Ballard Power Systems Inc

TSX:BLDP

Earnings Call Transcript 2021-Q4

[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. [Operator Instructions] And 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.

[Unknown]

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.

[Randall MacEwen, executive]

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, lightduty 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 2 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 is highlighting 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 3 clusters, Beijing, Shanghai and Guangdong. The 2 new clusters of Hubei and Henan are exciting expansions of the China fuel cell policy.

The Henan cluster is led by Ganzhou 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's 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, and 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 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 3 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 volume 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 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 road map 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 benefit 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 1 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, Van Hool, 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 Instructions] The first question comes from Michael Glen with Raymond James.

[Michael Glen, analyst]

Randy, maybe just to start, you spoke a bit about MAHLE. But can you just give some indication what are next steps there? Do you think you're going to look at putting a facility to assemble the modules in Europe? Or are there any -- should we think about maybe a commercial partnership with an OEM in Europe? Just trying to gauge what we might see on that particular partnership.

[Randall MacEwen, executive]

Great. Thanks for the question, Michael. 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 codeveloping 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?

[Randall MacEwen, executive]

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]

The next question comes from Mac Whale with Cormark Securities.

[MacMurray 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 into how you sort of allocate that.

[Randall MacEwen, executive]

Sure. Thanks for the question. I think it's important to understand kind of where we are. We have very attractive partners in each of our verticals now, bus, truck, rail and marine, off-road, stationary, blue-chip partners, blue-chip programs, demonstration programs underway. And where we are also in the development of our own technology and products, we're really maturing, in some cases, from concept level to prototype, et cetera.

And as you get deeper into these product development programs, the investments get heavier. So we have a number of programs and that we'll be effectively investing in both at the stock and module level. And stack and module programs, we're trying to focus on core products where we can rationalize market and product requirements from all these different verticals and the different geographics by core fuel cell technology, MEAs, bipolar plates, stacks obviously, and modules, including the module architecture.

And I think it's important that the testing and design validation, as I said, as you get into the maturing from -- into prototype and even beyond into series, it's just a deeper investment. So I think those are important.

And we also are, I think, about an 80% increase in research in 2022. And that's continuing our investment in core MEA components, catalyst, GDL membrane as well as pretty significant investment in balance of plant components. So [ HRB ], air compressor, DC, DC converters with partners in these cases, but it does require investment in Ballard as well.

On the CapEx front, pretty significant investment coming in our testing capability, so about 22 new test stations and some 48 test stations that are going through upgrades in 2022. So it's a fairly significant investment year on the testing capability side.

And then we have very significant investment on the production equipment, both for next-generation, pilot line project that we're working on, as I mentioned earlier, as well as continued manufacturing process improvements across MEAs and modules as well. Significant investment on the CapEx side for lab and engineering equipment, upgrades on our facilities and tooling and fixtures.

And on the tooling and fixture side, pretty significant investment for balance-of-plant component cost reduction and some of the tooling we need also for our new unit cell designs at the stack level, so at the unit cell level. So a pretty significant investment overall. And we're making that investment because all of these different markets that we're involved in, again we are, I think, going through this process where we're transitioning from customer acquisition, from platform wins to long-term supply agreements.

And we're readying with a lot of customer interest on understanding how we're scaling to support their expected growth.

[MacMurray Whale, analyst]

Okay. And just as a follow-up then, looking at -- you talked about the TAM increasing from $130 billion to $250 billion, would you -- because of these investments, is there a link to that? Like can we draw a line between that? And would your piece of market share of that with the pie -- your portion of the pie also be going up because of these investments? Like what's your thought on that?

[Randall MacEwen, executive]

Yes. I don't think the increase in the TAM is really driving this investment in 2022. Although I will say, in my opinion, rail and marine, I had mentioned this a few years ago, I thought they would surprise to the upside. That's what's happening, in my opinion, on rail and marine with the engagement we're seeing there for different customers.

What I also see, too, on the bus side, I think there's been a lot of debate over the last few years about battery electric versus fuel cell electric. And we're seeing a number of transit operators who trialed both technologies now saying increasingly, we're going to be moving to deployment of fuel cell buses rather than battery-electric buses.

And let me just give you 2 examples in North America. So for example, in North America, AC Transit that previously thought they would have 70% battery electric and 30% fuel cell electric. And now we see that actually being flipped, where they're forecasting now that 70% of their buses will be fuel cell buses.

Another one, we see another California transit operator going 100% fuel cell buses. So we're starting to see, in my opinion, the bus market opportunity picking up. And I do think we're going to start to see orders beyond the 10s and 20s into hundreds and multiple hundreds in -- particularly in the European market. So we're getting very excited about the bus market there.

But I think it's just a collection of all these different customer engagement programs that we have where the customers really want to see that as they scale to series and volume deployments that we have the right infrastructure, the right quality processes, the right manufacturing capacity to be their trusted partner. I think they're all there on the technology, and it's now about making sure we validate the manufacturing side. And we're making investments in both.

[Operator]

The next question comes from Rupert Merer with National Bank.

[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?

[Randall MacEwen, executive]

Yes. Thanks for the question. It's, of course, very early, but this repower EU plan for affordable, secure and sustainable energy, I think is 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, decarbonized 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?

[Randall MacEwen, executive]

Yes. I think this repower EU is -- you think about it on the heels of a Fit for 55, just overall, this acceleration from an energy transition 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]

I'll leave it there.

[Randall MacEwen, executive]

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]

The next question comes from Aaron MacNeil with TD Securities.

[Aaron MacNeil, analyst]

You've referenced 2023 as sort of this kind of growth kick-off year a few times now. We've got -- you mentioned long-term supply agreements as part of the answer to Mac's question. I guess, how are you positioning for this just at a very practical level? Like, should we see you start to build inventory, staffing up? I know you mentioned the testing expansion. Or do you feel like you have the capacity to meaningfully grow order flow just based on the staffing and inventory levels you have currently?

[Randall MacEwen, executive]

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 qualified 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?

[Randall MacEwen, executive]

Yes. Great question. And there's a lot of complexity to this that I think still needs to play out. I think given the COVID-19 situation in China right now, I would say this is not the top priority for the Chinese government to clarify this. But it is something that I think needs to get clarified very quickly because how you operate in one cluster and even the point scheme within that cluster and the value chain participation and how that translates to another cluster, still some ambiguity there.

So there's work that's being done with the government and industry in parallel working together to make sure that there's a transparency. So that when capital supports a deployment of vehicles, it has clarity on how that return is going to be -- is going to play out.

I will highlight, though, when you look at the 5 clusters, and some of them have announced fairly significant opportunities for vehicles. You've got Beijing that's looking at 5,000 fuel cell electric vehicles; Shanghai, another 5,000; Guangdong, 10,000. And then as we mentioned, Henan, 5,000 and Hubei at 8,000, you just look at these aggregate deployments over the next number of years. What we see is a scaling occurring, particularly in the 2025 timeframe as initial 2025 requirements for -- to kind of track to the 2030 goals of 1 million fuel cell electric vehicles on road.

And we also see a fairly significant build-out of hydrogen refueling stations. So in 2021, even absent strong adoption of fuel cell vehicles in 2021, there was another 100 fueling stations built out. So there's about 100 -- over 180 today and I think another 50-plus under construction.

So I think we're going to see over 230 hydrogen fueling stations by the end of 2022, supporting again, these are focused on bus and truck opportunities. These aren't for passenger car fueling stations.

So I think it's going to take some time to have clarity how these translate. Within the specific cluster here where Weifang is located, we do see a very strong position for the Weichai-Ballard joint venture. If you look at the companies that are included in that cluster, if you look at plate manufacturing, stack manufacturing, module assembly, the JV is the largest company in those parts of the value chain in that cluster.

[Operator]

The next question comes from Jonathan Lamers with BMO Capital Markets.

[Jonathan Lamers, analyst]

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, executive]

Jonathan, it's Paul here. So I'll take the first question on the backlog on the order book. So we did see the 12-month in total order book decrease about 15% from Q3 2021 from the last quarter. But what's interesting, when you look at the -- inside the order book, you see the European and North American composition growing, where Europe and North America is now 65% of the 12-month order book.

And in the total order book, it's about 60% versus 40% from last year. So the balance, you can see the movement from China to Europe and North America. And we also see increasing developing markets, including marine, stationary and off-road increasing as well.

The other dynamic I'd highlight, too, is the increased customer diversification. So in Q4, we had over 30 customers who had material orders over 250,000. That compares to about 20 in Q4 2020, so a year ago. So that's a pretty good increase in customer diversification overall.

As you mentioned, we did see the decline and continue to decline as we've signaled before, the wind -- in TS as the Audi contract winds down. And we also continue to fulfill the $90 million Weichai technology transfer agreement. So we expect to see that kind of -- those trends continue with the technology solutions leveling out.

So as we look forward, we're very confident in the long-term prospects. Still remain confident, as Randy mentioned in his remarks, about the adoption of fuel cells, hydrogen fuel cells for mobility and stationary power in particular. But we do expect there could be some volatility in orders in the near term, especially when you consider the inflationary environment, the geopolitical risk that we're in.

We have -- we would point to the quality of the large customers, all the customers we have, but particularly large customers and the work we're doing with them, Siemens, MAHLE, Caterpillar, for example, to develop these products. And as Randy mentioned, it takes time to develop and thoroughly test.

And one thing I've learned over the past year now, the amount of time it takes to really make sure that product is well understood and tested before we can get to scale production and volumes. And so we expect to see when we get to that point ever-increasing orders and revenue flow. But we do have good growth in the bus market and expect to see the other markets, truck, rail, marine, stationary, to follow a similar path as they continue develop and ramp up.

One of the proof points we point to too is, again, around the quality of our growing customer base. And just look at, for example, the Adani Group, which we mentioned. So commercializing fuel cells in various mobility and industrial applications in India, which was not a market we were looking at 12, 18 months ago, but certainly made signals that it is going to be a very large hydrogen market. So it's a great new partner in a new geography.

So to sum up, yes, there's going to be some potential volatility in revenues and orders in the near term. But we are very bullish on the long-term prospects.

[Randall MacEwen, executive]

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 this latest 2 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]

Okay. And just one follow-up if I can. Like quite a step-up in sales by the JV in Q4. Looking at the industry data, it looks like the semi tractor production in China really stepped up in Q4. Was some of that sort of like lumpy onetime orders ahead of the Olympics or -- can you just kind of give us any color on what happened in Q4 and sort of what cadence you would expect over the coming year if you can?

[Randall MacEwen, executive]

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 for a 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]

The next question comes from Rob Brown with Lake Street Capital Markets.

[Robert Brown, analyst]

Randy, I just wanted to get some more detail on the marine market. You had a nice order here recently. How is that market developing? Do you see that still in pilot orders? Are you seeing sort of a broader -- thinking on deployments there?

[Randall MacEwen, executive]

Thanks for the question. Marine is one of those markets where we've seen the total addressable market increased significantly from our early initiatives or review. It's a $40 billion TAM we now see for marine.

We have recently announced with ABB that our approval in principle and working towards what we call type approval, which would give our fuel cell module for marine, we call it FCwave, a global first milestone for type approval. And again, in the marine segment, we're initially focused on what I'll call some of the workboats, so ferries, cargoes, tugboats, workboats, riverboats, et cetera.

Some of these market segments -- and initially, we see it very focused on or concentrate on the European market. And one of the partnerships I do want to highlight, I mentioned in the prepared remarks was Norled, which is one of Norway's largest ferry and express boat operators. I think they own around 80 vessels currently in operation.

Actually, there are 2 or 3 videos on YouTube of the -- what's called the Hydra. This is the first fuel cell ferry, some very cool videos on YouTube that Norled has posted with this Hydra boat. And so they -- Norway, in particular, has the world's highest concentration of fjords. And there's a very strong support there for these environmentally sensitive waterways to be protected.

And so Norled is launching this world's first liquid hydrogen-powered ferry, which I think is an important development. The vessel itself, I think, it's around 83 meters long, about capacity for up to 300 passengers and 80 cars, travels around 17 kilometers an hour.

And so we've now supplied 200 -- 2 200-kilowatt FCwave modules. So that's 400 kilowatts of power that will help that vessel on propulsive power. And the liquid hydrogen is being supplied by Linde in a production facility with a 24-megawatt PEM electrolyzer. So there's a lot of pieces that have been put in place to support the world's first fuel cell ferry, and we're pretty excited about this opportunity.

And I think in later 2022, people in Norway, they'll have the opportunity to sail on this ferry on its route. So when you see these type of market opportunities where carbon emissions are being reduced by 95% for that type of application, it's pretty compelling.

ABB is another important partner for us in the marine market. I just had an opportunity to meet with them at the CERAWeek conference last week in Houston and continue to explore collaboration opportunities with ABB. So this is a market that I think we're very well positioned for with our Marine Center of Excellence in Denmark very close to these markets.

[Operator]

The next question comes from P.J. Juvekar with Citi.

[P.J. 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?

[Randall MacEwen, executive]

Yes. So in terms of deployments in the China market, I would say it was fairly muted deployment activity overall in the China market in 2021, and particularly on the bus market side, very limited numbers from the JV in 2021.

You asked about the ability to look at a ramp-up there. We've invested a lot with Weichai over the last few years on the development of that joint venture. So we have a -- I think the world's largest manufacturer of bipolar plates and assembly of stacks and assembly of modules for these target markets of bus and truck with about production capacity, annual production capacity of over 34,000 stacks to support 20,000 fuel cell engines. So think about that as 20,000 buses and/or trucks.

I do think in the long term, we will see a heavier weighting in the China market on trucks. It's going to be a lot of fuel cell buses for sure, but we do see a heavier weighting likely on the truck side.

So those are 2 markets that the joint venture is actively working against. I think it's important to understand that within the Weichai Group as well, they have 2 bus OEMs, Zhongtong Bus and Asiastar Bus, who have both incorporated the fuel cell modules from the Weichai-Ballard joint venture into platforms, have now tested and run them in real-life circumstances with real passengers over the last year. Think somewhere around 150 buses that we've got good traction against with those 2 bus OEMs within the Weichai Group.

And then additional customers outside, bus customers outside the Weichai Group, including Yutong, the world's largest manufacturer of buses, and as I mentioned earlier, strategically located in Zhengzhou. So we're very excited about the long-term bus market opportunity in China.

And on the truck side, as a reminder, within the Weichai Group, they own one of the largest truck OEMs in China, Sinotruk, #2 and #3 depending on which metrics you look at. And they have incorporated a number of fuel cell platforms into different classes of trucks at Sinotruk.

And so as an example, last June, I was in China attending the FC VC conference, where we had, I think, 4 different buses and trucks at that conference with Weichai-Ballard joint venture modules powering those vehicles. So still early in terms of market adoption given the policy uncertainty, but very well positioned to support the scaling to occur in the coming years.

[P.J. 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 timeframe?

[Randall MacEwen, executive]

Yes. P.J., we're very excited about the recent developments in India. You think about not just the green hydrogen policy that they announced, but really a push on renewables there and really a focus on not just addressing climate change and air quality, but now energy security and economic development.

So in February, India did announce this green hydrogen policy, focusing on encouraging really either to purchase or build out of renewable capacity specifically for green hydrogen production. And the policy provides open access approval, I think this is really important, within 15 days without central surcharge and 0 interstate transmission charge for 25 years.

So there's some very strong incentives to -- certainly before June of 2025 to get green hydrogen production online and benefit from these subsidy supports. And I think on top of that, what we're seeing is a very compelling partner with Adani. When you think about the different attachment points they have across the Adani business with port, trucks, and airport buses and rail opportunities and off-road vehicles, including mining, power generation of ports, it's a very exciting company.

And we're looking, as we've identified in the press release with Adani, the opportunity to manufacture fuel cells for these market applications in the Indian market. So we see Adani as a compelling long-term partner. And I want to highlight this is coming directly from Gautam Adani, the Founder and Chair, CEO of Adani Group.

So we've had the opportunity to meet with him in person and get his vision for a movement in energy transition in India. And I think it's very compelling what Adani Group is trying to accomplish as the #1 renewable player in India and now looking at how do they translate that to green hydrogen and the applications that have attachment points across their industrial diversified business.

[Operator]

The next question comes from Leo Mariani with KeyBanc.

[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, executive]

It's Paul here. So yes, we did see margin increase from Q3 into Q4 by a couple of points. But when you look year-on-year, we saw a decreased gross margin by about 7 points. The largest contributor to that is along the same lines of what we've been talking about already is the shift from technology services, which has got a -- traditionally has had a much larger contribution margin to Power Products, which has a smaller contribution margin. And that mix accounts for about 5 points of the gross margin decline.

We also saw -- had some pressure on material costs and freight, which each were about a point, as well as an incremental warranty provision of about a point, which was offset by some subsidies for COVID from the Canadian government by a point. So about 7 points overall.

So as we go forward into 2022, that shift in mix in favor of Power Products we expect to continue, and that's going to put some pressure on gross margins. We also talked earlier about the volatility -- inflationary environment we're in and the volatility in cost.

And when we talk to our suppliers whether it's energy costs or commodities, metals, those are all going to filter through into costs that ultimately will come our way as well. So we do expect that trend -- as well as shipping I should mention, too. So shipping costs have increased year-on-year, and we expect that to continue.

So we do see that downward pressure continuing somewhat as we go into 2022. We do also expect, though, that as volumes ramp up, we'll be able to amortize our increasing costs and scale over higher volumes. And that will have an increasing effect on gross margins as we go forward into 2023 and beyond. So expect the downward trend in 2022, but see some expansion as we get volumes ramping 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?

[Randall MacEwen, executive]

Yes, Leo. I think the situation just doesn't have the clarity at this time that enables us to have a confident posture on it. So I think we're going to have to wait and be patient. And as circumstances, policy, market demand -- and market demand that understands the policy landscape and is confident in committing capital, as that gets more clarity, that will trickle to the Weichai-Ballard joint venture orders, which will then trickle to Ballard for orders. But at this time, we just don't have the clarity and visibility to give us that confidence level.

[Operator]

[Operator Instructions] The next question comes from Craig Shere with Tuohy Brothers.

[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, executive]

Yes. I mean, we do have some dry powder, as you say, and looking to deploy that both organically and inorganically. Randy talked a lot about the increase in CapEx and OpEx that we've had this year, as well as going into next year.

In our strategic plan, we look out 5 years, at least 5 years and have a capital allocation plan that we're satisfied with that we can get to where we need to be within that timeframe. If we could, though, look to raise more capital if market conditions warranted and we had a larger M&A transaction.

Of course, with our -- the balance sheet size it is -- there is an upper limit. But we would look at market conditions at that time and see about raising more capital perhaps, again, if conditions were 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?

[Randall MacEwen, executive]

Yes. Craig, I don't think we see that happening earlier. There's a number of different elements that are coming together on a sequence time basis. So we're very pleased with the progress in 2021. We need to duplicate that progress now in 2022 and again in 2023.

So lots of work to do. I think most of the -- I'll call it, technology risk, we've worked through. So now a lot of it is more on the side of vendors that we've transitioned to new materials. And now we've qualified those materials, and we've done them in small samples, getting the scale up on the vendor side as well, supplier side. And then also on the advanced manufacturing initiatives, getting the volumes to drive those improvements that we expect to see on costs, and therefore gross margins, as well as in the managed manufacturing side.

So I think we're on track, and we're sticking with that plan. And I don't see a pull-in of it.

[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 2 around the corner, is there some point you would consider some leverage instead of just equity all the time?

[Paul Dobson, executive]

Yes. Yes, we would look at that. So of course, we would 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.

[Randall MacEwen, executive]

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]

The next question comes from Jeff Osborne with Cowen and Company.

[Jeffrey Osborne, analyst]

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, executive]

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 what we're trying to express there.

[Jeffrey 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?

[Randall MacEwen, executive]

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]

The next question comes from Greg Wasikowski with Webber Research.

[Gregory 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 [ Paladium ] supply chain and whether or not current events in Eastern Europe affect it or to what degree that it could potentially affect it?

[Randall MacEwen, executive]

Yes, Greg, thanks for the question. So if you kind of look at our products, where we do see some exposure is aluminum. So aluminum accounts for, I think about less than 5% of the total module cost. And actually, it's a significant part of our GHG cost as well in our modules. So it's something we're looking to continue to reduce the amount of aluminum we have. So there's an area where we could see some commodity exposure in 2022.

Platinum accounts for, I think, about less than 5% likewise or about 5% of our total module cost as well. So that's something that we're tracking, obviously, and tracked our entire life cycle here at Ballard.

We do have multiple suppliers for platinum with sourcing outside of Europe. So that's important. And iridium is another area, but this is now less than 1% of the module cost. So I think relative to some of the other technologies like battery technologies, we do have less exposure to volatility to some of the supply chain inputs and commodity costs.

But of course, this -- we are going to see, I think, cost increases across all activities and commodities. And of course, energy is going to impact all companies' operations. And so I do think we're going to see pressure. And I think this is just a geopolitical risk that every company, every industry has a challenge with in 2022.

[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.

[Randall MacEwen, executive]

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]

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