Government Love for Failing A123 Systems Was Unconditional

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A123 logoAs stimulus-funded ($249 million-plus) A123 Systems sees its stock price drop back near its all-time low and waits for a Chinese rescue, two Republican senators want answers about whether taxpayer dollars are again funding jobs and technology that will be transferred overseas.

Iowa Sen. Charles Grassley, the ranking minority member on the Judiciary Committee, and South Dakota Sen. John Thune queried A123 CEO David Vieau about the logistics of a proposed sale to China-based Wanxiang Group Corp. In August, just as the company reported another $82.9 million in second-quarter losses, a deal was announced in which 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.” If fully consummated, the end result could mean A123 ends up 80 percent Chinese.

“Our concern is that billions of U.S. taxpayer dollars have already flowed to foreign companies through the Recovery Act,” the two senators wrote last week, “and this recent announcement could lead not only to more taxpayer dollars going overseas, but as you noted, it could also lead to foreign government access to technology A123 has described as ‘innovative’ and ‘next generation.’”

Like Solyndra, Abound Solar, Ener1, Fisker Automotive (which Grassley and Thune similarly inquired about in April) and several others, A123 is another in the long list of Obama administration green energy bankruptcies or borderline failures. A123 has reported to the Securities and Exchange Commission that its ability to continue as a viable company was “a going concern.” The Detroit Free Press reported last week that A123 told the SEC it had “substantial doubt” about its ability to continue independently.

Besides its losses this year, A123 reported losses of $85.8 million in 2009, $152.6 million in 2010, and $257.7 million last year. Correspondingly its stock price has plummeted since its 2009 initial public offering, when it once rose as high as $25. It closed Friday at 23.7 cents, near its 52-week low of 19 cents and far below its 52-week high of $3.91. A123 has hovered so low that NASDAQ issued Vieau a delisting warning in August.

At that time Grassley and Thune inquired with Energy Secretary Steven Chu about A123.

“Billions of U.S. taxpayer dollars have flowed to foreign companies through the Recovery Act,” the two senators wrote in a letter dated August 14, “and we are concerned that the recent announcement could lead to even more taxpayer dollars going overseas.”

Failing to get answers from Chu, the senators turned to Vieau and A123, which received several of the same questions, and a few more. Among the senators’ concerns were whether A123 received any interest from American-based corporations, and what effect the sale to Wanxiang would have on the dilution of stock owned by existing shareholders. On the face of it, the deal makes little sense.

“It’s not clear what the Chinese are going to get out of this,” said Theodore O'Neill, a former analyst of alternative energy companies for Wunderlich Securities, to the Free Press. “There isn’t any value here. There really isn’t enough need for the product, and the product isn’t profitable.”

He later added, “This is a segment of industry that nobody’s making any money in.”

Besides concerns about U.S. taxpayers funding foreign jobs and technology, and the transaction’s effect on American investors, national security was a concern for Grassley and Thune. Considering there is no obvious financial or technological benefit for the Chinese – at least none that justifies the size of their investment – the senators’ curiosity is understandable.

“A123 already holds several multi-million dollar Department of Defense contracts and according to public documents, A123 is actively pursuing Department of Defense contracts in areas that range from military vehicles, power grids, and tactical energy surety to unmanned aerial and underwater vehicles, unmanned ground and portable power systems, high-energy lasers, and advanced armor,” the senators wrote.

Specifically, regarding national security, Grassley and Thune asked whether A123 has contracts with the federal government that are classified and require security clearances, and what level their clearances are. 

“If A123 is acquired by a foreign company, how will sensitive Department of Defense data be protected?” the senators asked.

Even though the amount of money wasted may not rise to the level of Solyndra, A123’s failure – or even the consummation of a deal with the Chinese – could equal or surpass the failed solar company’s embarrassment factor. Michigan, which gave A123 its own package of $141 million in incentives to establish two manufacturing plants in the state, is already indicating its own unease about past fanfare over the company. The Mackinac Center for Public Policy, a Midland, Mich.-based free-market think tank, reported last week that the Michigan Economic Development Corporation had removed from its YouTube page a video in which President Obama, Secretary Chu and former Gov. Jennifer Granholm effusively praised A123 and the thousands of jobs it promised to bring to the Wolverine State.

“What is important about this is that Michigan now becomes the advanced battery capital of North America,” Granholm said on the video, echoing Chu. “So this is the start of something huge for America, but really for Michigan, and it’s very exciting.” 

“This is thousands of jobs for us in Michigan,” said Democrat Sen. Debbie Stabenow.

Despite the suggestion from the senators and other media that the Wanxiang deal will go through, it’s not a foregone conclusion. As NLPC reported in August, there are several stipulations attached. One possible reason it may fail is that the U.S. and Chinese governments must approve it, which is uncertain, especially given doubts in Congress. Other conditions that could hold up the transaction include the retention of A123’s R&D and engineering teams, and assurances that the company will not lose its existing tax breaks and government incentives. Perhaps the biggest proviso of all is that A123 must retain its listing on NASDAQ, which won’t have a final determination until February unless the company can boost its stock price above $1.00 for ten consecutive business days. The last time it was over $1 was July 9. The Wanxiang agreement was supposed to launch it upward again, but instead it has lurched to its lowest level ever since joining NASDAQ in late 2009.

But the bottom line is, whether A123 transfers to Chinese interests or goes belly-up on its own, it is already on the list of green failures for the Obama administration. Obviously while the real world puts conditions on business deals, the bureaucrats in the U.S. Department of Energy and the State of Michigan had none that would protect their “investors.”

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