Mr. Cook: The Company was originally founded in the early 70’s to develop and manufacture a novel rotary engine known as the "Orbital™ Engine”, which was essentially a more sophisticated version of the Wankel engine. Rotary engines, of course, have the attraction of improved power density over reciprocating engines, and despite all the technical difficulties this was worth pursuing. Like a lot of innovation companies, it is not necessarily always the original idea that proves to be the most attractive commercially, and from those engines Orbital developed expertise in direct gasoline injection technology and particularly in air-assisted or dual-fluid direct injection technology. The first products that incorporated the technology appeared on the market in 1996 on Mercury outboard engines under their “Optimax” trademark. Subsequently, the technology appeared on SeaDoo personal watercraft from Bombardier, as well as motor scooters from Aprilia, Piaggio and Peugeot in Europe. Tohatsu and Nissan outboards also utilize the technology. So that gives you a sense of how the company has developed.
TWST: Can you describe the competitive landscape and how you see you company positioned in this space?
Mr. Cook: We derive our revenue from three major sources. One revenue stream relates to royalties and licenses from the direct injection technology that I have just described. The second revenue stream is derived from contractual powertrain engineering and engine management services, which we provide to OEMs, particularly in the automotive area. And third, we enjoy some returns from Synerject; a joint venture company between ourselves and Siemens VDO, which produces amongst other products the novel air injector associated with our technology. To talk about the competitive landscape, I need to cover each of these areas.
First, let’s talk about the fuel injection portion of the business. We have innovative technology that competes with high-pressure direct injection technology being developed and starting to enter the market from companies such as Robert Bosch, Siemens VDO, and Delphi. There are similar competitors in the Japanese environment, including Hitachi, Denso and Melco, for example. Our technology appears to be the most advanced, having been in the market in one form or another since 1996. It is cost competitive and it seems to offer the best outcomes, both in terms of fuel economy and emissions compared to the competitive technology. However, we lack the market presence and the size of a Siemens VDO, a Delphi or a Robert Bosch, but ultimately the OEMs are going to be dependent on that level of Tier 1 supplier for large volumes, assuming the technology is successful.
On the contractual services side of our business, there are a number of similar organizations to ours globally, that provide advanced engineering services to the OEM's. They include the companies like Ricardo, FEV, AVL, Lotus, and Porsche. The latter will be more visible to the average consumer because of their vehicle brands, but they do provide extended automotive services to other OEMs. In the contractual services area, there seems to be a couple of basic drivers that are encouraging OEMs to outsource an increasing portion of their development activity. Surprisingly, one of those drivers seems to be the consolidation that is going on in the industry. Consolidation forces the OEM to focus their limited resources into their brand and product marketing, less into product development which they can subcontract to specialist groups or suppliers.
The second driver seems to be that the technology in the average automobile is becoming highly specialized and the skills for it are not traditionally within the automotive manufacturing industry itself. The electronics that are on cars these days, exhaust gas catalyst and exhaust gas management, for example, not to mention the entertainment systems, are all areas of technology that the car maker has not typically been involved with. The result is to encourage the OEM to outsource that system's development and we think we are taking some advantage of that, particularly in powertrain engineering.
Tickers included in this excerpt: OE
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.