Inspector General Confirms Fun & Games at LG Chem

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LGChem logoThe employees of battery maker LG Chem still haven’t found anything to do worthy of their pay since they were caught playing games and watching videos four months ago, and now the Inspector General for the U.S. Department of Energy has embarrassed the company into returning some – but not much – of the $142 million (out of a $151 million grant) in taxpayer money they took.

Gregory Friedman released his report – which was based on an inquiry spurred by the original media stories in the fall about the mostly idle workers in Holland, Mich. – last week. Turns out the reports about workers on-the-clock playing Texas Hold ‘Em and video games, doing Sudoku and crossword puzzles, and volunteering at nonprofits like Habitat for Humanity, were not exaggerations.

In the words of the inspector, “We confirmed the allegations.” The work that was supposed to be done under DOE’s stimulus grant to LG Chem “had not been managed effectively.” The claim that DOE reimbursed LG Chem for man-hours of labor – that couldn’t even be considered “make-work” – “was substantiated,” according to Friedman.

“Our review revealed that LG Chem Michigan inappropriately claimed and was reimbursed for labor charges incurred…for activities that did not benefit the project…,” the report said. “We were unable to calculate the exact loss to the government because LG Chem Michigan did not track labor activities in detail. …We believe it is likely that the total amount of charges that included at least some non-productive work exceeded $1.6 million, about $842,000 of which was reimbursed by the Department in accordance with its cost-sharing arrangement for the project.”

LG Chem has reportedly paid back that $842,000, but it’s hard to imagine that comes anywhere close to the actual waste of time and money. As Friedman’s office reported, while a number of battery test cells were produced, none have been manufactured for use in electric vehicles yet. Only 60 percent of the grant agreement’s production capacity has been built, despite the expenditure of 94 percent of the DOE grant. Non-assembly of the batteries is blamed on weak demand for the Chevy Volt, so LG Chem officials have not transferred manufacturing from its South Korean facility to Michigan.

The inspector also determined that LG Chem “significantly underestimated” labor costs, and therefore did not complete construction of the plant as per the grant agreement. As a result, this fiasco created less than half the number of jobs that were estimated under the $151 million grant. Lest anyone forget, these newly created positions – now discovered to include “card dealer” and “video gamesman” – fall under President Obama’s and (departing) Energy Secretary Steven Chu’s favored “green jobs” category, which was also championed by the former chief executive of the Wolverine State.

“Thanks to a bold vision and aggressive strategy, Michigan is now the leader of the U.S. advanced-battery industry,” said former Governor Jennifer M. Granholm in March 2010, when the grant was announced. “We thank LG Chem for its commitment to our state, and we are proud to partner with the company, the city of Holland and the Obama Administration to grow a new industry and new jobs here.”

Predictably, many of the problems derived from poor accountability practices on the part of the government. Friedman reported that DOE “did not always take sufficient action to ensure adequate oversight of project progress” and that DOE’s National Energy Technology Laboratory (the primary monitor of the grant) said there was no language in the grant that mandated the shift of Volt battery production from South Korea to Michigan, and thus NETL had no leverage. Further, the inspector said monitoring was so poor that – despite the obvious evidence in early 2012 of employee furloughs, construction delays and cost overruns – no red flags or alarms were set off at NETL.

As for LG Chem’s part, the company claimed ignorance about what kind of labor costs were allowable vs. unallowable for reimbursement, as well as the requirement to use Davis-Bacon wage rates for subcontractors. Officials also told the inspector’s auditors that they “wanted to do their best to maintain the workforce in hopes that production would start soon,” and feared that if they didn’t keep the employees involved, the investment in their training would be lost.

Again, the electric vehicle farce was predictable. The Obama administration – by pouring billions of dollars into a green energy industry that the consumer choice-driven, free market would never support – sought to upend the laws of economics (they may just as well have tried to defy gravity) by “stimulating” demand. But like wind energy and solar energy, the demand lasts only as long as government subsidizes it – and even with that it’s not very strong. Apparently LG Chem, which ought to know better, doesn’t get that either.

“We regret this situation occurred, and we are confident that we are now taking every measure to be fully compliant in our use of the project grant funding,” the company said in a statement. “These market-driven delays have been very difficult for our team members, for our community and for our company.”

There was nothing “market-driven” about this boondoggle. Not only was LG Chem’s lithium ion battery viability dependent on phony demand for the Volt – which itself was heavily subsidized – but the company was also the vendor for Ford’s Focus Electric plug-in car. Only 685 units were sold in 2012, and as Jim Farley, head of marketing, said last April, “The marketing of the Focus Electric is to people who buy electric vehicles, not to you and me. We’re focused on the people who buy them.”

It’s pretty difficult to supply batteries to an electric car manufacturer who isn’t trying very hard to sell them. And Ford isn’t the only company that is exerting little effort to promote EVs. As Car and Driver reported in November, the alternative vehicles are barely on the market in order to comply with government-mandated Corporate Average Fuel Economy (CAFÉ) standards. Automakers incur huge penalties for failing to bring up the average gas mileage for all the vehicles they sell up to federal demands. So that’s a big reason they even bother to produce electric vehicles – for government compliance, not for sales.

“In many cases this is intentional,” Car and Driver reported, “with automakers building EVs to satisfy regulators and leasing a limited number of loss-making vehicles in California and a handful of other states.”

Last April the Detroit Free Press reported that the Obama administration had over-stimulated the electric vehicle battery market. Between the putrid sales and minimal production efforts, the newspaper forecasted a “looming shakeout in the industry, which would likely include plant closures and layoffs….” Those results have already been seen with the LG Chem silliness, the bankruptcy of Ener1 and A123 Systems, and Nissan’s embarrassing cancellation of the grand opening of its refurbished EV and battery plant in Tennessee.

As NLPC’s Mark Modica reported last month, the Congressional Budget Office estimated that federal policies to subsidize the manufacture and purchase of electric vehicles will cost taxpayers $7.5 billion over the next few years. It was a gamble worthy of Vegas. At least they had the card dealers part right.

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