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30 July 2020

Explaining the sudden exit of NEC from the BES market

The sudden exit of NEC from the Battery Energy Storage (BES) market was caused indirectly by Donald Trump’s pressure to disenfranchise Huawei in the west. NEC HQ realized that it while it may have fumbled the ball on 4G, it could re-build a key relationship with NTT DoCoMo back home, and become a force in 5G. but to do that it needed to get out of anything that was burning through cash.

We spokes this week to Hiro Ezawa, General Manager of NEC Energy Solutions and he made it clear that the two events were directly related.

“There was a decision in our parent company to focus more on software and the telecommunications market now there was an opportunity in 5G, with NTT. Anything that was using up cash had to be offloaded through partnerships, so that we could concentrate on that. Then Covid -19 came along and we did not have time so instead we cut the sales and marketing teams.”

The amounts of money were considerable. NEC Energy Solutions came out of the acquisition of A123 back in 2014 costing $100 million, and even though it has closed its doors to new business, will complete 2020 on revenues of about $200 million. It has some 20 projects that it is working on where it acts as the system integrator on grid BES projects and some of these will carry contract responsibility through until 2030.

Costs for 2020 would have been in the region of $400 million, creating a continuing cash drain on the business. Suddenly with the opportunity to replace Huawei in Japan in 5G, there was a shift in the company’s ROI calculations and it felt it could get a better return on investment back in its heartland of telecoms. NEC began as a telephone developed in 1904.

NTT DoCoMo, which is likely to become one of its principle customers in Japan in 5G, as it was in 3G and to some extent 4G, in June took a 4.8% stake in the business for a rumored $560 million.

This was perhaps because NEC Corp had already landed major software contracts at Rakuten, on the back of software work it had done to capture a lead in Open RAN software and compliant hardware. This made NTT the third-largest shareholder and largest industry investor in NEC. Open RAN is a version of 5G software which uses the open source model for code.

The key opportunity here is for NEC to be able, once again, to have market share outside of Japan in 5G and it is suddenly looking credible as a counterweight, along with Samsung, to the dominance of the largest suppliers (Nokia, Ericsson, Cisco) for any country constrained from doing business with Huawei or ZTE.

NEC Energy Solutions, which initially looked for a buyer as a going concern, then hit the Covid-19 skids, and took the plunge and laid off almost half of its workers. It went from a team of 203 staff, headquartered in the US, to 115 engineering and support staff, to continue with the 20 projects. It cut all sales and marketing staff, and some admin roles.

“The revenue for 2020 will still be $200 million for NEC Energy Solutions,” said Ezawa, “and even once those projects are complete next year it will still be $20 to $30 million for the next few years, supporting those installed projects. It will eventually fall to between $5 million and $10 million just to support installed systems.”

Which means that in essence it is still up for grabs, and could be sold at any point in that cycle, perhaps in the next 6 to 18 months, but any buyer would have to rebuild its sales and marketing arm, but it could not be funded through an indeterminate Covid-19 period with a full team, while losing money. However much of what it has discovered is software, for instance it has its own software for residential ESS systems it has sold back in Japan, to harness them as a true Virtual Power Plant (VPP). It is software like this which puts an asset value on top of those projects, and which might tempt a US or Chinese buyer to come to the table.

It was something similar that took NEC out of the race for lithium ion battery manufacture a few years ago. Ezawa expressed chagrin at the constant innovation and cost cutting that has to go into most renewable technologies bringing prices down. “We may be able to break even on the 20 projects now that staff have been cut, but this market is a constant challenge and there is pressure on prices all the time.”

Which is why NEC Corp and Nissan had worked together on a joint venture,  Automotive Energy Supply Corp, to build lithium ion batteries for cars in the first place, which was originally up for sale back in 2017. That deal, with a Chinese private equity firm, rumored to be worth $900 million fell through, but another was cut a year later with Envision, a company better known for its wind turbines, in China, which now boasts contracts and software supply to a number of the top residential battery players, including Shell’s sonnen. Today the NEC Energy Solutions lithium ion batteries are made by Envision.

Ezawa also said that NEC as a group always liked to have partners in a deal, so that it retained the flexibility to leave a sector, by offloading the business to the partner, or only having to offload part of the business to a third party. Clearly NEC is planning a lot of this to fund its attack on the 5G market afforded by Huawei’s US ban.