A123 Increases IPO Price Range

John Petersen

This morning, A123 Systems Inc. (AONE) amended its registration statement to increase the price range for its proposed IPO to $10.00 to $11.50. I take this as an indicator that their IPO road show has been well received and the offering will go to market in a timely manner.

While I’ve avoided commenting on A123’s prospectus, business or financing plans, there is one point that deserves some attention. Their prospectus summary says:

According to A.T. Kearney, the global lithium-ion battery market for automotive application in HEVs, PHEVs, and EVs is estimated to be $31.9 million in 2009. A.T. Kearney projects that this market will grow to approximately $21.8 billion by 2015 and $74.1 billion by 2020, based on a moderate drive for change influenced by increasing governmental regulation, emerging powertrain technology, changing consumer demand and OEM product strategies toward more fuel efficient vehicles.

After spending several weeks thinking about that statement, it finally dawned on me that the only way to reconcile A123’s market size forecast with its anticipated product cost was with an assumption that lithium-ion batteries would completely displace lead-acid batteries in the automotive market over the next 10 years. With that assumption as a given, a battery cost of $750 per vehicle and a 100 million vehicle per year market would actually work out to about $75 billion in potential battery sales.

While I wish A123 well and hope its offering is very successful, I feel compelled to point out that the lead-acid battery industry is not likely to take such a challenge lying down. As long-term readers know, I believe the new PbC battery that Axion Power International (AXPW.OB) plans to commercialize in cooperation with Exide Technologies (XIDE), together with other emerging lead-carbon battery solutions, are likely to dominate the stop-start and mild hybrid markets because they will offer comparable performance in stop-start and mild hybrids for one third of the cost of lithium-ion.

In the real world of paychecks and budgets, cost is important and the choice of technology always obeys the laws of economic gravity.

Upgrading from a $150 valve regulated lead-acid battery to a $250 PbC battery is not likely to give rise to substantial resistance from automakers who are actively seeking a more robust and reliable battery technology that will stand up to the demands of stop-start applications.

Upgrading from a $150 valve regulated lead-acid battery to a $750 lithium ion battery is a different story altogether, particularly when none of the automakers has any history using lithium-ion batteries which have a less than stellar track record under the harsh operating conditions that have made lead-acid batteries the technology of choice for automotive starting, lighting and ignition worldwide.

In a way it’s comforting to know that like me, A123 believes that stop-start systems and other mild hybrid technologies will become standard equipment over the next decade. I still think it’s far too early to claim victory in a technology race that hasn’t been called to the starting gates. Under the circumstances, I think A123 investors might want to take a hard look at the emerging lead-carbon battery technologies and consider hedging their bets.

Disclosure: Author has a large long position in Axion Power International (AXPW.OB) and a small long position in Exide Technologies (XIDE).