NEW YORK ( TheStreet) -- The market typically equates innovation with disruption, and disruption as a force of change, even revolution, if one watches enough Apple ( AAPL) commercials.

The case of Westport Innovations ( WPRT), the natural gas engine technology company, represents a different kind of innovation. It's an attempt to disrupt the very unsexy diesel fuel market.

It's an innovation aimed at the nuts and bolts of society. It's not a revolution in the way we move and share information in a digital age, but a story whose success rests in the same long haul trucks and highways that already move goods, like the iPhone, across the U.S., Europe, and in emerging giants like China.

Westport Innovations -- which in its choice of name shows the company isn't shy about how it wants to be perceived -- deserves to be seen as an innovator for one key reason: It didn't just have a first-mover advantage in developing natural gas engine technology for the transportation market, it saw the market and believed in it before any other company.

To take the now ubiquitous Apple innovation analogy one final place, the late, great Steve Jobs was famous for responding to a question about what the consumer wants with the dismissal of the consumer -- and the question -- through the response that the consumer didn't know what he wanted.

Westport Innovations knew what the transportation market needed before the transportation market did, and its deal announced last month with Royal Dutch Shell ( RDS.A) is arguably the most important acknowledgment from the powerful interests in the transportation and energy markets that Westport wasn't just right in being early -- it was founded in 1995-1996 -- but took the kind of chance that innovators need to take.

Westport Innovations CEO David Demers

Westport has a number of joint ventures blanketing the transportation market, from recent deals with Caterpillar ( CAT) and Heckmann ( HEK) for the locomotive and mining service truck markets, to Westport's only profitable venture to date, a 50-50 joint venture for the medium duty vehicle market with Cummins ( CMI).

Yet analysts say there are three deals that stand out in terms of showing the road ahead for the natural gas engine company. There's Westport's deal with Volvo to jointly develop natural gas engines, which was seen as a validation of its technology. And there's the company's venture with Weichei, China's largest trucking company, in the world's largest trucking marketplace. And there's the deal with Shell, which shows that the energy giants are finally getting serious about committing to this market, and that the infrastructure for the market will be built allowing natural gas-powered trucks using long haul corridors to refuel.

Westport CEO David Demers told TheStreet before the Volvo deal that the market viewed most of Westport's relationships as "proof of concept" deals, but the deal with Volvo broke through that hesitance.

"This was confidence in a global shift in commercial vehicles and our idea." Recent deals such as the one with Caterpillar validate the idea that there is work to be done with OEMs all over the world. But the Shell deal is different, tackling head-on the critical objections about fuel price economics and transportation and refueling infrastructure.

"The Shell deal landed the bomb on those objections," Demers said. "Shell is the largest and most sophisticated liquified natural gas company in world. We finally got one of the majors to make a very public move, and the implication is that then other majors will follow," Demers said.

José-Alberto Lima, Shell vice president for LNG & Gas Monetization, told TheStreet: "The driver for us is the global business and looking at both the industrial space and transportation. We would expect to have a competitive value proposition, and at the same time a sustainable value proposition for customers. We wouldn't launch it if it were not sustainable."

James Burns, business opportunity manager of Shell's Canadian Green Corridor -- the Westport venture selected Alberta as its first market in which to build natural gas refueling infrastructure -- told TheStreet, "The biggest incentive for Shell and Westport is that Westport can have the greatest product in the world, but at the end of the day the product needs infrastructure, and now there is the confidence that Shell will be there."

Shell intends to take the vote of confidence in natural gas engines global, too. Burns said that the Canadian deal is the first of many opportunities over the next several years. The Shell executives said the U.S. is a core area for Shell, so the company is looking at the U.S. In China, the Shell executives said the road to market may be different, as working in China often requires partnering with a local company, but Shell is looking at opportunities to take the natural gas transport model to China, too.

Shell's Lima added, "We are looking at opportunities globally, and not just the road transportation market but the marine segment, rail and mining. There will be different answers for different markets. I don't foresee major stumbling blocks, but it's a question of the right scale and the penetration strategy, the right partner and right customer value proposition to allow companies to make the decision to switch from diesel to natural gas engines ."

Westport Innovations is really just beginning to tackle the market that will make or break its business. Yet CEO Demers isn't hesitant to respond to the question about how much of the long haul transportation market share the company can ultimately command.

"We want it all," Demers said. "I can't give formal guidance on traditional fleet penetration across all businesses, but getting up to 20% market penetration is our first target, and depending on future gas prices, it could go significantly higher. There's lots of work to be done." He pointed to the company's most successful existing markets, buses and garbage trucks. "Over 50% of new refuse trucks are now running on natural gas, but it was zero not long ago," Demers noted. Overall, the refuse truck market has grown from zero to 20% in four years.

Ultimately, the case to be made is fairly straightforward, not just for stock market investors who have seen Westport shares act like a port in the storm during recent market volatility -- its shares are up 52% this year -- but also for the major corporations like Royal Dutch Shell, UPS ( UPS), Volvo, Caterpillar, Chesapeake Energy ( CHK) and Cummins, all of which have endorsed the Westport model.

"Some companies are paying as much as four times or more in some cases for diesel, and Westport is the one of the few ways to invest in the spread between natural gas and oil through the transportation market itself," said JMP Securities analyst Shawn Severson.

CIBC World Markets analyst Michael Willemse said that for some investors, the current spread between natural gas and diesel, as opposed to the long-term viability of Westport, is the trade.

However, Severson takes a broader view. "Where can an investor find a proprietary technology like this? Westport has scarcity value, and it's more about everyone operating under the assumption that the economics of natural gas transportation work long term, and then with that as backdrop, they turn to 'How do I make money off it?' "

Demers is both sober and confident in his outlook. One question left unanswered by the Shell deal is how long it will take to roll out the natural gas refueling infrastructure in a market like the U.S., even just targeting high-traffic, long haul trucking corridors like the Las Vegas to Los Angeles run.

"It will take years," Demers said. "We can't change the global transportation market overnight, but when you look at the example of the refuse market, it's easy for people to see the economic driver. Companies don't want to be left behind the competition when it comes to creating economic value. I'm surprised it's moving this fast."

Shell's Burns said it takes only a few months to put together an LNG unit. "The limitation isn't the pumps and the infrastructure, but market pull. If the market pulls, theoretically in two years we could cover the whole U.S. with natural gas refueling infrastructure." The Shell executive added, There's always a 'chicken and egg' discussion, and there will be a balance. We don't want to step out there if the market doesn't need the corridor or a certain amount of pumping stations."

So far, Shell is seeing a big impact from its endorsement of Westport. "Just by going public with the Westport deal we've been getting inquiries from customers and it won't take us more than months until we figure out how to quickly move forward. We're really ramping up discussions with core customers, but it's still early days."

Yet Shell exudes the same confidence as Westport in the engine innovation translating into a winning economic argument. "The economics make people look at the bottom line. Look at these fleets. Fuel is a major line item for them, and there is a value proposition in providing LNG at a discount to diesel," Burns said.

"It's all about competitive positioning and once we demonstrate the economic prize of a fuel half the price of diesel, people are compelled and need to move, and that creates a self-fulfilling market once your competitor moves. You need to or want to get ahead of your competitor," Westport CEO Demers said.

Indeed, a self-fulfilling market is a good place to take the Westport story full circle. It saw the natural gas engine market well before any of its potential competitors were ready or willing to place a bet. How the innovative market develops, though, is an open question.

Innovation also comes with the risk of disruption, and the first mover doesn't always end up as the winner written into the history books when larger competitors decide to move in.

For the time being, Westport owns the natural gas transport open road, but the true sign of its success, and testament to its innovation, could ironically be when the major diesel engine manufacturers decide it's time to try to get a piece of Westport's action.

-- Written by Eric Rosenbaum from New York.


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