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”