This Bankrupt Company Lost Taxpayers Millions. That Doesn’t Make It a Loser.

Commentary about business and finance.
May 2 2014 8:30 AM

Not Another Solyndra

The rise and fall and rise again of A123 Systems.

A123 Systems battery cell products
Battery maker A123 was seen as a total failure just two years ago.

Photo courtesy A123 Systems/Wikimedia Commons

Does anyone remember A123 Systems? The Michigan-based electric-car battery maker has gone down in public memory as Solyndra 2.0. Less than three years after receiving hundreds of millions from the government and holding a splashy initial public offering, it plunged into bankruptcy in the fall of 2012.

But a funny thing happened to A123 on the road to ignominy. While the solar startup Solyndra liquidated and vanished beneath the waves, costing taxpayers around half a billion dollars, A123 Systems emerged from bankruptcy in January 2013 under new, Chinese ownership. It has continued to innovate and find new customers for products that barely existed in 2009, the year of its IPO. A123 Systems was conjured into being—and ultimately broke itself—by responding to direct government financing aimed at boosting energy efficiency. It has now found a second, post-bankruptcy life thanks in large part to newly enacted government standards mandating greater energy efficiency.

Founded in 2001, A123 Systems spent several years quietly working on technology that would allow energy to be stored in (and released from) lithium ion battery cells. The most obvious application was for cars: electric vehicles and hybrids. The crisis in the Michigan-based auto sector and the stimulus in 2008–09 granted A123 the ammunition to blow up in size—and ultimately to blow apart. In August 2009, A123 became eligible for a $249 million grant from the Energy Department’s Electric Drive Vehicle Battery and Component Manufacturing Initiative; just around the corner was its well-received IPO. Its shares popped 50 percent on the first day of trading.

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Using the IPO proceeds and drawing down about half the government grant, A123 quickly built two plants in Michigan, in Romulus and Livonia. President Obama dialed in to the September 2010 grand opening of the Livonia plant, which was presided over by then Gov. Jennifer Granholm. Hundreds of unionized workers joined the payroll.

But things went south. Electric cars didn’t catch on. Toyota and Nissan preferred to use other suppliers for the batteries that would power the Prius and Leaf, respectively. “In the automotive space they had a lot of trouble getting a client,” says Sam Jaffe, an analyst at Navigant Research who has been covering the company for several years. A123 landed small contracts for niche products and signed up Fisker, the start-up electric car company that also received stimulus funds (and would itself ultimately go bust in 2013). Some batteries had to be recalled. The stock slumped, and revenue fell to just $10.2 million in the first quarter of 2012.

A123’s headlong rush toward bankruptcy in the summer of 2012 was a disaster on many fronts. The filing came right in the middle of an election campaign, in which Solyndra was a three-syllable Republican epithet for Obama-era corruption and failure, like Benghazi or IRS. Even-handed observers such as the Christian Science Monitor called A123 “another failed piece of the Obama administration’s renewable energy plan.” The government had picked another loser.

When Wanxiang, a privately-held Chinese industrial conglomerate, successfully bid on A123’s remains in a bankruptcy court auction, the optics were terrible: A Chinese company was picking up taxpayer-funded infrastructure for pennies on the dollar. (To allay national security concerns, A123’s Pentagon contracts and government business were sold to Navitas Systems. Rather than move the company’s assets to China, Wanxiang installed a new American CEO at A123, Jason Forcier.)

But in America, narratives about failure should never end with a bankruptcy filing. For years, A123 had been working on another use for its lithium ion cells: as vital accessories for electrical grids and power plants. In the electricity system, both production and demand for electricity fluctuate a great deal over the course of a day, especially when wind turbines and solar panels are part of the generating mix. The stable operation of electricity grids also requires extensive capacity for frequency modulation. Huge arrays of stationary batteries that can quickly store and release large amounts of electricity can thus be enormously useful.

A123 may have been behind the curve in auto batteries, Jaffe says, “but on the stationary side, they were on the vanguard.” At facilities in Westborough, Mass., and Chesterfield, Mo., A123 started stuffing loads of lithium ion batteries inside shipping containers and pitching them to utilities. It made its first sale of a grid-storage product in 2008 to AES, a power generator in California. This business gained critical mass in August 2010, when A123 got a big order from AES for 44 megawatts of storage systems—more than twice the cumulative total that it had sold in its existence. The next year, 2011, brought a demonstration project in China and a large, 11-megawatt battery system to be installed at a wind project in Hawaii.

As is so often the case in the energy world, newly implemented government standards can either mandate the use of a new technology, or create a regulatory framework that strongly encourages their use. And that’s precisely what has happened with grid-storage, even as A123 careened toward Chapter 11. A 2011 order issued by the Federal Energy Regulatory Commission requires all U.S. grid operators to implement strategies for installing batteries to help regulate frequency. And a law passed by California last year, AB 2514, requires the state’s three large regulated utilities to install 1.3 gigawatts of battery storage on the grid by 2020. Navigant foresees the market growing at a 50 percent annual clip between now and 2023.

With its track record and position as an industry pioneer, A123 Systems’ grid-storage unit was poised to cash in. Recognizing the potential, Wanxiang in May 2013 created the similarly named A123 Energy Solutions as a separate unit with its own headquarters in Massachusetts. In June 2013, A123 Energy Solutions commissioned a system on Hawaii that can produce 1 megawatt for up to an hour. And so far this year, A123 Energy Solutions, which employs about 130 people in the U.S., has turned on systems in China and Spain, and signed a large deal in Japan. It employs between 130 and 140 people in the U.S., about what it did before the bankruptcy. In March, NEC, the Japanese conglomerate, agreed to buy the unit for $100 million.

Meanwhile, A123 Systems is plugging along. Production at the Livonia plant is rising, and the company now employs about 500 people in the U.S. “Output for this year will be considerably greater than last year,” according to Jeff Kessen, vice president of corporate strategy at A123 Systems. Why? A123 makes hybrid batteries for companies like BMW, the battery system for General Motors’ tiny Spark EV, and exports battery cells from Livonia to China, where Shanghai Automotive is a big customer. And it will continue to ship lithium ion cells to NEC.

Just as it found a profitable new use for its core technology in the utility business, A123 is finding alternative uses for its auto-related technology. Electric cars may not be taking off, but the electrification of cars certainly is. In order to meet the stringent new mileage standards, car makers are deploying batteries in new ways—in hybrid-lite systems, and to enable fuel-saving technology that turns engines off when they idle. “Increasingly now, we’re gaining traction with 12-volt batteries and so-called micro-hybrid systems” Kessen says. And the company is also looking to place lithium ion batteries in smaller machines, such as e-bikes and medical carts.

The American taxpayers and shareholders will never get all their money back from their ill-fated investment into A123. But that doesn’t make it a loser.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

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