It’s been a rough last couple of weeks for many cleantech darlings. Two of them epitomize the struggles that the space is seeing today: A123 Systems and Better Place. For one, the fight is over. But the other is just beginning its journey.
The past two weeks have seen some depressing news on the cleantech front: inverter manufacturer Satcon Systems declared bankruptcy, PV module manufacturer JA Solar got a delisting letter from Nasdaq and Sunpower shut most of its Philippines factories. But the worst news came with two particular announcements: Better Place, the ambitious Israeli electric vehicle start-up, pushed out its CEO and evangelist-in-chief Shai Agassi, while A123 Systems, the Massachusetts-based battery manufacturer which was once the darling of the advanced battery industry, announced bankruptcy.
Is this the long-awaited cleantech apocalypse, or will some of these fighters rise from the mat? The short answer is this: those with effective business models (i.e. Better Place) have excellent prospects; those who don’t have a viable product to sell in the marketplace (i.e. A123 Systems) won’t be rising from anywhere.
All the news of the past few weeks certainly hasn’t helped cleantech, as an investing concept, to gain any respect. The fundamental problem with cleantech is that the name itself is a useful fiction: any company with a technology that might somehow be labelled environmentally positive can affix itself with the cleantech label and start selling shares. That leads to a bucket filled with a variety of companies with no real relationship to each other: from natural gas drillers to solar module manufacturers to high-tech laundromats.
In addition, most of the sectors that these companies play in are very hard to disrupt, such as energy and transportation. For a new company to compete, long lead times and many years prior to cash-flow positivity are to be expected. Meanwhile the Silicon Valley venture capitalists who backed such enterprises are quick to head for the exits when their expected 10x returns didn’t materialize within two years.
Thus cleantech as a whole was doomed to fail simply because it was a square peg of a marketing term that could never have fit into the round hole of expectations. That doesn’t mean that every cleantech investment will be a failure. The acid test for success will be the business model that the company is betting on. Many of them are still relevant and filled with value, even in the age of dropping PV and battery prices. Others are just plain bad bets.
Which brings to mind A123 Systems. I first became aware of the importance of the company’s technology when talking to model plane hobbyists. They were willing to pay a lot of money to get their hands on the first batch of production batteries from the company because they offered something unique: increased density at lower rate. The A123 battery, I realized, had a chance to disrupt the entire transportation sector.
Unfortunately, so did every other battery manufacturer. And there in lie the weakness in betting on A123’s: they were competing against dozens of other battery companies, most of whom had deeper pockets and access to cheap, government-subsidized capital. Thus LG Chem, AESC and Panasonic won the first round of the transportation battery wars. And A123 ran out of cash before they could even get to the second round.
The good news for the car and grid storage industries is that even if A123 won’t be able to compete anymore, its ghost certainly will. That’s because the factories in Massachusetts and Michigan have been acquired Johnson Controls, a company with pockets even deeper than LG’s and Panasonic’s. Thus the equipment and manufacturing spaces that once belonged to A123 will continue to crank out advanced batteries, albeit under a different logo. Johnson Control’s next generation chemistry, based on a Nickel Cadmium Aluminum cathode, will be even more energy dense and safer than A123’s iron phosphate chemistry and will have a shot at being a transformative battery technology for both the grid storage space and for the vehicle industry.
The Better Place situation is very different from A123’s. Better Place planned on launching a network of battery switching stations that would allow subscribers to their system limitless driving range. The idea was that Better Place would bring the wireless communications business model to personal transportation. They opened the first network in Israel and, lo-and-behold, the subscribers didn’t show up. Yet.
The problem with writing an obituary for Better Place is that the underlying business model is still very sound. I’ve spend a lot of time examining that model and various iterations of it. It makes sense. And it makes money. The problem, unfortunately, has been in the execution of the marketing plan. The Israeli car market is held hostage by a small oligarchy of leasing firms. Better Place chose to thread the needle by having those leasing firms be their distributors while at the same time not sharing enough profits with them. The leasing companies balked at becoming a middle-man, and froze Better Place out of the market.
The solution to the impasse is for Better Place to either re-mold its Israel operations as a head-on competitor to the leasing companies or to renegotiate its contracts with them. That’s a relatively simple fix. It will lead to a much higher market penetration and a flood of sales. It is my opinion that Better Place will eventually succeed in the market and will quickly thereafter be faced with EV network competitors. The company still has quite a bit of cash on hand to restructure its Israel operations and then can worry about international expansion.
Here are two companies that were both looking to disrupt the transportation industry with their respective products. One couldn’t compete with the large Asian behemoths. The other stumbled in the details of a specific local market. Both are being buried by the cleantech punditocracy. A123 Systems is definitely down for the count, although its tools will be put to be good use by Johnson Controls, which purchased them. Better Place, on the other hand, has a lot of fight in it and could mount a spectacular, albeit bruising, comeback.
This article originally appeared on IDC Energy Insights.
IDC Energy Insights provides research-based advisory and consulting services focused on market and technology developments in the energy and utility industries. IDC Energy Insights serves a diverse global client base, including electric, gas and water utilities, IT vendors, independent power producers, retail energy providers, oil and gas companies, equipment manufacturers, government agencies, financial institutions, and professional services firms. IDC is a subsidiary of IDG, the world’s leading technology media, research, and events company.
Images courtesy of Better Place, A123 Systems.