Another hydrogen hype cycle has come and gone, forcing Ballard Power Systems (TSX:BLDP) to batten down the hatches and consider a pivot from the Chinese fuel cell market in favour of the American one.
Later this year, Ballard is expected make a final investment decision on a new $220 million (US$160 million) manufacturing plant in Texas, but in the meantime, it faces some stiff “headwinds,” as it changes tack.
Last month, Ballard announced a “global corporate restructuring” that aims to reduce operating costs by 30 per cent, in response to “a slowdown in hydrogen infrastructure development and delayed fuel cell adoption.”
In announcing its restructuring plans, which include layoffs, Ballard also said it was re-assessing its China policy, including its joint venture with China’s Weichai Power Co.
“With continued challenges in the China fuel cell market and underperformance of the Weichai-Ballard joint venture, we are also conducting a strategic review of our China strategy, including all options relating to the WBJV,” Ballard CEO Randy MacEwen said in a news release last month.
The fact Weichai Power Co. owns a 15-per-cent share of Ballard and has two seats on its board of directors may have made for some uncomfortable discussions around the board table lately, as Ballard considers a shift in focus from China to the U.S., which has been flexing its industrial muscle with billions in incentives to lure companies like Ballard to invest in American manufacturing.
The U.S. is in the midst of a major reindustrialization effort, while China is in the midst of an economic crisis. Meanwhile, the hydrogen bubble appears to have popped.
Hydrogen and its related technology—fuel cells for vehicles and electolyzers for making green hydrogen—enjoyed a bull market, starting in 2020, that pumped Ballard’s stock to $52.23 per share on February 8, 2021. As of October 15, it had dropped to $2.25 per share.
Similarly, the share prices of New York-headquartered Plug Power Inc. (Nasdaq:PLUG) went from trading at US$4.50 per share on January 1, 2024, to $2 per share as of October 16.
A Hydrogen Insights report in September noted that total investments in hydrogen-related projects around the world increased from US$90 billion in 2020 to US$680 billion in 2024.
But in recent weeks, a number of large green and blue hydrogen projects have been shelved, as the anticipated demand for the zero-emission fuel has failed to materialize. Last month, both Shell and Equinor announced they were cancelling blue hydrogen projects planned for Norway, citing a lack of demand. Closer to home, Fortescue Ltd. also recently announced it was cancelling plans for a major green hydrogen proposal in Prince George.
Ballard’s order book for fuel cells dropped from $130 million in the previous two quarters to just $5 million in the second quarter, as customers began deferring new orders, MacEwan said in a second quarter earnings call in August.
“While we remain confident in the long-term value proposition of hydrogen fuel cells, the timeline for market adoption is clearly moving to the right,” MacEwan said, adding that he expected “order lumpiness for the foreseeable future.”
While China is still the world’s biggest hydrogen and fuel cell market, its economy has been sputtering ever since the COVID-19 pandemic and, as Nikkei Asia recently reported, China’s push to promote hydrogen fuel cell vehicles “is showing signs of stalling despite years of generous subsidies.”
In a June 2023 investor presentation, MacEwan said: “There’s no doubt in my mind … that China will be the largest hydrogen market and the largest market for fuel cell vehicles by 2030.”
But he said sales volumes in China have not lived up to expectations.
“We expected, clearly, to have a much higher volume ramp in the near- and mid-term,” MacEwan said in an investor presentation last year. “That hasn’t happened as expected. I do think the complicated policy environment and the local government funding challenges post-COVID have complicated that.”
Nearly a decade ago, Ballard began placing big bets on China as the biggest potential market for hydrogen fuel cells, and struck joint ventures with Chinese companies like Weichai Power. It was a misplaced bet, according to New York-based Spruce Point Capital, which shorted Ballard’s stock in 2018, and questioned the company’s expectations for growth in China’s fuel cell market.
Nevertheless, Ballard in 2022 announced plans to invest $130 million in a new Chinese manufacturing plant and R&D centre in Shanghai. In August 2023, Ballard said it was reconsidering the plan, as U.S. and European markets began to look increasingly more promising.
“As a result of the increasingly constructive hydrogen policy landscape and increased market activity in the U.S. and EU, and given the continued hydrogen and fuel cell policy uncertainties and market delays in China, we are accelerating our work on our ‘local for local’ global manufacturing plan and related future capital allocation plans,” MacEwan said in a news release.
In March, Ballard announced it would receive grants totalling US$40 million under the U.S. Clean Hydrogen Electrolysis, Manufacturing, and Recycling Program, followed in April by another US$54 million in investment tax credits towards a new $220 million manufacturing plant in Rockwell, Texas.
“Given the leverage from the $94 million in U.S. government funding awards, we continue to carefully assess our proposed investment for long-term manufacturing capacity expansion in Texas,” MacEwan said. “We are reviewing financing optionality to extend our funding timeline, and delay material cash outlays, until we have appropriate market adoption indicators.”
The new plant would have an annual production capacity of eight million membrane electrode assemblies (MEAs), eight million bipolar plates, 20,000 fuel cell stacks and up to 20,000 fuel cell engines per year.
As for why Ballard would contemplate building a new fuel cell manufacturing facility in the U.S. rather than in B.C., where Ballard is headquartered, the Canadian Manufacturers and Exporters (CME) recently published a special report that suggests why.
The U.S. is experiencing “a factory-building boom,” the report noted, thanks to “generous” incentives under the Inflation Reduction Act and the CHIPS and Science Act. It’s little, surprise then, that Ballard might be lured to the U.S.
“That’s a great example of what that kind of investment support can do,” said Andrew Wynn-Williams, the CME’s divisional vice-president for B.C.
Ballard was not available to comment on strategy to shift focus from China to the U.S.
Robert Artibise, general manager of Unilia Canada Fuel Cells Inc., and former chair of the Canadian Hydrogen and Fuel Cell Association, doesn’t view Ballard’s tilt to the U.S. necessarily as a retreat from China. China is still the market leader for fuel cells, he said.
“I would say that Ballard’s not moving (their focus) from China—they’re now including the United States as an established market for business development,” he said. “This is basically because the United States has actively been investing into the development of hydrogen hubs as part of the broader strategy to promote clean energy and to reduce GHGs (greenhouse gases).”
Last year, the administration under U.S. president Joe Biden announced US$7 billion to establish seven hydrogen hubs in the U.S., and $750 million through the Department of Energy for hydrogen-related manufacturing, including fuel cells, with the goal of producing 14 gigawatts of fuel cells per year in the U.S. The manufacturing plant Ballard is considering building in Texas, would produce 20 per cent of that capacity—three gigawatts.
In August, MacEwan said there remains uncertainty regarding U.S. clean hydrogen tax credit rules, and that it wasn’t clear whether they would be resolved before the next U.S. presidential election.
As for the proposed plant, MacEwan said Ballard would need to assess the business case for the project. A decision is expected later this year.
