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NEW YORK, May 27, 2004 – “Buy a micro fuel cell and get a free laptop computer,” runs the insider’s joke.

Efforts to miniaturize fuel cells for notebook computers have been beset by cost and performance problems that have delayed debuts and inspired the industry’s black humorists. But two small companies in New York intend to have the last laugh in what is shaping up to be a market showdown. Early success could translate into sales of up to 120-million units by 2012, according to a study released this month.

Medis Technologies, with offices in New York City and Israel, expects to deliver devices toward the year’s end that are smaller than a pager with enough power for 12 to 15 hours of mobile phone talk time or half a dozen recharges of a digital camera. Competitor MTI Micro Fuel Cells Inc. of Albany also plans to ship first-generation products for radios and RFID tag readers in 2004.

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Chief Executive Robert Lifton said that he expects Medis to send about 1,000 disposable units costing around $15 to distribution partner Kensington Technology Group, a division of ACCO Brands Inc. that makes computer accessories and cases. Products should be available to consumers in the first quarter of 2005. The company also works with General Dynamics on micro fuel cells to run military handheld computers.

MTI will supply fuel cells to Harris Corp. for military radios and to Intermec Technologies Inc. for industrial handheld RFID tag readers. Those customers can control the refueling of power cells in a warehouse or military setting. But Chief Executive William Acker said the company is aiming for the broader consumer market through its investor Gillette Inc. and its Duracell subsidiary.

MTI is developing a prototype small enough to work in portable consumer electronic devices. It is also partnering with Flextronics, an electronics manufacturing services firm, to facilitate its product launch and marketing.

The two startups rely on different technologies. MTI’s system runs on 100-percent methanol fuel, while the Medis Power Pack operates on a proprietary glycerol liquid. MTI’s device is built around proton exchange membrane (PEM) architecture using a polymer membrane material developed by DuPont. DuPont owns a 3.7-percent stake in the company. DuPont Fuel Cell is part of a supply-chain team MTI unveiled in mid-May.

David Redstone, editor of the Hydrogen and Fuel Cell Investor, gives Medis the edge. “The combination of their fuel, proprietary electrolyte and catalyst materials adds up to unmatched power density,” he said. He said Medis allowed its devices to be tested and measured independently, and reported what they will cost.

Large corporations such as NEC, Samsung, Motorola and Hitachi have announced, and delayed in Toshiba’s case, micro fuel cell plans and prototypes.

An analysis released May 19 by the Asian Technology Information Program said Japanese manufacturers would begin incorporating small fuel cells into notebook computers in 2005. ABI Research reported in mid-May that micro fuel cells would appear in a small number of laptops in 2005, and more than 13 percent of laptops would be powered by fuel cells by 2012.

Atakan Ozbek, director of energy research at ABI, said one of the Asian companies could make a breakthrough with a nanomaterial or engineering trick that could improve the commercial prospects of micro fuel cells. But “there are still more questions than answers” on how the field will unfold, he said.

Redstone remains skeptical until fuel cell companies provide products and set costs. “Micro fuel cells are not going to replace laptop batteries anytime soon,” he said.

Several analysts noted that electronics giants have been tight-lipped about the progress and timing of micro fuel cell products. But big companies can afford to remain silent while they nurture R&D programs and get performance data from internal field tests before making any product announcements.

Jerry Hallmark, manager of Motorola’s Energy Technology Lab, said the company continues to work on a micro fuel cell prototype that could power police and emergency radios Motorola makes. But he said Motorola would likely outsource the manufacturing of a micro fuel cell. Doing in-house research, he explained, helps ensure that Motorola will “know the right questions” to ask of a prospective manufacturing partner.

Walter Nasdeo, an analyst for the investment firm Ardour Capital Partners, noted that the cost of early devices is a concern. But he said that it was more important for companies like MTI and Medis to get products out the door “to show that they work, and give people the opportunity to touch, feel and get familiar” with such a promising new technology.

April 8, 2004 — A buckyball toxicity study that spawned considerable debate inside and outside the nanotech industry last week has been published in an environmental journal.

The journal Environmental Health Perspectives this week published Manufactured Nanomaterials Induce Oxidative Stress in Brain of Juvenile Largemouth Bass, written by Southern Methodist University environmental toxicology lecturer Eva Oberdorster. The peer-reviewed study, conducted by Oberdorster and her students, is believed to be the first to show that uncoated fullerenes can cause brain damage in aquatic species.

She and her group found the rates of brain damage to be 17 times higher in nine large-mouth bass exposed to a form of water-soluble buckyballs. The rate was in comparison to nine unexposed fish. The study found what she called “moderate toxicity” in the fish. The concentration of nanoparticles used in the 48-hour laboratory study was .5 parts per million.

Oberdorster presented the study last week at the national meeting of the American Chemical Society in Anaheim, Calif., which was attended by several media organizations and received broad international coverage. The study also became a hot topic among speakers and attendees last week at the National Nanotechnology Initiative conference in Washington. Some publicly accused the media of misleading the public about the environmental risks of nanoparticles.

In both her talk and the study, she stressed that further research needs to be done to evaluate the potential toxicity of manufactured nanomaterials on living organisms, and she is seeking federal money to continue her work. She also criticized some media reports that “twist your words around.”

“Considering the benefits of nanotech, I think it’s actually a great trade-off. Imagine if we can make more-efficient fuel cells and decrease our dependence on highly toxic fossil fuels,” Oberdorster told Small Times in an e-mail. “But that doesn’t sell newspapers. Scary stuff like ‘the buckyballs will eat your brains’ sells much better. Doesn’t matter that it’s not correct, as long as it sells papers.”

Still, she is grateful to have helped spur talk about the environmental impact of nanomaterials: “I think this also points out that the public really wants to know what the risks and benefits of nanotechnology are so that they can make informed decisions.”

Jan. 8, 2004 — Power & Energy Inc. is using a U.S. defense research contract to develop nanostructured membranes for fuel cell applications, according to a news release.

Power & Energy plans to make the thin-film membranes to enable fuel cell users to generate high-purity hydrogen-on-demand from any reformed fuel source. The company said the membrane technology is ideal for early adoption of fuel cells in remote, portable and mobile applications, such as backpack fuel cells for soldiers or distributed electric power generation for ships.

The Phase II Small Business Innovation Research contract awarded by the Defense Advanced Research Projects Agency, allows the Ivyland, Pa.-based company to continue its fuel cell work.

Dec. 11, 2003 — Almost without notice, a number of innovative, advanced material firms in the emerging fuel cell market have been acquired by larger firms. Two recent examples of the trend are Cabot Corp’s acquisition of Superior MicroPowders for $16 million in the United States and Belgium-based Timcal’s takeover of Erachem Comilog’s carbon black business unit in Europe.

 

Both of the acquired businesses are poised to supply materials to fuel cell makers. Things like nanopowders, nanostructured coatings and the like will play an important role in next generation fuel cell systems. “Nanomaterials have the potential to increase power density, extend durability, and lower costs,” said Toddington Harper, a business development manager at Fuel Cell Markets, a U.K.-based consulting company.

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“It’s all about getting the more productivity out of small volumes. As a result, there is a great deal of investor interest in the firms able to supply such technologies,” said David Berkowitz, a partner at Ventures West in Vancouver, a pioneering investor in fuel cell companies.

 

Industry observers, such as Atakan Ozbek, director of energy research at ABI, a market research firm, see the merger and acquisition activity as a jockeying by the larger players to position themselves to serve the emerging fuel cell market. The large players do not want to be left behind “once fuel cell systems become premium energy suppliers,” he said in an e-mail interview.

 

Ozbek expects this trend to continue in the coming years.

 

Berkowitz agrees, “There’s been a great deal of M&A activity to date and the trend will continue in the coming months.”

 

Cabot Corp. acquired Superior MicroPowders for its proprietary process to make “low precious metal content” electrocatalyst powders for proton exchange membrane (PEM) fuel cells. It is now doubling the number of R&D employees and moving to a larger facility in New Mexico.

 

Timcal acquired Erachem Comilog for its carbon black process in September, which is reportedly critical to lithium ion batteries and fuel cells. The unit has an annual turnover of approximately $18 million and owns an innovative special carbon black manufacturing process.

 

A wider trend

 

The silent snapup of nanomaterial manufacturers is part of a larger consolidation trend in emerging fuel cell market taking place on both sides of the fuel cell supply chain, according to Walter V. Nasdeo, an analyst at investment banking boutique Ardour Capital, in New York.

 

He goes as far as to say that fuel cells are a “commodity” and that the suppliers of parts and services are the ones who stand to have the “fattest margins” in the value chain in the future. This includes parts manufacturers, electrode assembly firms, power electronics, testers, materials suppliers, and on the other side of the fuel cell chain, the firms that can integrate fuel cells into systems.

 

PriceWaterhouseCoopers also noticed the trend in its “Fuel Cell Survey” published in October, pointing to Hydrogenics, which acquired venture-backed Greenlight Power and EnKat of Germany, to form the largest fuel cell testing equipment vendor in the world.

 

Indeed, the likes of GM, Shell and ChevronTexaco are starting to “hedge their bets on the sector, not just from one angle but from multiple platforms -both technically and strategically,” said Ozbek.

 

“Too many companies were funded during the boom. There was too much capital available and now there is too little. Startups are learning that one little piece of technology does not a company make,” says Berkowitz.

 

In other words, consolidation is driven by the financial distress of companies that are making one component or element of a fuel cell system. They need to find stronger, cash-rich partners in order to develop their technology into a product.

 

Another driver is the realization among larger firms that it is taking a lot longer to get to market than they expected and they need to buy in the pieces of the puzzle that are still missing. “There used to be an aversion to components or sub systems from outside suppliers, a not-invented-here mentality,” said Berkowitz. “But that is quite rapidly being abandoned,” he posits.

 

The trend will lead to “stronger companies,” according to PWC.

Dec. 1, 2003 — The global nanotechnology market is expected to grow to $18 billion by 2005, with nano-enabled flat-panel displays and fuel cells expected to launch within three years, according to a survey reported in Asia Pulse.

Nihon Keizai Shimbun Inc.’s second corporate survey on nanotech found that 40 companies are developing nanotubes and other nanomaterials. Most expect to release commercial products in one to three years, the report said.

The survey results, tabulated from 240 firms ranging from nano R&D to production, also said respondents tend to be developing materials such as nano-based glass or fibers. Products include high-capacity memory and environmental cleaning systems.

Nov. 12, 2003 — A University of California, Riverside, research team under contract with Pacific Fuel Cell Corp. has developed a fuel cell using carbon nanotube-based electrodes, according to a news release.

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Pacific Fuel Cell expects that use of multiwall nanotubes as a platinum support for proton exchange membrane (PEM) fuel cells will reduce manufacturing costs. The Tustin, Calif.-based firm plans to create joint ventures for commercialization, the release said.

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Pacific Fuel Cell, listed on OTC Bulletin Board, closed Tuesday at 23 cents, up from 10 cents Monday.