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Chinese Acquisition of Federally Subsidized A123 Batteries Seems Likely

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There’s quite a bit of irony in this story, but bear with me. The Boston-based battery supplier A123 received a $249.1 million federal grant in 2009 to build a factory to make lithium-ion batteries for cars. President Obama called then-CEO David Vieau to congratulate him and point out that “this is about the birth of an entire new industry in America—an industry that’s going to be central to the next generation of cars.”

Fisker's Karma uses A123 batteries, and that's one reason production has ground to a halt. (Jim Motavalli photo)It didn’t work out that way. A123, which licenses battery tech developed at MIT, built two plants (in Romulus and Livonia, Michigan), but the demand didn’t materialize. The company’s customers include Fisker, BMW (hybrid batteries), General Motors and Smith Electric Vehicles, but it’s fair to say that none of them offered the volume to really use the plant’s capacity. The result? A123, whose stock had soared after the company went public, filed for bankruptcy last October (the very day of Obama’s second debate with Mitt Romney), claiming $144 million in debts. It had spent $132 million of the government money.

The goal of the Obama program that awarded A123 that big grant was to capture some of the growing lithium-ion battery market for U.S. companies, instead of letting Asian tech leaders take it all. But if that was the aim, it backfired. It’s a Chinese company, Wanxiang America, that’s buying A123, for $257 million—about the same amount that A123 got from the government. The deal could close as early as Friday.

On Tuesday, the Committee on Foreign Investment in the U.S. (CFIUS) approved the sale to Wanxiang, despite some oppositional noise from Congress, which was worried about the transfer of American technology to a country that doesn’t always respect patent law. Romney aide Andrea Saul described A123 as “yet another failure for the President’s disastrous strategy of gambling away billions of taxpayer dollars on a strategy of government-led growth that simply doesn’t work.”

A123's Livonia plant is one of two in Michigan. The company's production capacity was greater than the demand. (A123 photo)To be fair, Obama’s Department of Energy (DOE) gave $2 billion in battery-related grants to 29 companies in 20 states, and most of that money was used productively. I’m all for government support of lithium-ion batteries, though it has to be more technically strategic than this program—too many of the grants went to companies in Michigan, which was and is struggling with high unemployment. I’d have preferred to see companies win on merit.

It seems likely at this point that Wanxiang will end up with A123’s assets, and not American bidder Johnson Controls, which didn’t comment on the CFIUS approval. Personally, I think Johnson Controls would have been the ideal winner, because the company’s work with hybrids and electrics is really aligned with A123’s tech. But Wanxiang bid higher, and this is America.

An A123 cell. The company licensed battery nanotechnology developed at MIT. (A123 photo)“Wanxiang America looks forward to closing the transaction and to continuing to foster the technologies A123 has worked so hard to develop with American taxpayer money,” said Pin Ni, company president. OK, he didn’t say the “with American taxpayer money” part.

The sale to China does not include A123’s military contracts, which were sold separately. Pin Ni said in an e-mail to Reuters that the CFIUS process is there “to fully protect national security issues,” but not everyone’s going to see it that way.

For the record, A123 did not make the batteries that caught fire in two Boeing Dreamliners. That would be GS Yuasa, a Japanese company that also supplies Mitsubishi and Honda with electric car batteries (though Honda says its different technology).

The Boeing Dreamliner's burned battery.Those fires did raise questions about the future of lithium-ion battery technology, which has always had heat and fire issues. But battery experts say there’s still nothing to compare with the chemistry for lightness and power delivery, in cars or planes. So for the time being, buying A123 is probably a good investment. A123 may retain some decent jobs in Massachusetts and Michigan, but it’s the Chinese economy that will ultimately benefit.
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