A123 Systems Bites the Dust - The Facts

October 17th, 2012
in econ_news, syndication

Econintersect: Most of us are old enough to remember Linda Blair's head spinning around in the Exorcist.   The bankruptcy of A123 Systems, and the contradictory data being shoveled in the media - most people's head should be spinning.  The following is information which has been checked and verified.


According to BankruptcyData.com:

A123 Systems and two affiliated Debtors filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead number 12-12859. The Company, which designs, develops, manufactures and sells advanced re-chargeable lithium-ion batteries and battery systems, is represented by Mark D. Collins of Richards Layton & Finger and D.J. Baker of Latham & Watkins. The Company also announced that it has entered into an asset purchase agreement with Johnson Controls in a transaction valued at $125 million.

Follow up:

The reason for the bankruptcy was best described by gas2.org - and had little to do with bad management.

A123 Systems provides batteries for numerous electric vehicles, among them the Fisker Karma and the Th!nk City. Alas, these (and other) electric vehicles sold in such low volumes that A123 has not been able to turn a single dime of profit, and one-off vehicles that run A123 batteries like the KillaCycle aren’t going to keep the company alive.

Perhaps what hurt A123 the most though was losing the contract to provide batteries for the Chevy Volt. While A123 was slated to provide batteries for the Chevy Spark EV, GM has yet to comment on how the bankruptcy filings will affect that deal.

It has been widely reported that A123 Systems was awarded a $249 Million grant by the U.S. Government under the Recovery Act of 2009 (aka the Obama Stimulus).  However, this is not exactly true as shown on the government website recovery.gov. A123 Systems received 2 awards totaling $279,013,083.  Further, it has been reported that the government payments under these awards totaled $129,529,710 - however, additional payments totaling $ 2,594,370 were made under the second award.

Top Awards

Project Title Award Amount
Vertically integrated mass production of automotive class lithium ion batteries $249,090,000
Tehachapi Wind Energy Storage Project $29,923,083

The Tehachapi Wind Energy Storage Project (TSP) is led by SCE. A123 Systems and the California Independent System Operator (CAISO) are project participants. SCE, a subsidiary of Edison International (EIX), is an investor owned utility operating in the State of California, covering over 50,000 square miles and serving over 13 million people with an energy portfolio that includes 12.6 billion kWh of renewable energy. SCE has over twenty years experience in large scale wind generation integration and in the development and testing of battery technologies for grid applications.

Some of the media has been implying that the government money paid to A123 Systems by the government went down the drain.  The Christian Science Monitor has properly reported in part:

Despite filing for bankruptcy protection yesterday, lithium-ion battery firm A123 Systems has said the factories where it makes electric car battery cells will be saved, thanks to a $125 million deal with automotive parts maker Johnson Controls.

The purchase of A123 Systems’ automotive business by Johnson Controls will not only give the auto-parts maker the chance to build and sell lithium-ion batteries to automakers, but hopes to safeguard two of A123 System’s battery facilities in the U.S.

Alongside the two U.S. factories--located in Livonia and Romulus, Michigan--the deal will also see Johnson Controls obtain A123’s cathode powder plant in China, as well as equity interest in a joint venture with Shanghai Automotive Industry Corp.

In addition to the $125 million acquisition, Johnson Controls will provide A123 Systems with $72.5 million to continue its operations at those two battery facilities, ensuring production of electric car batteries can continue.

Steven Hansen









Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.











4 comments

  1. ryan says :
    **---

    "A123 Systems received 2 awards totaling $279,013,083. Further, it has been reported that the government payments under these awards totaled $129,529,710 - however, additional payments totaling $ 2,594,370 were made under the second award."

    So did A123 receive $2,594,370 or a total of appx. $390,000,000? Either way, if the business is only worth $125,000,000, this is a lot of money down the drain. In addition to these grants (which presumably are not required to be paid back), A123 must owe its creditors substantially more than the $125,000,000 sale price. So, in fact, the business has cost the U.S. economy by inducing banks and trade creditors to provide money, goods and services that will never be repaid for a business that is worth a fraction of the amounts invested.

    Just a quick look at the bankruptcy court papers and the author could have provided the total secured debt and an estimate of total debt. Not being an interested party in this bankruptcy, I haven't done so, but I'd be willing to bet that the JCI sale will result in less than 25% of total debt.

  2. ryan says :
    *----

    "The reason for the bankruptcy was best described by gas2.org - and had little to do with bad management."

    The reasons stated by gas2.org were bad volume projections and losing a "valuable" customer contract. While this doesn't prove bad management, it certainly strongly suggests bad management. Over-investing in a very young industry with no plan B if your product proves less popular than the iPhone is not a good business plan.

  3. admin (Member) Email says :

    Ryan,
    i was only trying to correct some of the incorrect elements in the media - not trying to restate the entire situation. A very good writeup of the bankruptcy situation comes from zerohedge:
    http://www.zerohedge.com/news/2012-10-16/another-blow-green-industry-a123-files-bankruptcy-after-collecting-hundreds-millions.

    i accept your view of bad management as reasonable - but counter that startups seldom have plan b's because usually a plan b requires even more funding.

    honestly, my intent here is to counter the politicization of A123. the right wing press was distorting the facts, while the left wing press was understating.

    the debate should be focused on whether the USA should be using public sector funds to aid private sector profitability, and if this is acceptable - how it should be done.

    i personally believe that the stimulus and the pork was miss-targeted and done without a proper debate of methodology and targets. this is neo-Keynesian theory that it does not matter what you spend on - just spend, spend, spend to get yourself out of a recession.

    i believe the stimulus was 1/3 a waste of money (while the other 2/3rds was just costs related to an expanded social safety net caused by recessionary conditions. The bottom line is that the stimulus ended up with little long term effects - and even the government admits that only 160,000 jobs recovery.gov were created directly due to the stimulus.

    but back to A123. from an investor point of view, i have not seen anything to suggest this was a bad bet. yes, in hindsight - one would always do things different.


    steven

  4. ryan says :
    ***--

    Steven,

    Thank you for the response and the zerohedge link.

    The piece makes more sense to me with your explanation, but it does still seem a bit apologist to me.

    As to the debate that you want to focus on - the use of public sector funds to support private enterprise - we oviously can't judge an entire policy and stimulus bill by the results of a small percentage of recipients. We all knew that some of the recipients would end up failing, and we won't be able to fully analyze this for a number of years.

    However, for what its worth, I personally support government funding of basic research and have no problem with government support of even private company R and D. However, the decision of what technology to monetize and when, i.e., whether to build and operate mass manufacturing plants based on new technology, should be left to the capital markets. Allocating money is the one thing that the capital markets excel at, and overt involvement by the government almost always results in misallocation of capital.





 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved