AEC’s greener, gas-fuelled strategy

An early proponent of getting commercial vehicles running on natural gas has made Advanced Engine Components an innovator whose time has come. By TIM TREADGOLD

By Tim Treadgold

An early proponent of getting commercial vehicles running on natural gas has made Advanced Engine Components an innovator whose time has come.

Advanced Engine Components was a hot innovator 10 years ago. Unfortunately, no-one back then was looking at, or listening to, a company with a system to convert heavily-polluting, fuel-guzzling, diesel engines used in trucks and buses to low-polluting, cheaper, natural gas.

It’s different today – and we all know why.

Fuel costs have blown through the roof, and pollution in countries such as China and India is more than a national disgrace; it’s become an international worry as the world warms.

That’s why last month the Weifang Weichai Peterson Gas Company in China placed a $1.1 million order for 300 natural gas vehicle systems with AEC (headed by managing director Tony Middleton, pictured).

The deal was one of the biggest yet for the Perth-based company which, after years in the wilderness, is on target to boost annual sales by 50% this year, and shift gear from loss maker to profit maker.

Persistence, and a belief that eventually the world would recognise the simple value proposition of converting buses and trucks from diesel to gas, is paying off for AEC – though there have been some scary moments.

On the road to success, AEC spent two years on the suspended list of the Australian Securities Exchange, a victim of the collapse in 2001 of its major shareholder at the time, the telecom company NewTel, and the unravelling of the financial affairs of NewTel founder Peter Malone.

In the wash-up of the tech-wreck, Malone hit the headlines for all the wrong reasons. He was the man who spent a small fortune on exotic cars including, famously, a stretched Aston Martin DB7 (of James Bond fame) with the extra room to accommodate his children.

Inside the wreckage of NewTel were a number of “before their time” ideas, including the core of the telecom company itself which specialised in Chinese language services to users in Australia, a selling point which might even appeal today to the Prime Minister, Kevin Rudd.

Sitting alongside the telephone business was AEC, one of the few assets to survive the collapse of NewTel, but only because a handful of patient investors could see the value in its diesel-to-gas technology.

“We are in sight of success,” AEC managing director Tony Middleton said to SmartCompany this week. “We really are an idea whose time has come.”

The core technology of AEC is an engine management unit, a computerised “black box” which manages the flow of fuel to a vehicle’s engine, controls temperatures, air pressure, engine speed and a host of other engine operating parameters.

From a business perspective, the key factor is that the system can be fitted to new vehicles, or retro-fitted. It can also be used in vehicles running on compressed or liquefied natural gas, or “biogas” generated from biofuels.

“Typically, natural gas is 50% cheaper than conventional fuel,” Middleton says. “It’s also much more environmentally friendly, two selling points which are leading to a worldwide switch from diesel to gas.

“In China, natural gas already accounts for more than 1% of total vehicle fuel, and it’s growing at up to 13% a year, easily outstripping other alternative fuels. Currently, 60 cities in China are using natural gas in their bus fleets; that will rise to 270 by 2010.”

The Asian shift to cheaper, less polluting fuels is not yet reflected in Australia, where natural gas powered buses and trucks are a rare sight.

The slow uptake in Australia is one of the reasons why AEC is focusing on sales to Asia. The size of the respective markets is another factor in the company’s Asia-first strategy. “The latest Weichai sale will take to 671 units the number we have sold to that business over the past 12 months,” Middleton says.

Encouraging as the latest deal is, AEC is not yet profitable. In fact, its financials are fairly ordinary, albeit improving.

In the last full financial year (to 30 June 2007), AEC posted sales of $3 million, a rise of 20% on 2006, but not enough to avoid a bottom line loss of $3.1 million. In the latest half year (to 31 December 2007) sales rose 5.8% to $1.85 million, and the loss shrank to $958,000 – an improving trend, but better is required.

Middleton acknowledges the poor recent financial results, but believes he has momentum on his side. “The driving force behind our business is the switch away from diesel to cleaner fuels,” he says. “Until now the use of natural gas in vehicles, either as compressed (CNG) or liquefied natural gas (LNG), has been dominated by cars. There are some eight million cars using natural gas today.

“Looking ahead, and the projections are that by 2020 there will be 65 million vehicles running on natural gas, that points to an annual growth rate of 18% in natural gas vehicles, and it means that 9% of the world’s vehicles will be gas powered, cutting oil demand by seven million barrels a day.”

In theory it sounds terrific, and it might be that AEC is at the foot of a high-speed escalator. In truth, nothing in business is ever that easy.

Technology for converting vehicles to natural gas is widespread, and Middleton acknowledges that. “We have to win our contracts in open tender,” he says. “We compete with big companies such as Robert Bosch and Cummins.

“Our advantage is that we have a proven technology, and if you really want to know how good, go and talk to the people who run buses in France where we have 600 buses fitted with AEC systems.

“What we’re offering is the same technology that has been operated successfully since 2002.”

On the sharemarket, AEC has travelled a rocky road. From a share price peak of more than $4 at the height of the tech-boom in 2000, the stock crashed to a pre-suspension price of 41c.

After surviving the NewTel disaster AEC was reconstructed, recapitalised, and relisted in April, 2005. Interest in the stock started to grow last year, before falling away to see AEC trade as low as 5.6c.

Over the past two weeks the stock has risen to around 15c, capitalising the company at a $22 million, a modest value but infinitely better than being suspended and not knowing whether the business would survive.

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