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No. of Recommendations: 10
Tinker,

Just an opinion, but I think that investors are making more of this relationship with GE Power Systems than is warranted. The revenue and growth requirements for GE Power Systems (as desired by Jack) is carried almost entirely by the gas and steam turbine business (to support the huge number of large scale merchant generation projects.) This boom should last for at least another 2 to 4 years. As a result, GE can easily afford to "dabble" in emerging technologies without an immediate need (or even longer term need) for profitability - so long as it does not require a large upfront investment.

If it turns out that there really is something to an emerging technology then GE will be positioned to capitalize on it. If not - they move on and write it off as a strategic learning effort. In the case of SMES, it is a minor investment on their part and the only downside they have is to lose exclusive rights to sell the product (but if it doesn't sell who cares anyway.) If it sells then GE gets a nice high margin adder for their logo plus the sale of periperal equipment and services. GE can enter an arrangement like this because AMSC doesn't really have much choice - that is, if they want to sell SMES they must team up with a known and experienced power system equipment provider.

It's certainly positive that AMSC has a relationship with GE, I just think it is a stretch for anyone to conclude that this is a rousing endorsement from GE that SMES is the next big thing. I believe GE justs wants to be "around" on the outside chance that it is big - without a big investment. It also gives them a chance to learn about a new technology from the "inside" without laying out the big bucks. BTW, another big player with financial clout, ABB Power Systems recently "dabbled" in HTS transformers with AMSC - but pulled the plug because it did not appear to be commercially feasible until 2nd gen HTS is available. In any event ABB probably learned what they needed to know from the arrangement.

Right now, SMES sales (both PQ- and D-) are well behind projections (despite the GE alliance) for the current FY ending 3/31/01. They will need a deluge of orders in the very near term to meet their stated goal of breakeven for SMES in the current FY. This comes on the heels of missing projections for the previous fiscal year. At the recent BofA "Energy Tech" conference, management stressed that the GE alliance is just now gaining "traction" including a possible future deal for PQ-SMES with Intel. We'll see.

I view SMES sales as well as power electronics module sales as playing a vital role in AMSC's near and mid-term commercial viability. Given that substantial revenue from HTS wire will probably not materialize until the second half of the decade, revenues from these initial products are necessary to bridge the gap until such time (in addition to leftover cash from secondary offering). This is assuming that HTS wire eventually gains commercial acceptance. If it doesn't.......

At least with D-SMES sales, they face the near-term obstacle of the formation of Regional Transmission Organizations (RTOs). In the long term this may have a positive effect, but in the short-term I see at limited amount of spending by Transmission Owners until these new organizations (with new beneficial rate structures) are formed.

Should be interesting.



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