It developed a hybrid train that was fuel-efficient and reduced emissions. But then it found out that the hard part comes later, when you try to make a profit.
Nicolas Van Praet, National Post
Published: Thursday, March 01, 2007
You might think making money selling a hybrid train locomotive with the catchy name "Green Goat" would be easy, given North America's new-found obsession for everything environmentally friendly. But Railpower Technologies, a Montreal-based company that manufactures hybrid trains, is proving that green companies need more than just a great idea to turn a profit.
The company recycles heavily polluting yard and road switching locomotives -- which are used to connect railcars and pull them in and out of service -- by replacing their thirsty engines with a smaller diesel motor and a big battery pack. The result, the company says, are hybrid locomotives that use 20% to 70% less fuel than the old ones and emit up to 90% less in smog-precursor oxides. Switchers are called "goats" in the rail trade, so Railpower naturally dubbed its product "Green Goat." Some major players in the industry, such as Union Pacific, Burlington Northern Santa Fe Railway and Norfolk Southern, put in orders.
However, three years after its debut on the Toronto Stock Exchange in March 2004, Railpower has yet to prove it can make money. Despite having delivered around 78 locomotives thus far, and with orders for another 77 currently on its books, cumulative losses as of last September totalled $117 million. Seems Railpower is going through the growing pains that often afflict -- and sometimes kill -- environmental technology companies that are trying to move from research and development into production.
"We get approached by many companies with phenomenal technology," says David Berkowitz, who runs the energy technology portfolio at Ventures West, one of Canada's biggest privately-owned venture capital companies. "And turning it into a real business is exceptionally challenging."
The hurdles for Railpower are huge. Its reliance on outside contractors for assembly has meant that it has had no direct control over manufacturing. Costs have run over budget. And contracts with customers, like CP Rail, were signed at prices too low to cover costs. Meanwhile, two new competitors have sprung up to challenge Railpower. Losses could pile up further before they shrink.
Going forward, Railpower's best asset might be its skilled management team. Several senior managers are former Bombardier executives with experience in manufacturing, including CEO Jose Mathieu. The company has already undertaken some significant steps to stay alive. It renegotiated contracts and sold about $30 million worth of shares to raise money for ongoing operations. Now it's considering renting or buying a factory to start making its own products. That would completely reverse its business model, but would allow Railpower to take back much of the control that has been out of its hands for so long. In December, the company received a piece of good news that could also help reverse its fortunes: The U.S. Environmental Protection Agency approved its road switcher locomotive, and the certification will likely accelerate sales south of the border.
Venture West's Berkowitz compares Railpower's fate to that of another Canadian environmental hopeful, Ballard Power Systems. "Everyone went nuts about fuel cell vehicles 10 years ago, and it just never happened," he says. "Ballard still has a great product and a great idea. But what they have learned, and what Railpower has learned, is that executing on these business plans tends to take a little bit longer than anticipated."
© Financial Post Business 2007