This technology will replace 148 billion barrels of oil

Horacio Marquez
0 Comments|October 26, 2009

Warren Buffett quintupled his money in a little over a year

Not many investors noticed in September 2008, when Warren Buffett took a 10% stake in Hong Kong-based battery maker BYD Co. Ltd. for $230 million.

They should be noticing now.

Shares in BYD, which also makes cell phones and automobiles, have quintupled in a little more than 12 months, meaning that Buffet’s investment is now worth more than $1.5 billion.

But Buffet’s interest in this little-known Chinese stock isn’t the main story here. In fact, the investing icon is simply focusing a bright spotlight on an industry that could serve as a major profit play for years to come.

The real story here is battery power, a technology market that’s heating up in a big way. Just the market for rechargeable batteries is expected to zoom from $36 billion in 2008 to $51 billion in 2013.

And yet the battery market gets less attention than solar or wind power, its higher-profile (but less-technologically developed) cousins.

Modern battery technology is the keystone of the global push to find an energy alternative for oil. In fact, a specific new category of rechargeable batteries is actually a “breakthrough” technology that has the potential to replace as much as 148 billion barrels of oil over the next 50 years, a potential savings of $10.4 trillion – even at current prices.

And oil prices will certainly blast well above the current $78.50 a barrel as supplies diminish.

What these numbers don’t tell you is that there’s a powerful catalyst at work, one that’s behind the big push to develop new, rechargeable battery technologies: the electric – or “hybrid” – car.

Billions bet on “third element” technology

While last year’s record oil price of $147 a barrel served as a wake-up call for the car-driving consumer, it was also the catalyst that shifted the plug-in-auto industry into high gear.

In response to the oil price surge in 2008, U.S. President Barack Obama promised to invest at least $150 billion on alternative energy during his term.

But a big chunk of his $787 billion stimulus bill will finance development of a new, rechargeable battery technology for Plug-in Hybrid Electric Vehicles (PHEV).

The technology in question: Lithium-ion.

Sometimes referred to as the “Third Element” – because of its No. 3 position on the Periodic Table of the Elements, lithium is believed to have been one of the few elements synthesized in the “Big Bang” that created the universe.

Now it’s a key ingredient of the new class of rechargeable batteries needed to jump-start the plug-in car market. The other ingredient is capital.

President Obama’s American Reinvestment and Recovery Act allocates $2 billion for the development of battery systems, components and software for advanced lithium-ion batteries and for hybrid electric systems. Another $300 million will support an Alternative Fueled Vehicles Pilot Program.

While those allocations will nurture the continued development of lithium-ion technologies, another program is aimed at hybrid-vehicle buyers: Starting this year, buyers of commercial plug-in electric vehicles can receive a tax credit of up to $7,500.

And that was just a down payment: The $25 billion Advanced Technology Vehicles Manufacturing Loan Program will make sure the industry itself continues to develop.

Automakers have latched onto lithium-ion battery technology as the road to the future. Right now, nearly every automaker on the planet is gearing up to flood the market with some form of electric-powered car:

  • Daimler AG plans to roll out a hybrid version of its S-Class sedan later this year. The entire Mercedes lineup eventually will be available as hybrids in the next five years.
  • Tesla Motors Inc., of San Carlos, Ca., has already delivered the Tesla Roadster, a stunning electric two-seater that sells for more than $100,000.
  • Nissan Motor Co. Ltd. retooled a factory in Smyrna, Tenn. to produce a pure electric vehicle. Nissan expects to sell as many as 50,000 units of the hybrid Altima in its first year.
  • Ford Motor Co. is bringing out the pure electric Transit Connect commercial fleet van in 2010 and plans to invest $550 million to retool a Michigan truck plant to manufacture a pure electric Focus in 2011.
  • Chinese carmakers Hafei and Coda are planning to bring a mass-produced electric car to market in California in fall 2010.
  • And General Motors Corp. is counting heavily on new-technology lithium-ion batteries to power the Chevy Volt, its revolutionary and much-hyped PHEV, which is due to debut next year.

Global power (and profit) play

For further confirmation that the PHEVs are more than just a passing fad, look at the money being invested by governments across the globe.

Aabar Investments PJSC, an investment company wholly owned by the Abu Dhabi government, recently bought a 4% stake in Tesla Motors from Daimler. And Aabar Chairman Khadem Abdulla al Qubaisi says the fund is planning several more electric-vehicle ventures with Daimler.

“When we acquired our stake in Daimler in March, we identified a number of potential areas for co-operation between our two businesses. One of these was a desire to focus on the development of electric vehicles,” al Qubaisi said.

But here’s the real kicker: Aabar Investments is using Abu Dhabi oil revenue to finance its foray into these oil-supplanting battery technologies.

Worldwide demand for batteries of all types – both non-rechargeable (primary) and rechargeable (secondary) is projected to advance at roughly a 7% annual clip through 2010, reaching $73.6 billion, according to a study published by The Freedonia Group, a Cleveland-based market-research firm.

Not surprisingly, the “World Batteries” study predicts that China will post the largest gains, while sales increases are also expected to be strong in India, Indonesia, South Korea, Poland, South Africa, Brazil and Russia.

But it’s the China market that promises to put a real charge into the worldwide battery business.

On the home front, Beijing is pushing its assault on battery power through its “20% by 2020” campaign, meaning that 20% of China’s power needs will be served by renewable-energy technologies.

From a global standpoint, China is using its big advantage in labor costs to establish a leadership position in the worldwide battery market, and already has more than 50 factories cranking out product.

It’s an aggressive plan, to be sure, but it’s also cohesive and complete. And Beijing has the cash to make it happen.

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