What Went Wrong with A123?

China’s largest producer of automotive parts is poised to purchase a controlling share of a US company, A123 Systems, which develops and manufactures advanced lithium-ion batteries and battery systems.  China’s Wanxiang Group Corp said on Wednesday they intend to invest up to $450 million in A123 Systems, taking an 80 percent stake in the company.

The purchase is an almost textbook example of the kind of issues America currently faces in an ever more competitive and global economy.  A123 is a startup company that was founded in 2001 based on the research of a duo of scientists at MIT.  The company’s unique nanophosphate technology is built on novel nanoscale materials initially developed at MIT and, according to the company, “enables customers to commercialize innovative products for the transportation, electric grid, commercial and government markets”.  The company has received tens of millions of dollars in grants from Chrysler, General Motors, Ford, GE, and defense contractors to develop lithium-ion batteries using their technology for hybrid cars, commercial trucks and buses, and components to electric grids.  A123 received more than $200 million from venture investors before raising $378 million in a 2009 initial public offering.  The company had also received frequent grants and investments from the Department of Energy and in 2009 was awarded over $200 million as part of the Stimulus Act, specifically under the Electric Drive Battery and Component Manufacturing Initiative.

Apparently all this was not enough to keep the company afloat.  It reported a second-quarter loss this year of $82.9 million, or 56 cents per share, and a 53 percent drop in revenue to $17 million.  Its cash pile was more than halved to $47.7 million at the end of the quarter, down from $113.1 million at the end of the first quarter.  The battery industry as a whole has suffered in the US, with some pointing to too much capacity and not enough demand for hybrid vehicles.  Essentially, A123 and companies like it invested heavily in the ability to churn out their batteries on a large scale, and then found a painful lack of consumers.

A123 Systems is exactly the kind of company Americans hear so much about as the way forward in this global economy.  Researchers at one of the country’s top universities developed cutting edge technology, were able to successfully commercialize it, created manufacturing capacity here in the US, and received both private and government support that is so often considered a necessity for innovative startups.  Energy Secretary Steven Chu said of A123, “It’s a perfect example of what’s possible when the private sector, government, and academia work together”.  And yet, that company is now owned by a private Chinese company.  It remains to be seen what kind of tangible effects this will actually have.  The company will most likely still allow for manufacturing jobs in the US and will still have domestic factories; in fact the bailout from Wanxiang might actually save some American jobs.  Of course, it is unlikely that any future expansion will occur in the US.  More generally speaking, the case of A123 Systems shows that there is no easy fix when it comes to creating high-tech manufacturing in the United States and that further discussion, research, and methods need to be explored if the US hopes to be the home of companies like A123 Systems in the future.

Posted by: Sean Norris

Sources: CNNMoney, Reuters, The New York Times, BusinessWeek, Fortune

Photo Credit: Energy Secretary Steven Chu and Michigan Governor Jennifer Granholm at the grand opening of an A123 Systems plant in Michigan entitled A123 Systems Grand Opening in Livonia courtesy of flickr user graham.davis

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