July 19, 2005
Fuel Cell Sector Too Crowded
Source: The Globe and Mail
Mississauga — Canada's biggest fuel cell companies will find it difficult to achieve profitability so long as the sector remains crowded with small players, says Pierre Rivard, chief executive officer of Mississauga-based Hydrogenics Corp.
"We believe there is a need for consolidation because right now revenues are not sufficient to sustain that many companies in the fuel cell sector," Mr. Rivard, who runs Canada's second-largest fuel cell company, said in an interview.
Mr. Rivard said he would even consider the possibility of merging with industry leader Ballard Power Systems Inc. Such an alliance would have the potential to create cost synergies for both industry leaders, especially at a time when they are under increasing pressure from shareholders to show profitability.
"Their [Ballard] recent strategic shift to a stack-centred model fits very nicely with our fuel cell engine. By all means, we are open to such collaborations," Mr. Rivard said.
Ballard Power announced last month that it will receive $30-million (U.S.) in funding from a Japanese company to be spent on the development of fuel cell stack and system technology that will be installed directly at consumers' homes and generate electricity and hot water.
Canada's fuel cell industry has been expanding quickly for the past 10 years on the back of government assistance and investors' enthusiasm for a new technology, which some thought could be as lucrative as investing in Microsoft. There were high hopes that emission-free hydrogen fuel cells could replace gas-guzzling cars and even start producing power in homes, but this technology is still in the early stages. And industry leaders such as Ballard Power and Hydrogenics are struggling to bring down the cost of fuel cell systems.
The number of companies involved in the sector, however, has doubled from 1999 to 2004, with 23 public and 38 private fuel cell developers in Canada, according to a survey by PricewaterhouseCoopers LLP Canada last year.
Analysts say there are signs that the sector is ripe for consolidation.
Hydrogenics achieved No. 2 status when it acquired Ontario rival, Stuart Energy Systems Corp., for $155-million (Canadian). The acquisition has expanded Hydrogenics' product line and market access to Europe and Asia. Ballard Power last month told shareholders it was selling German subsidiary, Ballard Power Systems AG, to DaimlerChrysler and Ford because of the high cost of operations.
Jon Hykawy, director of technology research at Fraser Mackenzie Ltd., says only a few companies will be able to find profitable niches, while the rest will just burn capital.
"I don't see at this time much fundamental value that supports the current market caps of fuel cell companies," Mr. Hykawy said.
The share price of Ballard Power, for instance, has fallen to under $6.20 (U.S.), a fraction of its heyday price of $180 on the Nasdaq Stock Market. The company posted a $175-million loss in 2004, much steeper than previous year's $125-million. Similarly, Hydrogenics shares are trading below $4 on the Nasdaq, almost 38 per cent lower than in March. The company lost $33.5-million in 2004, compared with a loss of $22.1-million in the previous year.
But Mr. Rivard says the future of hydrogen fuel cell technology is still promising despite criticism that the technology has been slow to develop and achieve economies of scale.
"This perception is wrong," he says. "This is very wrong because we do have a market that exists today."
He is optimistic fuel cell technology will go commercial much earlier than anticipated because of two markets: One for backup power used in computer and data server rooms, and the other for in-house utility vehicles such as forklifts.
Hydrogenics recently won its biggest commercial order, selling to American Power Conversion Corp., which will use Hydrogenics' fuel cell batteries in its backup power products. Similarly, the company's hydrogen-powered forklifts have had a successful two-month trial at General Motors' car plant No. 1 in Oshawa. In the second leg of trials, hydrogen-powered forklifts will be put to use at FedEx facilities before commercial production begins.
"In the past 18 months, we demonstrated that we have solved the issue of durability for the specific market we are aiming for. And we have solved the performance issue," Mr. Rivard said.
With the strong balance sheet and $160-million in cash, Mr. Rivard said, the company is ready to play the role of an industry consolidator. "We get bombarded almost weekly by opportunities for consolidation. We are sifting our way through to see which one will make more sense for us initially."
