looking for better performance, longer range, all the things you would want. We used to talk about things like fuel economy. Basically, this is like battery economy. That's what this partnership was built around. The recognition is that the better you make a battery, the better you can make an electrical vehicle. The same is true for everything where there is a battery at the heart of it, like data centers or a grid, or even a corporate headquarters where you want to have some kind of disaster recovery plan. With so much power and computers, LED lights, things like that, you might have some kind of electrical generator that's powered with an advanced battery.

This is all part of, I think, a much bigger movement to make effective and efficient use of electricity, an important part of how we do business in the future. GM and Honda aren't the only ones. Toyota and Panasonic are doing this. Ford and VW are rumored to be expanding in this area. It's primarily EVs, but that's not the only thing that's driving this demand.

Sciple: Sure. As you look at battery demand, it looks like a classic exponentially increasing curve, just going straight up and to the right, the growth increasing year over year in exponential fashion. Leading up to today, we've seen most of the demand for batteries coming from our devices, like our smartphones and things like that. But as we're moving out, as you mentioned, EVs are going to be the driver of demand for batteries. Goldman had some numbers out, they're projecting about 55% of the lithium-ion battery market will be controlled by EVs by 2020. Another thing you mentioned is that stationary storage. We're expecting that to start catching up with devices when it comes to how much of the battery market is controlled by those things. We're really seeing batteries emerge as an important part of the economy when it comes to both energy production and transportation. It's definitely going to be an important thing to follow going forward.

As we talk about batteries, it's important to communicate what exactly a battery is and how it works. The simplest definition of what a battery is is that it's a device that is able to store electrical energy in the form of chemical energy and convert that energy into electricity. Like Tim said a minute ago, you'll have different chemical substances in the battery which then exchange electrons across the battery cell, which exchanges energy. The main parts of a battery are the cathode, which is the positive terminal of the battery; the anode, which is the negative terminal of the battery; and the electrolyte. What happens is, electrons flow from the anode, the negative terminal of the battery, toward the cathode and create a closed circuit.

Right now, the most popular batteries today for all the main applications that we're talking about are lithium-ion batteries. What that means is the lithium is the material that is in the cathode, in the positively charged side of the battery. That's what's used to exchange electrons across the system.

Tim, what's the real appeal behind lithium-ions right now? Why are we seeing them as the default when manufacturers want to make these large batteries, whether it's in your phone or an electric vehicle?

Beyers: Well, first of all, it happens to be that there's a fair amount of lithium available. But it's also very thin. It's very light. A classic alkaline battery in a car is called a lead-acid battery. It's very messy, it discharges a lot of electricity. Not very efficient. Whereas a lithium-ion battery holds its charge for quite a long time. When you charge a lithium-ion battery, whether it's inside your iPhone or in a Tesla car, you can be fairly secure that the charge you put in, most of it is going to stay there until you use it, unless for some reason the battery itself has gone faulty. But for the most part, a lithium-ion battery is very, very efficient, much more so than the classic alkaline battery, which is not rechargeable like a lithium-ion battery is, or a lead-acid battery, which is rechargeable, but it's consistently recharged. In the case of a car, when you drive, you're literally recharging that lead-acid battery. But after a while, because you keep going and going and going, even that's going to lose its charge because it's just not that efficient.

A classic example of this -- and we've all done this, so there's no judgment -- you leave the lights on in your car overnight, and the next day, you can't turn on the car. You've wasted the battery. That's an example. A lithium-ion battery would not just sputter out if you left the lights in your Tesla on overnight. I don't think Tesla even allows you to do that, but let's just say for the sake of argument that you did. That's the difference between a lead-acid battery or an alkaline battery and a lithium-ion battery: straight-up efficiency.

Sciple: Sure. In addition, you get some advantages with energy density. As you mentioned, it doesn't discharge itself, so sometimes you'll have issues where you'll leave a battery and not use it over a period of time, maybe you come back a week later and 20% or 30% of your charge has gone down on the battery. You don't have that issue with lithium-ion batteries. Another thing we think about -- a lot of times you hear about -- you want to let your battery go all the way down to zero and then charge it up to max, otherwise you're going to lose capacity in your battery. Lithium-ion batteries don't have that problem. They don't have this memory effect, where they remember how much of the battery you use, and the battery degrades over time. There's a lot of advantages to using lithium-ion batteries, which is why they've become a large part of the battery market, and looking to be the dominant force when it comes to batteries moving forward.

When we talk about how important this is, lithium as a material to make these cathodes in these next-generation batteries, let's talk about how we even get lithium in the first place. When we look at production sources back in 2017, it's split between lithium produced from brine ponds predominantly in South America in Argentina and Chile, and also production from mineral rocks in Australia, China, Zimbabwe, and Portugal. Just a brief background on these. When you're mining lithium from a brine pond, it's basically removed through normal natural evaporation of the water from the brine, and you extract the lithium and other materials. It's probably the cheapest and simplest way to extract lithium, but it can be time-consuming. A stat that I saw was it took eight months to two years to extract lithium in that way. When you produce lithium from mineral rocks, there are some advantages. I believe you can get more concentrated amounts of the metal when you mine. But, it's more expensive to extract lithium this way, and also has some environmental impacts.

The important thing to note about lithium is that China really dominates the market globally. Do you want to talk a little bit about that, Tim?

Beyers: Yeah. Roughly half the market, in fact. China has a lot of natural-resource issues. For example, they don't have very much in the way of oil reserves, so they're dependent on their neighbor, Russia; they're dependent on the Middle East in some ways. Even us, we have some advantages there, because we have more oil reserves than the Chinese do. But, boy, they have a lot of lithium. Most of it, I believe, is mineral-rock lithium. They have lots of mining. This is really good for producing lithium-ion batteries.

There are several companies, Chinese companies, native companies, that are making their name in the lithium business. One of them, for example -- I'm probably going to butcher this name, my apologies to the listeners -- Tianqi Lithium. They recently paid more than $4 billion, they have that kind of cash, to become the second-largest shareholder in Sociedad Quimica y Minera -- let's just say SQM. It's a Chilean mining company.

This is one of the largest lithium aggregators and producers in the world; that's really the important thing to remember here. It's a Chinese company. Really, when we're making lithium-ion batteries here, or we're importing them, in a lot of ways, we are subject to how these Chinese companies are willing to deal with us. That's true in other countries, as well. There hasn't been a lot of talk about the impact of the trade war on this, because it's such a popular element. Of course, China wants to be selling this as much as humanly possible.

In their home market, because lithium-ion batteries are key to electric vehicles, it's a very big advantage for them to be able to have this much native production of lithium and be able to make lithium-ion batteries for EVs or electrically powered buses, remaking the grid, things like that. China has a homegrown advantage in this area. So, when you're looking at this as an investor, it's natural to be taking a look at China.

Sciple: Right. When you look at China, they've been wanting to push more toward cleaner energy, given their pollution issues, as well as you mentioned they've been able to make investments in lithium-mining facilities in both South America and Australia, to get a big bite out of the market outside of China. In addition, they're relatively weak when it comes to supplies of hydrocarbons, like maybe oil or natural gas. However, China comparatively has a pretty robust lithium reserve that they haven't dived into in a significant way, as they've locked up supply elsewhere. You can see both their natural-resource positioning draws them toward lithium, as well as the emphasis on clean energy. This is definitely a point of emphasis for China. We'll discuss later that China controls a large part of both the demand side when it comes to the battery markets in EVs, as well as the supply side.

The other thing I want to talk about -- we mentioned lithium and China's role there. Let's talk about cobalt. Cobalt is another element of a battery, which is pretty significant. It's expensive, which is why you've seen a lot of battery manufacturers try to bring down the supply of cobalt. However, even with efforts to do that, cobalt is still expected to increase in demand by between 10 and 25 times current levels by 2030, with over 50% of that demand coming from batteries. Even though folks want to get cobalt out of the battery, it's really important when it comes to both the longevity of the battery -- being able to charge a battery to full and then use its energy and recharge it -- cobalt helps to maintain the stability of the battery, as well as from a safety perspective; as you decrease the amount of cobalt in the battery, you necessarily have to increase the level of nickel in the battery, which increases risks of overheating and fires and things like that. So, it's a really important input toward batteries that maybe is under-recognized.

The IEA [International Energy Agency] has noted there's some risk when it comes to the cobalt supply, in that about two-thirds of the global supply of cobalt is sourced out of the Congo. The Congo is a country that, No. 1, it's remote, it's in Central Africa; but No. 2, it has a history of political instability. The IEA has called out that that could be a risk to cobalt supplies going forward. Something to keep in mind.

Again, when it comes to cobalt, China has a significant position in that market. I believe they control eight of the 14 largest miners in the Congo. They also account for 90% of the production of cobalt-related chemicals -- you have to take that metal out of the ground and then refine it into something that's usable for your battery.

Taking China's position in cobalt, and layering it over with what's going on with lithium, what are your thoughts on that nation's efforts to lock down and get their fingers in the supply for these important inputs for lithium-ion batteries?

Beyers: It helps them be a key player in this market going forward. When you look at how China has locked up parts of the supply chain, both on the supply and the demand side, like you were pointing out, Nick, what it means is that whether you're talking about cobalt for stabilizing the battery -- a brief interlude of history here. Cobalt is a stabilizing agent in a lot of ways. In fact, it used to be the principal stabilizing agent in nuclear power plants, or one of the key stabilizing agents. This is something that is industrial-grade even though it's expensive. That's one of the reasons it's expensive, because it's industrial-grade. It has long life, it has a lot of uses. But we're going to use it up pretty quickly, I would say, as demand for electric vehicles grows. So, there's this movement from Tesla and others to reduce their dependence on cobalt, not just because of the China chokehold, but because of the expense of building a battery that is very stable, not flammable (or at least less flammable), because of using cobalt in combination with lithium. This is one of the areas where China is very cagey, very smart. They do have a little bit of a chokehold on this.

So, as the electric-vehicle market grows, as it becomes the principal standard, it becomes where you have a need to figure out which of these parts, where you're going to get them from, and who's going to be single-source suppliers. And right now, it's looking very much like the China market is where we'll be going to, unless Tesla has immense success with the Gigafactory, something they have out in Las Vegas. But here in the U.S., we have very little lithium. Lithium is not a big natural resource here in the United States. When you're looking at alternatives, there are things like nickel -- manganese is another one. As you look at different ways to produce cathodes to go with that lithium anode, there's a strong interest in moving away from the strongholds that China has built up some reserves around.

Sciple: Sure. There are some explorations into: Can we replace lithium in the cathode with aluminum? I want to call out: The lithium goes in the cathode side of a lithium-ion battery. The anode, predominantly at this time, is graphite, which...surprise, surprise: China in 2017 had 65% of the global production of graphite. So, on both the cathode and anode sides of the battery, China's had a major presence there.

On the anode side, we have seen some exploration into -- maybe we can replace the graphite with aluminum that can hold more lithium ions. There's definitely been some exploration there. But I don't think any of those technologies are ready to reach commercial scale right now. What's important to take away from the macro perspective is, as we look out into the battery market, at least in the near term -- when I say "near term," the next three to five years -- it's going to run through China in some capacity or other. The leading EV battery formula that's being used right now is a nickel-manganese-cobalt-oxide cathode. China controls 57% of the production there. When you talk about having significant control of the inputs when it comes to lithium and cobalt, when it comes to the refining capacity for cobalt, I think they have 80% of that capacity, to put that cobalt into the chemical form needed to put it into the battery. And then, on top of that, they have a majority share of manufacturing of those cathodes that go into the main lithium-ion batteries. And about 40% of EV demand by 2040 is what the IEA is projecting China to control.

So, as I mentioned earlier, when you're controlling all the steps in the value chain from a rock coming out of the ground all the way down to an EV driving off the lot, at least in the near term, it appears that China is going to have a very important role there.

All right, Tim, let's talk about a few companies that catch our eye in the battery space. First off, you wanted to share a little bit of a cautionary tale, a little bit of a "tread lightly" story. What's the company you wanted to mention when it comes to that in the battery arena?

Beyers: It's A123, which is now a subsidiary of Wanxiang Group in China. They were a very hot public company several years ago, back around 2010. They were a maker of lithium iron phosphate batteries. This was before Tesla was the big maker of lithium-ion batteries here in the U.S. A123 was a public company that was purporting to be a battery supplier, and had rich contracts in China to make these very useful batteries. Unfortunately, even after they wrote a contract with Fisker Automotive, which was a competitor to Tesla a few years ago, there was a recall on their batteries. That recall essentially just ended the dream for both companies. They were acquired for pennies on the dollar. I'm talking both about A123 and Fisker, which are now both part of Wanxiang. They're bit players now, but for Wanxiang, this is one of those Chinese companies we were talking about earlier which has parts of the supply chain that they're stitching together. As the homegrown market for electric vehicles improves, you can bet that this company is going to take some of that intellectual property and see how they can leverage it for their own vehicles using the Fisker brand. The A123 brand is still around.

This is a classic case of where you don't really know. Even if the opportunity is very clear, it can be hard to determine who the winners are going to be. And sometimes, what you want to look for are things like what kind of R&D [research and development], and what are you seeing from that R&D [that's] going into each of these companies. We're still kind of early, Nick.

Sciple: Yeah, we are, Tim. Another thing to mention, too, when you're talking about a market as global as batteries, and when you're talking about inputs like lithium and cobalt, this is a market that's probably going to be commoditized relatively quickly. Particularly as we see more supply come online to try to meet this demand, it could be a little bit of a roller-coaster ride when it comes to some of these companies. You want to make sure you invest in a company that really has some competitive advantage, whether it's from a management perspective, being able to ride the ups and downs in the market and continue to keep moving up and to the right; or, as you mentioned, a company that's really innovative and can stay one step ahead of the competition doing something unique that no one else is doing. If you can't identify either of those, it's probably a stay-away in a market as nascent as this.

Let's talk about the company that everybody thinks of first when it comes to EVs, and probably when it comes to batteries: Tesla. Through their partnership with Panasonic at the Gigafactory in Nevada, they produce a large share of the world's EV batteries, at least the production that's available today. When you look at Tesla's battery business and where it fits in the context of the business as a whole, what do you think the opportunity is there? What stands out to you?

Beyers: What stands out to me -- let's start there. Tesla is a volume producer. What I mean by that is, they're taking individual lithium-ion batteries. The way that they make them is a little bit different than some others. Like, they use a combination of lithium, nickel, cobalt, and aluminum, so their cathodes are a little bit different than standard. That's probably smart. As you're inserting aluminum (you mentioned aluminum earlier, Nick), aluminum can be a very useful conducting agent. It's very plentiful in the earth, but it's unproven right now in this particular part of the market. I think there's some real opportunity there, so it's nice that Tesla's trying this. But basically, they're taking a lot of batteries, stitching them together, and making a very big battery.

What's very interesting about Tesla is, as they continue to experiment with this -- and this is where I think the real long-term opportunity is, it's certainly in the vehicles -- but if you look at where they did a very big experiment in the Australian outback and made a very stable power plant overflow, they were rolling blackouts throughout parts of Australia because the grid had proven to be unreliable. Correct me if I'm wrong here, but I believe they went out and built this battery backup plant that could be an overflow for the grid. And it's essentially all Tesla batteries. They're built with that same lithium-ion technology; it's renewable, it's storable. It's a test case for what you can do, as part of remaking a grid, with things like lithium-ion technology. And it's proven to be very, very successful in Australia. That does not mean it's going to work everywhere, or that it's something that you can do at scale. But every experiment that Tesla conducts in this area, to either increase the efficiency of a battery or to increase the viability of it at scale, creates a whole new infrastructure, potentially, for power and power usage, from data centers to electrical vehicles to the grid. Tesla is unique in playing in a lot of these areas. They do report things like their storage-product performance. They have solar energy products. They're very much involved in the entire ecosystem, and they're unique in that way.

Now, Tesla has some problems, specifically some management problems. But given their position, and given what they're trying to do, it will take them a while to get over on the infrastructure. But I do believe that they're uniquely positioned, more so than any other company, and are playing in areas where others just are starting to experiment. And that's highly useful. I like Tesla at these levels because of that level of optionality. But I recognize that there are some challenges ahead for the company, too.

Sciple: Yeah. I want to call out a few things on Tesla, maybe get your thoughts on some of those things that you mentioned. I want to call out Tesla's battery production. They're taking a different tack than the rest of the market, both the battery chemistry -- they've been able to bring the cobalt input in their batteries down as low as anyone else on the market, which has helped them bring down the cost of their battery packs. They're also making batteries in a little bit different way than the rest of the automotive market has been pursuing. Tesla makes what are called cylindrical battery cells. They look cylindrical, it looks like the battery that you might put in your remote control, or any like that. Those are the individual cells, and you wire a bunch of those together, and that becomes the battery pack for a Tesla vehicle or their energy-storage products or anything like that.

That's different from what you've seen from the rest of the automotive market, focusing on prismatic batteries. The latest deal we've seen addressing prismatic batteries has been the deal between Toyota and Panasonic, where they're going to have a joint venture of 51% owned by Toyota, with the rest owned by Panasonic, to manufacture these prismatic batteries. When I mention Panasonic, I wanted to bring this up to you, Tim, and get your thoughts. As Tesla is building its new factory in China, there are talks that its exclusivity deal with Panasonic is going to go away and they're going to move toward more Chinese suppliers. It had been that their key partner on the Gigafactory was Panasonic. They put in about $1.6 billion into the facility. We're seeing that partnership maybe splinter a little bit, or maybe see a gap forming between those businesses. What are your thoughts on that relationship between Tesla and Panasonic entering in[to] a different dynamic?

Beyers: I don't think that's surprising. The reason I don't think that's surprising is: Tesla doesn't have much choice other than to play China's game. They don't have a very well-constructed balance sheet right now. They have a lot of debt. They're just starting to generate cash flow. You can't really name your terms when your balance sheet is a little bit weak, and Tesla's balance sheet is a little bit weak.

They're starting to set up a factory there. There's two things at play. First is a little bit of nationalistic spirit. Whether you think the president is right or wrong on the trade war, it has inspired some moves by Chinese regulators to start thinking about, "How can we make sure we use more homegrown technology?" That applies all the way from chips right down into batteries. Also, recognize that in China, which could be one of the biggest EV markets in the world in just a few years, Tesla has a lot of competition already. For example, there's a company called NIO that's basically building the equivalent of Tesla's lower-end EVs, the Model 3. They're purporting to build those right there in China. They also have U.S. facilities that they're ramping up right now.

To the degree that Tesla can make friends with local Chinese suppliers, the more success I expect them to have in the Chinese market. In that sense, looking beyond the Panasonic relationship makes a ton of sense. Having said that, it's a risk. Panasonic knows Tesla very, very well. They've worked together for years. Building an entirely new supply chain is not easy and it creates risk. In the case of Tesla, we probably all remember when Elon Musk got spellbound by automation, tried to remake the production lines, and it led to a real disaster in terms of production for the Model 3. Any time you're rethinking how you make componentry and how you source componentry, you're introducing risk. But in this case, I think it's a risk worth taking.

Sciple: Tim, last thing on Tesla. For me, when I look at the company -- I know a lot of folks really like the opportunities and the optionality behind it. For me, those questions about competition, and those questions about what's going to happen in China and abroad, are really something that makes me want to stay away from it. I couldn't see myself putting money to work there.

When it comes to the amount of vehicles they're pumping out relative to major automakers, it's really not there. They're only on the high-end, luxury side of the market. With EV tax credits starting to roll off, and competition really coming online, the two places they're going to search for demand -- as demand on the high end, maybe, has got pulled forward, as EV tax credits were rolling off at the end of 2018 -- the place[s] Tesla's really looking for demand [are] in Europe and in China. And that's where there's really a lot of competition online. Particularly in Europe, you've got things like the Porsche Taycan, the Jaguar I-PACE, numerous competitors coming online that will be able to compete with Tesla on price as well as features. Again, we look out into China. For China to make a meaningful impact on Tesla, they have to get this Gigafactory in China up and running quickly. Given their track record on ramping up Model 3 production, I'm not particularly confident they're going to do that, especially considering that their facility where they're going to do construction, last I saw, it was a dirt lot six weeks ago.

I don't know how you're going to get to a global-quality production line, in a country you've never done business in, at scale from zero quick enough -- particularly when you've got things like a $900 million convertible note coming due in March, and all these tax credits beginning to roll off, and them having difficulties making profits even with those tax credits assisting those price points for their customers. So, for me, there's a lot of question marks. I don't know how I'd invest in it. At the end of the day, I think they're still a car company. Despite whatever presence they have in batteries, you have to look at the core car business first before you decide how to invest. Reasonable opinions may differ on this business, but it's one I want to shy away from personally.

Another company you wanted to talk about, Tim, was EnerSys (NYSE:ENS). This is a relatively small-cap company, $3.5 billion market cap. It has background in traditional lead-acid batteries used in automotive, but they're starting to move more into backup power plants for renewables from a battery perspective. What do you like about EnerSys?

Beyers: This is very different from Tesla. Tesla is highly leveraged, like you mentioned. I want to quickly say, I wouldn't get too hung up on that convertible. The odds are, those notes are going to convert.

Sciple: You think they're going to get $360 by March?

Beyers: Will it hit $360? I don't know. But I do think those notes are going to convert. I also think that if they don't convert naturally, there will be a deal to convert those. I sincerely doubt that Tesla is going to be called to the carpet to come up with $920 million in cash. They might! They certainly might. But I would expect dilution more than I would expect any kind of cash crunch there. I just don't think that makes sense for the creditors, and I don't think it's going to happen.

Having said that, EnerSys doesn't have that problem. But EnerSys also is doing the opposite of Tesla. They're trying to milk the battery market instead of reinvent it. Tesla is taking a lot of risk by putting a lot of money to work in R&D and trying to reinvent the battery. It really isn't about the cars with Tesla, it's about the battery. If they do reinvent the battery and they can produce them at scale, nothing stops that company. If they don't, then there's nothing that will save that company. It really is a binary future in that way, as I see it.

EnerSys is sort of a roll-up company. You mentioned that they they're getting into things like backup and renewables. That's primarily due to acquisitions. One of the most recent was for Alpha Technologies. Alpha has some alternative ways to build batteries, like fuel cells. Fuel cells are similar to renewable power in the sense of...a classic fuel-cell setup would be a hydrogen battery. You have an element that needs to be controlled, stabilized, but can produce a lot of power durably over a long period of time. Hydrogen is that kind of element. Alpha Technologies built batteries around creating fuel cells that have durable life. They're very, very good at things like backup sources for disaster relief, or for backing up a grid, or for backing up a critical data center operation, things like that.

What I like about EnerSys, Nick, is that because of that position with Alpha Technologies, they have a durable position they can lean on for a really long time. That backup power is going to be necessary. And it's getting increasingly so. I don't expect this to be a high-growth business, but it's only a $3.5 billion market cap. It doesn't need to grow at an exceptional rate to deliver returns to shareholders.

But a roll-up -- there are some risks to that. Recognize that this is a company that's stitched together. It's not organic growth. It could present some problems over the course of time as demand increases.

Sciple: Yeah. Definitely one to watch. Another one we've mentioned that's in that backup-storage space on this show is Enphase Energy (NASDAQ:ENPH). Another interesting company. They do micro-inverters for solar and renewable-energy generation. They're starting to branch out into storage. I think when you have those connections with a business line where it looks like there's some synergy down the supply chain to provide additional services, in addition to what you've already been providing, that's definitely an interesting way to play it.

Let's talk about the company that I'm most excited about, or most interested in when we look at batteries: BYD, out of China. Probably the way most folks have heard about BYD is that it is a Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) investment. I believe they invested maybe 10 years ago, a long time ago when it was a much smaller company; it's been one of Berkshire's best-performing businesses. Warren Buffett would be the first to tell you he had nothing to do with it, it was all Charlie Munger. It's really been an impressive company. It went from basically a standing start at zero to now, one of the largest battery manufacturers in China. What do you like about BYD?

Beyers: What I like about BYD is they have a history. You mentioned that Berkshire invested many years ago. They have 17 years under their belt of making different types of EV batteries. In their home market, where demand is highest, they're the unequivocal leader. That creates a huge, huge moat for them. As demand for EVs spikes, BYD is positioned to be the primary supplier to those EV makers for batteries. Tesla might be the lone exception, although I would not at all be surprised, as those Gigafactory investments begin, that there's a tie-up with BYD. That wouldn't be surprising at all. That's local expertise, and that's something that could ease the path to approvals for Tesla in China.

I would say that's a potential catalyst. I wouldn't rate it highly. I don't think BYD needs that as its catalyst in order to generate returns for shareholders. Again, they're the biggest maker of alternative-energy vehicles. They've basically transformed themselves from a maker of cellphone batteries into a manufacturer of industrial-grade batteries for electric-powered cars and monorails. In that way, they have the favor of regulators. China is battling pollution in many of its biggest industrial capitals, not just Beijing. You're talking about Shenzhen and Shanghai. And I believe that BYD is headquartered -- I may get this wrong, Nick -- I thought it was Shenzhen, but I'm not entirely sure. Regardless, the point is that BYD has a history. They have a big market in front of them where they're the primary player, which gives them a moat. And they have regulatory blessing, which is always huge in China. This is the biggest market in the world, and they're the biggest player. That's a deep pool to swim in, and they can create long years of profits. I really like this company for that.

Sciple: Sure. BYD is not a company I'm intimately familiar with, in[side] and out. But any company that Charlie Munger can get excited about is something that I think is worth any of us paying attention to. He's spoken as admirably about BYD as I've heard him speak about almost any business.

The last company I want to talk about -- if you notice, we've gone from, at least in my view, the riskier investments down to the safest one. I think one of the safest investments in the stock market, if not in the battery market, is Berkshire Hathaway. We already mentioned that Berkshire Hathaway has a significant stake in BYD. I saw some numbers from Bloomberg suggesting it's almost a quarter of the business. It's their largest foreign investment to date. So, you get some exposure there. As well, Berkshire has some exposure to some U.S. lithium reserves. There have been some rumors being bandied around recently with regard to what the future might be for them. Do you want to talk about what that news is, and what the rumor mill is suggesting when it comes to Berkshire and lithium?

Beyers: Yeah. It's BHE Renewables, Berkshire Hathaway Renewables is a subsidiary. They have contracts for mining lithium in California. There was a story in The Financial Times about a deal to supply what lithium they could extract from that mine to Tesla for as much as $1.5 billion annually. That would be material, that would be a very big win for that subsidiary. But this is different technology. I think it's fair to say -- we talked about this before going on air, Nick -- just as there was a shale business, where oil makers would go out to the fields in South Dakota and other parts of the West to extract oil from the ground in a different way than the traditional pools of under the water or under the Texas sand, and so forth -- this is a little bit similar. You use geothermal technology to go in and identify and extract lithium.

If Berkshire Hathaway was able to do this well, it would surpass the annual output from big global producers like SQM. It's very interesting. It could be a catalyst. But first of all, we don't know that it's real. Berkshire itself has said that there's no deal yet with Tesla. It's interesting, it could happen at one point. I think it's likely to happen at one point because we don't have any other options here in the U.S. Right now, we're getting lithium supply from overseas. Having a homegrown supplier makes a lot of sense. But nothing is set yet. Until something is set, it's all rumor and speculation at this point. The good news is, there's never a bad time to invest in Berkshire Hathaway. It's one of the most stable, most interesting companies in the world. It's exceedingly well-run. Insiders are buying shares. When insiders are buying, and Warren Buffett has authorized a big repurchase of Berkshire's own stock, that tells you quite clearly that some of the best investors in the world think their own stock is very cheap. That's a pretty good signal. You don't need that catalyst to profit from Berkshire's stock, but it's nice to know you have at least a couple in that BYD stake and the potential for a nice lithium strike from BHE Renewables.

Sciple: I agree with you on everything, Tim. Going back to that analogy with fracking, we've known that these lithium supplies have been available in these geothermal brine pools for decades, but we haven't had the technology to be able to access that. We don't know whether this Berkshire deal is ever going to materialize, whether there's new technology available or expertise available that they're going to use in whatever thing they may attempt that may finally make access to this resource available. But given the increase in demand that we're expecting to see over the next few years, I think we're definitely going to see some people try. It's an interesting opportunity.

Berkshire has some other assets that I think make some sense when you start looking at an EV future. You look at an acquisition like Pilot Flying J -- they acquired them last year or the year before -- a major truck-stop operator. When you think about what it takes to recharge an electric vehicle, to go from zero to full, you're looking, at minimum, half an hour or so. If I'm on the highway, I'm going on a road trip and I want to stop and recharge my vehicle, I think I would much prefer to stop at the service station that maybe has a little bit nicer bathrooms, has a restaurant, has food, has a full, built-out convenience-store aspect to it. I think there's some optionality in parts of Berkshire's subsidiaries where you can pull a lever and really appeal to the way EVs are materializing in the future.

You talk about exposure to BYD, talk about exposure to lithium, talk about some assets that could be directed in a way that makes sense for EVs. And it's Berkshire Hathaway. It's an investment that you're not going to go wrong with. It'll be interesting to see what happens with them and the rest of these folks going forward. That'll be something we have to watch and follow. We'll talk about it more on the show, I'm sure.

Beyers: Absolutely. I'm very interested in what Berkshire does with this. Think about this. A parting thought in terms of where this is going to present next in the U.S.: What's brilliant about that Pilot Flying J acquisition is that, of alternative fuel as we have it today, we're only talking about diesel, but diesel is an alternative fuel. When you can commercialize and get high-performance, long-haul, quality electric batteries and put them in trucks, you'll know this is for real. That's the signal. When Volvo, which is a big truck maker, or Peterbilt, they come out with a viable electric engine that can go 600 miles, 800 miles, 1,200 miles, and pull a load with it, you'll know this is here to stay.

Sciple: Yeah. I don't think there's any doubt it's going to be here one of these days. It's just a question of how quickly it's going to come online. We've talked about some of the things today that need to occur to put things in motion to make that happen. We'll continue to follow it. Thanks for coming on to talk to us about it, Tim! We'll have you on later to continue to monitor.

Beyer: My pleasure! Thanks, Nick!

Sciple: Thanks to you as well, Tim! As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass. For Tim Beyers, I'm Nick Sciple. Thanks for listening and Fool on!

Nick Sciple owns shares of Berkshire Hathaway (B shares). Tim Beyers owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Tesla. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.