The Institute for Energy Research is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets.

About IER
Latest Analysis
November 20, 2012

DOE Spends Taxpayers’ Money While A123 Goes Bankrupt

November 20, 2012
Print Friendly
Facebook

The [A123] plant’s opening “is about the birth of an entire new industry in America — an industry that’s going to be central to the next generation of cars,” President Obama said during a call to A123 Systems in September 2010. “And it’s going to allow us to start exporting those cars, making them comfortable, convenient and affordable. It helps our manufacturing industry to thrive, and with it, that means our communities and our states and our country are going to thrive.” 

President Obama also thanked Energy Secretary Steven Chu “for his extraordinary work to get the money out the door quickly and wisely.” Politico Pro, October 16, 2012[i]

A123 Systems Inc., a bankrupt electric car battery manufacturer, received an almost $1 million installment of its $249 million grant from the Department of Energy (DOE) on the same day the company filed for bankruptcy protection. In filing for bankruptcy protection on October 16, 2012, A123 cited defective battery packs with a $55 million replacement cost. These battery packs resulted in electric car maker Fisker Automotive Inc., another DOE grant recipient, to recall its Karma sedans (each  Karma costs $103,000). Further, while A123 is going through bankruptcy, it intends to hand out bonuses worth as much as $4.2 million to 10 employees for staying on the payroll as the company’s assets are sold. According to the filing approved by the Securities and Exchange Commission, the payouts of at least $2.4 million range from 70 percent to 100 percent of each employee’s base salary.[ii] This is on top of previous bonuses. Before A123’s stock plummeted from its high of over $25 per share, its company officials received over $11 million in stock sales.

A123 Systems Inc.

DOE’s $249 million grant to A123 System Inc. required A123 systems to build facilities that could make at least 500 megawatt-hours of lithium-ion battery capacity a year by November 2012. That amount of capacity would supply the equivalent of 21,000 Nissan Leaf electric-cars, much more than the current demand for those vehicles. A123 also supplied plug-in car batteries to General Motors Co., Bayerische Motoren Werke (BMW) AG, truck maker Navistar International Corp., SAIC Motor Corp., China’s largest domestic car maker, and Fisker Automotive Inc. The company ran into trouble after producing defective battery packs that caused Fisker to recall its expensive Karma sedans. In August, A123 reported a loss of $82.9 million in the second quarter, up from a loss of $55 million a year earlier.

To deal with its financial losses, in August 2012, A123 struck a deal with Chinese auto parts manufacturer, Wanxiang, to provide $25 million immediately and to invest a total of $465 million over time, ultimately gaining an 80 percent ownership interest in A123.[iii] Opponents of the deal were concerned that the Chinese company would get access to technology and products made possible by government grants funded by American taxpayers. A123 also received several military contracts, including two worth a total of more than $4 million, to develop batteries for the Air Force and it had confirmed that it had received one federal government contract with a “secret” security classification.[iv] The deal with Wanxiang was not completed and A123 could not repay Wanxiang for funds it had borrowed.

In October, A123 filed for bankruptcy protection due to a $2.8 million debt payment coming due that it was unable to pay. At the time of filing, A123 announced that it had agreed to sell its automotive assets and factories to Johnson Controls for $125 million; Johnson Controls also plans on providing $72.5 million in financing for A123’s reorganization in bankruptcy.[v] Johnson Controls is another American car battery producer that has benefited from federal assistance to the tune of $299 million, receiving about $123 million to date.[vi]

The latest installment of $946,830 from the federal government’s grant was received on the same day A123 filed for bankruptcy. A123[DK1]  plans to sell its assets at a Dec. 6 auction, where bidders will include both Johnson Controls and Wanxiang.

Not only did A123 get the $249.1 million grant from the federal government, receiving about half of that grant money, but the economically-suffering state of Michigan gave A123 Systems $100 million in cash subsidies in 2010 and another $41 million in tax breaks and other subsidies. [vii]

Conclusion

It seems that DOE is no better picking battery makers than it is in picking solar panel manufacturers. In both cases, the industries are having trouble because the demand that the federal government was expecting did not materialize. Most likely the reason is that the products are either so expensive that the American public cannot afford to buy them or they have no interest in buying them due to what is being offered. But to make matters worse, government employees are doling out taxpayer funds when it is clear that the company is in trouble.

When private companies not on the government dole stake out new territories, they do research to ensure that markets exist for their commodity in the new areas. Companies must ensure profits for their stockholders, but the only requirement of government employees is to ensure that their commander in chief is satisfied. From President Obama’s comments, it looks like he is, or at least that he was.  This is a but part of a continuing saga of failures of green venture capitalism on behalf of the government, wherein some get wealthy while the taxpayers and free markets take a beating.


[i]Politico Pro, A123’s bankruptcy filing hits before the debate, October 16, 2012, http://www.politico.com/news/stories/1012/82459.html

[ii] Crain’s Detroit Business, A123 got almost $1 Million From U.S. on day of bankruptcy, November 18, 2012, http://www.crainsdetroit.com/article/20121118/FREE/121119869/a123-got-almost-1-million-from-u-s-on-day-of-bankruptcy#

[iii] New York Times, U.S. Battery maker in Financing Deal with a Chinese Firm, August 16, 2012, http://www.nytimes.com/2012/08/17/business/us-battery-maker-sets-financing-deal-with-chinese-firm.html

[iv] Yahoo News, Battery maker A123 got U.S. funds as it sought bankruptcy, November 16, 2012, http://news.yahoo.com/exclusive-u-gave-a123-nearly-1-million-filed-160159016–finance.html

[vi] Politico Pro, A123’s bankruptcy filing hits before the debate, October 16, 2012, http://www.politico.com/news/stories/1012/82459.html


View Comments

Leave a Reply

  • (will not be published)

Back to top