VC land a coup & A123 loses its CFO

Black Coral Capital, Flybridge Capital Partners, Stata Venture Partners landed a coup when they announced that A123 CFO Michael Rubino was going to join their venture backed firm Digital Lumens.

A123 – The consequence
This move may be a blow to A123 but a great opportunity for Digital Lumens. We wrote about ‘The Past, the now and the future of A123‘ earlier this year. With Michael Rubino leaving we feel that A123 has a lot to answer for. A123’s share price is down some 40% since IPO and the future path is somewhat in limbo. Losing a senior executive certainly adds to the uncertainty. Thus it is not surprising that Wunderlich Securities downgraded the stock. The new target price stands at $6! Now, for a company that was never profitable $6 may be considered good (remember those dot.com valuations?) but it certainly does reflect that the growth trajectory and EV/PHEV adoption curve is likely to be slower than anticipated. Arguably, we could see the stock trade lighter than current levels. However, at some point we would think that some large automotive players East (SAIC) or West (VW, Daimler – Smart) may have an interest in looking at the company.

The hard facts are bleak: A123 posted a loss of some $44m, with revenues at $26m. A turnaround seems still some quarters away.  A $6 share price doesn’t sound too bad when compared to our dot.com friends who may have had similiar costs but nowhere near as interesting revenues.

How does A123 business success relate to the EV sector? One of the interesting electric vehicles we have looked at is Th!nk, the Norwegian EV producer. (A HBR case study can be found here; paid content.) In May 2010, Think  presented an update on its business. It essentially announced that another $40m of equity was provided by the existing shareholder base. Moreover, the company projects that it will be cash-flow positive by 2011. A123, Enerdel (promo video) and Zebra will provide batteries ranging from 18 Kwh to 28 Kwh.

Think and Deutsche Bank provide a chart (see above) that summarized EV model releases over the next few years. So is A123 depending on the speed up model ramp up or are EV manufacturere depending on battery capacity? The interdependence is obvious and securing battery supply has long been a key battle ground.

Digital Lumens – Opportunity in the LED & SSL space
Digital Lumens operates in the energy efficiency segment which we consider is more attractive in the near term than betting on technology backed companies alone. Rather, the opportunity to replace existing stock with better materials seems obvious and makes both commercial and ‘green’ sense. LED lighting in particular appears to be attractive for its energy savings potential. The Department of Energy (DoE) has set up the Solid-State Lightening initiative (SSL) that proposes that it can cut US energy lighting usage by 25%. In March 2010, the DoE published a Muli-Year Program Plan for SSL. The report states that ‘[t]he global lighting fixtures market is expected to reach $94 billion by 2010, and SSL is expected to play a substantial role in the market by that time. Sales of high-brightness LEDs (HB–LEDs), the technology associated with LEDs for lighting applications, were $5.3 billion in 2009.” Siemens‘ Osram’s Sylvania program notably focuses on SSL.

Khosla Venture and General Catalyst have both been active in the LED space: both funded LumenZ, a Boston based University start-up. Checking on Khosla’s website, we fail to find it in their Portfolio section. However, in a presentation delivered in 2009, it is still in the portfolio. Highland Capital Partners made an investment in QD Vision. QD’s pitch is interesting ‘QD Vision is developing quantum dot solutions for efficiently backlighting mobile phones and other mobile displays, as well as LCDs for desktop and notebook computers and LCD television screens. These initial applications alone represent an addressable market exceeding $2 billion by 2014 for quantum dot-based components’. According to some news sources, QD Vision has raised a total of US$33m to date.

Overall, as costs of LED is coming down the adoption curve is likely to increase significantly. For now, technology hurdles, costs, and general consumer/ commercial acceptance are issues that need to be addressed.

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Liquid Assets – Media Update

We just saw CNBC’s Liquid Assets – Big Business of Water (opens CNBC video, 42:43min). Although very US centric, the overall message is pointing in the right direction. The cost of water is simply too low. As Peter Gleick puts it: “An oil tanker filled up with oil may be worth $200m – $300m. The same tanker filled with water would be worth just $400’000 – $500’000.”

Another CNBC report looks at Water stocks. Debra Coy is giving her views (opens CNBC video: 04:00min). The discussion briefly touches on water rights also. Two companies mentioned are Cadiz Inc. and Pico Holdings.

Chinese 12th 5-year plan – New Energy, New Energy Cars

Are the days counted for China’s top-down macro economic decisions and for its state-owned monopolies? The next 5-year plan proposed by the Chinese Government focuses its attention on new energy and clean-energy cars. According to China Daily the government intents to ‘speed up new energy development and promote clean and efficient use of traditional energy, develop hydroelectric and nuclear power, and increase strategic oil reserves’.

Alongside new materials, high-end manufacturing, next generation information technology, and biotech,  these industries form part of the “new magic 7” emerging strategic industries. (The old magic 7 consisted of national defence, telecom, electricity, oil, coal, airlines, and marine shipping.) It appears that the new magic 7 are more focused on bottom-up drivers and allow companies to use their ‘innovation’ process to drive capital allocations.

Ahead of the Chinese party conference, HSBC published a report titled ‘China’s next 5 year plan – what it means for equity markets‘ which investigates the new proposal in some detail. Specifically, the overall objective of the 12th five year plan (2011-2015) lies in the pro-rate increase in domestic demand to total demand and secondly, and as importantly, the overall reduction of the carbon footprint (CO2) by 40%-45% by 2020.

Source: HSBC, China's 12th 5-year plan, New Magic 7

Further, the proposal projects that urbanisation will march on. HSBC estimates that a further 200-300m people could be urbanized over the next 20 years. If the hukou or registration simplification process moves in line with this shift, the projection suggests that consumption should increase significantly. The caveat here is that the property market development should ensure that the property bubble itself can be contained and price movements are more gradual going forward.

More importantly, there appears to be a continued drive to allow private capital to compete in what once were state monopolies or controlled industries. This should be great news for China focused private equity funds. From our view, there are still many low hanging fruits to be harvested by the largest funds in the region, including John Zhao’s Hony Capital for example. The investment pace has slowed a little since 2007 but funds are still putting capital to work. We need to wait and see whether some assets were overpriced and IRRs for Investors will be meaningful. Our views is that funds that put money to work throughout business/ macro cycles will do well for the time being.

We also note the drive to reduce high pollution and high energy consuming industries. For one, any energy price subsidies should be reviewed to allow a ‘fairer’ market price. Regrettably we feel that this process will take longer than currently proposed. We see a risk that some local producers/ polluters input cost competitiveness may be at risk on the global stage. In particular, pharmaceutical, the glass and other high water/power consuming sectors could lose some of their appeal. Can the government afford this – yet?

Source: HSBC, China's 12th 5-year plan, Roadmap

Certainly, the governments objective to double or indeed triple per capita income can only be a welcomed target. With that, domestic consumption levels should raise dramatically allowing for more propensity to consume (let’s hope little will be used for gambling!). Overall, the plan is intriguing and we look forward to seeing particulars.

To sum up, the China Council for International Cooperation on Environment and Development (CCICED) suggests four scenarios for a low carbon economy until 2050. Although not that specific yet, it demonstrates the authorities focus on renewable energy and commitment to cleantech. The four scenarios proposed split into four categories: (i) BaU (business-as-usual) under high growth rate (BaU), (ii) Low Carbon Scenario under high growth rate (HCL), (iii) Enhanced Low Carbon Scenario under high growth rate (HELC), (iv) Low Carbon under high growth rate (LLC). See the link above for more details.

China’s Pathway Towards a Low Carbon Economy

China’s Pathway Towards a Low Carbon Economy

Surprise development between Tesla and Toyota

Two forces we follow closely on the blog have decided to join teams, while another partner looks on from the sidelines. No, we are not referring to Elon Musk’s wife and girlfriend, where ongoing divorce proceedings may or may not affect a Tesla IPO, but instead a partnership between Tesla and Toyota, with Daimler playing the role of existing and current partner. The deal is the single, largest clue for investors as to the future of both firms.

Courtesy Gov. Schwarzenegger's Office

Yesterday, May 20, Governor Schwarzenegger helped announce the partnership between Toyota and Tesla where the large Asian OEM is expected to invest $50MM in exchange for an undisclosed ownership percent of Tesla. Tesla will also buy a closed Toyota plant in Fremont, CA to manufacture its upcoming Model S. The partnership also extends to engineering, parts, production systems and of course, cars. Daimler AG, on the other hand, invested $50MM in May 2009 in exchange for 10% of the company and a partnership that includes the sale of battery packs. Later, in July 2009, Daimler sold half of its 10% stake to its largest investor, Aabar Investments PJSC.

A Daimler spokeswoman mentioned to Business Week that they welcome the partnership with Toyota which has shared goals and that this new agreement will not impede its previously existing relationship. For information’s sake it would be interesting to know what percent of Tesla the Toyota capital purchased so we could compare valuations however that knowledge is not public at the moment.

The focus on this deal should be on both Toyota and Tesla. This may now help answer the question about Toyota’s less than assertive direction beyond hybrids that we discussed previously.  Toyota does have an electric model planned, although it looks like a toy and has a range of 50 miles. One simply need to look at the planned Tesla Model S to see what Elon Musk’s company can bring to the table. A combination of the resources and capital from Toyota with the vision and expertise of Tesla may prove to be a very potent combination. Toyota is the world’s leading seller of hybrid cars and practically created the industry.

I’ve felt an infinite possibility about Tesla’s technology,” said Akio Toyoda, chief executive officer of Toyota, founded by his grandfather. “By partnering with Tesla, my hope is that all Toyota employees will recall that ‘venture business’ spirit.”  We too would like to see the large scale success of Toyota combined with the design, performance and abilities of a Tesla.

Tesla Model S, Range of 300 miles. This is why a deal was done! Courtesy Tesla Motors

Toyota needs help in the EV department, Courtesy Toyota

Efficiency, the alternative Alternative

Earlier we wrote about the superior returns on investment efficiency plays offer when measuring reduced energy and emissions per dollar spent. Today we tackle the question- what does a region do that is renewable energy resource poor? What if there are no windy areas? When solar, biomass, geothermal and nuclear play a limited role- how do we lessen emissions, energy use and the need for additional power plants? The answer is not a surprise- reduce wasted energy.

A recent report by both Duke and Georgia Tech Universities gives further support to the argument that focusing efforts on efficiency can have a more dramatic effect than other methods, and can do so in areas where renewables are not competitive or available. The SouthEastern US is a perfect place to focus- an area that has virtually no wind resources.

Here are the highlights from the report:

  • In 2020, energy bills in the South would be reduced by $41 billion, electricity rate increases would be moderated, 380,000 new jobs would be created, and the region’s economy would grow by $1.23 billion. (regional GDP)
  • The cost/benefit ratios for the modeled policies range from 4.6 to 0.3, with only two showing costs greater than benefits. When the value of saved CO2 is included, only one policy is not cost effective
  • The initiatives would involve actions at multiple levels (state and local, national, utility, business, and personal). In the absence of such initiatives, energy consumption in these three sectors is forecast to grow by approximately 16% between 2010 and 2030.
  • The nine illustrative policies show the ability to retire almost 25 GW of older power plants and also avoid over the next twenty years the need to construct 49 GW of new plants to meet a growing electricity demand.
  • 8.6 billion gallons of freshwater could be conserved in 2020 (56% of projected growth in cooling water needs) and in 2030 this could grow to 20.1 billion gallons of conserved water (or 45% of projected growth).

Investments of $31.5B over the 20 years (to 2030) would generate a savings of $126B (4.0x ROI.) Clearly this is a net positive investment for any region and returns numbers that most renewables currently can not beat. The nine suggested policies include: increased appliance standards, weatherization of buildings, retrofit incentives, enhanced building codes and more (see page 15 of study.) Increasing appliance standards has the best ROI at 4.6x and all of the policies together have a 3.4x ROI.

Energy Use with & without efficiency (Duke/ Ga. Tech Report)

The South consumes 43% of the nation’s electric power, 40% of the energy consumed in residences, and 38% of the energy used in commercial buildings, says the study- thus a successful efficiency policy would have a major impact on both the US as well as any other renewable resource region in the world.

One would expect resistance for any political measures that mandate clean energy requirements from areas that are not fortunate enough to have the natural resources to comply. Accounting for improved efficiency standards in commercial and residential homes is a worthy compromise that achieves the same goals as clean energy and does so, at times, at a more economical rate. Because the numbers speak for themselves, it likely is a good idea for the capital and policies to follow.