Why did A123 Systems go to bankruptcy? The naysayers are WRONG

Today A123 Systems announced a Chapter 11 bankruptcy and sale of the company’s automotive business assets to Johnson Control.  This is the beginning of the end for the company that was formerly the darling of the green technology hype machine.  The company has developed some amazing battery technology, but ran into two serious problems.  Because the company received loans from the Dept. of Energy, we can expect the Republicans to raise a stink over the bankruptcy, but the story is not as bad as they’re making it out to be.

A123 Systems is the designer and manufacturer of a line of lithium-iron-phosphate batteries.  Their batteries are characterized by safety, and high power density.  There was a cool factor to the company, and for example the KillaCycle racing team used A123 cells to build what was at the time the fastest electric drag bike in the world.

But this year the company has faced a long litany of problems that resulted in today’s bankruptcy announcement.  I’ve written up a summary of those problems, as well as links to earlier articles this year detailing each step along the way.  See:  A123 Systems veers from Wanxiang to Johnson Controls and bankruptcy

There were two basic problems:

  • Quality problems in A123’s manufacturing led to expensive replacement programs covered under warranty.  These costs blew a big hole in the middle of A123’s financial balance sheet.
  • Fisker Automotive, A123’s primary customer, had delay after delay of getting the Fisker Karma into production, and then froze the Fisker Atlantic plans that would have had the car going into production by the end of this year.  If Fisker hadn’t flaked out, A123 would be in the middle of ramping up battery pack production.

The naysayers are trying to spin this as proof that nobody wants electric cars.  Really?

What’s actually happening is that A123 made some basic business mistakes.  A major one was to be overly dependent on a primary customer, Fisker Automotive, because delays in Fisker’s plans caused a problem for A123.  The other basic business mistake was to let quality problems be caught by customers.  It’s a lot cheaper to fix a quality problem in-house and be caught by the company’s QA department, rather than have the problematic product slip out, be installed in an OEM vehicle, and then have one of those OEM vehicles die while Consumer Reports is testing said OEM vehicle.

There isn’t proof here that nobody wants electric cars.  It is proof that some business managers make mistakes, however.

In June, A123 warned the investment community it might be unable to continue operation as a going concern.  That’s a kind of preview warning saying that the company might have to go into bankruptcy if its fortunes don’t change.  Unfortunately things did not change, and it did enter bankruptcy, today.  In mid-August a rescue deal was announced between A123 and Chinese autoparts maker Wanxiang that would have had A123 bought out by China, in effect.  This obviously has bad implications, that U.S. government support went into a company whose technology would then end up in the hands of China.

The deal with Johnson Controls will keep the technology in the hands of a company based in America.

The deal with Johnson Controls is only for the portion of A123 that produces batteries for automotive uses.  A123 also has a line of business selling grid energy storage systems, where the battery pack size is measured in 10’s of megawatts versus the 10’s of kilowatts that are used in an electric car.  The bankruptcy announcement says A123 is looking to sell that line of business to yet other companies.

The U.S. Government may not be repaid the investment money it gave to A123.  But at least the technology will not end up in the hands of companies based in China, and this technology will presumably continue to be used in vehicles and grid energy storage systems.

Other key considerations from the U.S. Dept. of Energy:

The advanced battery market is expanding dramatically in the United States and around the world — from $5 billion in 2010 to nearly $50 billion in 2020, an average annual growth rate of roughly 25 percent.

A123’s promising technology has a long history of bipartisan support. In 2007, the company received a $6 million dollar grant as part of the Bush Administration’s efforts to promote advanced battery manufacturing,

Prior to this investment, a battery with a 100 mile range cost $33,000. Because of technology improvements and the high volume manufacturing capability we have today, the estimated cost is down to about $17,000 and is expected to drop to $10,000 by 2015. As costs come down even further, the market for hybrids and electric vehicles – which has nearly doubled in the U.S. since last year – will grow even further.

“Government can help facilitate innovation, but the natural business cycle remains – some failures in any emerging industry are inevitable,” says Jay Friedland, Plug In America’s legislative director. “Yet, our country is experiencing tremendous success as we electrify transportation. A raft of companies – Johnson Controls, Envia, Saft, GM, and LG Chem among them – are making great strides in driving down battery costs while creating a U.S.-based manufacturing sector for battery technology. This drives down the cost of plug-in vehicles while creating jobs and keeping at home the $1-billion per day we’re currently sending overseas for oil, creating a better, safer America.”

Brian Wynne, president of the Electric Drive Transportation Association (EDTA), issued the following statement in response to today’s announcement about Johnson Controls purchasing A123 Systems’ automotive business assets:

“Consolidation is an expected market force in all emerging industries, especially one as dynamic as the global electric drive market. Advanced battery technology powers the electric drive industry, increasing the fuel efficiency of the U.S.automotive fleet and reducing our reliance on imported oil.

“Johnson Controls’ purchase agreement is a positive development for A123’s U.S. operations and for the long-term growth of the advanced battery industry. The electric drive industry is still in the early stages of market development – this is the second year of plug-in hybrid and electric vehicles availability on the mass market. The U.S. has already seen tremendous growth throughout the electric drive supply chain and battery technology during this time. The energy storage market is projected to be a $50 billion global industry by 2020.

“Standing up an entirely new supply chain is a challenge to which industry leaders are committed. Strong private investment continues and manufacturing opportunities for advanced batteries and electric drive components are growing jobs and building market share. The global race in the energy storage market is competitive and moving rapidly – it is critical that theU.S. secure a position as the leader.”

About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.

About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.

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