Chinese Investment Could Give A123 Power Boost In Challenging Battery Market
It's been a tough year for A123 Systems, the Waltham-based lithium ion battery maker that has operations in Westborough and Hopkinton.
The company's revenue has fallen, exacerbated by product recalls in its program with California-based electric vehicle maker Fisker Automotive. And its stock price hit all-time lows recently, dipping below the $1 mark for long enough to prompt a delisting warning from the NASDAQ stock exchange.
Andrea James, an analyst with Minneapolis-based Dougherty & Co., summed up A123's core problem: “They run a business where the cost to make the product is higher than the cost they can sell the product for,” James said. “They need to get growth costs down; they need to sell volume.”
Help could be on the way, though not without controversy.
A123 has attracted the interest of a major Chinese conglomerate, Wanxiang Group, which has offered to invest up to $465 million for 80 percent of A123's common stock.
The deal is still pending and will require government approvals. The announcement sparked political outcry from some in Congress because A123 was awarded a $249-million federal grant in 2008, and some fear the taxpayers' investment could end up benefiting the Chinese instead of Americans.
But Daniel Borgasano, A123 spokesman, said the money can only be used to build capacity and domestic jobs.
“The track record of Wanxiang and their stated intention has been to grow our business here in the U.S. and grow the facilities we've got,” Borgasano said. “We think this deal gives us the capital and the balance sheet necessary to compete in the markets we're going after globally.”
Michael Lew, an analyst with New York-based Needham & Co., said the Wanxiang deal would provide near-term financial stability and help retain customers who might be nervous about A123's financial status. GM has selected A123 to provide batteries for its Chevy Spark electric vehicle next year.
“If I'm a major household name like GM — not that (A123 has) lost the program — but you've got to believe GM may be thinking that this company is not financially stable and I also have to look at other sources,” Lew said.
Another problem for A123, Lew believes, is it must compete with major players like LG Chem.
Having a place in the EV market keeps A123 moving along, but Lew believes the company's future lies in the electric grid storage, or “stationary,” market, which is in the earlier stages.
Borgasano said A123 hopes to grow the grid and other markets that make up a small portion of its revenue. That could be good news for the future of its 67,000-square-foot facility in Westborough, which serves the stationary market.
Borgasano said there's no indication that there will be any significant changes at the two facilities, which employ 170.
Financial Turbulence
For the first half of the year, A123's revenue fell 58 percent to $18.8 million from $45 million in the first half of 2011. Losses have widened to $207.9 million compared to $109.1 million last year.
When A123 went public in 2008, its executives talked of crossing the $1-billion revenue mark by now, Lew noted.
The Wanxiang deal would mark the third clean-tech company with Central Massachusetts operations to shift some control or operations to China.
First was photovoltaic wafer maker Evergreen Solar, which shuttered its Devens plant and filed for bankruptcy protection last year. The company is now operating in China under the control of its former backers.
The following month, Westborough-based lithium ion battery maker Boston-Power announced it would open a manufacturing facility in China, eliminating 30 MetroWest jobs and creating several hundred overseas.
Boston-Power recently announced a deal to produce hundreds of batteries for Beijing Electric Vehicle Co. Boston-Power said it was lured by Chinese government incentives and the same burgeoning electric vehicle market that A123 hopes to further tap into with its Wanxiang deal.
China’s Effect On Mass.?
Are Chinese companies going to eventually snap up all promising technology developed in Massachusetts?
David Levy, chair of the management and marketing department at University of Massachusetts-Boston and head of the Center for Sustainable Enterprise and Regional Competitiveness, said the Wanxiang deal raises these complicated questions for Massachusetts:
• How can state government possibly compete with the scale and resources of China?
• What part of the clean-tech value chain should be incentivized for maximum effect?
• Is foreign investment in Bay State companies a good or bad thing?
“As environmentalists, we should at least be relatively happy,” Levy said. “And as Massachusetts residents, it's keeping some companies alive.”
Levy believes the state's competitive strength lies in its research; low-volume, specialized manufacturing; and software and technology products that operate clean-tech systems.n
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