enerested's analysis of ECD
in 5 posts on Yahoo today
beginning with his preliminary intro:
(posts #114922-114926)
<<We sorely need some sensible discussion regarding the putative management problems at ECD.>>
Ray,
I strongly agree that this board needs to raise its level of discussion about management and the value of the company. Although management is fair game for criticism, that doesn’t excuse the level at which many post on this board. Most criticisms amount to whining or short-sellers bashing. Similarly, much of the enthusiasm displayed in posts lacks sufficient rational to separate it from mere stock-pumping. I don’t know if the level of posts can be raised significantly, but for kicks, I will attempt a few posts with that exact purpose in mind. If I fail, then I will just continue adding whiners and pumpers to the ignore list until the thread slowly disappears into oblivion for me.
Where to start? How about how ECD has gotten to this spot in its long history, still sans any long-term debt while being the holder of intriguing IP?
Fundamentally, ECD is in the alternative energy business, which may have seemed the perfect area to operate a company during the days of our first energy crisis of the 1970’s. As made obvious with the crash of the energy market in the mid-1980s, nothing could have been further from the truth. (So much for the Club of Rome’s forecast based on Forrester’s expediential growth model.) Instead, until recently, the real cost of energy has steadily trended downward, assigning energy companies in general, not to mention alternative energy companies, to Wall Street’s ignore list. It would be almost impossible for any alternative energy company to make money under the market (energy and finance) conditions that prevailed over the last twenty years. There were occasional blips, but with long-term trends firmly entrenched investments in alternative energy languished.
The fact that ECD survived this unending drought with its IP and balance sheet in tact says something positive about management. A better appreciation of management’s perspicacity, however, can be derived by delving into the organizational alignment of prominent products, or business areas, using the latest tools of what is now preached by business gurus.
I’m going to take a management consulting look at three business areas: batteries, OUM and solar. I will attempt to line up how the company has organized the handling of each of these business areas with what modern management would prescribe. Not only will this analysis give robust clues about management’s capability, but it becomes a springboard for developing a definitive indication of what might be in store for each business area, and thus the long-term future of ECD.
I think you will find the results surprising, uplifting in some respects and perhaps disappointing in others. Let’s see.
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Batteries:
Due to poorly negotiated licenses with commercial battery producers, or perhaps just due to the necessity of doing what you must to survive, the excitement over ECD’s battery business lies with COBASYS, not commercial batteries. Even within COBASYS the main excitement pertains to batteries for vehicles: cars, trucks and buses. In any case, that’s what I will focus on here: NiMH batteries for transportation.
GM and Ford screwed up what might have been a huge market for ECD when they introduced the EV as a sustaining technology. At the time when GM and Ford were introducing EV in California, the electric vehicle technology was disruptive, not sustaining (fuel injectors replacing carburetors is sustaining; PC’s taking out both mini- and maxi-computers is disruptive). Large, mainstream companies never successfully implement disruptive technologies, mostly because they can’t help trying to push them as sustaining. This is true even though large companies are the actual inventors of most disruptive technologies. Despite the EV’s popularity with gadget freaks and environmentalists, the EV didn’t come close as a possible substitute for ICE vehicles. They lacked adequate range; they needed access to an electric plug; and their real cost was way too high. Moreover, the real cost of gas was, once again in the American way, encouraging the emergence of gas-guzzling SUVs and trucks.
Although ECD and investors must have been extremely excited over EV possibilities for NiMH batteries in EVs in the mid-1990’s, cooler heads should have been able to see that the market at that time had to disappoint. In fact, ECD’s battery business would have been a total bust were it not for Toyota’s miracle: the practical hybrid. Most auto executives spurned Toyota’s efforts in creating the hybrid because they believed, and many still do, that marrying two motors, gas and electric, in a car would hardly improve efficiency enough to offset a steep cost increase. We now think they were wrong, and the hybrid technology seems to be off to the races. Unlike EV, for all practical purposes, hybrid technology simply substitutes for ICE-only, making it a sustaining technology, not disruptive.
Sustaining technologies are successfully promulgated only by mainstream companies, never with much success by small-scale innovators. Consequently, small companies finding they are trying to ride a sustaining technology to riches are advised either to sell out or partner with a mainstream player. That is exactly what ECD has accomplished by sharing COBASYS with ChevronTexaco. Whether ChevronTexaco is the best choice of a partner is left up to the reader, but the company has the needed attributes for success: mainstream presence in the energy business and no business conflicts with potential customers. Dumb luck thanks to the Toyota hybrid maybe, but ECD’s position in the battery space has turned out to be optimal, or close to it.
We will see what this entails for ECD’s future when I recap after reviewing the company’s other business areas.
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OUM:
OUM started life as a being a great disruptive technology. It couldn’t replace DRAM or SRAM out of the box, and it was too expensive and lacked the density initially of replacing Flash. Of course it was way too expensive to replace hard disk storage. But it has some great properties that over time, and with learning in the Fab, would stand a realistic chance of finding new markets and eventually disrupting the mainstream market.
The BAE partnership was perfect for bringing out a disruptive technology, except for the languishing pace of government development contracts. Space applications are non-consumers of traditional, low-priced memory products because of the harsh environment of space. This makes it easy pickings for something like OUM.
The Intel partnership, on the other hand, was a horse of a different color. Intel has no interest in mucking around with anything disruptive. By every word Stephan Lai speaks, it should be clear Intel is only interested in new memory technologies that eventually will replace Flash. Intel is only interested in OUM as a sustaining technology.
STM is in between BAE and Intel. They appear to be willing to introduce OUM in special applications, discrete or embedded, yet nothing specific as been announced. The Nanochip OUM license deal captures a remarkably disruptive technology that is ideally situated within a company of Nanochip’s size, financing and connections. Keep an eye on Nanochip as an exciting IPO hopefully one day soon.
Ovonyx, a very small company, is ECD’s partner in pursuing OUM as a Semiconductor Intellectual Property company. Ovonyx is too small to personally take out mainstream Flash by becoming a Flash-replacement Fab company, and it doesn’t seem interested in directly fabricating disruptive memory products and taking them to market. In short, it is strictly beholding to its licensees, some of which are disruptive and one big one, at least, is sustaining.
While OUM is a mixed bag of disruptive and sustaining technology, it does appear organizationally optimal. The disruptive aspects of OUM are being pursued first with BAE supported by government contracts and Nanochip, a pure disruptive technology company. The sustaining aspects are being pursued with absolute giants of the Flash memory business: Samsung, Intel and STM, with the latter seeming to be willing to experiment with disruptive uses of OUM.
If I had my druthers I would like to see much more disruption in Ovonyx’ technology, but partnering with Intel precluded an early emphasis in that direction. Given the investment realities of trying to pursue OUM early on without Intel’s participation, there may not have been much choice as to how to proceed. Ovonyx is now a mixed bag of both disruptive and sustaining potential, which may be the best that could be expected without a significant ECD investment. More about this in the wrap up…
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Solar:
As a true energy alternative - read mainstream - the solar business got crushed by the energy crash of the mid-eighties. Ever since then, solar has been swimming upstream with absolutely no respect given by mainstream energy players. In its latest energy outlook, Exxon-Mobile states flatly that the company is not investing in solar because it is both insignificant and unprofitable. The cost per KWatt for solar remains significantly higher than fossil fuels, and the solar market that has developed has been cutthroat, making it difficult for solar companies to survive – at least until very recently.
Meanwhile, solar costs continue dropping 5% per year while gas and oil appear finally to be trending upward, and not just trending but escalating.
This is a textbook example, maybe one of the best examples of all time, of a disruptive technology ready to blast off. The energy industry is the biggest on earth, and it is being attacked by a disruptive technology that major players ignore. By virtue of economics, the solar attack has been happening mostly with non-consumers of grid electricity (remote locations) and where government subsidies entice early adopters. The best place for disruptive technologies to surface first is with non-consumers of mainstream products ultimately to be disrupted.
At some point solar costs will penetrate the lower bound of fossil fuel costs, and when that happens, “Katie bar the door.” Solar will begin to disrupt a trillion dollar market. Actually the cost penetration point already is starting to occur in Japan, and is close in Germany. It is not a coincidence that both of these countries are leaders in the deployment of solar installations.
Now, back to earth for a moment, how would be want ECD to organize its solar venture? Since solar is perfectly disruptive, ECD should own the venture 100% and take the time and make the effort to nibble away at newly developing markets. Disruptive technologies are best pursued by small companies – never mainstream players. Small companies can adapt and survive handily on smaller revenues and margins, unlike large companies.
As investors, you surely know the biggest marbles on Wall Street go to small companies that successfully introduce a disruptive technology that ultimately makes it into the mainstream. By extension, the biggest marbles of all will go to the small company that introduces the dominant, disruptive technology in the biggest industry in the world.
While the company didn’t get to 100% ownership of Uni-Solar without a few zigs and zags, it did get there. In other words, it would be hard to claim management plotted the current result all along, because that would imply complicity in its relations with Bekaert. Nevertheless the outcome could not be better for ECD and shareholders.
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Organizational Implications for ECD’s Future Value:
The goods news is that each of ECD’s primary business areas, by hook or crook, is optimally organized for success. That doesn‘t mean any of them have to succeed, it just means they are NOT guaranteed to fail because of inappropriate organizational structure.
The battery business, with a heavy-hitting partner in what appears to become a mainstream business, is set to grow revenues rapidly and profitably. ECD doesn’t have to do anything more about COBASYS at this point but enjoy the ride. I would like to see COBASYS ramp revenues profitably to a significant number, like $1 billion, and sell 10% to 30% of the company to the public. Besides providing COBASYS funds for expansion, the value of ECD’s ownership of COBASYS would be realized immediately in its stock. If Wall Street doesn’t award ECD sufficiently, i.e. the value doesn’t show through, ECD’s ownership in COBASYS should be distributed to shareholders. COBASYS can do nice things for ECD’s value, but not take it to the moon.
OUM has a chance to become highly valuable if Intel/Samsung/STM succeed in introducing OUM as a sustaining technology replacement for Flash or if Nanochip succeeds in its disruption of hard disk storage. Whether the value is accrued by Intel acquiring Ovonyx or by Ovonyx going public and having its market cap reflected in ECD’s is unknown. What is known is that the true potential value from the Nanochip disruption of hard disk technology would be best realized by Ovonyx staying independent and ultimately issuing an IPO. Unfortunately, the timing is completely unknown for any of these potentialities beyond the BAE product releases (which will not boost Ovonyx or ECD’s value much) or STM’s hints at near-term product releases, which could impact Ovonyx’ perceived value. Disruptive technologies tend to linger slowly until they hit an inflection point, which might be years away. Sustaining technologies, like what Intel is up to, will not implement before its time, but then ramp instantly when ripe.
Uni-Solar is perfectly positioned to begin experiencing explosive revenue growth that can continue unabated for decades. The cost per KWatt of solar generated electricity in Japan is bumping up against the cost to the user of electric power on the grid. You are beginning to witness one of the biggest disruptions ever experienced by mankind, which is just starting in Japan. Germany is next; Italy is next after that. Because of California’s recent scare with exorbitant (extortionist?) power costs, California isn’t nearly as far back in the pack as the rest of the United States or what rational economics would dictate.
This opportunity is so great that there should be no thought of spinning off Uni-Solar, or partnering with any other company, particularly a mainstream energy company. Worst of all, there shouldn’t be even a suggestion that ECD should sell Uni-Solar. Just because Uni-Solar is optimally positioned doesn’t mean it must succeed, but it appears to have a great technology at exactly the right time and place to become extremely successful.
ECD’s greatest violation of good management principles is their long-lived pattern of ignoring the need for profits. Generally, early profits with disruptive technologies are useful to ensure management gets helpful feedback on what customers are willing to buy, therefore aiding the adaptive process leading to a successful product. In ECD’s case, the NiMH hybrid battery, Uni-Solar panels, and, it appears likely, OUM are all proven or mostly proven. Thus, again, through luck or great vision, ECD management has avoided the very pitfalls this rule-of-thumb is designed to prevent. Consequently, the rule is not applicable going forward for ECD. This company is truly an enigma
Whether ECD management is the luckiest on the planet or they are plenty smart, I like the way the main business areas are positioned for success. |
