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Chinese bidders apparently see more value in A123 Systems than the leading United States suitor, and, according to an article in the New York Times and in reports in other business news outlets, will probably walk away with most of the lithium battery maker. The paper reports that Wanxiang Group’s offer of $256 million for A123’s three manufacturing facilities and its commercial businesses top what Johnson Controls felt the company is worth.

Interestingly, while it appeared until now that Wanxiang and Johnson Controls were going to be the only ones to enter the bankruptcy auction, the Times reports that a Japanese company, NEC Corp., and a German company, Siemens AG, also submitted bids.

One significant asterisk to the deal is that the portion of A123’s business related to government/military work has been carved out and will be sold to Navitas Systems, a company based in Woodridge, Ill., for $2.2 million. Navitas implies that it is already involved in the production of lithium batteries and energy systems for military applications, but it seems relatively new (and its web page has only been online for a few months). Most of the people involved with Navitas used to be involved with an entity known as MicroSun Technologies, which was recently sold to Palladium Energy.

The carve out is necessitated by concerns raised about the loss of certain intellectual property and “sensitive military technology” to non-US firms. In late November, a nongovernmental policy group, the Strategic Materials Advisory Council, publicly raised objections to the sale of A123 to Wanxiang. The SMAC’s website describes itself as “a coalition of former US government leaders and industry experts who have significant experience with strategic and critical materials” and says the group “was formed with the clear objective to promote policy solutions that ensure continued access of both US industry and military to those materials needed to support a robust 21st century economy and military.” SMAC urged Treasury Secretary Timothy Geithner to block a sale to Wanxiang. Even with the proposed Navitas carve out, SMAC is unhappy and today called upon members of the Treasury Department’s Committee on Foreign Investment in the United States to block the deal. The CFIUS must approve the bankruptcy agreement (as must the Delaware Bankruptcy Court judge assigned to oversee A123’s future) it’s not clear to me if anyone has mustered the financial, legal and political arguments to derail things.

Wanxiang, which has a US affiliate and apparently employs several thousand here, it is still committed to following through on production agreements with GM and Fisker Automotive.

Johnson Controls officially withdrew itself from the bankruptcy auction Dec. 9, noting that it “declined to match a higher bid.” Alex Molinaroli, president, Johnson Controls Power Solutions, says, “While A123’s automotive and government assets were complementary to Johnson Controls’ portfolio and aligned with our long-term goals, Wanxiang’s offer was beyond the value of those assets to Johnson Controls.”

It isn’t surprising that companies in these situations value the same property differently. Typically, bidding companies try to estimate the value of physical and intellectual assets, and then add the net value of future revenues. In particular, valuing future revenue flows can vary greatly from company to company, based on the possible “fit” of the acquired business, assessment of risks, proprietary market insights, etc.

Meanwhile, Reuters reports that A123 will not get the remaining $116 million that was the balance of a $249 million DOE grant. Reuters says bidders for the company were aware that grant payouts were to end.

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The rise and fall of A123 Systems has been something of great interest to me and to ACerS, in no small part because of the important role one of our members, Yet-Ming Chiang, has had in the enterprise. Also, I, and many others I know, followed the A123 developments (see, for example, my 2009 interview with Chiang) because it was a story of how breakthroughs in ceramic materials science and engineering (i.e., lithium-ion phosphate energy storage) might spur a disruptive and transformative era in transportation.

But, while it made a good story, the business reality has been painful to observe. The general decline of A123 hasn’t been rapid, but the speed of the developments over the past few weeks (the desperate purchase proposal with the Wanxiang Group, the collapse of that purchase agreement and the subsequent bankruptcy filing) has been dizzying.

The latest controversy has to do with a proposal put in front of the bankruptcy court judge yesterday to give $4.1 million in bonuses to nine “key employees” that would be dependent on the how the sales of A123 assets goes. It is unclear, at least to me, who these nine are.

Regarding the sales of the assets, the relatively good news for investors is that at least two companies are vying to gobble up what is left: the aforementioned Wanxiang Group and Johnson Controls. Wanxiang’s initial effort in August to buy the company unraveled, according to some press reports, for political reasons as well as for unresolved questions related to A123’s liquidity. Johnson Controls eventually became A123’s suitor-of-choice when bankruptcy became the only option, but the bankruptcy judge so far has insisted that Wanxiang be allowed to compete with Johnson Controls. Dow Jones’ Bankruptcy & Debt Blog has a good story on the “bidding war” and more may be known about the way forward after the next court hearing Oct. 30.

In the meantime, there has been a lot of debate about whether A123’s fate was determined by flawed technology, flawed business plans, national political and policy shifts—or a combination of all of these. My own belief is that A123 failed because the company made its largest bet where it used Chiang’s technology with a mismatched application: automobiles. My impression is that A123 never came close to making a profit with its deals in the fickle PHEV market (e.g., Fisker), which is highly influenced by government policy and the general state of the economy (which has real and psychological affects on discretionary spending). Despite an arguably superior rechargeable battery system for cars, market experts, such as Lux Research, had been warning for years that if advanced battery makers wanted to pursue transportation-related sales, the only profitable route was through selling batteries for e-bikes for use in Asia, where there was much pent-up demand.

Ironically, my understanding is that A123 was making a profit (or was close to breaking even) in one area: Enormous “Hybrid Ancillary Power Unit” battery systems purchased by utilities to stabilize power grids. Fabricating and selling batteries as tractor-trailer-sized units had to have been much more lucrative and less susceptible to shifting purchasing and policy winds, and all indications have been that utilities will need more and more of these units as Smart Grid construction builds out. I have always been baffled about why A123 never split off this division where it clearly had a strategic edge on the competition. It will be interesting to see what happens to this work now.

The only other possibly successful outlet for A123 technology was in microhybrid (”start-stop”) systems that are now becoming more commonplace in a variety of sedans, but the company’s professed interest was probably too little, too late.

Time will give everyone better perspective about just what went wrong, but here are some of the interesting opinions being offered now:

[T]he big auto makers know better than anyone that the century-old dream of running cars on batteries will remain just that for most consumers unless somebody can re-order what’s known about the limits of storage battery chemistry and deliver batteries with far greater range at far lower cost. From a 2009 report commissioned by the Obama Energy Department to independent analyses such as a recent Sanford Bernstein study with the title, Don’t Believe the Hype,” the conclusions are the same: Current electric vehicle battery technology doesn’t stand a chance in head-to-head competition with state of the art internal combustion engines.

— Joseph B. White, “A123’s Flop: Science Trumps Politics”

“We believe that A123’s automotive capabilities are a good complement to our existing portfolio and will further advance Johnson Controls’ position as a market leader in this industry.”

- Alex Molinaroli, head of the power systems unit of Johnson Controls, speaking to the New York Times

But that flood of money would sow the seeds of A123’s fall, enticing it to ramp up commercial production too quickly - far faster than the market for electric vehicles would grow. As the economy struggled, gas prices moderated, and a national energy policy failed to gain traction, A123 burned through cash to finance stubbornly high production costs for a market that never really materialized.

— Erin Ailworth, “Cash-fueld climb led to fall of A123 Systems”

“They were on the knife edge for a while, and they just slipped,” said Andrea James, a senior analyst that tracks A123 for Dougherty & Co. LLC in Minneapolis. The company “bet its costs would come down and they just didn’t come down quickly enough.”

— quoted by Erin Ailworth, “Cash-fueld climb led to fall of A123 Systems”

A123 was killed off by their own success. Being the most successful supplier of batteries for electric vehicles at the wrong economic time cost them. … A123 had about twice the forecast order from the automotive industry than what was finally purchased. To get those orders, you have to show them you have factory capacity and supplier contracts to produce that volume. … [A]ll their contracts contain clauses which allow them to shape their order up or down, depending on the actual run rate of their factory. A123 probably would have had a substantial amount of factory capacity and work in progress. And then the orders were cut back, maybe as much as 30 percent to 50 percent. I have no indication A123 had any technical issues.

— Richard Smith, Fullpower Principal, quoted in “Energy Storage Experts Explain What Happened at Battery Firm A123″

Brilliant scientists can develop the chemistry and the engineering behind these cells, but manufacturing them is a completely different thing. That requires a completely different set of expertise. Just because there were some very brilliant minds that developed the cells, that didn’t in any way guarantee that they would be manufactured to the proper standard, and obviously they weren’t.

— Ed Kim, analyst at AutoPacific Inc., quoted in “A123 Filing Shows Struggle Extending MIT Smarts to Factory Floor”

Despite A123’s recent quality issues, its lithium-ion phosphate chemistry continues to be viewed by the auto industry as one of the strongest around.

— Rod Lache, analyst at Deutsche Bank, quoted in “A123 Filing Shows Struggle Extending MIT Smarts to Factory Floor”

Brian Warshay, an analyst with Lux Research in Boston, told me this week the Chapter 11 filing actually facilitated the company’s sale to Johnson Controls, a larger company that will now have the time to make its electric car technology work. “The technology is good,” he said. “They made significant strides. The problem was the cost of production was too high for the current market, except in small niches.” The energy density of lithium-ion batteries, like those at A123, remains one-tenth that of gasoline, notes Warshay, and that’s why electric cars are not making the kind of market headway that hybrids like the Toyota Prius are. But there is work being done on higher-density battery technologies, and on cheap low-cost, low-density battery materials that can store solar and wind power for later use on the electric grid.

— Dana Blankenhorn, “After A123, Battery Makers Take Stock”

“… we were moving away from our strengths. The more we moved away from power and towards energy, the less of a technical advantage we had.”

— Bart Riley, CTO of A123, as quoted in “Pioneering Batter Maker Files Bankruptcy”

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Most all of us in the ceramics field, to greater and lesser extents, have been rooting for A123 Systems to succeed, so its been painful to see the company in recent months entering what appears to be a death spiral. Yesterday, with the release of A123’s Q2 financial reports and the official announcement of a Chinese company taking a major ownership stake in the enterprise, the direness of its straits became fully stark.

In an online report, A123 Systems said, “Total revenue for the second quarter of 2012 was $17.0 million, a decrease of 53% from $36.4 million in the second quarter of 2011. Within total revenue, product revenue was $11.5 million, a 61% decrease from $29.6 million in the second quarter of 2011, and services revenue was $5.5 million, a decrease of 19% from $6.8 million in the second quarter of 2011.” Ouch.

The profit/loss picture was even uglier: “Gross loss was ($29.2) million in the second quarter of 2012, compared to a gross loss of ($17.5) million in the second quarter of 2011.”

Clearly, this was an untenable situation and something had to give. Thus, it is not surprising that the company simultaneously announced that it had reached a “nonbinding” agreement with China-based Wanxiang Group Corp. that would permit the company to invest up to $450 million in A123 Systems, with the option of an additional investment of $175 million. (Practically speaking, the “nonbinding” adjective means Wanxiang may decline to make the investment if circumstances and facts change, and the two sides “are currently negotiating definitive documentation.”)

A123’s announcement describes the Wanxiang Group as “China’s largest automotive components manufacturer and one of China’s largest non-government-owned companies.”

A123 CEO David Vieau says in the announcement that the agreement

“… is the first step toward solidifying a strategic agreement that we believe would remove the uncertainty regarding A123’s financial situation. A substantial capital investment from Wanxiang would not only provide financial stability to A123 as we continue to grow, but it would also align us with a large, successful global brand in the automotive and cleantech industries. Wanxiang has a successful track record of operating in the US with significant employment and commitment to good corporate citizenship, and we expect that a strategic agreement with Wanxiang would help enhance our competitive position in the global marketplace, especially in China.”

It may be jumping the gun a bit, but the Wall Street Journal and Reuters are reporting that with these moves, Wanxiang is grabbing the reins of of A123.

Will the investment work? The WSJ reports that Wanxiang “has been an active buyer of distressed auto-parts makers for nearly a decade.”

But, I don’t think it is going to go well for the Obama administration and the DOE, who provided a grant to A123. The development is going to be a headache, and is sure to be spun as something along the lines of Solyndra 2.0.

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The future of Fisker Automotive’s luxury hybrid vehicle is unclear after DOE suspended its loan guarantee. That affects the fortunes of its vendors, including A123, supplier of the battery packs. Credit: Fisker Automotive.

The short version of the story is that A123 is in something of a scramble mode thanks to the problems with Fisker Automotive’s DOE loan guarantee.

The story first came to light on Feb. 9 when, according to a Forbes report, Wunderlich Securities analyst Theodore O’Neill reduced his rating of A123 stock in reaction to a DOE loan guarantee to Fisker being put in hiatus.

So, what’s up with Fisker Automotive?

Fisker is a California-based start-up company that makes luxury hybrid cars and was started in 2007 by Henrik Fisker and Bernhard Koehler. In 2009 it received a $528 loan guarantee from the DOE, of which it has received $193 million so far, according to an online Reuters article, to support development of its first model, a luxury vehicle dubbed Karma. Also in the works is a sedan called Nina. In an email, FA spokesman Russell Datz says the company actually received two loans totaling $528.7 million: one for $169 million to support the Karma program, and the remainder to support Project Nina. He says the company has drawn all $169 million for the Karma and about $24 million for Project Nina.

The company built about 1,500 Karmas and delivered 400-500, including its first car, which went to investor and ecocelebrity, Leonardo DiCaprio, in July. Prospective customers must indeed have lots of (monetary) karma to purchase a Karma—they sell for upwards of $100,000.

Although some press reports claim DOE suspended the loan guarantee, according to Fisker, the delay in DOE funding was initiated by the company, itself. A company spokesperson says, “In May 2011, Fisker Automotive opted to stop taking reimbursements from the DOE while the company entered negotiations to implement more realistic and achievable milestones.”

Last week Fisker laid off 25 workers in its Delaware plant. The company says the 25 had been refurbishing the plant in preparation for Project Nina. The Karma is assembled in Finland and Fisker says the layoff is not directly related to its production or the company’s need for batteries.

Nevertheless, O’Neill suspects that the interruption of DOE funding is likely to result in reduced Karma production. In his research note, quoted in the Forbes article, he says lower Karma production “throws 2013 estimates [for A123] into disarray because Fisker has started laying off employees at its plant in Delaware and this would have been a much larger opportunity for A123 Systems.” O’Neill estimated that Fisker has about 2,000 battery packs in its inventory and implied that might be enough, “We can’t be sure when it [Fisker] will need more or if it will have the money to pay for it. In either case, we have to lower our revenue forecast [for A123].”

This is the third straight month of unfortunate developments for Fisker: In December 2011, they recalled 239 vehicles because of a possible defect in the batteries, and in January sales reportedly were stopped for four days to fix a software glitch.

Fisker was reported to be A123’s largest customer, and the battery pack is the most expensive component in the car. Forbes reported that O’Neill had downgraded his rating of A123 stock from Hold to Sell. In his research note explaining his analysis and recommendation, O’Neill said that the DOE loan guarantee has “become part of an intense political debate, [and] it may never be restored.” He sees this as part of the political fallout from the Solyndra hot potato, and that it sets up the possibility of “two Solyndras for the price of one.”

A Boston Globe article reports that about 60 percent of A123’s 2011 revenue came from the transportation industry. A123 seems to be working hard to make the best of a tough situation. The Globe says the company laid off about 20 percent of its Michigan workforce, affecting about 325 employees. However, since the problems arose with its Fisker business, it has raised $23.5 million from investors to fund its growth.

It’s a scary moment in A123’s history. Crain’s Detroit Business reported that the company’s stock fell almost 24 percent on Thursday following Fisker’s announcement that it was delaying the Nina project. That brings A123’s stock down by a sobering 80 percent in the last 12 months.

Jason Forcier, A123 vice president and general manager in Michigan prefers to see opportunity, saying in the Crain’s article, “This delay on the Nina project actually helps us by allowing us to pull our engineers to other programs.” A123 has recently reported several significant sales to power grid companies.

Forcier is not a lone optimist. The Globe reports that Deutsche Bank analyst, Dan Galves, sees the setback as significant, but temporary, saying, “We still see this company as having done very well in terms of carving out a position in the advanced lithium-ion battery market.”

Fisker, too, prefers to see the sunshine between the clouds. Founder Henrik Fisker is quoted in the Reuters story, “Our survival is not dependent on the DOE. We have already looked into alternative financing and we have really good possibilities.”

And, O’Neil may have it wrong with regard to Fisker’s future with the DOE. In the Globe article, a DOE spokeswoman says it “is working with Fisker to review a revised business plan and determine the best path forward so the company can meet its benchmarks, produce cars and employ workers here in America.”

If so, that would be encouraging karma for Fisker and A123.

[Editor's note: Since first publishing this story, we received a note via email from Fisker spokesman and director of corporate communications, Russell Datz, providing some company background for the information contained in the news reports we quoted and linked to in the original version. This story has been updated to include Fisker's point of view.]

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Beautiful weather in Orlando, Fla. beckoned these attendees at the Electronic Materials and Applications meeting.

The 2012 Electronic Materials and Applications meeting opened yesterday in Orlando, Fla. This is the third consecutive year for the event organized by ACerS’ Electronics Division and Basic Science Division, and this year’s gathering attracted just under 200 participants.

The program focuses on electronic ceramics for energy generation, conversion and storage applications. There are eight symposia covering advanced dielectrics, piezoelectrics, materials for batteries, thermoelectrics, metamaterials and microwave materials, as well as a symposium dedicated to sustainability and green materials processing.

Yesterday’s plenary speaker was Tony Gozdz, principle scientist at A123 Systems, pinch-hitting for Bart Riley one of the cofounders of A123, who was unable to come at the last minute. Gozdz, a polymer chemist by training, really knows batteries and set the tone for the conference by outlining the materials science and engineering successes, ambitions and challenges that are yet to be overcome.

The talk, “Advances in Lithium-ion Technology for Automotive and Grid Application,” started with a brief history of battery technology and quickly focused in on the development of lithium-containing batteries beginning in the 1960s. Observing, “The chemistry of batteries is the chemistry of interfaces, basically,” Gozdz went on to describe how solutions to surface and interface problems drove the evolution of lithium batteries, and continues to do so. He outlined A123’s work developing nanophosphate cathode materials, and offered some thoughts on nascent energy storage ideas and on the energy paradigm shift underway in this country. I’ll have more on the three plenary talks in a later post.

Meanwhile, enjoy this photoblog from Orlando!

Amit Goyal, chair of the Electronic Division, welcomes attendees to EMA 2012

Tony Gozdz of A123 Systems delivered the opening plenary talk on lithium batteries for automotive and grid applications.

Students polish their talks during the mid-morning coffee break.

A special symposium gave students the opportunity to present their work. Here, Manuel Rivas, a senior at U. Texas-Pan American, presents his work on doped barium titanate.

Christopher Turner, PhD candidate at U. Florida, fields questions during the poster session and reception.

Alp Sehirlioglu and Geoff Brennecka at the reception.

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