Lithium-Ion Batteries: The Dreamliner Fallout

by Will Ashworth | January 18, 2013 2:04 pm

It’s hard to believe that technology used to operate your cell phone is also used in the Boeing (NYSE:BA[1]) 787 Dreamliner. Lithium-ion batteries have become the Achilles’ heel of the world’s most fuel efficient aircraft[2], and Boeing is racing to find a solution to this serious safety concern. It could be a long way off. Many companies, most notably but not just Boeing, will suffer serious consequences if this requires something bigger than a quick fix.

Japan’s GS Yuasa (PINK:GYUAF[3]), relatively unknown in America, manufactures the lithium-ion batteries in question. Its stock dropped as low as 297 yen Wednesday on the news. By the end of Friday’s trading it was down 6.8% for the week, 10.3% on the year and 54.7% over the last three years. This isn’t what the company needs right now.

So why is it getting hammered?

It’s become apparent that the real issue with the Dreamliner is the way Boeing has chosen to power it. In an effort to make the 787 the most fuel-efficient commercial plane operating anywhere, Boeing is powering most of the aircraft’s systems electrically rather than with hydraulics, the traditional method. Virtually every system on the plane is run with electricity, making these super-size batteries vital to its operation. Wired.com’s Jason Paur has written an excellent piece about the technology involved[4]. You should definitely have a read if you’re at all technically inclined.

Before investors give up on GS Yuasa, or Boeing[5] for that matter, it’s important to look at the big picture. This isn’t the first plane to have serious defects coming off the assembly line. Airbus introduced its giant A380 in 2007. It has gone through periodic groundings since its introduction. The latest wing-crack issues are forcing airlines to keep the planes grounded for up to eight weeks to permanently repair the wings. Airbus’ initial repair estimates are $315 million. Planes made until 2014 will still have the defect and need to be repaired. Thereafter, the fix will have been designed into the A380′s manufacturing process.

These things happen, especially when you’re incorporating a ton of new technology — the Dreamliner is Boeing’s most advanced plane ever — all at once.

GS Yuasa’s reputation is more at stake than anything financial. Lithium-ion batteries represent approximately 7% of its overall revenue, and the battery division is currently losing money. But it would take a scenario where regulatory bodies around the world conclude that the lithium-ion batteries aren’t safe due exclusively to the manufacturing process before GS Yuasa, which is more known for car batteries, would be “up a creek without a paddle.”

I have to think Boeing is going to shoulder a lot of the financial repercussions of getting the batteries right. But time will tell.

I’ve looked at GS Yuasa’s financials, it appears to be a sound company that’s had a tough couple of years — and its stock price shows that. The latest challenge is another impediment for shareholders. Still, if I lived in Japan, or Asia, I’d have no problem investing in its stock.

For other adventurous investors, the Global X Lithium ETF (NYSE:LIT[6]) has GS Yuasa in its top 10 holdings with a weighting of 3.69% and Saft Groupe (PINK:SGPEF[7]) at 4.81%. Saft Groupe is the supplier of lithium-ion batteries for Airbus’ A350, which is under development. Although the ETF has had a rough run since its inception in July 2010, it’s having a good 2013 so far, up 3.1% through Jan. 17. It has felt little effect from the Dreamliner debacle.

While there’s lots of noise right now about the implications of the 787′s grounding, the reality is that what’s happening is simply a part of operating in the aircraft manufacturing business. We might think it’s the end of the world, but Boeing has been through this many times. If it’s scared, it’s not showing.

That’s a good thing for GS Yuasa — and all the other firms involved in building this plane.

As of this writing, Will Ashworth didn’t own any securities mentioned here.

Endnotes:
  1. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  2. Achilles’ heel of the world’s most fuel efficient aircraft: http://investorplace.com/2013/01/the-dreamliner-has-boeing-going-sleepless/
  3. GYUAF: http://studio-5.financialcontent.com/investplace/quote?Symbol=GYUAF
  4. technology involved: http://www.wired.com/autopia/2013/01/boeing-787-electric-fire-grounding/
  5. Before investors give up on GS Yuasa, or Boeing: http://investorplace.com/2013/01/should-i-buy-boeing-3-pros-3-cons-jan-17/
  6. LIT: http://studio-5.financialcontent.com/investplace/quote?Symbol=LIT
  7. SGPEF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SGPEF

Source URL: http://investorplace.com/2013/01/lithium-ion-batteries-the-dreamliner-fallout/
Short URL: http://invstplc.com/1fwU9d3