Valence gets energized
Austin firm's twist on the lithium-ion battery moves closer to paying off for its faithful founder.
By Dan Zehr
AMERICAN-STATESMAN STAFF
Monday, April 09, 2007
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Carl Berg helped found Valence Technology Inc. in 1989, and in the succeeding 18 years he's spent more than $100 million just to keep the Austin-based battery maker afloat.
It hasn't been the Silicon Valley billionaire's most lucrative investment — at least not yet.
Valence has sorted out production bugs that crippled it for the past 15 years, Berg said in recent phone interview, and the company finally could be moving toward its first profitable quarter.
"I think it's always a difficult, long process" to build a successful company, said Berg, a real estate developer and venture capitalist who ranked 322 on Forbes magazine's list of the 400 richest Americans last year. "But if I would've understood batteries then like I do now, I wouldn't have touched this.
"Normally, I wouldn't stay with a company this long," he added, "but I still believe this is going to be the winning technology."
Berg has put his faith in a different twist on the rechargeable lithium-ion batteries used to power millions of notebook computers and other consumer electronics. Valence and a crop of other firms are using a chemistry in their lithium-ion batteries that's safer and more stable than the cells in widespread use today.
The battery recalls issued last year by several computer makers illustrated the dangers of the current technology. But Valence's chemistry doesn't deliver the same pound-for-pound power.
So Valence and its rivals have focused on applications where the more popular lithium-ion batteries would be too great a risk — hybrid vehicles, motorized scooters, power tools and cell phone towers, to name a few.
"You have many of these cells in a large area, and you don't want something to happen that will cause a big fire and create safety issues," said Ahmad Pesaran, principal engineer at the National Renewable Energy Laboratory in Golden, Colo. "That's where this technology is teetering on the edge of breaking through — as the next battery that goes into a Prius" or another hybrid car.
Valence already has its batteries powering Segway scooters, cell phone towers and automated wheelchairs. It has lined up dozens of companies to test its batteries, including several hybrid and battery-powered vehicle programs. And it sells a smaller version of its batteries as a back-up power system for notebook computers and other consumer electronics.
But it still has a long way before its products become widespread. The company is working out final details on new packaging and electronics that control the larger battery systems, Berg said. And this variety of lithium-ion chemistry remains expensive.
But the challenge now is driving sales, not trouble-shooting the production and technical issues that dogged Valence for years.
One of the toughest parts of selling new battery technology "is building credibility in the market," said Sara Bradford, manager of the power supplies and battery group at Frost & Sullivan, a research firm. Large customers "want to have a credible source, both from a safety and reliability perspective. They want to know their orders are going to be filled."
Recently departed CEO Jim Akridge, who had decades of battery industry experience, finally solved the production problems during his tenure. With Akridge tiring of the constant trips to Austin from his home in Tucson, Ariz., Berg brought in former IBM Corp. executive and technology consultant Bob Kanode last month to take over as CEO.
Kanode, who brings deeper experience in sales and marketing, had worked closely with Berg over the past six months. He said he'll work to shift the company — and its 380 employees in Austin, Las Vegas and overseas — into sales mode.
"I'm here to turn the corner commercially," Kanode said.
Electronics makers still pine for longer-lasting batteries, but the list of potential battery uses have exploded beyond consumer electronics and PCs.
"The secret is to find the applications that can't move to the next level" without Valence's technology, Kanode said in an interview at the company's headquarters in North Austin.
The growing interest in hybrid vehicles is a prime example. Current hybrids use nickel-metal hydride batteries. Although they tend to be fairly stable, they can't deliver the same power and performance over the life of a charge that lithium-ion can. To make a jump forward in performance, Kanode said, they'll need a battery such as Valence's.
The company and several of its rivals — most notably A123 Systems, a six-year-old firm based in Watertown, Mass. — already have their batteries under testing in a variety of applications. A123 has gotten much more buzz in recent months, including a meeting with President Bush in February.
"A123 is doing exactly what we did in 1990, when we were the buzz of the country," Berg said. "I'm not too shocked at that. With our track record, we have to go out and prove to the world" that we can do this.
The world is waiting for that proof. Valence's shares peaked at $39.66 in March 2000, but they haven't topped $10 in the past six years. The stock closed Thursday at $1.14.
A123, a private company, has focused primarily on cordless power tools, including some popular Black & Decker and Dewalt models. Only more recently has it turned its attention to hybrid vehicles, said Bradford, the Frost & Sullivan analyst.
"For a long time, Valence was the spearhead in the industry," Bradford said. And although A123 is getting more press now, she said, "I still feel (Valence) has a very solid position."
Stiff competition
Both companies face stiff competition from the established lithium-ion battery makers, whose ranks include Sony, Sanyo and Panasonic. But even in applications where its more stable compound holds bigger advantages, there's plenty of room for several companies, Kanode said.
Take the market for lead-acid batteries, the ones found under a car's hood. The market for those batteries is $16 billion to $17 billion, he said, and Valence's batteries could offer better performance in many of the places lead-acid is used.
At the federal renewable energy lab, Pesaran and his team are testing a Valence-powered hybrid car. They plan to move on to A123's system next, he said.
"Competition is good, because they push each other," Pesaran said. "But also, because there's more than one company, people accept the technology better."
But the companies face the same barriers, the biggest of which is price. Their type of lithium-ion battery costs almost four times as much as auto manufacturers will pay, Pesaran said. A full battery system, electronics and all, can cost as much as $20,000, he said, but automakers want something more in the $4,000 range.
Those prices will drop if the technology catches on and companies can begin producing the systems in greater volume. And because the chemistry uses iron instead of cobalt, its raw materials are cheaper than those in the lithium-ion battery powering a notebook PCs.
Valence also has managed to sharply reduce its production costs by moving its manufacturing to established battery firms in China.
Other obstacles
But price isn't the only barrier Valence and its rivals face. As they build larger battery systems, the electronics needed to manage them grow more complex. If one of the battery's cells falters, Pesaran said, the whole system's performance can suffer.
And a more fundamental problem could be looming in the form of a patent dispute over the chemistry Valence and A123 use.
The chemistry that makes their batteries more stable has its roots in work done by John Goodenough, a mechanical engineering professor at the University of Texas. The school and Hydro-Quebec, a Canadian utility that licensed Goodenough's technology, have sued Valence and A123, claiming they've infringed on the UT patents.
"We're confident to go forward," Kanode said of the company's patents.
Kanode will look to add rising sales to the company's recent success in cutting costs. Although the company reported revenue of $11.9 million through the first nine months of its latest fiscal year, it also reported a $16.4 million net loss.
Valence has drastically cut the cost of producing its batteries, though. For the first time, Valence reported a quarter in which it made more revenue than it spent to manufacture its batteries.
Given those improvements, pulling in more sales could lead to a profitable quarter — which Valence has yet to have. Berg said that any one of several potential deals could double revenue and that he hopes the company will be profitable on a sustainable basis by this time next year.
A profit would be a long time coming, but Berg said he'll back the company as long as it increases sales and moves toward profitability.
And if it wants to get back the buzz it has lost to its younger rivals, he said, Valence will have to string together a series of strong quarters.
"Then the world will start to believe in Valence again," he said. "We've been around so long that most of the world has lost interest in the company. (They're saying) 'Valence hasn't done anything in 15 years, so why now?' "
"It all boils down to doing sales," he said.
dzehr@statesman.com; 912-5932
