The theory was that the federal government could guide an entire US electric vehicle (EV) industry into existence by orchestrating a constellation of grants, loans and loan guarantees to manufacturers and infrastructure developers, along with generous tax credits for purchasers. That vision was attractive, because EVs have the potential to be an important element of a long-term strategy to counter climate change and bolster energy security. However, yesterday's bankruptcy of battery-maker A123 Systems, Inc. provides a costly reality check. Along with the earlier bankruptcy of another advanced battery firm, Ener1, and disappointing battery-EV sales, it raises new doubts concerning both the government's model of industrial development and the achievability of President Obama's goal of putting one million EVs on the road by 2015.
A123 was built around a novel lithium-ion battery technology developed at MIT. For a time they were the darling of the advanced battery sector, with a market capitalization above $2 billion following its 2009 initial public offering. That IPO came on the heels of A123's receipt of a $249 million stimulus grant from the Department of Energy and $100 million of refundable tax credits from the state of Michigan. Subsequently, though, they experienced low sales and a costly battery recall that contributed to their signing a memorandum of understanding with China's Wanxiang Group to sell an 80% interest in the company for around $450 million. Instead, it now appears that Johnson Controls, a diversified company that was the recipient of a $299 million DOE advanced battery grant of its own, will end up acquiring A123's assets for around $125 million. Johnson is apparently providing "debtor-in-possession" financing for A123's Chapter 11 process. It's not clear whether Johnson would be able to draw down the unused portion of A123's federal grant.
Because of the government's close involvement with A123, and in particular its structuring of aid to A123 in a manner that left taxpayers without any call on the firm's assets ahead of suitors like Johnson Controls or Wanxiang, this event is inherently political. I was a little surprised it didn't come up in last night's presidential debate. If it does become a "talking point" in the next two weeks, however, I'd prefer to see the conversation focus on the real issues it raises. The reasons for A123's failure appear very different from those behind the much-discussed failure of loan-guarantee recipient Solyndra. While the latter ultimately called into question the judgment of officials who loaned money to Solyndra when that company's business model was already doomed, A123 highlights the much deeper challenges involved in attempting to conjure an entire industry out of thin air.
The earlier failure of GM's electric vehicle effort in the 1990s, the EV-1, demonstrated the chicken-and-egg nature of EV sales: Vehicle sales depended on recharging infrastructure that in turn depended on robust vehicle sales to justify infrastructure investment. But at least GM could begin then by relying on a mature lead-acid battery industry. Those batteries turned out to be inadequate to meet consumers' expectations of range and recharging convenience, which led to the creation of another chicken-and-egg dependence for the new EV industry: carmakers needed a reliable supply of advanced batteries from producers who couldn't invest in the capacity to make them, without knowing that vehicle sales would consume enough batteries to turn a profit. So in 2009 the administration set out to short-circuit all those inter-dependencies by simultaneously funding the key elements of these loops, including advanced battery makers. It makes me wonder if anyone involved had any direct manufacturing experience--a natural doubt considering that the entire US auto industry was restructured in 2009 by a task force without a single member who had worked in any manufacturing business, let alone the auto industry.
The main causes of A123's failure appear to have involved basic manufacturing issues of capacity utilization and quality control. The company wasn't selling enough batteries to cover its costs, and too many of the batteries it sold came back in an expensive recall. They weren't the first business to experience such growing pains, but their challenges were compounded by the burden of a manufacturing line that had been sized to meet the demand of an EV market that hasn't yet materialized. US EV sales through September amounted to just 31,000 vehicles, or less than 0.3% of total US car sales. The picture looks even worse if you subtract out sales of GM's Volt and Toyota's plug-in version of its Prius, the gasoline engines of which provide essentially unlimited range, circumventing the limitations of today's batteries. I think there's a strong argument that the government's assistance to A123 was actually a key factor in leading them to bankruptcy, by prompting A123 to grow much faster than could have been justified to its bankers or private investors.
Perhaps it's some consolation that A123's technology has apparently been snapped up by a competitor, rather than going the way of Solyndra's odd solar modules. Yet that outcome hardly justifies the casual dismissal of A123's fate by a DOE spokesman as a common occurrence in an emerging industry. That sort of talk merely perpetuates the perception of cluelessness fostered by Energy Secretary Chu's failure to hold anyone accountable for the Solyndra debacle. Yes, companies in emerging industries fall by the wayside, but the preferred response would be to examine what happened and apply the lessons learned to the rest of the "venture capital portfolio" with which the administration's industrial policy has saddled the DOE. With EV sales still low and several key EV makers experiencing delays and production problems, a thorough public review of the entire EV strategy is in order.
Showing posts with label industry consolidation. Show all posts
Showing posts with label industry consolidation. Show all posts
Wednesday, October 17, 2012
Thursday, July 05, 2012
A Sign of Sanity in Solar Manufacturing
I've been writing for some time about the chronic overcapacity in global solar manufacturing and the consolidation this is likely to produce. Now here's a sign that at least one company realizes how bad the situation is. GE is apparently delaying the construction of its previously announced Aurora, Colorado, thin-film solar panel factory, and "taking this opportunity to re-look at our solar strategy." I couldn't find a GE press release to back this up, but it's been reported by RECharge and confirmed by Forbes. It's easy to read too much into a single event, but I think this looks significant, particularly in the wake of Monday's Chapter 7 bankruptcy filing by Abound Solar, incidentally another recipient of a sizable federal renewable energy loan guarantee.
If this information is correct, GE is backing away--for at least 18 months--from building a 400 MW thin-film photovoltaic (PV) solar line in Colorado. That suggests that they have concluded that even a brand new facility using the latest technology and large enough to compete on scale with thin-film leader First Solar wouldn't be able to earn an attractive margin in this market. And as a global competitor, GE would presumably regard the new US tariffs on China-based PV manufacturers as insufficient to resolve global PV overcapacity that appears to be stuck at about the same magnitude as demand, despite the continued rapid growth of the latter.
In the last year I've seen numerous articles and blog posts attributing the recent PV price declines to the predicted scale-related effects that have long anchored the industry's central narrative: If we build and deploy enough PV, the cost will fall to the point at which it will be competitive with conventional electricity generation. That may still be true in the long run, but few of these advocates seem to have understood that the industry was getting ahead of its own narrative--that a big slice of the recent price declines was the result of intense competition among producers who over-expanded and whose margins have contracted sharply or turned negative in the process. That's a good reason for GE to hit the pause button and focus on improving its technology in the lab, rather than the fab, while other, less well-capitalized firms struggle to survive long enough to participate in the expected growth surge when solar reaches "grid parity" on a sustainable basis.
PV is an important energy technology with a bright future, but its present doesn't look so great. It's not unusual for manufacturing industries to experience boom-bust cycles, though in my experience those are more common in commodities like chemicals and fuels. However, it is distinctly unusual for governments to contribute so much to the inflation of the boom part of the cycle through a wide array of incentives, loan guarantees and loans to manufacturers and with subsidies--in some cases extravagantly generous ones--to the industry's customers. Such interference may have been necessary to jump-start PV supply and demand, but it will almost certainly make for a harder and messier landing for companies, investors and employees, and in cases like that of Abound Solar for taxpayers.
If this information is correct, GE is backing away--for at least 18 months--from building a 400 MW thin-film photovoltaic (PV) solar line in Colorado. That suggests that they have concluded that even a brand new facility using the latest technology and large enough to compete on scale with thin-film leader First Solar wouldn't be able to earn an attractive margin in this market. And as a global competitor, GE would presumably regard the new US tariffs on China-based PV manufacturers as insufficient to resolve global PV overcapacity that appears to be stuck at about the same magnitude as demand, despite the continued rapid growth of the latter.
In the last year I've seen numerous articles and blog posts attributing the recent PV price declines to the predicted scale-related effects that have long anchored the industry's central narrative: If we build and deploy enough PV, the cost will fall to the point at which it will be competitive with conventional electricity generation. That may still be true in the long run, but few of these advocates seem to have understood that the industry was getting ahead of its own narrative--that a big slice of the recent price declines was the result of intense competition among producers who over-expanded and whose margins have contracted sharply or turned negative in the process. That's a good reason for GE to hit the pause button and focus on improving its technology in the lab, rather than the fab, while other, less well-capitalized firms struggle to survive long enough to participate in the expected growth surge when solar reaches "grid parity" on a sustainable basis.
PV is an important energy technology with a bright future, but its present doesn't look so great. It's not unusual for manufacturing industries to experience boom-bust cycles, though in my experience those are more common in commodities like chemicals and fuels. However, it is distinctly unusual for governments to contribute so much to the inflation of the boom part of the cycle through a wide array of incentives, loan guarantees and loans to manufacturers and with subsidies--in some cases extravagantly generous ones--to the industry's customers. Such interference may have been necessary to jump-start PV supply and demand, but it will almost certainly make for a harder and messier landing for companies, investors and employees, and in cases like that of Abound Solar for taxpayers.
Wednesday, May 23, 2007
Short Memories
One of my ongoing themes here is that, despite high energy prices that now rival those of the last energy crisis, we are not experiencing the second coming of the 1970s. Unfortunately, we do seem fated to revisit every bad energy idea from that period, and today we have two on display. First, a columnist in the Washington Post proposes establishing a national oil company (NOC) to promote expanded supply, new refineries, and "hyper-competitive" pricing. Then later this morning the Joint Economic Committee of the Congress is holding a hearing on whether to pursue breaking up the largest US oil companies. At this rate, I'd better make room in my closet for the paisley shirts and leisure suits that must surely be on their way.
In his column Steven Pearlstein anticipates all sorts of oil industry opposition to the idea of a chartered national oil company set up to compete with them, and given all sorts of breaks on refinery siting and permitting and production from federal lands. Never mind that if the existing oil companies had been given those breaks when energy prices were low, we might not be in the present pickle. While I'm sure Mr. Pearlstein's plan would provoke the expected response from energy companies and trade associations, the biggest complaints ought to come from taxpayers and watchdog groups. This approach was tried all over the developed world in the 1970s, and with very few exceptions, it was given up as a bad idea. The successful NOCs are all in big net-producing countries, not net consumers. The history of Petro-Canada, founded in 1975 and 80% privatized in the early 1990s, illustrates this cycle. Mr. Pearlstein probably isn't serious, of course. His contrasting portrayal of a hypothetical NOC seems mainly intended to shame the publicly-traded oil firms for being profitable and rewarding their shareholders. But in today's climate, I wouldn't be surprised to see some legislator take up this mock cause.
Turning to today's Congressional hearing, it has become an article of faith in some quarters that the country's energy woes are the result of the industry consolidation that took place in the late nineties and early oughts. Smaller, more aggressive competitors would have apparently increased oil production and expanded their refineries at a faster pace, so that while global oil prices might now be high, at least refining margins would be lower, with consumers paying more like $2.40/gallon, instead of $3.22. But while you're unlikely to find an industry insider less enamored of merger mania than I am, this scenario flies in the face of the economic facts that drove those mergers in the first place.
From 1997-2001 I worked in Texaco's Corporate Planning & Economics Department. During that period, we experienced the disdain of investors for "old economy" industrial firms that needed capital to compete with the growing power of the NOCs in producing countries, which held more than 80% of the world's oil reserves. We just weren't New Economy enough. Then, to add insult to injury, the price of oil collapsed from the $20s to single digits, before recovering. The mergers triggered by these events weren't focused on market domination and pricing power: they were about ensuring the survival of an industry that had just come through a near-death experience.
One of the other concerns that occupied much of my time in that period was refineries. Simply put, they were dogs. Not only were US refineries consistently earning less than the cost of capital, but they were a constant drain on capital, because of wave after wave of environmental investments in reformulated gasoline and ever-lower sulfur diesel fuel, for which consumers didn't want to pay an extra penny. All that management wanted to do was to find ways to reduce our exposure to this awful sector, and that's exactly what we and the other majors did, through joint ventures and outright sales. Is it any wonder that, on the back end of such a cycle--when demand growth has outstripped domestic capacity and our reliance on gasoline imports from Europe and elsewhere has grown steadily--refining margins are finally enjoying a bonanza? If oil companies invested as much in new refining capacity as their critics would like--even if new greenfield facilities could get permits--the result would likely be another protracted cyclical bust. In the face of a 35 billion gallon/year alternative fuels mandate, that may just happen anyway.
I persist in my hope that enough of us actually learned something from the experience of the 1970s and the energy price cycles that followed that first energy crisis. If we want to ensure that the US has access to the oil and gas it will need during a lengthy transition away from fossil fuels, then what we need is not a national oil company, and certainly not a gaggle of smaller oil companies. Instead, we need a strong, dynamic energy sector, led by companies big enough to deal with the NOCs as equals and to take expensive risks on the frontiers of technology, whether in ultra-deepwater drilling or cellulosic ethanol. The times demand something much better than merely recycling the ill-considered notions of the past.
In his column Steven Pearlstein anticipates all sorts of oil industry opposition to the idea of a chartered national oil company set up to compete with them, and given all sorts of breaks on refinery siting and permitting and production from federal lands. Never mind that if the existing oil companies had been given those breaks when energy prices were low, we might not be in the present pickle. While I'm sure Mr. Pearlstein's plan would provoke the expected response from energy companies and trade associations, the biggest complaints ought to come from taxpayers and watchdog groups. This approach was tried all over the developed world in the 1970s, and with very few exceptions, it was given up as a bad idea. The successful NOCs are all in big net-producing countries, not net consumers. The history of Petro-Canada, founded in 1975 and 80% privatized in the early 1990s, illustrates this cycle. Mr. Pearlstein probably isn't serious, of course. His contrasting portrayal of a hypothetical NOC seems mainly intended to shame the publicly-traded oil firms for being profitable and rewarding their shareholders. But in today's climate, I wouldn't be surprised to see some legislator take up this mock cause.
Turning to today's Congressional hearing, it has become an article of faith in some quarters that the country's energy woes are the result of the industry consolidation that took place in the late nineties and early oughts. Smaller, more aggressive competitors would have apparently increased oil production and expanded their refineries at a faster pace, so that while global oil prices might now be high, at least refining margins would be lower, with consumers paying more like $2.40/gallon, instead of $3.22. But while you're unlikely to find an industry insider less enamored of merger mania than I am, this scenario flies in the face of the economic facts that drove those mergers in the first place.
From 1997-2001 I worked in Texaco's Corporate Planning & Economics Department. During that period, we experienced the disdain of investors for "old economy" industrial firms that needed capital to compete with the growing power of the NOCs in producing countries, which held more than 80% of the world's oil reserves. We just weren't New Economy enough. Then, to add insult to injury, the price of oil collapsed from the $20s to single digits, before recovering. The mergers triggered by these events weren't focused on market domination and pricing power: they were about ensuring the survival of an industry that had just come through a near-death experience.
One of the other concerns that occupied much of my time in that period was refineries. Simply put, they were dogs. Not only were US refineries consistently earning less than the cost of capital, but they were a constant drain on capital, because of wave after wave of environmental investments in reformulated gasoline and ever-lower sulfur diesel fuel, for which consumers didn't want to pay an extra penny. All that management wanted to do was to find ways to reduce our exposure to this awful sector, and that's exactly what we and the other majors did, through joint ventures and outright sales. Is it any wonder that, on the back end of such a cycle--when demand growth has outstripped domestic capacity and our reliance on gasoline imports from Europe and elsewhere has grown steadily--refining margins are finally enjoying a bonanza? If oil companies invested as much in new refining capacity as their critics would like--even if new greenfield facilities could get permits--the result would likely be another protracted cyclical bust. In the face of a 35 billion gallon/year alternative fuels mandate, that may just happen anyway.
I persist in my hope that enough of us actually learned something from the experience of the 1970s and the energy price cycles that followed that first energy crisis. If we want to ensure that the US has access to the oil and gas it will need during a lengthy transition away from fossil fuels, then what we need is not a national oil company, and certainly not a gaggle of smaller oil companies. Instead, we need a strong, dynamic energy sector, led by companies big enough to deal with the NOCs as equals and to take expensive risks on the frontiers of technology, whether in ultra-deepwater drilling or cellulosic ethanol. The times demand something much better than merely recycling the ill-considered notions of the past.
Friday, May 04, 2007
A Mixed Legacy
Major oil companies are rarely home to "celebrity CEOs." BP's John Browne was the exception, and it's ironic that his departure--already in the works after a couple of years of bad results on safety--was hastened by the intense media scrutiny that celebrity status now attracts. Most of the articles about Lord Browne that I've read in the last several days have focused on two areas in which his decisions as CEO of BP put a lasting imprint on the oil and gas industry and the world beyond it: industry consolidation and climate change. I can't resist a few thoughts on both topics, which have had a significant impact on my own career.
Although not everyone sees the outcome as a good thing, Lord Browne generally gets credit for starting the wave of oil industry consolidation that began in the late 1990s. The timeline of major mergers supports this notion, with BP having announced its acquisition of Amoco in August 1998, a year before Exxon and Mobil agreed to merge. BP's acquisition of ARCO followed in 2000, creating the present company. Meanwhile, France's Total acquired first Petrofina of Belgium in 1999 and then Elf Acquitaine in 2000. 2001 saw the last changes on this scale, when Chevron merged with Texaco and Conoco with Phillips. Lord Browne's role fits neatly into a "great man" view of this history. However, for those who see leaders arising in response to events, we can't forget the pressures created by the collapse of oil prices in the late 1990s, following the Asian Economic Crisis. Shrinking oil company cash flows set the stage for consolidation, as did the realignment of the US downstream market, when Shell and Texaco joint-ventured their refining and marketing operations early in 1998.
The value of these mergers remains debatable, as does their "industrial logic." While the merged companies are clearly stronger financially, how much of that is attributable to the transactions, and how much to global market conditions beyond their control? Are the merged entities replacing more of their reserves than their predecessors could have, independently? We will never know, though Mobil, Texaco and Amoco were certainly large enough on their own to have continued participating in world-scale projects, while the productivity of tens of thousands of employees lost to "synergies" might have been helpful to an industry struggling to keep pace with the growth of energy demand. And while I don't subscribe to the idea that these mergers reduced competition by enough to harm consumers, the retail market concentration in many regions is at levels that would have been unthinkable in the 1980s. All in all, the legacy of these mergers is a mixed bag, and I don't just say that because one of them effectively ended my 22-year career at Texaco.
In contrast, I regard Lord Browne's impact on matters such as climate change and alternative energy as generally positive. He was a pioneer in recognizing the importance of these challenges and speaking out about them. Mark Moody-Stuart of Shell may have been saying many of the same things in the late '90s, but for those of us working in US major oil companies, it was different hearing it from BP, which had an operating philosophy closer to ours. Without John Browne's high profile on such issues, it would have been harder for others to break out of the pack. And while BP has not always lived up to the expectations set by its aspiration to move "Beyond Petroleum", we can't discount the subtle effect of that subversive little tagline.
It's too early to say how much Browne's legacy will be tainted by the safety problems that surfaced late in his tenure. They serve as an important reminder to leaders in any organization that big strategies are not sufficient for lasting success, without an equal attention to the details of their consequences. As John Browne departs, no one can say he was cautious or run-of-the-mill. I suspect it will be some time before we see another oil company CEO in his mold.
Although not everyone sees the outcome as a good thing, Lord Browne generally gets credit for starting the wave of oil industry consolidation that began in the late 1990s. The timeline of major mergers supports this notion, with BP having announced its acquisition of Amoco in August 1998, a year before Exxon and Mobil agreed to merge. BP's acquisition of ARCO followed in 2000, creating the present company. Meanwhile, France's Total acquired first Petrofina of Belgium in 1999 and then Elf Acquitaine in 2000. 2001 saw the last changes on this scale, when Chevron merged with Texaco and Conoco with Phillips. Lord Browne's role fits neatly into a "great man" view of this history. However, for those who see leaders arising in response to events, we can't forget the pressures created by the collapse of oil prices in the late 1990s, following the Asian Economic Crisis. Shrinking oil company cash flows set the stage for consolidation, as did the realignment of the US downstream market, when Shell and Texaco joint-ventured their refining and marketing operations early in 1998.
The value of these mergers remains debatable, as does their "industrial logic." While the merged companies are clearly stronger financially, how much of that is attributable to the transactions, and how much to global market conditions beyond their control? Are the merged entities replacing more of their reserves than their predecessors could have, independently? We will never know, though Mobil, Texaco and Amoco were certainly large enough on their own to have continued participating in world-scale projects, while the productivity of tens of thousands of employees lost to "synergies" might have been helpful to an industry struggling to keep pace with the growth of energy demand. And while I don't subscribe to the idea that these mergers reduced competition by enough to harm consumers, the retail market concentration in many regions is at levels that would have been unthinkable in the 1980s. All in all, the legacy of these mergers is a mixed bag, and I don't just say that because one of them effectively ended my 22-year career at Texaco.
In contrast, I regard Lord Browne's impact on matters such as climate change and alternative energy as generally positive. He was a pioneer in recognizing the importance of these challenges and speaking out about them. Mark Moody-Stuart of Shell may have been saying many of the same things in the late '90s, but for those of us working in US major oil companies, it was different hearing it from BP, which had an operating philosophy closer to ours. Without John Browne's high profile on such issues, it would have been harder for others to break out of the pack. And while BP has not always lived up to the expectations set by its aspiration to move "Beyond Petroleum", we can't discount the subtle effect of that subversive little tagline.
It's too early to say how much Browne's legacy will be tainted by the safety problems that surfaced late in his tenure. They serve as an important reminder to leaders in any organization that big strategies are not sufficient for lasting success, without an equal attention to the details of their consequences. As John Browne departs, no one can say he was cautious or run-of-the-mill. I suspect it will be some time before we see another oil company CEO in his mold.
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