Ballard Power Systems Inc

TSX:BLDP

Earnings Call Transcript 2021-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Q3 2021 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.

[Kate Charlton]

Thank you, operator, and good morning. Welcome to Ballard's Third Quarter 2021 Financial and Operating Results Conference Call. With us today 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. I'll now turn the call over to Randy.

[R. Randall MacEwen, CEO, President & Non]

Thanks, Kate, and welcome, everyone, to today's conference call. Given the growing number of research analysts covering the company, we'll keep our prepared remarks relatively brief to leave sufficient time for questions. We joined today's call with an exciting industry backdrop, including COP26, $9 billion of fresh commitments to hydrogen coming in the United States and a growing global recognition of the important role of hydrogen to achieve deep decarbonization, including hard-to-abate sectors such as heavy-duty mobility.We continue to have high conviction in our strategy and growth plan. Our business model has significant leverage and resiliency as we deploy the same core competencies and fuel cell technology across multiple verticals, bus, truck, rail, marine, off-road and stationary power, and across multiple regional markets, Europe, North America and China. We're focused on large market segments where the value proposition for fuel cells are strongest and the barriers to refueling infrastructure are lowest. We made solid progress across our business activities over the past quarter, including in customer programs and deliveries, in our technology and product development programs and strengthening our operating platform in new customer acquisition and in our partnership strategy. We also achieved a major corporate and industry milestone. In October, we announced that Ballard's PEM fuel cell technology and products have now powered fuel cell electric vehicles over 100 million kilometers around the globe. Let me repeat this again. Buses and trucks with Ballard technology have now accumulated over 100 cumulative kilometers of real on-road experience. This is a massive differentiator for us and puts us in a different league of demonstrated capabilities compared to any other company that provides fuel cells for medium and heavy-duty mobility. Our proven in-service experience with a track record of safety, quality, availability and performance continues to be a compelling value proposition for our customers and a strong calling card for Ballard. This provides customers with confidence in Ballard technology, product durability, quality and our total cost of ownership in real-world duty cycles and operating conditions. And we've been very busy on the customer side and with our partnership strategy. On partnerships, we continue to focus on simplifying the fuel cell electric vehicle experience and ease implementation friction points for OEM customers and end users. We are putting the customer at the heart of our strategy and our investments. We believe there's a high value to offer our customers integrated fuel cell powertrain solutions that are optimized for performance and cost. We have strengthened our platform to better support our OEM customers, including our recent partnerships with Hexagon Purus and Forsee Power. California-based Hexagon Purus is a leading hydrogen equipment supplier and integrator. We're planning to work together to develop Class 6 and 7 fuel cell electric truck markets, incorporating their turnkey electric drivetrain and hydrogen storage solutions with our fuel cell engines. And a few weeks ago, we announced the signing of an MOU with Forsee Power, a France-based leader in smart battery systems for sustainable electromobility. Through this strategic partnership, we plan to develop integrated fuel cell and battery solutions optimized for performance cost and installation for heavy-duty hydrogen mobility applications. Now what does this all mean when you look at the landscape of our strategic partnerships, including Weichai, MAHLE, Linamar, Hexagon Purus, Forsee Power and others? It means we're positioning Ballard to deliver innovative, high-value, high-performing, efficient, low-cost fuel cell engines that can produce at scale. We're designing engines that can be paired and optimized with complementary powertrain solutions and which can be easily integrated into powertrain and vehicle platforms for our OEM customers. So our proven track record of 100 million kilometers, our continued work on product cost reduction and our strategic partnerships to simplify the fuel cell electric vehicle experience are all leading to increased customer engagement at the very time when end users are demanding zero-emission solutions. This is leading to repeat business with existing customers as well as new customer acquisition. On the new customer front, we recently announced an exciting new customer relationship with QUANTRON, a German-based specialist in electric vehicle integration. The initial collaboration will see QUANTRON integrate Ballard's FCmove family of heavy-duty fuel cell power modules into QUANTRON's electric drivetrain and vehicles. The fuel cell electric platforms currently in development include a 7.5-ton delivery truck, a 40-foot -- 44-ton heavy-duty truck and a municipal waste collection truck. Initial delivery of QUANTRON fuel cell electric trucks is scheduled for late next year. We also want to highlight today the growing activity levels for fuel cell buses in Europe. We recently announced repeat orders for a total of 40 fuel cell engines from existing bus OEM customers for deployment in new and existing European transit operations. Over the past 12 months, we've expanded our deployment market from 10 European cities to over 25 cities in 10 countries. As of the end of October, there are nearly 160 fuel cell buses powered by Ballard in service across Europe. This is an increase of over 80% from October last year. And in total, there are approximately another 150 fuel cell modules currently on order, which will nearly double the number of fuel cell electric buses driving passengers on European streets. A similar growth trajectory is also being seen in the North American markets, particularly in California as transit authorities make strides towards decarbonizing their bus fleets to meet ICT regulatory compliance, which requires all new transit buses in California to be zero emission by 2029 and 50% of new transit buses to be zero emission by 2025. We expect to soon have nearly 80 additional Ballard-powered fuel cell electric buses on California roads, complementing the approximately 50 already in service. We're excited by the pace and scale of fuel cell electric bus implementation across California and are encouraged at increasing rate of adoption in other states as well. In the truck market, our joint development program with MAHLE continues to progress as planned. The concept of demonstration module is expected to be in test in Germany by the end of the year. Testing of this 240-kilowatt module is expected to continue into 2022. And commercial prototypes are expected to be ready for initial customer projects by early 2023. And as I've discussed in the past few earnings calls, the long-term outlook for the rail market continues to strengthen with new orders announced for hydrogen-powered passenger train with Talgo in Spain, a pilot with CP rail locomotives in Canada and ongoing work with Siemens in Germany. As announced earlier this year, Ballard work with a consortium of other industry leaders deliver Scotland's first hydrogen powertrain, which is currently being showcased as part of COP26 in Glasgow. This is yet another proof point of the growing global interest in fuel cells in rail applications, where rail operators can electrify and decarbonize their rail lines without the need for costly overhead catenary wire infrastructure and where heavy payload, long range and rapid refueling are key customer requirements. In the marine market, we're seeing a high amount of customer engagement driven by increased pressures for decarbonization. We've continued to progress our work with Norled to deliver a hydrogen fuel cell-powered passenger ferry and expect to deliver the first FCwave modules to Norled by the end of the year. The backup in stationary power opportunities are also gaining traction with about a 90% increase in revenue from Q3 last year. As a proportion of our 12-month order backlog, we've seen a fourfold increase in the past 2 quarters, surprising to the upside for backup and stationary power. We recently announced the construction of our project with HDF in French Guiana. The containerized power project is the world's first multi-megawatt baseload hydrogen power plant and the largest green hydrogen storage of intermittent renewable electricity sources powered by an on-site solar park. In Europe, we announced a project with Fusion Fuel in Portugal to deliver a peak shaving unit also to be fueled by green hydrogen. Now we're also seeing strong initial market uptake for critical zero emission power for data centers, particularly for backup power. Large format hydrogen fuel cells present an opportunity to produce reliable backup power as a sustainable alternative to incumbent diesel technology. So our core industry-leading PEM technology is being leveraged in a variety of cross vertical applications as the broad uses of hydrogen as a critical pathway for decarbonization expand. Let's now move to China. China fuel cell policy and the related sales of our Weichai-Ballard JV have disappointed in 2021. While we've been challenged with the adoption pace of fuel cell electric vehicles in China amid extended policy uncertainty, we've continued to achieve important technical and operational milestones in our joint venture, including in stack and module development and as part of our technology development program to advance the localization of products. As of the end of September, there were over 3,330 fuel cell electric vehicles deployed in China powered by Ballard technology. Our Weichai-Ballard joint vendors continues to make decisions and investments to have leading market share in the fuel cell truck and bus market in China over the long term. We're focused on developing the right products, localization strategy, cost structure, scaled manufacturing and market positioning to win in the national China market over the next decade. In the near term, we're interpreting the complicated cluster policies and positioning our platform to target and penetrate the initial cluster regions. So while 2021 has been disappointing and visibility for 2022 remains cloudy, we have high conviction and remain firmly bullish on the long-term market for our technology in China. We expect to be in a position to provide an update during the next earnings call. We also want to comment on the supply chain challenges. Throughout 2021, we've been working hard to risk mitigate global supply chain disruptions. We've seen delays in freight shipments and have been moving more inbound products by air, resulting in elevated costs and putting pressure on gross margins. In the fuel cell industry, Ballard is one of the leading customers for many specialized suppliers. As a result, our long-standing relationships with key global suppliers continues to help us navigate these supply chain dynamics. In some cases, we've accelerated the supply of materials to derisk customer impacts, which has also elevated inventory levels. As we look to next year, we're encouraged by the record levels of customer engagement across all application verticals in Europe and North America. We're set up for an exciting 2022 marked by continued customer wins, product innovation, cost reductions, additional deployment and development of key partnerships and technology and the start of a long-term revenue ramp. With that, I'll turn the call back over to the operator for questions.

[Operator]

[Operator Instructions] The first question is from Rob Brown from Lake Street Capital Markets.

[Robert Duncan Brown, Senior Research Analyst]

Just wondering if you can give some further color on the marine market in terms of the customer engagement. Are customers sort of ramping up their efforts? And is this being driven yet by the IMO kind of discussions around carbon emissions? Or sort of where is marine at in the customer engagement efforts?

[R. Randall MacEwen, CEO, President & Non]

Yes. Rob, thanks for the question. The marine market is a market that, I think, if we stepped back 2 years ago, I probably wouldn't have forecasted the high level of customer engagement we're seeing at this time. And part of it, you're right, is being driven by, in some cases, targets; in some cases, real mandates, depending on which jurisdiction you're in. So we do, of course, have the International Maritime Organization target to reduce emissions 50% by 2050. But we're also seeing a number of jurisdictions look at sensitive waterways, where they're looking to protect those waterways. And decarbonization is going to play out, I think, much faster there. We've also seen electrification occurring in marine applications both with battery and fuel cells. And we see, particularly with Forsee Power an opportunity to package an integrated fuel cell and battery opportunity there rather than the current diesel battery packages that are being contemplated for marine. And now with Norled, we will be delivering our first modules to Norled for, I believe, the world's first fuel cell ferry. We're pretty excited about this. Norled is a major player in the marine space for ferries. And this is a critical project that we're investing a lot on. We launched the FCwave product last September. And already, we're seeing a fairly significant order book and interest level develop for that product. And that -- interestingly, that product has application not just in the marine space, but the way it's packaged and containerized, it has application for other verticals as well. So I think there's a lot to do to prove out the value proposition in marine. But we are very bullish with the activity levels we've seen with key customers like Norled as well as some partners like ABB.

[Robert Duncan Brown, Senior Research Analyst]

Okay. Great. And just following up on the European bus market -- number of order activity. Is that still being driven by the JIVE program? Or are you seeing orders starting to flow from cities and regions sort of independent of that?

[R. Randall MacEwen, CEO, President & Non]

So we have seen a number of projects driven by adoption with JIVE support. What I do think you're likely to see before the end of this year is the next announcement from Europe on support of fuel cell buses. I think we need to be clear that the value proposition still does need some policy nudges. With the low level of penetration that we have today, it's important for these jurisdictions to get some policy support to help with initial adoption. But I think the interesting thing is as we look at another 150 buses in Europe and then behind that, real scaling where you're starting to see sites where we'll have quoting activity for 100 to 200 buses right now. So I do think as we move from tens and hundreds to thousands in Europe, in North America, and as we've seen in China, costs will come down.

[Robert Duncan Brown, Senior Research Analyst]

I think you'll turn over.

[R. Randall MacEwen, CEO, President & Non]

Thanks, Rob.

[Operator]

The next question is from Mac Whale from Cormark Securities.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Randy, when you look at the sort of the pace of adoption in China and just the sort of the delay that we've seen there, does that impact your development time line, like your product development time line? I'm trying to get an idea of whether it gets to the point where so much -- there's so much passage of time, you actually skip a generation. Can you tell us how you adjust your development there in China?

[R. Randall MacEwen, CEO, President & Non]

Yes. Mac, thanks for the question. And certainly, when we entered our collaboration with Weichai back in 2018, one of the things that was really important to both Ballard and Weichai was to make sure we had the highest performing products at the right cost structure to have high market share over the long term. And we spent quite a bit of time at that point talking about the development of the right stacks and the right modules for the bus and commercial truck market. And we laid out the plan, the $90 million technology solutions plan to develop those products. So we've done, I think, a very good job collaboratively developing those products with a couple of really interesting dynamics I would suggest over the last 18 months. One is that Weichai in the joint venture has been very effective at working to help localize components in the bill of materials for our fuel cell modules in China. And so that has gone, I would suggest much faster than we expected. So I think that's a positive. And then as we look at the capabilities of the joint venture to take on more module design, Weichai is an expert at designing high-volume engines for the diesel market. You pair that up with Ballard's ability to design fuel cell modules, so we're now having next-generation modules being developed at the Weichai-Ballard joint venture with less contribution from Ballard and more contribution at the JV level. So there are a number of modules that are currently being developed by the JV, which I think are pretty exciting. And just to give you an example, we've recently deployed at the JV 10 49-ton fuel cell trucks to [indiscernible] Steel. And those are powered by 160-kilowatt fuel cell engines that have been developed by the JV for that application. So when I think about the program we have for the development of the fuel cell stacks at Ballard and the use of those stacks in the joint venture as well as the development of fuel cell engines for the China market, I think we're doing a really good job with Weichai, understanding the market requirements and then developing solutions for those market requirements. So I would say the development program is on pace. When you say skip a generation, I feel like we're pushing the boundaries every time that we're releasing our next generation already.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. And just as a follow-on because you touched on power levels. Like some of those modules are -- that's a pretty big power level on that. Whereas in Europe, the partnerships you talked about most recently are more of a hybrid type of arrangement. Should we be thinking of lower per vehicle power levels, say, in Europe versus China? Is this sort of a bifurcation of the market?

[R. Randall MacEwen, CEO, President & Non]

No, I don't think so. I think if you think about -- just coming back to the China market, our JV has also developed a 50-kilowatt module. So it's really very much trying to make sure you have right products for market segments, particularly in the commercial truck market, which is very segmented and, of course, for the bus market as well. So if you think about the fuel cell engine we're developing for MAHLE, that's a 240-kilowatt fuel cell engine for the commercial truck market in Europe.

[Operator]

The next question is from Chris Souther from B. Riley.

[Christopher Curran Souther, Research Analyst]

I just wanted to touch on between some of the partnerships you've built out here between MAHLE and Linamar, Hexagon, QUANTRON and now Forsee. Are any of those customers currently in the backlog? With some of the customers ramping up towards the end of 2022, early 2023, I'm curious what's the timing when we start to see that flow into the backlog prior to the revenue ramp with some of them?

[R. Randall MacEwen, CEO, President & Non]

Yes. Chris, thanks very much for the question. And I just want to clarify an important point. So we're talking about strategic partners that we're looking at module design, improving module design, including, in some cases, like MAHLE, bringing some balance of plant components inside of our fuel cell engine, and then others who are experts at integrating that fuel cell engine into the powertrain and can offer complementary products so that we have a solution that is optimized for performance and cost. So the collaborations that we have there, those partnerships will actually help drive adoption by the customers that are vehicle OEMs. So I wouldn't characterize those companies you listed as customers. QUANTRON would be a different example. They're actually a customer that will be buying fuel cell modules directly from Ballard. But the MAHLEs, Weichais, Linamars, et cetera, the idea there is to collaborate on the different scope of work where we have strengths to improve our offering for vehicle OEMs. So if you look at the order backlog today, we're seeing, I think, a pretty nice trend in terms of the pickup in order backlog for heavy-duty motive. And those are the segments that we're particularly focused on. So we've had about a 30% increase in our order backlog, our 12-month order book, I should say, for heavy-duty motive throughout Q1 through Q3 of this year. And part of that is this emphasis by Ballard on simplifying the fuel cell electric vehicle experience and some of the value that these partners will deliver. But most of these partnerships still have work to do in terms of co-development activities. And I think you'll see the real leverage of that as we start looking at 2023.

[Christopher Curran Souther, Research Analyst]

Okay. Got it. And then looking at kind of the China market where it's been a bit of a pause here for quite a while. Are you seeing the competitive atmosphere heat up with some local players kind of come in? Or where do things kind of stand from a competition standpoint of people trying to catch up with the capabilities you're building with Weichai? It sounds like there's continued progress on the tech side with Weichai. I'm curious what -- how does the competitive landscape looks today?

[R. Randall MacEwen, CEO, President & Non]

Yes. So Chris, I would say the competitive landscape became very intense a few years ago. I wouldn't characterize that as a recent phenomenon. So there are certainly lots of domestic players that are actively trying to find their way in the hydrogen fuel cell market in China, trying to find their appropriate positioning in the value chain and ecosystem. And of course, there are a number of international players who, like Ballard, see a large market where there's going to be very scaled adoption. Let's not forget, we're talking about a target here of 1 million fuel cell electric vehicles by 2030 and 2,000 hydrogen fueling stations. So it will be the largest market for the adoption of fuel cell trucks and buses, in my opinion. So the competitive dynamics continue. I think the pause in the China market hasn't, of course, just impacted Weichai-Ballard. It has impacted all the players in that market with relatively slow deployment in 2021.

[Operator]

The next question is from Michael Glen from Raymond James.

[Michael W. Glen, Equity Research Analyst]

Randy, just on MAHLE. There has been some management changes take place within the organization. Just wondering if you've had a chance to up -- to talk to the incoming CEO. And has there been any sort of shift or thoughts on their direction with respect to hydrogen?

[R. Randall MacEwen, CEO, President & Non]

Yes, you're right. Michael, thanks for the question. And this has been known for some time. So going back, in fact, to around last Christmas, we knew there would be some change at MAHLE. So the leadership change, I don't think is going to translate into any reduction in interest in the fuel cell opportunity with Ballard. My -- over the last year, what's happened, of course, is that the demand for hydrogen and the opportunity set for hydrogen has grown exponentially. And during that period, MAHLE has joined the Hydrogen Council and now has visibility at the Council level on the growing market opportunity set that they're seeing, not just for commercial vehicles but in other markets as well. So I think we'll continue to have discussions with MAHLE, including with the CEO and really make sure that there's alignment on the future investment cycle and timing and pace for adoption of fuel cell electric trucks in the European market.

[Michael W. Glen, Equity Research Analyst]

Okay. And then just following up on China. If we're looking at MEA volumes or MEA sales potentially into China, any thoughts on timing for the next MEA order from the JV?

[R. Randall MacEwen, CEO, President & Non]

Yes. No, nothing we can share today with any conviction. It's still uncertain at this point. So I don't want to overstate where we are.

[Operator]

The next question is from Viveck Panjabi from National Bank Financial.

[Viveck Panjabi, Associate]

This is Viveck on behalf of Rupert. Just wanted to asked about the HICAP fund, the investment in the hydrogen infrastructure. Could you talk about other opportunities as the team may be considering in hydrogen infrastructure?

[R. Randall MacEwen, CEO, President & Non]

Yes. Viveck, thanks for the question. So there are 2 or 3 new funds that have formed over the last 12 months. And those funds are typically designed to be hydrogen infrastructure funds, where they will support the adoption of hydrogen fuel cell -- hydrogen projects but including hydrogen fuel cell projects from mobility applications. And I think one of the real advantages of these funds is that they'll match up the supply particularly of green hydrogen, although blue hydrogen is in the option as well, supply of green hydrogen with demand on the application side and be a financier for those projects. So Ballard is actually -- will be investing in 2 of those funds. You mentioned HICAP as one of them that we've included in our subsequent event notes in our financial statements. There's a second fund that we're making an investment in as well. And the point of these investments for Ballard is really getting visibility on where these funds see opportunities to invest capital and potentially influencing opportunities by bringing projects to those funds for potential investment. So we think this is an important way for us to, again, match up hydrogen supply with demand applications.

[Paul Dobson, Senior VP & CFO]

Yes. It's Paul here, too. So the other thing, I think, that these funds are really helpful for Ballard too, as it gets us a seat at the table and into the deal flow of various opportunities. So we could look at potentially co-investing, or if the fund is not going to take a pass on it, it might be something that Ballard is very interested in. So staying current and in the deal flow across the whole ecosystem is a good objective for us too as we look for different opportunities to deploy our capital.

[Operator]

The next question is from Vaibhav Vaishnav from Coker & Palmer.

[Vaibhav D. Vaishnav, Oilfield Services and Energy Transition Analyst]

I guess like maybe if we can set up expectations for the near term, how should we think about orders level near term or call it for 2022 versus this $20 million, $25 million per quarter that we have been seeing so far?

[R. Randall MacEwen, CEO, President & Non]

Yes. Vebs, thanks for the question. And I think as we look at 2022, we see clearly the start of a growth ramp, a long-term growth ramp developing. So I'm very excited about the opportunity for 2022. One of the things we really like about our business model is the ability to leverage our core competencies in technology across multiple verticals and across multiple regions. And we see strength right now in Europe and North America, and we see strength in most verticals moving forward as well. So I think that suggests a strong growth rate in 2022. I think the wildcard to add to that growth rate will be what happens in China in 2022.

[Vaibhav D. Vaishnav, Oilfield Services and Energy Transition Analyst]

Got it. And maybe -- we talked about inflation, how you had to do some airlift and everything just because of supply chain disruptions. How do we think that progresses or subsides as we move into 2022? And just on operating cost, how are you -- how should we think about as the revenues ramp or as the orders ramp?

[Paul Dobson, Senior VP & CFO]

Yes. So on the supply chain, Randy had a few remarks about it. But I would say that the team has done a pretty good job actually in getting ahead of the issues with suppliers. So some suppliers in various regions and APAC and others have had some disruptions. But we've been able to manage through them, build up some inventory and have established really good relationships and find the alternatives. Where we've really seen the impact is in the delays in shipping and increasing freight costs as well. So for both air freight and with the sea freight. So the costs are increasing, but even just the availability is pushing back the delivery times, which can impact our deliveries as well. So that's where we're seeing it happening. We've also seen some impact earlier in the year on things like platinum prices and iridium prices. The platinum has settled back down. Iridium is still high, but it's a relatively small percentage of the total bill. So in terms of when we see these challenges subsiding, it's probably going to be later in 2022 or possibly even beyond. I mean these are -- this is a global issue, the supply chain and the shipments and the freight in particular. So we are exposed to that to some degree. But so far, I think the team has done a pretty good job staying ahead of it. And you're really not seeing very material impact in our financial results from it.

[Operator]

The next question is from Jonathan Lamers from BMO Capital Markets.

[Jonathan Lamers, Analyst]

Following the recent partnerships that have been established, what areas of the powertrain does Ballard remain interested in acquiring or establishing partnerships to gain access to the technology or simplify the fuel cell adoption for the customers?

[R. Randall MacEwen, CEO, President & Non]

Jonathan, thanks for the question. So the way I would think about it is for a hydrogen fuel cell electric powertrain, you need to have storage. You need to have a fuel cell engine, which is our core competency. You need to have power conditioning, typically a DC/DC converter. You'll need to have battery technology and then a thermal strategy and controls. And as we look at that powertrain integration, also have an integration capabilities and understanding of integration is important, too. So as we look at partnerships and M&A opportunities, we're looking at each one of those boxes and identifying partners for -- collaboration, partners for potential M&A that help simplify the fuel cell vehicle experience for customers. And I think part of what we're seeing in the collaboration cycle is that there is high, high value. I think it's white space right now for optimization. So the ability to go to an OEM customer and say, here's a total solution that's optimized for performance for your duty cycle is very powerful.

[Jonathan Lamers, Analyst]

Okay. And a follow-up question to that. For the Forsee Power partnership, what markets are Ballard and Forsee targeting first?

[R. Randall MacEwen, CEO, President & Non]

Yes. The first markets with Forsee Power will be bus, truck and rail. And Forsee has a very strong position in the bus market. In fact, Ballard and Forsee share a number of same customers already that have been buying Ballard fuel cells and foresee battery packs independently, separately, not optimized. So that's certainly the nearest term market opportunity. And Forsee Power also has, I think, a very strong position in the rail market. So they made an acquisition earlier this year of a company that has competencies on battery packs for rail and have counted Alstom as one of their key customers as well. So those 3 markets, bus, truck and rail, and particularly bus and rail, they have strong capabilities in today. I would characterize them as the market leader in bus and rail and a very strong position in truck as well.

[Operator]

The next question is from Aaron MacNeil from TD Securities.

[Aaron MacNeil, Equity Research Analyst]

Randy, you referenced it in the prepared remarks and some of the Q&A, but I'm hoping you can speak a bit more to the broader partnership strategy specific to the truck market and maybe outside the Weichai JV in China. But I guess what I find interesting is you've sort of itemized recent partnerships to optimize different vehicle profile and powertrains rather than by geography, which seems to be what you've done in the bus market. So I guess what I'm wondering, do you have an appetite to take on more partners or collaborators? Or do you think you've sort of hit all the main end markets that you want to pursue with the current partnerships? And do your existing partners have any sort of exclusivity on the types of end products that you're developing?

[R. Randall MacEwen, CEO, President & Non]

Yes. Great. Thanks for the question, Aaron. And I think there's a couple of key points there. One is, do we have an appetite for more partnerships? Clearly, there's areas that we still think there's opportunity for continued evolution in the powertrain design. And so the ability to understand the integration of all these components together into a powertrain solution for customers is something that we think is important, particularly as customers -- if you think about customers, for example, in the off-road market, where they typically aren't doing their own integration, they're relying on third parties to help them with integration. So a number of customers that we see increasingly are asking Ballard for more support on powertrain integration. Maybe they're asking for a DC-DC converter solution. Maybe they're asking for hydrogen storage solution, and recommendations on battery packs, for example. And so it's really in response to a very clear signal by the OEMs particularly as they start an early adoption that they need help, including application engineering. So I do think there will be additional customers that we -- and partners, M&A opportunities that we'll be looking for to further strengthen these capabilities. Some of them will have regional capabilities. Some of them will have expertise that is global in nature. So we'll have to watch for that as we look at different collaboration models and different value chain positioning.

[Aaron MacNeil, Equity Research Analyst]

I'm not sure if you had anything prepared, but can you give us an update on the 2024 target to reduce your cost by 70%?

[R. Randall MacEwen, CEO, President & Non]

Yes. So we have internally an objective this year to -- for a very significant increase already in 2021. We will not just beat that but beat it significantly in 2021. So we're ahead of plan on product cost reduction for our program installment in 2021. So I think that bodes very well in total for the 70% cost reduction for 2024.

[Operator]

The next question is from P.J. Juvekar from Citi.

[Eric B Petrie, VP & Senior Associate]

Randy, it's Eric Petrie on for P.J. What do you need to see in China to increase visibility? Is it production costs compared to diesel? Or is it the cluster program or other incentives? And just talk too about the recent spike in diesel and how that might shift appetite towards fuel cell engine adoption.

[R. Randall MacEwen, CEO, President & Non]

Yes. Eric, thanks for the question. I think the key there is really in the very near term, it's actually the application of very complicated cluster region policies. And how do you ensure you're in the supply chain? Or how do you have a channel strategy to penetrate those cluster regions? So I think that's part of it. And more importantly and more broadly is how do you have a national strategy in China to win in the long term with the right volume, the right cost structure, the right technology? So those are 2 things that we're working on in parallel.

[Eric B Petrie, VP & Senior Associate]

And any comment with the adoption from higher diesel costs?

[R. Randall MacEwen, CEO, President & Non]

Yes. I would say not just the adoption of the higher diesel costs. But also what you're seeing, of course, in China recently, is power shutdowns and really a movement away from trying to import coal. And I believe there is very strong, very strong political and economic reasons why you'll see China become the leading adopter of green hydrogen over the long term as they look to decrease their dependence on imported energy. I think this is going to play out very strongly. They have massive renewable resources. And you're seeing now, I think there's an estimate of another 1.2 gigawatts of solar wind capacity that's been identified already recently. So if you look at a number of the companies that are talking about investments in blue and green hydrogen production like Sinopec and Baofeng and [indiscernible] and Sungrow, there are a number of companies that are really focused on this opportunity to produce green hydrogen. And on the refueling side, you've got Sinopec announcing 1,000 hydrogen refueling stations by 2025. So there are a number of players, including, I think, 1/3 of state-owned enterprises now reported a plan to invest in the hydrogen industry. So there are a number of players that are looking at the hydrogen supply side, which I think is a very valuable development in that market.

[Eric B Petrie, VP & Senior Associate]

Okay. And then as a follow-up, you talked about the excitement and development and adoption of Europe fuel cell electric buses. Can you also talk a little bit about the latest infrastructure build and money set aside to replace fleets to zero emission in the U.S.? I think currently less than 2% of the U.S. municipal fleet is based on fuel cell.

[R. Randall MacEwen, CEO, President & Non]

Yes. I think we're -- not just in the U.S. but globally, we are at the first, second of a 24-hour day in terms of market adoption. So the $8 billion in the U.S. infrastructure bill is really around clean hydrogen hubs. And again, here, this is critically important, where you're matching up the supply of low-carbon hydrogen with demand and particularly including mobility applications. In addition to that, there's $1 billion that have been allocated for R&D and demonstration commercialization for electrolyzer technologies to effectively reduce the cost of electrolytic hydrogen to $2 per kilogram by 2026. And then on top of that, I think the next development out of Washington are tax credits. And so that's currently in reconciliation right now with different bills evolving. But we do see likely an outcome here where we'll have hydrogen production tax credits potentially as high as $3 per kilogram for the cleanest and greenest hydrogen. So we're very optimistic moving forward about the opportunity for electrification fuel cell electrification in the U.S. market, which is a fairly sharp contrast to where we were a year ago.

[Operator]

The next question is from Jeff Osborne from Cowen and Company.

[Jeffrey David Osborne, MD & Senior Research Analyst]

I was wondering if we could touch on the warranty charges in the quarter I think the release mentioned. What was that attributable to?

[Paul Dobson, Senior VP & CFO]

Yes. Jeff, it's Paul here. So yes, we did have slightly higher warranty costs as we continue to test our products. And some of our newer products we saw in some of our tests that they weren't performing exactly as we had thought. So we thought it prudent to add a little bit to our warranty to ensure that our customers are covered. The team is working on the issue, and we're pretty confident. They're already making great progress, pretty confident they're going to solve it. Also in the quarter, though, too, we had some other warranty provisions for older products, which turned out that we didn't need. And so when we net those together, I think it was around $400,000, $500,000 net charge in the quarter. So not hugely material, but we've always taken a very prudent and conservative approach to our warranty provisions because we want to make sure as we're developing these products and getting them to customers that we stand by them and customers will always be covered.

[Jeffrey David Osborne, MD & Senior Research Analyst]

Got it. That's helpful. And then maybe, Randy, for you, my follow-up is there's a lot of things in life that you can't control and there's things you can control. And I was just wondering what it would take for Ballard to start to think about giving guidance as it relates to things like CapEx and operating expenses, just as you gear up in 2022 for this sort of hockey stick that you've been talking about for several years commencing in 2023. Should we think about the OpEx run rate being consistent with what we saw in Q3 or something more meaningfully higher?

[R. Randall MacEwen, CEO, President & Non]

Yes. Jeff, thanks for the question. And I certainly think you're going to see a higher OpEx in 2022 and 2023 compared to 2021. We are making significant investment in the business, in people, in technology, in products, in our customer experience. We're building out capabilities here, including our corporate development office and strategic management office. So there's a lot of activity going on at Ballard. And particularly as we focus on these verticals, bus, truck, rail, marine, off-road, stationary, et cetera, having the right expertise inside the company that understands these verticals is critically important as well. And that comes with a cost structure associated with it. So we will be investing in the business. And I think your question is timely as well as we start moving towards Q4 and looking at 2022, we'll take your comments into consideration, Jeff, as well and think about what type of guidance we can provide in 2022, whether it's a top line or as you identified maybe some discrete operating expense lines.

[Operator]

The next question is from Pearce Hammond from Piper Sandler.

[Pearce Wheless Hammond, Research Analyst]

The first is on the backlog. I was just curious if the backlog included those 40 fuel cell modules for the European market that you press released earlier this month.

[R. Randall MacEwen, CEO, President & Non]

It includes about a half.

[Pearce Wheless Hammond, Research Analyst]

Okay. And then just curious on the translation from some of the recent announcements you've made, which have been positive and how quickly that kind of manifests itself into the backlog.

[R. Randall MacEwen, CEO, President & Non]

Yes. Most of the customer engagements and strategic partnership engagements take time. So we're -- particularly when we're talking about developing solutions and getting them to market, that's typically a -- can be an 18-month to 36-month cycle in some cases. Where we're talking about new customers, for example, like QUANTRON, what we're seeing likely deployments by them in late 2022. So I think it varies. But certainly, what we're seeing is that the market interest in fuel cell buses, fuel cell trucks, rail and marine, off-road and stationary, all of these markets have shown real strength on customer engagement. And so I think what we should see is a trend in the right direction on the order book as we move into 2022.

[Pearce Wheless Hammond, Research Analyst]

Okay. And then just a quick follow-up on the cost reduction question from earlier. Congrats on the reductions that you've yielded this year. Just curious, I mean, what are the major kind of levers or drivers that led to those cost reductions this year?

[R. Randall MacEwen, CEO, President & Non]

It's really a combination of 3 different factors. One is really looking at the materials that we use, qualifying new suppliers -- materials, new chemistries, et cetera. That could be in the MEA, so gas diffusion layers, membranes, catalysts, ionomers, materials for our bipolar plates as well. So that's number one. And a lot of technology development has been done over the past 3 years to make that viable today. So that's a return on our investments we've been making for some time to look at these new materials and qualify new suppliers and actually work with suppliers. In some cases, we've -- we work with suppliers who knew nothing about the specifications required for fuel cell technology. And we walked them through 11, 12, 13 iterations of their product to get it where it needs to be. So that takes time, of course. So that's the first point. The second point is how do we look at processing and production. And we've invested quite a bit particularly at the MEA level on advanced manufacturing and have invested over $15 million in Vancouver on the advanced manufacturing, not just 6x time capacity expansion but looking at all the process steps. We're literally from raw materials into finished goods out, looking at the process steps, mapping those process steps and looking at pack times, looking at the tools and the equipment we use, introducing more robotics, more automation, reducing labor hours and reducing pack time. So a lot of work has gone into the advanced manufacturing side, particularly the MEA level. We're now looking at -- in 2022 and 2023, we'll be spending more time on the plates. And then the third part is really looking at volume and the opportunity for global customer -- global supply arrangements as we start to get larger commitments on the customer side and pairing that up with the demand for materials. So we see all 3 of those coming together. Most of the technology development work is very late stage or are finalized. And the advanced manufacturing for the 70% cost reduction has effectively been finalized earlier this year. And so we're very bullish on the opportunity to decrease our cost 70% by 2024.

[Operator]

The next question is from Craig Shere from Tuohy Brothers.

[Craig Kenneth Shere, Director of Research]

Most of my questions have been asked, but kind of wanted to get a bigger picture. There's been a lot of unexpected traction in train, stationary power and marine this year that 12, 18 months ago, we wouldn't have anticipated or baked into the long-term total addressable market. Could you give any sense or color around how you're now thinking about your mid-decade and end-of-decade opportunity set given more verticals seemingly kicking in?

[R. Randall MacEwen, CEO, President & Non]

Craig, thanks for the question. It feels like you must have been in our boardroom yesterday as we were discussing this very topic. Our TAM is growing every month, it seems. And these verticals, if you go back to September of 2020, when we highlighted -- we had our Investor and Analyst Day, we highlighted a TAM of $130 billion by 2030. That is significantly underestimating the total addressable market that we see today. And so we are in the process of updating that. I'll just give an illustrative example. That included in the rail market just the opportunity for commuter rail in Europe. So it didn't include China. It didn't include North America. And of course, in North America, we're seeing a very significant opportunity for freight locomotives in rail as well. Similarly, we constrained that TAM to certain market segments in certain geographies in marine, and I could go on. It didn't include off-road, where we're seeing lots of traction right now as well. And of course, it didn't include stationary power, which is by itself a very large addressable market. And certainly, just backup power for data centers on its own is a large addressable market. So I appreciate the question. You're going to be patient with us. We'll continue to work through that and provide an update on the expected TAM and what the implications are for our cascade of revenue and our stacking of revenue out through 2030.

[Craig Kenneth Shere, Director of Research]

Do you think that we could have an update by the time we get some kind of guidance into '22?

[R. Randall MacEwen, CEO, President & Non]

Yes. I think we will provide an update during the next call, for sure.

[Operator]

The next question is from Alex Kania from Wolfe Research.

[Alexis Stephen Kania, Senior Vice President]

I just was curious if you could talk a little bit more about the some of the stationary power potential that you've got, I think, particularly the HDF project. I'm just curious if you see that kind of as a one-off in terms of thinking about this hydrogen -- green hydrogen baseload power generation projects? Or do you see -- do you want to see that work out first before you pursue similar types of opportunities? Or is there a lot that's potentially out there right now?

[R. Randall MacEwen, CEO, President & Non]

Yes. Alex, thanks for the question. So a couple of points there is that we see the opportunity in certain stationary power markets, again, to get leverage off, if not the same, substantively the same products that we're offering in high-power mobility applications. And certainly, when we think about, for example, the data center market opportunity there, we're seeing a lot of interest from the data center community in our 200-kilowatt fuel cell engine that we've designed for the marine market, so our FCwave product and its containerized or its packaged approach. So we see a lot of leverage there. As you know, we're in the small hydrogen backup power business. And that continues to -- it's still modest but growing. And we see pretty nice deployment happening in the Nordic countries at this time. But going to your point about green hydrogen baseload, I think where you see microgrid opportunities, where you have renewables that are required to supply primary power. And of course, renewables being intermittent, hydrogen provides a wonderful energy storage vector and the ability then to use that stored hydrogen to redeploy it back as power when needed. So when the renewables aren't blowing or the sun isn't shining or to use that hydrogen as high-value zero-emission fuel. And one area that we see this model very pronounced is in the mining sector, where mining communities typically are remote. They have high power requirements at the mines. Many of them are looking at decarbonization strategies, including on-site renewables and including the need to electrify these heavy trucks, which cannot go battery.

[Operator]

The next question is from Greg Wasikowski from Webber Research.

[Gregory Adrian Wasikowski, Associate Partner]

I was wondering if you could just refresh us on the time line for profitability, the ramp. Any notable milestones in China following some sort of policy clarification? Just to refresh us on our expectations there once we get over that hump.

[R. Randall MacEwen, CEO, President & Non]

Yes. So I think we haven't been providing guidance on when we would be looking at profitability. But certainly, what we've been indicating for a number of years as Jeff Osborne alluded to a few minutes ago is that we see this curve -- growth curve starting in 2023 and really moving through 2030. So I think it's a few years out from 2023 when we see that cross over because we continue to make significant investment in our business to make sure we have high market share in these large attractive verticals for the long term. So I think 2023, you'll start to see a very significant revenue ramp. And you'll see that across the verticals and across the geographies with a lot of resilience in our business model.

[Gregory Adrian Wasikowski, Associate Partner]

Okay. Great. And then similar to the last question on stationary power but with respect to marine. Just curious, like specifically, where are you seeing that interest and demand? Is it just for ferries and smaller ships and applications? Or are you starting to get interest from maybe larger brown water barges or even some sort of blue water, larger tonnage?

[R. Randall MacEwen, CEO, President & Non]

Yes. Good question. The marine market, like all of the markets are very segmented. So in the marine space, where we expect to see early adoption between now and 2030 would be ferries, tugboats, work boats, push boats, river boats. These are all the applications where if you look at the duty cycle, for these marine vessels, they're paired very nicely with what fuel cell technology can offer. They also offer the ability to have either return to port or a port-to-port refueling infrastructure. So I think that's very compelling on the fueling side. I think some of the larger marine opportunities, for example, cruise ships and freight going ships, there's a much longer market to develop. These are all long-lived assets. It takes time for these to turn. Even just to hit the 2050 decarbonization milestones in maritime, we're 1 investment cycle away from technology disruption. So I think you'll see some of those applications start to see penetration in 2030 onwards.

[Operator]

The next question is from Craig Irwin from ROTH Capital Partners.

[Craig Edward Irwin, MD & Senior Research Analyst]

So Randy, I was pleasantly surprised to see the $1.5 million on the P&L from Synergy. Can you talk a little bit about the products that Synergy is taking? Have they exercised the option for the next-generation stack? And where do we stand with Synergy? They have come on and off over the last couple of years, a couple of times up, down. Is this potentially a customer that can rebound nicely in '22?

[R. Randall MacEwen, CEO, President & Non]

Yes. Craig, nice pickup and thanks for the question. Yes, Synergy was a bit of a surprise for us. They effectively have run down their inventory and were looking for additional purchase of MEAs for the 9SSL stacks. And they are producing 9SSL stacks for some customers that already have 9SSL on their platforms. And so I wouldn't -- I don't think we'll see Synergy as a high-volume long-term customer. I think many of the vehicle OEMs will be looking for the next-generation technology, which is at the Weichai-Ballard joint venture. But Synergy is also looking at designing other fuel cell stacks independently that could use Ballard MEAs. So we'll see that as a longer-term opportunity, too.

[Craig Edward Irwin, MD & Senior Research Analyst]

Great. And then I was hoping for an update on the Audi, Volkswagen relationship. You have a long history of partnering together. You've done a lot of R&D work for them. And there always was an expectation of a commercial endpoint in there. Is that still a possibility? Or do you hold much hope for that at the moment? Or maybe is it something that should be revisited -- from now?

[R. Randall MacEwen, CEO, President & Non]

Yes. We don't expect to see any small series production of Audi fuel cell cars. So they have been developing the h-tron, which included the stack we've designed for them, the high-power density stack for automotive applications. So I think Audi and VW are very much focused on the battery segment at this time. And so I don't expect to see any developments there for the passenger car market with Audi in the near term. And our current relationship with them in terms of the program we have is expected to complete around August of next year.

[Craig Edward Irwin, MD & Senior Research Analyst]

Okay. And if I could squeeze just another quick one in, backlog, right? Total backlog has been burning off a little bit over the last couple of years with some very big bookings a couple of years ago. We're looking at possible revenue inflection really taking shape over the next 12 months. How far ahead of that revenue inflection should we really see the bookings materialize? I know you talked to the customers for years before we see the bookings as analysts. But can you approximate for us? Is this 2, 3 quarters ahead? Or should we have it a year ahead for some of these very large programs that you're targeting?

[R. Randall MacEwen, CEO, President & Non]

Yes. Great question, Craig. And if you look at the total order backlog and even you go back to Q1 of 2020, where the order backlog -- total order backlog was about $108 million, and today, it's about $57 million. And the -- I'm talking about for Technology Solutions, by the way, not the total order backlog. So it's gone from about 170 at the start of 2020 to about 109 in total at Q3 2021. And the big change there, as you point out, is the Technology Solutions has dropped off from about $108 million to $57 million. That's really the execution against the Weichai Technology -- Weichai-Ballard Technology Solutions program and the execution against the Audi program. And really what we see going forward is the power products, heavy-duty motive being the driver of growth. And you think about all these markets, we've talked about bus, truck, rail and marine, where we've got bus OEMs in Europe, in North America and in China with Ballard products already inside their platforms, with truck OEMs starting too, and the work we're doing on the truck market with Weichai in China and with MAHLE in Europe and for light-duty truck with Linamar as well. And so -- that's a passenger van. And so when you look at a number of these programs, including rail and marine, they will take a number of quarters, even years before they start to see development in the order book. But again, I want to come back to this point. If I look at the order book for heavy-duty motive from Q1 to Q2 to Q3 in 2021, it's up 30% since Q1. And to me, that's the real story is that we're seeing the market take up, even with China being light, we're seeing the market take up in Europe and the United States for heavy-duty motive, where we expect to see the lion's share of growth moving forward. So I think the question is when will we see what's the linkage between when the order book starts to materialize and then subsequently revenue. I think it's -- a year is about right. In some of these cases, projects will take a year to execute against as customers go through hydrogen refueling stations, as they go through getting the engines into their platforms and getting ready for deployment. So we've seen that historically in the bus market. And I expect to see a similar thing occurring in the truck, marine and rail market, where you've got 12 potentially up to 18 months before projects go from order book to revenue.

[Craig Edward Irwin, MD & Senior Research Analyst]

Congratulations on the progress.

[R. Randall MacEwen, CEO, President & Non]

Great. Thanks, Craig.

[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.

[R. Randall MacEwen, CEO, President & Non]

Great. Well, thank you all for joining us today. And Paul, Kate and I look forward to speaking with you in the new year, when we'll discuss results for Q4 2021. Thanks again.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.