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A123 Bankruptcy Update: Wanxiang, Johnson, Fisker Spar in Court
The unfolding saga of an insolvent U.S. advanced battery company and its competing suitors in bankruptcy court
JEFF ST. JOHN: OCTOBER 29, 2012
Bankrupt battery maker A123 has a lot of demands on its time nowadays. While U.S. giant Johnson Controls and Chinese giant Wanxiang compete over the Department of Energy-backed lithium-ion battery company’s existing business assets, one of its key customers, Fisker Automotive, wants the whole process slowed down.
Those are some updates from the ongoing legal battle over the Waltham, Mass.-based company’s remains in U.S. federal court in Wilmington, Del., where the struggling company filed for bankruptcy protection two weeks ago. The key struggle appears to be between Johnson Controls and its $125 million offer for A123’s automotive battery business (and DOE-grant-funded factory in Michigan), and Wanxiang, whose $465 million bailout offer in August still remains on the table as far as the Chinese automotive equipment manufacturer is concerned.
The latest on that front appears to put Wanxiang in the lead. According to news reports, A123 has asked the court for permission to tap a $50 million loan from Wanxiang, supplanting a competing offer from JCI to provide its own debtor-in-possession loan. Wanxiang’s 12 percent offer beat JCI’s 15 percent offer, the Wall Street Journal reported. JCI had previously won court approval to provide $15.5 million of a planned $72.5 million in in debtor-in-possession financing as well, but according to The Washington Post, the Milwaukee, Wisc.-based industrial controls giant backed out to avoid a legal fight.
A123 CEO David Vieau said in an earlier statement that the company had scrapped its Wanxiang deal “as a result of unanticipated and significant challenges to its completion,” though he didn’t specify the challenges involved. But it’s clear that the idea of a Chinese company taking over taxpayer-backed U.S. technology won’t sit well with a Congress already investigating the company’s outstanding loan agreement with the DOE. Wanxiang’s structured deal with A123 did involve it retaining access to the $249 million Department of Energy stimulus loan that’s helped build A123’s factory in Livonia, Mich., as well as ownership of A123’s intellectual property.
What’s A123 worth? Measurements vary. The company had $459.8 million in assets and $376 million in debt as of Aug. 31, according to bankruptcy filings. Certainly its Monday afternoon market capitalization of $23.1 million, compared to post-IPO highs of more than $2 billion, is a sad reminder of the destruction of a lot of investor capital. But its ongoing automotive battery business could offer competitive products to whomever buys it. The same goes for its grid storage business -- 24 percent of its total revenues come from grid partner AES, according to bankruptcy filings.
As for how that business is divided up, that’s up to the courts and its competing parties with an interest in the business. That includes also-struggling Fisker Automotive, which accounts for more than a quarter of A123’s revenues. On Friday, Fisker’s lawyers asked the court to delay the A123 sale process for another 30 days, though the company didn’t specify what it hoped to do with the extra time.
Here’s our ongoing coverage of the A123 bankruptcy and its financial and political fallout:
We’ve already seen the inevitable comparison to bankrupt solar company Solyndra, which took a $535 million loan guarantee from the Department of Energy only to go under last year. DOE-backed flywheel energy storage maker Beacon Power and thin-film solar startup Abound Solar have since declared bankruptcy as well, making A123 the fourth to get DOE cash, then go under.
A123’s fate is likely to be much different than Solyndra’s, which has seen its plant dismantled and its technology stranded. Obviously it has many suitors for its technology. Still, that won’t extinguish the political firestorm to come on A123’s crash and burn, of course. Congressional inquiries into A123’s remaining share of its DOE loan, as well as its relationship to struggling plug-in hybrid automaker (and key A123 customer) Fisker Automotive, have been underway for months.
Let’s start with the main stage. Mitt Romney’s campaign issued a statement on Tuesday calling the bankruptcy “yet another failure for the president's disastrous strategy of gambling away billions of taxpayer dollars on a strategy of government-led growth that simply does not work.” President Obama’s campaign fired back that Romney, as Massachusetts governor, had presided over state loans to companies that later defaulted on their debts.
On a less personal, but still political, note, a Department of Energy spokesman wrote in a blog post that Republican members of Congress had signed on as A123 supporters -- not surprisingly, both from Michigan, where A123’s plant was built with federal and state support.
DOE’s blog also stated that 100-mile-range batteries have dropped in price from about $33,000 before it started investing billions of stimulus dollars into the sector, to about $17,000 today. That’s on track to drop to $10,000 by 2015, DOE predicts. Of course, that’s based on a rosy projection for the advanced battery market, which DOE says is set to grow from $5 billion in 2010 to nearly $50 billion in 2020.
In large part, that’s tied to equally optimistic, official Obama administration goals to put 1 million plug-in vehicles on U.S. roads by 2015 -- a growth rate that is hard to imagine, given the fact that only 50,000 EVs have been sold so far this year.
Cost, Quality Struggles: Will GM Stick With A123?
Beyond the core problem of a slow-to-develop market, A123 may have faced struggles to compete on cost against its rivals, according to an analyst who spoke to Wired. Asian companies dominate the advanced battery market today -- South Korea’s LG Chem makes the batteries for GM’s Chevy Volt, Japan’s Panasonic makes Tesla Motors’ batteries, and the Nissan Leaf’s batteries come from a Nissan-NEC joint venture.
To be sure, A123 has a long list of EV customers, including General Motors, BMW, SAIC Motor Corp., Tata Motors and Smith Electric Vehicles. But Fisker was its main customer, with about 26 percent of A123’s revenue, according to bankruptcy filings -- and Fisker has been having its own problems as it strives to meet terms of its own $529 million DOE loan. Fisker was also the company that received A123 batteries that were subject to a mass recall this spring, a disaster that triggered A123’s spiral into bankruptcy.
It’s hard to predict how the proposed acquisition by Johnson Controls will affect those ongoing relationships. GM, which has tapped A123 to build batteries for its Spark EV, issued an official "no comment" on its Chevy Volt website on Tuesday as to whether it would continue using the bankrupt company’s batteries if the Johnson Controls deal goes through.
Price vs. Value for Domestic Green Technology Support
In the meantime, the company as a whole has lost a collective $1 billion over the course of its publicly-traded life, retaining $459.8 million in assets and $376 million in debt as of Aug. 31, according to bankruptcy filings. The company has seen its market value fall from a high of $2.3 billion shortly after its 2010 IPO to an estimated $8.2 million as of Wednesday afternoon, representing the destruction of a whole lot of capital.
At the same time, EV supporters were quick to point out that A123’s assets and intellectual property represent ongoing value for whichever company picks them up. “Government can help facilitate innovation, but the natural business cycle remains -- some failures in any emerging industry are inevitable," Jay Friedland, legislative director for nonprofit advocacy group Plug-In America, said in a Tuesday statement.
In that sense, A123’s bankruptcy is simply a fire-sale opportunity for consolidation into a growing industry, whether under domestic or foreign ownership. Johnson Controls got its own $299 million DOE advanced manufacturing grant in 2009 to build domestic manufacturing capacity for hybrid and electric vehicle batteries, and will be keeping jobs and intellectual property in the country if it takes over A123’s automotive business.
That means that federal investment into A123 -- and Johnson Controls, for that matter -- will be achieving its goals of creating jobs and fostering domestic technology innovation, the Information Technology and Innovation Foundation, a nonprofit founded and chaired by former Republican lawmakers, noted in a Tuesday statement.
“Through critical public investments in battery innovation by ARPA-E and DOE investments in next-generation battery manufacturing, the U.S. battery industry has made significant technological progress in a few short years,” the group noted. “And as shown by Johnson Controls purchase of A123’s manufacturing plants and technologies, it’s helped spur very promising technologies that U.S. industries will continue to use and build on.”
Whether or not U.S. manufacturing plants can compete on costs with Asian rivals is another question. Both A123 and rival lithium-ion battery maker Boston-Power have turned to building batteries in China with partners, both for low production costs and to serve China’s future market for electric vehicles.
Meanwhile, the fate of A123’s significant grid-scale battery business -- some 24 percent of its revenues came from grid storage partner AES, according to bankruptcy filings -- and other parts of the company remains unclear. Indeed, other bidders may emerge to challenge Johnson Controls for A123’s automotive battery business, which includes plants in Livonia and Romulus, Mich., a factory in China and its stake in a joint venture with Shanghai Automotive.
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