American Superconductor Corp. (NSDQ: AMSC) has caught the wind energy boom, but you wouldn't know it from its incongruent name.
The Devens, Mass.-based company operates a business model unlike many others in the wind energy equipment business. It licenses its wind turbine designs to customers, who in turn buy power converters, performance monitoring systems and other parts from the company to run the turbines built on its specs.
In a sense, it's the same strategy Intel has used to allow a raft of companies get into PCs and servers: give them access to intellectual property, sell them components, and then have your new customers undercut the establishment.
The company is a hit among Chinese turbine makers, who also happen to be located in one of the fastest growing wind energy markets in the world. American Superconductor has five customers in China (and one in Taiwan), including the biggest domestic wind turbine supplier, Sinovel Wind, said Jason Fredette, a company spokesman. Sinovel signed a $450 million contract with American Superconductor last summer.
American Superconductor doubled its revenues to reach $40.38 million in the second fiscal quarter ending Sept. 30 2008, according to the company filings with the U.S. Securities and Exchange Commission. It did the same for the first six months of the fiscal year.
"Our company has had a huge amount of success in China," Fredette said.
The company anticipates solid growth over the coming year because of its reception in China, Fredette said. It generated $112 million in revenues for fiscal 2007, which ended March, 31 2008. It expects to generate $175 million to $185 million in revenues from the current fiscal year. For the next fiscal year, the company expects to bringing in more than $225 million in revenues.
But the company also believes that it will post profit for the first time in the fourth quarter of the current fiscal year.
The turbine designer recently added Hyundai Heavy Industries in South Korea to its roster of Asian customers. Hyundai is licensing two designs: a 1.65-megawatt and a 2-megawatt turbine. The company plans to start producing the 1.65-megawatt turbine by the end of this year for the U.S. market.
American Superconductor also makes power-grid equipment. It announced last week its first Chinese customer for its system that regulates voltage to make sure electricity flows smoothly through the grid. Called D-VAR by the company, the equipment is going to a power substation in Inner Mongolia that is operated by the North East Power Grid.
Because wind energy is intermittent, voltage regulators have become necessary pieces of equipment for utilities and grid operators with renewable portfolios, Tyler Tringas, a wind power analyst at New Energy Finance.
"As you see higher penetration of wind power, you will need to incrementally add these improvements" to the grid, Tringas said. "The wind energy is growing rapidly, outstripping the aging grid infrastructure. It's one of the top concerns for utilities."
How did the company get its name? That has to do with what it set out to do when it started in 1987. The company has been developing superconductor wires that it says can carry up to 150 times more electricity than copper wires commonly used in underground power transmission cables today.
The super wires are made up of composite materials including bismuth and copper-oxide ceramic. Two scientists won the 1987 Nobel Prize in physics for their work on superconducting materials. One of them, K. Alex Muller, became a consultant to American Superconductor.
Utilities and transmission line developers aren't a bunch that quickly embraces new technologies. So the company has relied on projects that are partly funded by the federal government to prove itself. Still, this original business could see a both as utilities arm themselves to revamp the grid.
Last year, the Long Island Power Authority in New York became the first utility to run the transmission voltage system built with American Superconductor's cables. Consolidated Edison Co. of New York plans to connect two of its power substations in Manhattan with the super cables next year.
The company began developing other types of energy equipment about a decade ago. The purchase of Austria's Windtec Consulting in Austria in 2007 lead to the turbine design subsidiary.
Entering the wind energy market has turned out to be a good bet. The company's power system business unit, which sells wind energy equipment, generates nearly 90 percent of its sales. The unit has also posted operating incomes while the business unit for developing superconductor wires has posted operating losses.
While it has found fans in Asia, the company has had a tougher time cracking the U.S. market, which overtook Germany in 2008 as the world's largest wind energy producer (see U.S. Wind Power Doubles in Two Years). The challenge is the same for the European market.
Jostling for market share against large players such as General Electric (NYSE: GE), Vestas and Gamesa is tough, Fredette said. The company also competes against others in the power-grid equipment and cables sectors, including Mitsubishi Electric, Siemens, Sumitomo and Toshiba.
American Superconductor could gain competitive muscle if its Chinese customers can produce quality turbines for export, Tringas said. Nonetheless, licensing good designs alone won't necessary lead to high-performing equipment, he added.
Chinese companies are producing wind turbines that are generally seen as subpar, and financing companies in the United States and Europe aren't willing to back projects with Chinese wind turbines, Tringas said.
"There are very few exports of Chinese turbines, and they are not well accepted in the U.S. and Europe," Tringas said. "They have a lot to prove."
Feeding China's growing appetite for wind also will boost American Superconductor's fortune.
"The Chinese government wants to increase power supply and minimize pollution, and they want to create jobs," Fredette said. "Our business has picked up quite a bit over the past two years."