Can Taxpayer-Subsidized Battery Maker A123 Survive?

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A123 logoThe taxpayer-funded ($279 million) battery supplier that gave big raises and parachutes to its executives shortly after it cut “Green jobs” at its Michigan factories, reported last week it would suffer big losses again for 2011.

A123 Systems, whose fortunes were entwined with those of electric vehicle startup manufacturer Fisker Automotive, also announced it would look to China and India in order to survive.

A123 also received grants and tax credits from Michigan that could total more than $135 million.

The company said it would realize a loss of $257.7 million for last year, compared to the $152.6 million in losses for 2010. A123, which received a $249.1 million grant from the Department of Energy to refurbish plants in Livonia and Romulus, Mich. (plus another $30 million sub-grant for another energy storage project), has never been profitable. 

A123 is an investor in Fisker, which had its own $529 million DOE loan suspended because it failed to reach milestones in the delivery of its $102,000 Karma electric car last year. A123 took a loss of $85 million in the 4th quarter in part because of a $11.6 million write-down of its stake in Fisker, in addition to the reduced orders of its batteries.

At least one Wall Street analyst said the scenario reminded him of bankrupt DOE grant recipient Ener1, another battery company that was dependent on electric car company Think Global, itself a repeat bust. Just prior to its bankruptcy filing in January, Ener1 wrote off its investment in Think and stated the electric car business would not present an opportunity for profitability any time soon, according to The Street’s Eric Rosenbaum.

“A123 is now talking about a strategy in which no customer represents more than 15 percent of its sales, moving away from the over-reliance on Fisker,” he wrote. “Yet Ener1 wasn't able to diversify away from Think after that disaster became too obvious to ignore.”

Rosenbaum also noted a revelatory moment for former Ener1 CEO Charles Gassenheimer in his final quarterly earnings conference call, when he told analysts governments have to provide more subsidies for electric cars or the “business does not work in the short-term.” Indeed, as Nissan CEO Carlos Ghosn said recently, he will manufacture the electric Leaf wherever government provides incentives – the entirety of the EV business depends on them. 

Rosenbaum wasn’t the only Wall Streeter that turned more pessimistic about A123’s prospects. The Benzinga Web site reported that Bank of America cut the rating on its stock to “underperform” with a $1.50 target price (A123 was down to $1.61 at yesterday’s closing, from $2.65 only a month ago). BofA said, “From a fundamental perspective, we are concerned that (1) the electric vehicle business may develop too slowly with too intense competition, and (2) A123’s focus on ancillary services is one of the smaller applications in the grid storage world and perhaps not best suited for lithium-ion batteries.” 

This followed the opinion expressed three weeks ago by respected analyst Theodore O’Neill of Wunderlich Securities, who said A123 faced a “doomsday scenario” after Fisker’s woes were announced. As Forbes pondered whether Fisker/A123 would produce “two Solyndras for the price of one,” O’Neill “reduced his rating on A123 to Sell from Hold, with a new target of 50 cents, down from $3.” Now, according to Rosenbaum, O’Neill says “it’s all over” for A123.

Not everyone is pessimistic about the company though, as Robert Brown at Craig-Hallum Capital points to A123 customers GM and BMW “for future electric car models.” And A123 itself, in what looks like an effort to burnish its image in light of the negative developments this year, announced a flurry of “new” customers:

·      VIA Motors, for its extended-range electric trucks

·      Northern Powergrid for the U.K.'s Largest Smart Grid Project (apparently one of the “ancillary services” customers BofA was talking about)

·      The announcement of a battery design for military vehicle applications

·      India’s Tata Motors for hybrid electric transit buses and other commercial vehicles

·      China’s SAIC Motors to “meet increasing demand for lithium ion battery technology”

SAIC is the Chinese state-run vehicle company that General Motors recently joined in partnership with to produce their own version of the Volt. GM likely had to share its EV technology with the Chinese in order to gain access to the country's $19,300-per-vehicle incentives. Will A123 have to give up any of its intellectual property?

The China and India announcements came on Thursday and Friday last week, after A123 released its dismal numbers for 2011. Taking into account that the company’s compensation committee boosted the salaries of three top executives (one who was just hired in May) by an average of 36.6 percent, despite its massive losses and plummeting stock price, the moves have the look of desperation. In addition, at least two other executives – including CEO David Vieau – received new stock considerations and severance considerations should the company transfer ownership. Meanwhile, A123 laid off 125 workers at its Michigan plants in November.

And considering that GM itself laid off 1,300 employees working on the Chevy Volt last week, due to weak demand, it doesn’t look like having them as a future EV customer is anything to boast about.

Of course, the whole enterprise is surrounded by crony socialism. Investors in both A123 and Fisker are wealthy supporters of Democrats, as NLPC has documented. Vieau gave then-Senator Barack Obama $2,300 three weeks before he was elected president in 2008, and has given $5,000 to the Democratic Senatorial Campaign Committee during the last two years, according to the Center for Responsive Politics. Vieau and another A123 co-founder, Gilbert Riley, Jr., have given Massachusetts Sen. John Kerry $8,000 for his Senate campaigns in recent years. Vieau also gave $3,900 to Rep. Ed Markey, D-Mass., who was the chief co-sponsor of the Waxman-Markey climate legislation a couple of years ago. Vieau was also featured in a 30-second spot in late 2009 to promote energy and climate legislation promoted by President Obama and his fellow Democrats.

From the looks of things, President Obama and Energy Secretary Steven Chu have another pending disaster on their hands, and House Oversight and Government Reform Committee Chairman Darrell Issa should start preparing another investigation.

Paul Chesser is an associate fellow for the National Legal and Policy Center.