01 Sep 2011
Driving a green-tech businessby Julia HannaTopics:
The catch-all “green” category covers a range of industries, from wind and solar power to alternative fuels and carbon sequestration. Yet each faces a distinct set of business and strategy challenges. In the case “A123 Systems,” HBS professor Richard Vietor presents the issues confronting a manufacturer of the complex, evolving technology of lithium-ion batteries.
Based in Watertown, Massachusetts, and founded in 2001 with technology out of MIT, A123’s patented rechargeable batteries include a breakthrough Nanophosphate powder that increases conductivity, providing higher power levels and longer battery life. With initial applications for commercial customers (such as Black & Decker), the majority of the company’s business is now driven by the automotive industry, followed by smart grid stabilization solutions that provide “fill-in” power when customer demand outstrips supply. Given the technology’s potential applications and finite employee resources, the case boils down to this: Should A123 focus on automotive or the grid? And can it execute either in a timely enough fashion to begin breaking even?
“It’s a familiar issue,” Vietor says. “How does a new venture company manage its cash as it is developing its technology over time?” A123 raised $378 million through its IPO in late 2009, making it one of the most successful of the year. But with some 400 employees devoted to research, many with PhDs, the company has significant resources committed to the brains that give its product a technological edge. The company has deals in the pipeline, but it needs to execute them and get some traction before the money runs out.
So which has a rosier time horizon? Automotive or the grid? Each is promising, but difficult to forecast. A123 already has a number of automotive customers, including Magna-Volvo, BMW, and BAE Systems, the leading North American manufacturer of hybrid bus propulsion systems. An agreement with Shanghai Automotive Industry Corporation (SAIC) to manufacture battery systems for the Chinese market presents its own questions, Vietor notes. For one, the joint venture is considered a foreign subsidiary, so A123 can only report its repatriated net, not gross earnings. For another, SAIC has asked if it can take over part of the battery’s production, which could result in a gradual loss of technology. “That’s been China’s strategy across the board,” Vietor remarks. “Businesses want to be there because the market is so big, but that move comes with risks.”
The company’s 53-foot-long, two-megawatt power systems, manufactured in Hopkinton, Massachusetts, are also in use in areas as diverse as Chile’s Atacama Desert; Johnson City, New York; and Tehachapi, California, as part of a “smart grid” solution designed to stabilize the fluctuating demand for electricity. As the case points out, however, the low cost of natural gas is currently making gas-fueled turbines more competitive than those run by batteries. Even so, history has shown that energy prices can shift quickly.
However it chooses to focus its resources, A123 needs more cash and manufacturing capacity. In September 2010, the company opened a lithium-ion battery manufacturing plant in Livonia, Michigan, thanks in large part to $249 million in financing from President Obama’s stimulus package, with a second plant coming online in Romulus, Michigan. “The interplay of state and federal government and the company’s dependence on such funding will no doubt raise another discussion point,” Vietor says, adding that federal subsidies will expire in 2012.
Students will tackle these dilemmas and many others when the case is used in a fall MBA elective, The Energy Business and Geopolitics, taught by HBS associate professor Noel Maurer, and this November in the Executive Education Global Energy Seminar. The course takes a global view of fossil fuel, nuclear power, and renewable energy, considering all three through the lens of competitive strategy and the political risk that is part and parcel of the energy industry.
“More and more of our students are becoming interested in the intersection of business, energy, and the public sector,” says Vietor. “It’s a rich, fascinating area that will only become more critical in the coming century.”