August 2004

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VANCOUVER - If you go by the Gnomes of Wall Street’s instant judgments, Ballard Power Systems’ restructuring of its joint fuel cell operations with DaimlerChrysler and Ford last month was a bad sign, foreshadowing more gloom and doom - maybe a glidepath to oblivion.

But if you look at some of the fundamental realities presented by the company and endorsed by some knowledgeable outsiders, things don’t look so bad at all - certainly not in the long-term view, which informs hydrogen and fuel cell advances.

In fact, Ballard insists it still leads the pack of fuel cell developers, and it says it intends to stay there.

Ballard announced in early July it was restructuring its alliance with the two carmakers in a new arrangement in which DaimlerChrysler and Ford would re-acquire Ballard’s German operations in Nabern, Ballard AG (formerly XCELLSIS) which Ballard had bought in 2001 (H&FCL Nov. 01). This division is principally responsible for systems integration of Ballard’s fuel cells into vehicles. The three companies have signed a Memorandum of Understanding to that effect, subject to shareholder approval later.

Systems integration there apparently represented “the big cash drain” for Ballard, one close observer of the situation told H&FCL. Ballard also discovered that systems integration and offering complete systems didn’t charm very many carmakers: “When we look at the long-term potential of the systems business today, what we’re finding out is that the (automakers) prefer to do systems in-house and that the market isn’t as large as we envisioned,” a July Canadian Press report quoted Ballard CEO Dennis Campbell as telling analysts in a conference call.

Returns to Core Capabilities

Under the new arrangement, Ballard will return to its core competence by focusing on further research, development and manufacturing of fuel cell stacks while continuing to support the development of its electric drive system. DaimlerChrysler and Ford, by taking over the Nabern facility, will be jointly responsible for r&d of the entire vehicular fuel cell system, the balance of plant, according to the announcement.

The two carmakers will also make a Can. 55 million(about U.S. $41 million) equity investment in Ballard, and they will also provide up to U.S. $58 million “engineering services” revenue for stack and electric drive development to the company, Ballard said three weeks later on July 28 in its second quarter 2004 release.

The carmakers are also providing assurance of long-term continuity, DaimlerChrysler by agreeing to purchase the next generation fuel cell electric drive (although the release didn’t say what the target dates were) and Ford via existing purchase commitments through 2021.

Sputtering Stock, Gloomy Assessments

Still, the initial July 8 restructuring announcement sent Ballard’s already anemic stocks sputtering downward. The day after, Ballard’s stock slid 19% to $7.26 on the NASDAQ, apparently largely as the result of a downgrade by Credit Suisse First Boston. One analyst speculated that the cash burn will accelerate this year, despite the removal of the money-eating Nabern facility from Ballard’s books. Another believed that while the move may in fact reduce Ballard’s cash burn, the company “has moved down the value chain” and that the company will not only face reduced revenue prospects from the automotive fuel cells area but that overall margins will be relatively lower as well.

One Canadian analyst, MacMurray Whale, of National Bank Financial, even worried that the company may run out of cash before it can start commercial production. “Should Ballard fail to develop economical suitably (fuel cell) stacks, it could possibly run out of resources to continue,” Whale was quoted in a July 17 Globe and Mail article. Since that first announcement, Ballard’s stock has slipped some more, to a low of US $6.33 later in July but has recovered somewhat since then. And that decline didn’t seem to have anything to do with the restructuring either: Traditionally, Ballard stock has moved almost in lockstep with NASDAQ’s average, and both NASDAQ and the Dow have been in a slump recently.

Overall, Ballard’s management argues vigorously that the restructuring is good for the company. “This transaction reduces Ballard’s risk and increases our focus,” CEO Campbell said in the second quarter release. “”It reduces our risk in financial terms, in operational terms, and in terms of commercialization. Ballard will be financially stronger due to higher cash balances, lower cash consumption and clear definition of, and funding for, our next generation fuel cell technology.

“It provides us with greater flexibility to work with other automakers to extend our industry-leading market share. DaimlerChrysler and Ford remain committed to fuel cells and will focus considerable resources and expertise on the refinement of the automotive fuel cell balance-of-plant and vehicle integration.”

Campbell: Fuel Cells are Engines for 21st Century

In a conference call with analysts discussing the second quarter, Campbell acknowledged that hybrid electrics, which he sees as a “useful bridge” to future zero-emitting fuel cell vehicles, have “great curb appeal......The technology is here and available now.

“There is, however, a fatal flaw in the hybrid world scenario. Hybrid electrics still require fossil fuels.”

Among major automakers, “the debate on this point is essentially over,” Campbell said, according to a July 28 Canadian Press account of the call. “The fuel cell will be the automotive engine of the 21st century.”

Steve Kukucha, Ballard’s director of external affairs, is insistent in saying that no other fuel cell developers have reached the level of expertise and experience that his company has accumulated. “Ballard is still leading. Let me quote some statistics:

“Right now, we have more than 100 fuel cell vehicles operating worldwide, including 45 buses. We are powering more than 50% of all DoE (fuel cell) vehicles. This year, we will put more than one million kilometers (625,000 miles) on the road,” he told H&FCL. That total is expected to grow to more than 160 vehicles in the next two years, according to Campbell.

Says Kukucha, “Nobody else has that experience. And you learn from that experience.” He says the company fully expects to work with carmakers other than DaimlerChrysler and Ford in the future as well, citing Honda as one example. Despite the fact that the Japanese carmaker has been developing its own fuel cell stacks, “our partnership with Honda is still very strong,” he adds. “They have stated that they will be a customer,” but also that “they will compete.

“Automakers, whichever you want to name, want the best technology.”

And at least one former Ballard executive thinks that the company will remain a force to be reckoned with. “People are making the assumption that over the marathon of fuel cell development, Ballard is going to trip or make a misstep,” Paul Lancaster, Ballard’s former chief financial officer who recently joined Palcan Fuel Cells Ltd. in the same capacity (See Transitions), told H&FCL. It ain’t necessarily so: “There is nothing to back this assumption up, nothing concrete you can look to make you think this is going to happen,” says Lancaster.

“Based on everything you can see in the public arena, they remain in the lead, even though they are facing competition from a lot more companies than in the past.”

P.S.: Ballard announced a couple of management changes at the July28 2nd quarter briefing: Noordin Nanji, until then vice president in charge of corporate strategy & development, was named vice president for marketing & business development, replacing Ross Witschonke who is leaving Ballard by mutual agreement. Nanji’s former position was eliminated and the functions were reassigned to chief financial officer Dave Smith. Michael Rosenberg was named to the new position of treasurer. A top priority is Ballard’s continuing search for a chief technology officer. Contact/Sources: Ballard, Stephen Kukucha (media), stephen.kukucha@ballard.com; www.ballard.com; media reports.