Taxpayer-Funded A123 May Get a Chinese Bailout

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A123 logoMonths ago, after they issued their most recent dismal quarterly earnings report, A123 Systems officials announced they would explore options in order to save the company, leaving the impression they were looking for a buyer. 

On Tuesday the heavily subsidized electric vehicle battery manufacturer released its latest financial bad news, but also disclosed that it also had a potential buyer – from China. According to media reports, just as A123 reported another $82.9 million in second-quarter losses, good news also magically materialized as Wanxiang Group Corp. was announced as a new investor. A123 had reported recently to the Securities and Exchange Commission that its ability to continue as a viable company was “a going concern.”

The good news/bad news announcements continue a trend by A123 in which every time the company has a negative media hit or stock downturn, a new press release comes out to give the impression of hope. While the bad news represents a whopping 33 percent increase in the amount of losses in the same quarter a year ago, the Wanxiang development – which the media is reporting as an 80 percent ownership stake but on the surface looks very tentative – paints a little happier face on the picture.

Up front the deal piles more debt upon the crushing liabilities A123 already has. According to Reuters, Wanxiang would deliver $75 million in initial loans and then would buy $200 million of senior secured convertible notes, followed by a possible $175 million “through the exercise of warrants it would receive in connection with the bridge loan and convertible notes.” Both the U.S. and Chinese governments would have to approve the deal.

U.S. taxpayers have made similar outlays for A123, including $249.1 million to help launch two battery-manufacturing plants in Michigan. The company also received nearly $30 million for a wind energy storage project as a subcontractor for another federal grantee. Also, A123’s batteries were used as part of a $5 million Department of Energy stimulus project with Detroit Edison Company. And A123 received grants and tax credits from the State of Michigan – where it established its two manufacturing plants – that could total more than $135 million.

So why don’t Americans get an equity ownership stake in A123?

Not that it’s a deal anyone would want. Shares closed yesterday at 50 cents, after having reached an all-time (since its 2009 public offering) low of 44 cents recently. The stock was once above $25 a couple years ago, and its 52-week high is $5.13.

Why the Chinese would want a piece of A123 is another mystery. Executives running the place, including CEO David Vieau, have taken care of themselves in anticipation of ownership changing hands not long after laying off 125 workers. And the business has suffered multiple blunders, including two separate occasions when it has had to fix batteries installed in electric cars manufactured by their top customer, Fisker Automotive. Another battery caused an explosion at a General Motors research facility, and defects with batteries for other customers and related warranty claims A123 has had to cover led to an investor class action lawsuit. Lax sales of electric cars in the U.S., as well as an over-stimulus of the battery industry by the Obama administration, have also hurt A123 to the point where Vieau and his lieutenants told the media they would de-emphasize production for EVs in favor of industries like electrical grid storage. 

But as NLPC readers have understood for a long time, the Obama “investment” of public money into green initiatives such as wind power, solar power and electric vehicles requires an endless supply of subsidies. The companies that have benefited from them understand that also, because in reality they are in the dependency business. With the failures of companies like Solyndra, Ener1, and Abound Solar, however, congressional scrutiny has increased and the attention has brought great discomfort  upon the government green energy schemes. 

So it shouldn’t surprise that the rent-seeking executives look to other nations such as China. As Vieau told Reuters in an interview, "our mutual ambition is to have a significant role" in China's government-mandated expansion of the market for electric and hybrid vehicles. Obviously EV the industry doesn’t exist where government doesn’t mandate that it exist. That’s probably why another bankrupt U.S. battery maker, Ener1, joined Wanxiang in a business partnership last year.

A later report from Reuters that analyzed the proposed A123 deal suggested it could spell problems for President Obama, especially in an election year in which he has been hit hard on the green stimulus failures of his administration. If technology financed by the U.S. government ends up under the ownership of the Chinese, it’s hard to imagine a more damaging political ad that could be easily made by Republican nominee Mitt Romney.

Supporters of electric cars and green initiatives don’t even like this development.

“This is a very troubling transaction that should be strictly scrutinized by the U.S. government,” said Michael Wessel, a member of the bipartisan U.S.-China Economic and Security Review Commission, to Reuters. “This is a critical sector and one that American policy makers have focused on in terms of future economic opportunity and job creation.”

Even former GM executive Bob Lutz, a big defender of the Chevy Volt, ridiculed the folly of U.S. mandates and subsidization of the battery industry, calling it “economically idiotic.”

“When capital is spent on a product for which there is insufficient demand,” he wrote for Forbes, “negative economic value is created and jobs, green or otherwise, are lost.

“To make matters worse, not only is the capital lost, but had it not been squandered on green ‘hope and change,’ that same capital could have been spent productively, creating something that the public actually wants and needs.”

Meanwhile the Obama administration keeps its head buried, telling Reuters that Chinese investment in A123 does nothing to damage a program to promote development of batteries in the U.S. 

To recap: American taxpayers are forced to put hundreds of millions of dollars into a battery start-up to create U.S. jobs, but the company ends up being as much as 80 percent owned in China, where it appears much of its growth will occur. This will be acceptable to America?

Paul Chesser is an associate fellow for the National Legal and Policy Center and publishes CarolinaPlottHound.com, an aggregator of North Carolina news.