Troubled US battery makers recharge with overseas investors

Aug 02, 2012, 6:08 PM EDT


By Deepa Seetharaman and Ayesha Rascoe

Aug 9 (Reuters) - Early in 2012 President Barack Obamaresponded to critics of his multi-billion-dollar greentechnology initiative by saying he was "not going to cede thewind or the solar or the battery industry to China."

Six months later, he faces that very real possibility forthe U.S. car battery industry, a once-high flying sectorbuttressed by generous federal grants, but struggling with agreen car market that has fallen far short of expectations.

A123 Systems Inc on Wednesday became the secondU.S. government-backed battery maker this year to go overseasfor a lifeline - and it turned to China. Auto parts supplierWanxiang Group will take a controlling interest and invest $450million in the Massachusetts-based battery maker, which facedrunning out of cash by the year-end.

Earlier this year, Ener1 Inc, another batterymaker that received a government green technology grant, emergedfrom Chapter 11 bankruptcy under the control of Russian investorBoris Zingarevich. New York-based Ener1 is also a joint-venturepartner in China with a Wanxiang subsidiary.

In the past three years, U.S. battery makers, anticipatingconsumer demand for green cars that never materialized, haveover built production capacity, often with government funding.

Electric vehicle and hybrid sales for the first seven monthsof the year totaled 270,000, representing only 3 percent oftotal U.S. car sales, according to the green-car

As part of the 2009 American Recovery and Reinvestment Act 'sE lectric Drive Vehicle Battery and Component ManufacturingInitiative, A123 was awarded a grant of $249.1 million. Ener1subsidiary EnerDel was awarded $118.5 million to manufactureadvanced lithium-ion batteries for electric and hybrid vehicles.

A123 promised to create 38,000 U.S. jobs, including 5,900 atits own plants. A123 said on Thursday it has 1,300 workers.

Theodore O'Neill, a former equities analyst with WunderlichSecurities, said A123 "built a factory that's big enough to meetdemand that's probably not going to materialize until 2020 ...They built it much larger than the market turned out to need."



That kind of underperformance provides new fodder for Obama's opponents in the Republican Party with just three monthsuntil election day.

Obama has spent months battling critics of theadministration's green-tech initiative in the wake of thehigh-profile bankruptcy of solar-panel maker Solyndra.

"It's not going to be a smooth, easy ride ... Some companieswill fail," he said in his State of the Union speech in January.

But tempering expectations has done little to quiet thecritics in Washington, who ramped up their attacks on Thursdaywith the added accusation of putting technology in Chinesehands.

"Once again it appears the Department of Energy and theObama administration have failed to secure sensitivetaxpayer-funded intellectual property from being transferred toa foreign adversary, which raises serious national securityissues," said Rep. Cliff Stearns. Stearns is a FloridaRepublican and chairman of the House Energy and CommerceCommittee's Subcommittee on Oversight and Investigations.

A123 spokesman Dan Borgasano said on Thursday that, withWanxiang's bid to take control of the battery company, "ourintention is to continue to build in the United States and reachcertain job levels. We think we found a partner to help us dothat ... I don't think we'll necessarily be making hard and fastjob projections."

After it received the DOE grant, Ener 1 said in early 2010that it planned to create 1,400 jobs at its Indianapolis batteryplant. Today, the plant employs around 250. The plant wasdesigned to produce battery packs for up to 600,000 hybridvehicles.

The companies' struggles with over capacity are typical ofan industry whose fortunes are tied directly to those ofelectric and hybrid vehicle manufacturers.

"There was a bit of a rush to put in capacity that reallywasn't justified by the events as they turned out," said TomGage, president of EV Grid, an infrastructure company based inPalo Alto, California. "In retrospect (the industry) wasover-optimistic in terms of projecting the rate of growth fordemand for car batteries."

Charles Ebinger, head of the energy security initiative atthe Brookings Institution, said controversies surroundinggovernment-backed companies such as A123 will make lawmakershesitant to support expanded funding of clean energy, especiallywith federal budget battles looming.

"I think it's going to slow down," Ebinger said. "It's goingto be increasingly difficult to argue for subsidies for anysector."