Ballard Power Systems BLDP S
September 29, 2003 - 2:55pm EST by
2003 2004
Price: 13.64 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,610 P/FCF
Net Debt (in $M): 0 EBIT 0 0
Borrow Cost: NA

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Summary: BLDP, a short sale recommendation, is the leading company working on PEM fuel cells. Fuel cells are like batteries, in that they produce electricity by chemical means, the difference being that fuel cells can operate continuously by being fed additional fuel, while a battery either is disposed of when dead, or requires recharging. There are several types of fuel cells: Ballard’s PEM type requires as fuel ultra pure hydrogen, which it combines with oxygen in the air to produce electricity and water, i.e., electrolysis in reverse. Because efficiency is high even at small sizes and there are no direct pollutants, PEM fuel cells have been touted as potentially replacing internal combustion engines in cars. Hence BLDP’s $1.25B EV, because, as we know, cash burning development stage companies are often valued based upon the size of the problem they are trying to solve, regardless of how small their chances of actually solving it.

Yes, three years ago the stock was even more absurd at ten times this price, but back then investors were told that major car companies were within three or four years of introducing commercial fuel cell powered cars. Now full commercialization is viewed to be a good ten years away--or never, which is my guess.

Hydrogen has gotten great press in the last few years as a supposed solution for the country’s energy and pollution problems. Politicians love talking about H2, and so do the car companies, for the same reason: spending money on H2 R&D gives the public the impression that something is being done about our energy imports and the environment, assuaging their guilt about buying 12 mpg SUVs. But the hurdles to overcome are insurmountable, IMO.

H2 is a very expensive fuel. It exists on this planet mainly in water and hydrocarbons. The process of extracting the H2 is highly energy intensive, whether using electrolysis or the much more common high temperature steam reforming of natural gas. This makes H2 inherently many times more expensive per unit of energy it contains than gasoline, natural gas, or any other conventional fuel. And while fuel cell stocks get a boost any time there is a crisis in the Middle East or gasoline prices rise, in fact higher conventional energy prices just make it that much more costly to produce H2.

Perhaps some day solar energy might efficiently split water, but it would take major breakthroughs in photovoltaics just to bring the cost of H2 produced that way down to that of conventionally produced H2. And let’s not forget that H2 must be pressurized or liquefied for transport to its site of use, both of which processes are, guess what?, quite energy intensive, which further adds to the cost of H2.

Fuel cells cars using H2 would indeed be more “efficient” than internal combustion engines using gasoline, but that is only part of the arithmetic. Who would want a car that gets somewhat better mileage, if its fuel costs $10 per gallon?

According to the study cited below, the US would need to double its electrical generating capacity to produce enough energy to manufacture enough H2 to power fuel cell cars, were they to completely replace gasoline powered ones. Who would make that investment? What would the extra demand for fuel to run those power plants do to the price of energy?

With tailpipe emissions consisting of little but water, fuel cell cars would indeed have zero emissions. But making the H2, and making the electricity needed to make the H2, would sharply increase air pollution and greenhouse gases nationwide.

The inherent high cost of H2 is a serious problem, but so is the necessity of someone investing billions in a retail H2 infrastructure. This is a classic chicken and egg problem: No one is going to buy a car unless it can be refilled anywhere they might drive, and no one (outside of a spendthrift government) is going to invest in H2 filling stations unless there are a lot of fuel cell cars around as potential customers. H2 service stations won’t come cheap. H2 must be kept in high pressure tanks, or kept very cold in liquid form, and will need special dispensers to move the H2 into high pressure tanks within the cars.

A few years ago, one of the prime goals of BLDP’s R&D effort was to come up with a small reformer to fit in the car that could extract H2 from gasoline. That would avoid having to change the country’s fuel infrastructure. BLDP has given up—its fuel cells require H2 of the utmost purity, and the small reformers couldn’t deliver it. Plus, the reforming process consumes energy and releases pollutants, eliminating the ability to claim either efficiency or zero emissions at the tailpipe.

For more on the fatal flaws of the hydrogen economy fantasy, I recommend this recent paper: (

Besides the cost and availability of H2, fuel cell powered cars as presently designed, even were they mass produced, are still many more times expensive (most estimates—at least ten times) than they need be, to be competitive with conventional cars. There are serious technical hurdles to overcome, most of which are potential showstoppers. Freezing temperatures could destroy a PEM fuel cell, or at best require a lengthy warm up period before the car will operate. Conventional H2 storage at 3600 psi will barely get a car 125 miles before requiring refueling; 10,000 psi will require a lengthy refueling process, and turn the car into a bomb. The necessary platinum catalysts, already expensive and even more so if PEM fuel cells become widespread, get poisoned easily. Durability of the fuel cell stack is substandard. The balance of plant is complicated and costly, etc. This recent document, by a pro fuel cell organization, gives a sobering look at many of the hurdles:

Even if all these problems get solved, it will still require production in the hundreds of thousands annually for the unit costs to decline enough to compare to conventional vehicles. Even if that happens, it doesn’t mean that BLDP would have anything close to a monopoly of automotive fuel cells. BLDP has been backed by Daimler and Ford, but General Motors has been working on its own, as has Toyota. A division of United Technologies has been working with Nissan and Hyundai. Every PEM fuel cell developer claims a raft of patents, but it appears there are plenty of “work arounds” that prevent any from getting a big edge.

When all is said and done, a fuel cell used in a car is just another auto part, and will garner the usual tiny margins typical in that field. If anything, margins might be well below average for years after any successful commercial fuel cell car introduction, since it will be such a struggle for them to be price competitive with conventional cars.

Moreover, conventional technology will not stand still for the next ten years waiting for fuel cells to catch up. Gradual improvements continue to be made in terms of the efficiency and emissions of internal combustion engines. The biggest threat to fuel cell car commercialization comes from gas/electric hybrids, such as the Toyota Prius. Hybrid technology is based on the fact that internal combustion engines are actually very clean and efficient once the vehicle is moving along at, say, 20 mph; the worst mileage and pollution occur getting it from zero to 20. A hybrid merely hands the first step off to a powerful battery—only when the car is moving along does the gas engine kick in, while the battery gets recharged by regenerative braking, and never has to be plugged in. Already the mileage is spectacular (typically around 50 mpg for the Prius) and emissions are very close to zero.

That is what today’s hybrid can deliver, embryonic though the technology still is, and it can do it without anyone spending a dime changing our gasoline based infrastructure. Over the next few years most car companies plan to introduce many more hybrids. For example, next year the Lexus 330 SUV will have a hybrid option, giving the V-6 the power of a V-8 and mileage of 30-35 mpg. The hybrid of ten years from now, by which time fuel cell developers hope to catch up with today’s conventional cars, will be much better.

Pretty much everything I have written so far has been known, at least to some people, and could have been said five years ago. So why have the car companies collectively spent a few billion dollars so far working on fuel cell cars? Why do Ford and Daimler together own a third of BLDP? Why did Pres. Bush propose a multibillion hydrogen fuel initiative, and so many other politicians, most recently Schwarzenegger, tout fuel cells as the wave of the future?

My guess: the usual mix of wishful thinking, ignorance, hypocrisy and corruption. People desperately want to believe that there is a technology solution to our energy and environmental problems. They look at the promised clean and efficient performance of a fuel cell car, and forget to count the massive energy consumption and pollution involved in making and delivering the fuel. The car companies and the government both want the public to keep buying lots of high margin, low mileage SUVs, and their ballyhooed work on fuel cell cars serve to keep consumers from feeling guilty about doing so. In the case of Ford and Daimler, investing money directly in Ballard let them get the publicity advantage of working on fuel cells, while diverting the R&D expense into an asset, and away from their own income statements. At some point, when they write off their investments in Ballard, the loss will be considered non-recurring, and ignored.

Are fuel cells utterly useless? No, there are potential applications that might make economic sense some day. For example, buses, FedEx delivery vans, and other vehicles. They operate daytime in cities, where smog is a big issue, and return to one central H2 depot which could refuel them over night. But there are only about 5000 buses sold per year in North America. Even if you started replacing local delivery vehicles owned by big organizations, such as the post office, that can be browbeaten into buying them, the market for fuel cell powered vehicles might expand to 50,000 per year, as a guess. That isn’t enough to get the economies of scale that fuel cell vehicles would need to get the costs down to anything close to what would make sense to a non-coerced buyer.

Then there are stationary power applications, but the PEM type of fuel cell in which BLDP specializes is the wrong kind for that. Molten carbonate and solid oxide fuel cells, which run at much higher temperatures, letting them use standard pipeline natural gas as fuel without any expensive reforming to extract the hydrogen first, are much better than PEM for that. Their efficiencies are much higher than PEM, and they produce useful waste heat.

BLDP does do work on non-vehicle applications for its PEM fuel cells, but I have ignored them so far because the stock is primarily a bet on fuel cell cars. BLDP has an ultimately doomed effort in stationary power, and has been promoting its fuel cells as a backup power source, something which gave the stock a boost after the recent blackouts. The problem is that the cost of a fuel cell is many times that of a conventional backup generator. Yes, it would be cleaner and more efficient (again, ignoring the emissions, energy consumption and expense of creating, delivering and storing the H2) when it is actually operating, but who cares, since by definition a backup device is rarely in use.

As to numbers, BLDP has a lot of cash, at $356M as of June, which is about $3/share. It expects to burn about $70M this year. It has agreements in principle with Daimler and Ford for them to invest another $36M starting next year, and another $28M (plus $69M in “engineering service revenues”) sometime in 2005-7, when it hopes to be working on its next generation engine. So BLDP won’t be running out of cash any time soon.

What it will run out of, though, is credibility. The car companies will continue to give lip service to the glorious fuel cell car future, and will gladly take any handouts from the government to pay for R&D. But it will be increasingly obvious from their actions that their real bets are elsewhere. Hybrids already can achieve a large part of what one ultimately wants from a fuel cell car, and will be getting much better.

Meanwhile, Daimler and Ford aren’t exactly rolling in dough. BLDP says that it expects to finalize its agreement for additional funding from DCX and F this year, and I have no reason to think it won’t go through. But I expect that to be the last major funding these car companies provide, and expect them to slash their own fuel cell research (other than what they can get reimbursed by the government) as they focus their R&D on hybrids.

Warning: Fantasy concept stocks with no immediate shortage of cash such as BLDP are susceptible to strong rallies in bubble like periods. There are several other fuel cell developers which will probably fold up much sooner, but BLDP’s $1.6B market cap makes it by far the most liquid, and relatively easy to borrow.


Short term: nothing. Medium term (1-2 years): there is a good chance that Daimler Chrysler and Ford, pressured by their own finances, will reduce their support for BLDP’s technology. Also, the prospects for fuel cell car commercialization will diminish as a competitive technology, gas/electric hybrids, become mainstream. Long term: the lack of any large economically viable market for PEM fuel cells should reduce the stock to some discount to its then cash per share.
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