Wednesday, October 17, 2012

A123 Bankruptcy Casts Doubts on EV Goals

The theory was that the federal government could guide an entire US electric vehicle (EV) industry into existence by orchestrating a constellation of grants, loans and loan guarantees to manufacturers and infrastructure developers, along with generous tax credits for purchasers.  That vision was attractive, because EVs have the potential to be an important element of a long-term strategy to counter climate change and bolster energy security. However, yesterday's bankruptcy of battery-maker A123 Systems, Inc. provides a costly reality check. Along with the earlier bankruptcy of another advanced battery firm, Ener1, and disappointing battery-EV sales, it raises new doubts concerning both the government's model of industrial development and the achievability of President Obama's goal of putting one million EVs on the road by 2015

A123 was built around a novel lithium-ion battery technology developed at MIT.  For a time they were the darling of the advanced battery sector, with a market capitalization above $2 billion following its 2009 initial public offering. That IPO came on the heels of A123's receipt of a $249 million stimulus grant from the Department of Energy and $100 million of refundable tax credits from the state of Michigan. Subsequently, though, they experienced low sales and a costly battery recall that contributed to their signing a memorandum of understanding with China's Wanxiang Group to sell an 80% interest in the company for around $450 million.  Instead, it now appears that Johnson Controls, a diversified company that was the recipient of a $299 million DOE advanced battery grant of its own, will end up acquiring A123's assets for around $125 million.  Johnson is apparently providing "debtor-in-possession" financing for A123's Chapter 11 process.  It's not clear whether Johnson would be able to draw down the unused portion of A123's federal grant.

Because of the government's close involvement with A123, and in particular its structuring of aid to A123 in a manner that left taxpayers without any call on the firm's assets ahead of suitors like Johnson Controls or Wanxiang, this event is inherently political.  I was a little surprised it didn't come up in last night's presidential debate.  If it does become a "talking point" in the next two weeks, however, I'd prefer to see the conversation focus on the real issues it raises.  The reasons for A123's failure appear very different from those behind the much-discussed failure of loan-guarantee recipient Solyndra.  While the latter ultimately called into question the judgment of officials who loaned money to Solyndra when that company's business model was already doomed, A123 highlights the much deeper challenges involved in attempting to conjure an entire industry out of thin air.

The earlier failure of GM's electric vehicle effort in the 1990s, the EV-1, demonstrated the chicken-and-egg nature of EV sales: Vehicle sales depended on recharging infrastructure that in turn depended on robust vehicle sales to justify infrastructure investment.  But at least GM could begin then by relying on a mature lead-acid battery industry.  Those batteries turned out to be inadequate to meet consumers' expectations of range and recharging convenience, which led to the creation of another chicken-and-egg dependence for the new EV industry: carmakers needed a reliable supply of advanced batteries from producers who couldn't invest in the capacity to make them, without knowing that vehicle sales would consume enough batteries to turn a profit.  So in 2009 the administration set out to short-circuit all those inter-dependencies by simultaneously funding the key elements of these loops, including advanced battery makers.  It makes me wonder if anyone involved had any direct manufacturing experience--a natural doubt considering that the entire US auto industry was restructured in 2009 by a task force without a single member who had worked in any manufacturing business, let alone the auto industry. 

The main causes of A123's failure appear to have involved basic manufacturing issues of capacity utilization and quality control.  The company wasn't selling enough batteries to cover its costs, and too many of the batteries it sold came back in an expensive recall.  They weren't the first business to experience such growing pains, but their challenges were compounded by the burden of a manufacturing line that had been sized to meet the demand of an EV market that hasn't yet materialized. US EV sales through September amounted to just 31,000 vehicles, or less than 0.3% of total US car sales.  The picture looks even worse if you subtract out sales of GM's Volt and Toyota's plug-in version of its Prius, the gasoline engines of which provide essentially unlimited range, circumventing the limitations of today's batteries.  I think there's a strong argument that the government's assistance to A123 was actually a key factor in leading them to bankruptcy, by prompting A123 to grow much faster than could have been justified to its bankers or private investors.

Perhaps it's some consolation that A123's technology has apparently been snapped up by a competitor, rather than going the way of Solyndra's odd solar modules.  Yet that outcome hardly justifies the casual dismissal of A123's fate by a DOE spokesman as a common occurrence in an emerging industry.  That sort of talk merely perpetuates the perception of cluelessness fostered by Energy Secretary Chu's failure to hold anyone accountable for the Solyndra debacle.  Yes, companies in emerging industries fall by the wayside, but the preferred response would be to examine what happened and apply the lessons learned to the rest of the "venture capital portfolio" with which the administration's industrial policy has saddled the DOE.  With EV sales still low and several key EV makers experiencing delays and production problems, a thorough public review of the entire EV strategy is in order.


Ed Reid said...

None of the manufacturers' efforts or the government's incentives mean much if "the dogs won't eat the dog food".

The US vehicle purchaser has his or her own concept of "utility", which contributes to the choice of a vehicle. The utility of EVs (though not hybrids) is severely diminished both by their very limited range and by their long recharge cycles.

The early unit fires have also contributed to purchaser skepticism. It appears that the EVs were "not ready for prime time". There are very good reasons for extensive field testing of new products.

alternative energy kent said...

Its better to use Alternative energy,Alternative energy sources cannot be depleted, thus making it impossible for worldwide energy shortages to occur. This is one of the most important alternative energy benefits, because renewable energy will always be in abundant supply for mass use, and will not run out like fossil fuels. The sun, wind, tides, and other natural elements will always be there for us to take advantage of.
When we talk about vehicles, Hybrid and plug-in electric vehicles can help increase energy security, improve fuel economy, lower fuel costs, and reduce emissions.

Geoffrey Styles said...

The issue here isn't platitudes, but finding effective ways to introduce such vehicles when they are still far from mainstream cost and performance. And here I'm referring mainly to EVs, not hybrids, which have mostly been weaned off subsidies, with the exception of perks like the free use of high-occupancy vehicle lanes in some jurisdictions.

And by the way, your comments identity should lead to a person, not to a commercial entity like yours. I treat those as spam.

Geoffrey Styles said...

And here's another bitter pill for taxpayers arising from the Solyndra bankruptcy. In addition to our exposure from the $535 million loan guarantee--which ended up being a direct loan from the Treasury's Federal Financing Bank--it now appears that the same parties who got the DOE to agree to subordinate the government's loan to their own $75 million late-in-the-game loan will end up with a share of tax breaks that could be worth up to $341 million, per Bloomberg:

So the net loss from Solyndra to the US Treasury, when all is said and done, could be just shy of a billion bucks. At a minimum, the Treasury should have had the right to retire Solyndra's tax-loss-carryforward credits in exchange for the defaulted loan.

Cash For Cars Atlanta said...

The tax payer is never returned his investment, that is forced. Ugh.

-Evergreen Junk Cars