Will A123 of Waltham become the next Microsoft or the next Solyndra?

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    Will A123 of Waltham become the next Microsoft or the next Solyndra?

    A123 of Waltham is introducing what it calls a new "battery chemistry" today, June 12. The business is lithium batteries for electric aotomobiles. The major customer is General Motors. [ Bill Vlasic and Matthew L. Wald, Shaky battery maker claims a breakthrough, New York Times, June 12, 2012, at http://www.nytimes.com/2012/06/12/business/energy-environment/a123-us-backed-battery-maker-claims-breakthrough.html ]

    Like BYD of China, A123 currently uses lithium ferrophosphate chemistry. As compared with other lithium chemistries, it offers better safety and low-temperature performance, but it has relatively low energy density. There are many variations on the chemistries, some using nanoparticles. From the preannouncement cited in the NY Times this morning, it is not clear what A123 may have done to improve it.

    Like the failed Solyndra, A123 has received major federal support from the 2009 "stimulus" funds. With that support, it kept a headquarters office in Massachusetts but built a factory in Michigan. As with Solyndra, the company's biggest challenge is not a technology that works but a market that can produce a profit. So far, electric automobiles remain playthings for rich gadget-hounds.

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    Another company headed out of town

    A123 may survive, but not as a U.S.-based company. In the wake of its recent financial disaster, ruining months of production because of incompetent parts assembly, it announced a Chinese "partner," Wanxiang, the largest freestanding auto-parts manufacturer in China. According to Forbes, the buyout of up to 80 percent values A123 equity at $0.77, when initial investors paid $13.50 a share. A bridge loan from Wanxiang will keep A123 in business until the agreement closes. [ China's Wanxiang to take control of battery maker A123, Reuters, August 8, 2012, at http://af.reuters.com/article/metalsNews/idAFL4E8J84OH20120808 ]

    A123 also reported miserable second-quarter financials, with revenue falling to $17 million from $34 million in the same quarter last year, plus a whopping $83 million quarterly loss. It is writing down about $60 million in defective product shipped to customers and $15 million in defective inventory. Evidently customer deliveries are taking a big hit from the disruption. Wanxiang must have confidence in A123 technology, since its agreement values A123 at more than half again what the penny-stock market does. [ Associated Press, A123 posts $82.9 million quarterly loss but gets financing from China, Boston Globe, August 8, 2012, at http://www.boston.com/news/local/massachusetts/articles/2012/08/08/a123_posts_829m_2q_loss_gets_financing_deal/ ]

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    Property of the People's Republic

    A123 began as a U.S.-based company with U.S.-based technology, stemming from inventions at MIT. If the company had been differently managed, it might have continued that way. To do that, however, the company would have had to dismiss the electric vehicle market as a fad, ignore the opportunity for a federal "stimulus" loan, opt for a slow-growth strategy and defend its patent base.

    So far, financial analysts did not single out cost of manufacturing as a critical issue for A123. Instead its key problem was credible manufacturing capacity. The company scaled up faster than it could manage and got into big problems. It's a sad but classic story for a company that was oriented heavily to science rather than to business and engineering.

    Earlier this year, as news of its manufacturing disaster spread, it became clear that while the company's technology might have some value, A123 was likely to perish. No domestic investors were willing to put in enough money to keep the scaled-up company going.

    Wanxiang is backed by ongoing, direct and indirect investments from the Chinese government, which has made growing a properous automobile industry into national policy. If Wanxiang had not been willing to bail out the company, A123 would have cratered like Solyndra.