Earnings Call Transcript
Ballard Power Systems Inc. (BLDP)
Earnings Call Transcript - BLDP Q4 2021
Operator, Operator
Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Q4 and Full Year 2021 Results Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.
Kate Charlton, Vice President, Investor Relations
Thank you, operator, and good morning. Welcome to Ballard’s fourth quarter 2021 financial and operating results conference call. With us on today’s call are Randy MacEwen, Ballard’s CEO; and Paul Dobson, Chief Financial Officer. We will be making forward-looking statements that are based on management’s current expectations, beliefs and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. Given the growing number of research analysts covering the Company, we will again keep our prepared remarks relatively brief to leave sufficient time for questions. I’ll now turn the call over to Randy.
Randy MacEwen, CEO
Thanks, Kate. And welcome, everyone, to today’s conference call. These are extraordinary times. As we look back on 2021, the existential threat posed by our global climate crisis was building to decarbonize our global economy. With this backdrop, there were important developments for the hydrogen sector, including global policy initiatives, increasing net zero targets, deeper pools of capital moving to the energy transition in hydrogen and unprecedented market engagement. And now, amidst the atrocities of the war in Ukraine, the geopolitics of energy have profoundly and irreversibly shifted. The prioritization deck has been reshuffled. Both energy security and decarbonization have jointly galvanized a global worldview that we must accelerate the clean energy transition. Notably, last week, the European Commission released a plan to accelerate the development of secure and sustainable energy with a focus on cutting dependence on Russian gas before 2030. Within this plan is a specific initiative to create a hydrogen accelerator to develop additional infrastructure and significantly increase clean hydrogen production and importation plans. An increase in clean hydrogen development directly impacts the cost competitiveness and TCO breakeven thresholds for hydrogen fuel cell applications, particularly in a world of rising hydrogen carbon fuel costs. We see a strong foundation supporting the global energy transition. And at Ballard, we too continue to lay the foundation to be the long-term market leader in PEM fuel cells. Before we talk about 2022 expectations and outlook, I’d like to take you through some of Ballard’s current focus areas and 2021 highlights. Our focus continues to be on the medium- and heavy-duty motive mobility markets of bus, truck, rail and marine with product leverage in select stationary power market segments. The total addressable market for these verticals in our medium and heavy-duty motive markets continues to grow with the evolution towards a net zero world. In our 2020 Investor Day, we outlined a 2030 estimated TAM of $130 billion for the bus, truck, rail and marine markets. Based on current estimates, we now estimate this to be over $250 billion. This does not include the rapidly growing opportunities in the stationary and backup power, light duty and off-road markets. We expect these additional markets to account for a meaningful proportion of our near- and long-term revenue growth. We plan to provide TAM estimates on these additional verticals at our Investor and Analyst Day this fall. I’d like to walk through each of these key verticals and the 2021 highlights. Throughout the year, we grew our European and U.S. bus business significantly. This growth was supported by repeat orders from key customers, including New Flyer, Solaris and Wrightbus as well as entrance into the new regional robust markets with Tata in India and Global Ventures in New Zealand. In the truck market, we executed against our development programs with MAHLE and our Weichai Ballard joint venture programs, while also announcing new collaborations with Hexagon Purus, Linamar and QUANTRON. Regarding the progress with MAHLE, we delivered the 120-kilowatt fuel cell engine to the MAHLE team in December, on time with the development schedule. This concept engine will now be integrated with their components for the next phase of testing. The parallel go-to-market strategies of partnering with Tier 1 suppliers and vehicle integrators not only enables us to span various classes of trucks, but also addresses different market demands and stages of maturity. The Tier 1 suppliers act as long-term channel to global truck OEMs while the vehicle integrators accelerate nearer-term demand of fuel cell trucks by bringing early-stage fleets to market. You can expect us to continue to address the truck market with the strategy through 2022 and beyond. We expanded our opportunity set in rail, signing new projects with CP Rail, Sierra Northern Railway and Talgo while transitioning our Siemens development program to initial product sales for train development in Germany. In the marine vertical, we delivered our first FCwave modules to customers in a number of exciting marine applications, including Norled’s hydrogen ferry program. In stationary and backup power, we increased our revenue and announced an important new partnership with Caterpillar and Microsoft for the data center market while HDF announced the start of its multi-megawatt baseload hydrogen power plant deploying Ballard large-format fuel cells. On the technology and operational front, we exceeded our internal 2021 goals for our 3x3 stack cost reduction plan and are on track to achieve our 2024 target. We also launched our FCmove HD+ fuel cell engine and achieved a field experience milestone with vehicles powered by Ballard fuel cell technology, aggregating an industry-leading 100 million kilometers of on-road service. In corporate development, the strategic equity investment in Forsee Power and the acquisition of Arcola Energy are two examples of how we’re thinking of expanding across the value chain and increasing our technical capabilities. With the acquisition of Arcola Energy, now named Ballard Motive Solutions, we have in-house fuel cell powertrain and vehicle integration capabilities, allowing us to reduce customer adoption friction points while strategically expanding across our value chain opportunities. We ended the year with a strong balance sheet and cash position to further deploy as accretive and strategic opportunities arise. Now, looking at our key regions. As we highlighted in our Q3 call, we continue to see significant growth in the European market. Our 2021 European revenue increased nearly 20% year-over-year. And in the Power Products segment specifically, we saw an increase of over 50% in fuel cell sales. This highlights the continued maturity of the European bus market and the growth in other fuel cell applications of truck, rail, marine, stationary and power. In North America, orders from Cat, CP Rail and continued follow-on orders from New Flyer are driving the over 300% year-over-year growth in the Heavy-Duty Motive revenue in the U.S. and Canada. Moving to China. Our strategy in addressing the China market remains on track, and we assess the best routes to market as additional clarity around subsidy frameworks becomes available. In mid-January, a second batch of demonstration city clusters was announced in addition to the first batch of three clusters, Beijing, Shanghai and Guangdong. The two new clusters of Hubei and Henan are exciting expansions of the China fuel cell policy. The Henan cluster is led by Zhengzhou city, where the Weichai-Ballard joint venture bus customer, Yutong is located and consists of 17 participating cities. One of the cities included is Weifang city, where the Weichai-Ballard joint venture is located. The Henan cluster hasn’t released any numbers on fuel cell electric vehicles or hydrogen refueling station deployments as yet, but the industrial experts forecast more than 5,000 fuel cell electric vehicles to be deployed in the Henan cluster during the demonstration period. While details around the subsidy framework have not yet been published, we expect the fuel cell products from the Weichai-Ballard joint venture to qualify for the subsidy program at this time. We continue to evaluate opportunities for Ballard and the Weichai-Ballard joint venture to further strengthen our positioning across the cluster regions in the near term and post subsea adoption in the longer term. Now, shifting to the 2022 outlook. Supply chain challenges have been globally ubiquitous throughout 2021 and are continuing into 2022. To date, we’ve been largely able to risk mitigate global supply chain disruptions by increasing supply of materials and moving more inbound products by air. In 2022, we’re anticipating some electronic component supply constraints but are continuing to identify alternatives and site agreements to secure supply continuity. Regarding the increasingly dire situation in Ukraine, we have no direct vendors from either Russia or Ukraine and have not received any identified impacts from discussions with suppliers so far. We do have a number of suppliers in Europe in neighboring Ukraine. So, we are tracking open orders and trying to expedite deliveries where possible to avoid material shortages. More broadly on commodities and component pricing pressure, 40% of Europe’s natural gas and 25% of Europe’s crude oil is provided by Russia. So, pricing pressure is expected on components globally as energy costs for production and transport continue to rise as the conflict continues. To date, we have not received any price increase notifications from our suppliers. We are honoring pricing on our existing customer contracts but have already taken action to adjust commercial quoting activities for future orders to reflect the current cost and risk environment. We’ve initiated 2022 guidance on total operating costs and capital expenditures to provide clarity on our capital allocation plans and priorities. Our total operating costs for this year are expected to be between $140 million and $160 million, a 50% increase from 2021. This increase is largely driven by increasing our investment in technology and product development relating to next-generation products and component development across our key target markets of bus, truck, rail and marine as well as increased investments in sales and marketing. These resources are working to develop additional product capabilities aimed at key growth markets such as bus, truck, rail and marine and next-generation fuel cell technologies. We’re confident in investing ahead of the curve. And we believe this is critical to maintain technology leadership and market share as the hydrogen growth accelerates over the coming years. Our 2022 capital expenditures are expected to be between $40 million and $60 million. This estimate excludes potential investments in corporate development activities. We are increasing capital investments on our testing capabilities, adding production lab and engineering equipment and investing in additional prototype and functionality. Following our investments over the past three years on advanced manufacturing of MEAs, we’re now starting investments in advanced manufacturing of bipolar plates. We are expecting additional pressure on our gross margin outlook for 2022, consistent across the industry. Key drivers are continued increase in material pricing, freight-in cost and labor as well as an ongoing shift in the revenue mix to additional power products versus technology solutions. We are still in the early phase of adoption. And production volumes and platform acquisitions, customer acquisitions, and therefore, the cost of fuel cells are still suboptimized, putting pressure on gross margin. As the industry grows and production volumes scale, we expect to see concurrent gross margin expansion. Corporate development work will continue to be a strategic priority in 2022, including potential acquisitions, investments and partnerships to improve competitive positioning, expand our product portfolio and solutions across the value chain, simplifying and enhancing customer experience, accelerating fuel cell adoption in target markets and accelerating business scaling. As the energy transition and pace of decarbonization accelerates globally, we’re also focused on reducing our own emissions. In 2019, we launched our Mission Carbon Zero initiative to evaluate and steadily reduce the environmental impact of our organization. In 2022, we plan to complete our roadmap to achieving this corporate carbon zero goal by 2030 through defining long-term strategies to reduce and offset our emissions and other impacts. On the last earnings call, we discussed the significant leverage, diversification, and resiliency in our business model across multiple regions and multiple verticals. We are already seeing early signs of this strategy and the benefits play out. While our backlog was down from Q3, this top-line number does not tell the whole story and masks key growth signals from underneath. This diversification in our revenue mix by region, vertical, and customer is critical as we establish a presence with an increasing number of leading companies in our target markets of truck, rail, marine, and stationary power and continue to build on our bus market. Our 2020 year-end order backlog was made up of 20 customers with meaningful orders, excluding the Weichai-Ballard joint venture. At the year-end 2021, just one year later, this number grew over 50% to over 30 customers with meaningful orders. We also saw growth in European and North American composition in the order book now comprising approximately 60% of the total backlog in contrast to approximately 40% at the end of 2020. As we have seen the translation of growth with companies like Wrightbus, VanHool, Solaris, and New Flyer, we expect a similar growth profile for new customers making up increasing proportions of our future order book. With this resilient and diversified business model, growing technology capabilities by investing ahead of the hydrogen growth curve and increasing partnerships in key verticals and regions, we’re excited about the 2022 outlook and long-term positioning for Ballard. This year and the years to come, we will continue to set the stage and lay the foundation for years of growth ahead as the energy transition takes hold. With that, we’ll turn the call back over to the operator for questions.
Operator, Operator
The first question comes from Michael Glen with Raymond James. Please go ahead.
Michael Glen, Analyst
Good morning. Randy, to start, you mentioned MAHLE. Can you provide some insight into the next steps there? Are you considering establishing a facility to assemble the modules in Europe, or could we anticipate a commercial partnership with an OEM in Europe? I'm trying to understand what to expect from that partnership.
Randy MacEwen, CEO
Great. Thanks for the question, Michael, and good morning. Yes. So, just for the audience, of course, here, MAHLE and Ballard are jointly developing a fuel cell engine platform for the commercial truck market for Europe. And this is a multiyear development program. We made, I think, very significant technical progress on designing and developing a 240-kilowatt fuel cell electric powertrain last year. That’s 2 120 kilowatts for a total of 240. Our responsibility at Ballard in terms of our scope of work is designing the fuel cell stack as well as the system design. MAHLE last year and this year will be working on significant development of key balance of plant components as well as thermal management and power electronics for the complete fuel cell system and powertrain integration. So, as we kind of look at 2022, I think one of the important things we should highlight is that MAHLE has just seen a new CEO join in January. We actually have a call with that CEO next week. So that will be important for us to start the development of our relationship with the new CEO at MAHLE. Long term, what we see is a market opportunity for MAHLE and Ballard to be co-developing fuel cell engines for the commercial truck market. I think there’ll be leading fuel cell engines with components that have reliability and cost and supply chain muscle from the MAHLE organization. In terms of whether that’s a joint venture and joint manufacturing capabilities, I think we’re still fairly early with the new CEO. So, we’ll wait to comment on that. Similarly, on the commercial side, a lot of important work to continue technical work in 2022. So, we really do see 2023 and beyond as markets where we’re going to see more commercial engagement. It’s really about designing the product with the right components, the right cost structure for the long term last year and this year.
Michael Glen, Analyst
Okay. And my follow-up on that is, when do you think we would actually see the entire unit in a truck driving on the road?
Randy MacEwen, CEO
Yes. In terms of public deployment of that, I think 2023 would be a realistic timetable for that to happen. Certainly, there are activities in 2020 that will be internal at Ballard and MAHLE. So, you can think about that fuel cell engine actually tested in a real powertrain, in a real vehicle in 2022 but not publicly with third parties.
Operator, Operator
The next question comes from Mac Whale with Cormark Securities.
Mac Whale, Analyst
Randy, given the CapEx and OpEx increase, I’m wondering if you could give us an idea of the nature of those investments. For instance, is it essentially just creating like a bigger headcount doing the same, or are you really broadening efforts in areas that we may not yet comprehend? So, I’m wondering whether you can give us more insight on how you sort of allocate that.
Randy MacEwen, CEO
Good morning, Mac. I appreciate your question. It's crucial to recognize our current position. We have established strong partnerships across all our sectors, including bus, truck, rail, marine, off-road, and stationary, with reputable partners and programs in progress. Our technology and product development is progressing, moving from the initial concept phase to prototyping and beyond. As we advance in these development programs, our investments are increasing significantly. We are focused on several programs at both the stack and module levels, concentrating on core products that align market and product needs across various sectors and regions. This includes our fundamental fuel cell technology, MEAs, bipolar plates, stacks, and modules, as well as their architecture. It is essential to note that as we advance from prototype to series production, the investment in testing and design validation continues to deepen. In 2022, we saw about an 80% increase in research investment, which is ongoing, focusing on key MEA components, catalysts, GDL membranes, and substantial investments in balance of plant components as well. This includes air compressors and DC to DC converters alongside our partners, requiring investment from Ballard as well. On the capital expenditure side, we are making significant investments in our testing capabilities, adding around 22 new test stations and upgrading approximately 48 stations in 2022. This reflects a robust investment in our testing capacity. Furthermore, we are investing heavily in production equipment for our next-generation plate pilot line and continuing improvements in manufacturing processes for MEAs and modules. We are also making significant capital investments in lab and engineering equipment, facility upgrades, and tooling and fixtures. This includes essential investment in tooling for balance-of-plant component cost reduction and new unit cell designs at the stack level. Overall, we are making substantial investments because we are transitioning from customer acquisition and platform wins to long-term supply agreements in these various markets, driven by a growing customer interest in how we scale to meet their anticipated growth.
Mac Whale, Analyst
Okay. Just to follow up, you mentioned that the total addressable market is increasing from $130 billion to $250 billion. Is there a connection between this growth and your investments? Can we expect your market share to increase as well due to these investments? What are your thoughts on that?
Randy MacEwen, CEO
I don’t believe the increase in the total addressable market is driving this investment in 2022. However, I do think rail and marine will have unexpected positive outcomes, which we're currently witnessing through increased engagement with various customers. On the bus side, there's been considerable discussion over battery electric versus fuel cell electric technologies. Many transit operators who previously trialed both are now increasingly transitioning to fuel cell buses over battery electric buses. For instance, AC Transit, which initially planned for a fleet of 70% battery electric and 30% fuel cell buses, is now forecasting that 70% of their buses will be fuel cell models. Additionally, another transit operator in California is planning for a fleet comprised entirely of fuel cell buses. This indicates a growing opportunity in the bus market, and I expect to see order volumes rising from the tens and twenties to hundreds and even multiple hundreds, especially in Europe. We're very enthusiastic about the bus market's potential. The key is ensuring we validate our manufacturing capabilities, backed by the right infrastructure, quality processes, and capacity, to become a trusted partner as customers scale up their operations. We are committed to making investments in both the technology and manufacturing aspects.
Operator, Operator
The next question comes from Rupert Merer with National Bank. Please go ahead.
Rupert Merer, Analyst
Randy, you talked about the crisis in Europe and the plans to accelerate hydrogen infrastructure there. Are you involved in any discussions to accelerate plans in Europe, or is it too early?
Randy MacEwen, CEO
Yes. Rupert, good morning, and thanks for the question. It is, of course, very early, but this repower EU plan for affordable, secure and sustainable energy, I think it’s just the start. We expect to see similar type of initiatives in other countries where energy security is top of mind. And it’s a program that’s really focused on accelerating adoption of low-cost renewable power but also looking at this hydrogen accelerator program. And I think what we’re going to see is fairly significant scale-up in terms of green hydrogen supply in Europe, a 4x acceleration compared to what was previously contemplated. So, I think that’s important. And, of course, that green hydrogen is going to be used for a variety of opportunities, decarbonize energy, industry and mobility. And particularly on the mobility ones, we feel we are very well positioned, very well positioned in each of the vertical markets where you’d expect to see green hydrogen uptake in mobility applications. So bus, truck, rail and marine in Europe, we feel strongly positioned in.
Rupert Merer, Analyst
So, it is early, but is there any discussion on timeline for starting to ramp up activities and availability of subsidies or mandates to accelerate hydrogen?
Randy MacEwen, CEO
Yes. I think this repower EU is you think about it on the heels of a Fit for 55, just overall, this acceleration perspective now energy security I think will lead to increased order uptake in the 2023 timeframe. I think it’s going to take some time for that to translate into programs and policies. And as a reminder, of course, all of these market applications we’re in, bus, truck, rail and marine, these markets do have long lead times in terms of customers getting, in some cases, financing opportunities, support and then, of course, going through a program where they put out to tender their bids for whether it’s bus or truck, et cetera. So, it will take time for that to translate to orders, but we’re very confident about the positioning we have in these key markets.
Rupert Merer, Analyst
Great. Thank you. I’ll leave it there.
Randy MacEwen, CEO
Yes. And Rupert, one thing I’d add, too, is that I do think we’re going to see an acceleration in ports, which has been highlighted as a key area where you can see hydrogen clusters with multiple applications using that same hydrogen refueling infrastructure. And I think Europe is going to lead the way.
Operator, Operator
The next question comes from Aaron MacNeil with TD Securities. Please go ahead.
Aaron MacNeil, Analyst
You’ve mentioned that 2023 is a pivotal year for growth several times. You talked about long-term supply agreements in response to Mac’s question. How are you practically preparing for this? Should we expect to see you building up inventory or increasing staffing? I know you mentioned expanding testing, or do you believe you currently have the capacity to significantly increase order flow with your existing staffing and inventory levels?
Randy MacEwen, CEO
Yes. Thanks for the question, Aaron. So, that is really part of the reason we’re looking at this increased investment, both on the operating cost side and the CapEx side in 2022. And some of that will translate into 2023 as well because we see the market engagement, we see the customers wanting to have long-term arrangements. But we need to get through these pilot projects. We need to demonstrate very clearly not just the technology from a dependability and reliability and performance perspective in the demonstration projects, but show the ability to manufacture at quality in scale at the right cost structure. So, our 3x3 cost program, our manufacturing expansion initiatives, our investment in our resourcing, all very important. And I’d highlight, we’re also increasing the investment in the organization in terms of how we’re structured to attack the market opportunities. So, we have effectively repositioned our organizational structure with a real focus on the different verticals, bus, truck, rail and marine, and have strong leadership, cascading, of course, market requirements, product requirements into our core product portfolio and global manufacturing capacity as well. So a lot of work in 2022 that will support future growth. And again, it’s all about taking those customers from A to B and ultimately further than that over the next few years and scaling the business. Critically important that we get the scale as we make these investments in order to drive down our cost for our technology and our products and really see gross margin expansion in the future.
Aaron MacNeil, Analyst
Understood. And maybe switching gears a bit. I just want to understand the Chinese city cluster dynamic a bit better. You mentioned the 5,000 vehicles over the period. I was curious, what is the duration of the demonstration period? Can you qualify for other city clusters and how might you do that? And then specific to the one that you qualify for, what does the competitive landscape look like in that specific city cluster? And how do you feel in terms of your competitive positioning there?
Randy MacEwen, CEO
Yes. That's a great question. There is a lot of complexity to this that still needs to be resolved. Due to the current COVID-19 situation in China, I believe this is not the highest priority for the Chinese government to clarify. However, it's something that needs to be clarified quickly because operating within one cluster and the point scheme in that cluster, along with the value chain participation and its translation to another cluster, still has some ambiguity. There is work being done with the government and industry to ensure transparency, so when capital supports vehicle deployment, there is clarity on how returns will play out. Notably, when looking at the five clusters, some have announced substantial opportunities for vehicles. Beijing is considering 5,000 fuel cell electric vehicles, Shanghai another 5,000, and Guangdong 10,000. Additionally, Henan has announced 5,000 and Hubei 8,000. These aggregate deployments over the coming years indicate scaling, especially around 2025, to meet the 2030 target of 1 million fuel cell electric vehicles on the road. We are also seeing a significant build-out of hydrogen refueling stations. In 2021, despite limited adoption of fuel cell vehicles, 100 fueling stations were established. Today, there are over 180, with another 50-plus under construction. We anticipate over 230 hydrogen fueling stations by the end of 2022, primarily focused on bus and truck opportunities, not passenger cars. Clarity on how these translate will take some time. In the specific cluster where Weifang is located, the Weichai-Ballard joint venture holds a strong position. If you examine the companies in that cluster, particularly in plate manufacturing, stack manufacturing, and module assembly, the joint venture is the largest player in those segments of the value chain.
Operator, Operator
The next question comes from Jonathan Lamers with BMO Capital Markets. Please go ahead.
Jonathan Lamers, Analyst
Good morning. On the backlog, is this becoming less of a relevant indicator for revenue over the next 12 months as Ballard transitions to more of a manufacturing business from a consulting business? And just the second part to that question if I can. For the Weichai-Ballard JV, how far ahead of production do you expect the lead times for the next round of MEA and plate orders to be?
Paul Dobson, CFO
Hey Jonathan, it’s Paul here. I’ll address the first question regarding the backlog on the order book. We observed a decrease of about 15% in the 12-month and total order book compared to Q3 2021 and the previous quarter. However, it's noteworthy that within the order book, the composition from European and North American markets is increasing, with Europe and North America now representing 65% of the 12-month order book. In total order book terms, this figure stands at about 60% compared to 40% last year. This indicates a shift in focus from China to Europe and North America. Additionally, we are witnessing growth in developing markets, including marine, stationary, and off-road sectors. Another important aspect is our increasing customer diversification. In Q4, we had more than 30 customers with substantial orders exceeding 250,000, up from around 20 in Q4 2020, reflecting significant progress in customer diversification overall. As you noted, we are still experiencing the decline in the wind sector as the Audi contract concludes, while we continue to honor the $90 million Weichai technology transfer agreement. We anticipate these trends will persist, with technology solutions leveling off. Looking ahead, we maintain confidence in our long-term prospects, particularly regarding the adoption of hydrogen fuel cells for mobility and stationary power. However, we acknowledge there may be some fluctuations in orders in the near term, especially given the current inflationary pressures and geopolitical risks. We emphasize the strength of our large customers, including Siemens, MAHLE, and Caterpillar, and the collaborative efforts we’re undertaking with them to develop these products. As Randy mentioned, thorough development and testing take time before we can scale production effectively. Once we reach that stage, we expect a steady increase in orders and revenue. We are already seeing positive growth in the bus market and anticipate the truck, rail, marine, and stationary sectors to follow suit as they ramp up development. A key example of our expanding customer base is the Adani Group in India, which is pursuing fuel cell applications in mobility and industrial sectors—a significant market we were not targeting just a year to 18 months ago. To summarize, while we foresee potential short-term volatility in revenues and orders, we remain very optimistic about the long-term prospects.
Randy MacEwen, CEO
And Jonathan, maybe just to follow up on your question on the MEA supply to the joint venture, there is no material MEA supply in the order book. So, I think we just saw these latest two cluster regions announced just a number of weeks ago. So, it’s still very early to see how that’s going to play out. But I think we’ll have more visibility on the next MEA order from the JV to Ballard later this year.
Jonathan Lamers, Analyst
Thank you. I have a follow-up question. There was a significant increase in sales from the joint venture in the fourth quarter. The industry data indicates that semi-truck production in China also rose sharply in Q4. Were some of these orders one-time events ahead of the Olympics? Can you provide any insights on what occurred in Q4 and what sales cadence we might expect for the upcoming year?
Randy MacEwen, CEO
Yes. I don’t think we’re going to see kind of a smooth pattern of order flow out of China or really any market in the very near term. It is very much a project-based business with lumpiness per quarter. So, I don’t think we could translate Q4 to what that will mean for the coming quarters in China. I think we’ll have to wait and see how the policies unfold. I do think overall in the China market, you are right. There was a tick up in Q4 ahead of the Olympics. We didn’t have a significant presence at the Olympics. Most of these were Beijing-based companies that were providing primarily fuel cell buses. There was a Weichai truck at the Olympics with a Weichai-Ballard JV engine that was actually doing waxing of snowboards and skis. So, it was a pretty interesting truck, heavily visited at the Olympics. But this didn’t relate to the Olympics. This is more about the Shandong market opportunities.
Operator, Operator
The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.
Rob Brown, Analyst
Randy, I wanted to ask for more information about the marine market. You recently received a nice order there. How is that market progressing? Are you seeing some pilot orders? Is there a broader trend in deployments?
Randy MacEwen, CEO
Good morning, Rob. Thank you for your question. Marine is one of those markets where we have seen a significant increase in the total addressable market compared to our earlier assessments. We now estimate the total addressable market for marine at $40 billion. Recently, we announced with ABB the approval in principle and are working towards what we call type approval, which would grant our marine fuel cell module, known as FCwave, a global first milestone for type approval. In the marine segment, we are initially focusing on work boats, such as ferries, cargo vessels, tugboats, and river boats. Initially, we see this market concentrated in Europe. One partnership I want to highlight is with Norled, one of Norway’s largest ferry and express boat operators, which operates around 80 vessels. There are also a couple of videos on YouTube featuring the Hydra, which is the first fuel cell ferry, showcasing some exciting footage posted by Norled. Norway has the world’s highest concentration of fjords, and there is strong support for environmentally sensitive waterway protection. Norled is launching the world’s first liquid hydrogen-powered ferry, a significant development in the sector. The vessel is approximately 83 meters long, can carry up to 300 passengers and 80 cars, and travels at about 17 kilometers per hour. We have supplied two 200-kilowatt FCwave modules, totaling 400 kilowatts of propulsive power for this vessel. The liquid hydrogen is provided by Linde from a production facility with a 24-megawatt PEM electrolyzer. Many components are in place to support this pioneering fuel cell ferry, and we are enthusiastic about this opportunity. In late 2022, people in Norway will have the chance to sail on this ferry along its route. Seeing market opportunities that can reduce carbon emissions by 95% for this type of application is compelling. ABB also remains an important partner for us in the marine market, and I recently met with them at the CERAWeek conference in Houston to explore collaboration prospects. We believe we are very well positioned in this market, especially with our Marine Center of Excellence located in Denmark, which is close to these opportunities.
Operator, Operator
The next question comes from PJ Juvekar with Citi. Please go ahead.
PJ Juvekar, Analyst
You gave some encouraging numbers about bus targets in different cities in China. How many FC modules did the Weichai-Ballard joint venture actually sell in 2021? And then, how do you see that ramp up in ‘22 and beyond as your production and testing capabilities improve?
Randy MacEwen, CEO
In terms of deployments in the China market, 2021 saw relatively limited deployment activity, especially in the bus sector, with the joint venture contributing very few units. We have made significant investments with Weichai in developing that joint venture. We are now the largest manufacturer of bipolar plates and assembly for stacks and modules aimed at the bus and truck markets, with an annual production capacity of over 34,000 stacks to support 20,000 fuel cell engines, equating to 20,000 buses and/or trucks. I believe that long-term, we will see more focus on trucks in the China market, although there will certainly be many fuel cell buses. The joint venture is actively engaging in both sectors. It's also important to note that within the Weichai Group, they possess two bus original equipment manufacturers (OEMs), Zhongtong Bus and Asiastar Bus, both of which have integrated our fuel cell modules into their platforms and have tested them in real-world conditions over the past year, involving about 150 buses with positive traction. Additionally, we have other bus customers outside Weichai, including Yutong, which is the largest bus manufacturer globally and is strategically located in Zhengzhou. We are very optimistic about the long-term bus market potential in China. On the truck side, Weichai owns one of the largest truck OEMs in China, Sinotruk, which ranks second or third depending on the metrics used. They have started integrating fuel cell platforms into various truck classes at Sinotruk. For instance, last June at the FC VC conference in China, we showcased four different buses and trucks powered by Weichai-Ballard joint venture modules. While market adoption is still in the early stages due to policy uncertainty, we are well-positioned to support growth in the coming years.
PJ Juvekar, Analyst
Great. And then, you have this MOU with Adani in India. And what’s the scope of that project? And when you combine that with your Tata bus deal, how big the India market could be for you and sort of what time frame? Thank you.
Randy MacEwen, CEO
Yes, we are very excited about the recent developments in India. The green hydrogen policy announced there is part of a broader push on renewables, focusing on climate change, air quality, energy security, and economic development. In February, India announced a green hydrogen policy aimed at encouraging the purchase and build-out of renewable capacity for green hydrogen production. The policy includes open access approval within 15 days without a central surcharge and zero interstate transmission charges for 25 years. This creates strong incentives to get green hydrogen production started before June 2025 to take advantage of these subsidies. Additionally, we see a promising partnership with Adani, given their diverse operations with port trucks, airport buses, rail opportunities, and off-road vehicles, including mining and power generation. We plan to manufacture fuel cells for these market applications in India in collaboration with Adani, who we view as a compelling long-term partner. This perspective comes directly from Gautam Adani, the Founder, Chair, and CEO of Adani Group, with whom we have met to discuss his vision for energy transition in India. Adani Group aims to be the leading renewable player in India, and they are looking to apply that to green hydrogen across their diversified industrial business.
Operator, Operator
The next question comes from Leo Mariani with KeyBanc. Please go ahead.
Leo Mariani, Analyst
I was hoping you could talk a little bit more about gross margins. I think in your prepared comments, you did talk about continuing to see some margin pressure in 2022. However, it looks like your margins were up a little bit here in the fourth quarter to kind of around 13%. So, maybe you could just provide a little bit more color on perhaps what we should expect in terms of gross margins as ‘22 evolves.
Paul Dobson, CFO
Sure. Hi, Leo. It’s Paul here. Yes, we noticed a margin increase from Q3 to Q4 of a couple of points. However, looking year-on-year, gross margin decreased by about 7 points. The main reason for this is the transition from technology services, which typically has a much larger contribution margin, to Power Products, which has a smaller contribution margin. This mix accounts for approximately 5 points of the gross margin decline. We also experienced pressure from material costs and freight, each contributing about 1 point, along with an incremental warranty provision of around 1 point. This was partially offset by a COVID subsidy from the Canadian government by 1 point, leading to a total of about 7 points overall. Looking ahead to 2022, we expect this shift towards Power Products to continue, which may further pressure gross margins. Additionally, we previously mentioned the inflationary environment and cost volatility. Our discussions with suppliers regarding energy, commodities, and metals indicate that costs will continue to rise. Shipping costs have also increased year-on-year, and we expect this trend to persist. Therefore, we foresee ongoing downward pressure as we move into 2022. However, as volumes increase, we anticipate being able to spread our rising costs over a larger volume, positively impacting gross margins in 2023 and beyond. So, while we expect a decrease in 2022, we also expect some improvement as volumes pick up.
Leo Mariani, Analyst
Okay. That’s helpful, for sure. And I guess, just wanted to kind of circle back a little bit on the Weichai JV there in China. If I kind of heard you all right in terms of some of the comments that you made, it sounded like we really shouldn’t expect much in the way of revenue from that in ‘22, at least certainly not at the beginning of ‘22, as I know there’s some policy initiatives that still need to be cleared up. Is that a reasonable way to think about it?
Randy MacEwen, CEO
Yes. Leo, the situation lacks clarity at this moment, which prevents us from taking a confident stance on it. We will need to wait and be patient. As circumstances, policy, and market demand evolve—especially a market that understands the policy landscape and is willing to invest capital—things will become clearer. This clarity will eventually lead to orders for the Weichai-Ballard joint venture, which will then translate into orders for Ballard. However, we currently do not have the visibility needed to instill that level of confidence.
Operator, Operator
The next question comes from Craig Shere with Tuohy Brothers. Please go ahead.
Craig Shere, Analyst
First, you have quite a strong balance sheet and dry powder, but given the growing organic OpEx and CapEx investment as well as near-term pressure on gross margins, do you want to stay on the safer side as far as liquidity? Do you have some upper limit on what you’re willing to consider for M&A?
Paul Dobson, CFO
Yes, we do have some cash reserves and are looking to invest that both through organic and inorganic means. Randy mentioned the increase in capital expenditures and operating expenses we've experienced this year and expect to continue into next year. Our strategic plan extends at least five years, and we have a capital allocation plan that we feel confident about to meet our goals within that period. However, we may consider raising additional capital if market conditions are right and we encounter a larger merger or acquisition opportunity. Of course, given the size of our balance sheet, there is a limit to how much we can raise. We will assess the market conditions at that time to determine if raising more capital is a viable option, provided the circumstances are favorable.
Craig Shere, Analyst
Got it. And there was a reference to doing better than expected in ‘21 on stack cost reductions and moving well on your way towards the 2024 target. Could you opine about perhaps achieving that earlier, or could we achieve mid-decade targets more like 2023? What goes into that?
Randy MacEwen, CEO
Yes, Craig, I don’t think we see that happening earlier. There are several factors that are coming together over time. We are very pleased with the progress made in 2021 and need to replicate that in 2022 and again in 2023. There is still a lot of work to do. I believe we have managed most of the technology risks. Now, our focus is on transitioning to new materials, having qualified those materials in small samples, and scaling up with our vendors and suppliers. Additionally, we need to enhance our advanced manufacturing initiatives to achieve the volumes that will drive the cost improvements we expect to see, which will positively impact gross margins. I think we are on track and will stick to our plan without anticipating any changes.
Craig Shere, Analyst
Very good. As a very quick follow-up to the first question, if you’re getting close to commercialization and you think positive cash flows are within a year or two around the corner, is there some point you would consider some leverage instead of just equity all the time?
Paul Dobson, CFO
Yes. Yes, we would look at that. So, of course, we want to have a steady stream, positive stream coming in. And we would certainly look at perhaps some leverage, but that’s into the future, not in the near term.
Randy MacEwen, CEO
Yes. Craig, I think as we think about the capital stack, just to follow on Paul’s point, we have sufficient capital to get us to where we need to be from a business perspective, a cash flow perspective. What we’re talking about is in the event of a larger M&A transaction, particularly if we’re not able to use paper for part consideration, that’s the type of circumstance where we may need to look at raising capital. But, as the business mature, of course, in terms of the capital stack, we look at the introduction potentially of green bonds or other debt structures that made sense in the market at that time.
Operator, Operator
The next question comes from Jeff Osborne with Cowen and Company. Please go ahead.
Jeff Osborne, Analyst
Yes. Good morning, Randy. And thanks for all the details on the call in terms of OpEx and CapEx. It’s very helpful. Two quick questions on my end. On the Tech Solutions side for 2022, is that still a headwind from a gross margin perspective? I think you alluded to 5 points of pressure for ‘21. I was just curious how to think about the mix shift in ‘22 itself.
Paul Dobson, CFO
So, Jeff, for Tech Solutions, the margins did compress a little bit in ‘21 versus ‘20 by a couple of points, but we would see the margins being fairly steady. Maybe we might lose another point or 2 in 2022, but not beyond that. The mix change really is the sort of relationship, the increasing revenue from Power Products versus Tech Solutions. And so, the impact of mix on the blended gross margin is we’re express there.
Jeff Osborne, Analyst
Got it. And then any thoughts, Randy, on electrolyzer applicability to your PEM development? Is that something that you’ll be working on this year as part of the increased R&D?
Randy MacEwen, CEO
Yes. Great question, Jeff. We feel like we have a lot on our plate with just the fuel cell applications here and customer requirements and market opportunities. So, PEM electrolyzers are not something where we would do in-house organically at this time.
Operator, Operator
The next question comes from Greg Wasikowski with Webber Research. Please go ahead.
Greg Wasikowski, Analyst
Just one for me here to end it. Can you comment a little bit more on component and raw material availability in 2022? Kind of where your concerns may be? And then particularly related to your palladium supply chain and whether or not current events in Eastern Europe affect it or to what degree that it could potentially affect it? Thanks.
Randy MacEwen, CEO
Yes, Greg, thank you for the question. Looking at our products, we see some exposure to aluminum, which makes up about 5% of our total module cost and is a significant part of our GHG costs as well. We aim to reduce our aluminum usage further. Additionally, platinum also accounts for about 5% of our total module cost, and we are closely monitoring that as well. We have several suppliers for platinum, sourced outside of Europe, which is crucial. Iridium is another component, but it represents less than 1% of the module cost. Compared to other technologies like battery technologies, our exposure to supply chain volatility and commodity costs is lower. However, we expect to see cost increases across all areas and commodities, with energy costs impacting all companies. This presents a geopolitical risk that every industry will face in 2022.
Operator, Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Randy MacEwen, CEO, for any closing remarks.
Randy MacEwen, CEO
Thank you for joining us today. Paul, Kate and I look forward to speaking with you in May when we will discuss results for Q1 2022. Thanks again.
Operator, Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.