As its vehicle batteries stumble, A123 diversifies
 | A123's Jason Forcier says the company's power grid and commercial transportation businesses are "more than offsetting" its EV battery problems. Photo credit: KENNY CORBIN |
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Last month, A123 Systems Inc., which makes batteries for the Fisker Karma plug-in hybrid, told the U.S. Securities and Exchange Commission that it had doubts about its ability to continue as a going concern.
But in an interview this month, A123 officials said the company plans to return the work force to peak levels at its suburban Detroit plants and is embarking on a recovery plan calling for more nonautomotive customers and new products.
The lithium ion battery maker plans to hire 400 employees over the next four months at its plants in Livonia and Romulus, Mich., on the heels of landing strong power grid and commercial transportation contracts. At its peak last year, A123 employed 1,020 in southeast Michigan, before dropping to its current 781.
But whether the plan to attract a new line of customers will get the company where it needs to be to become profitable -- or even survive -- is a big question. Analysts are skeptical about the long-term viability of the Waltham, Mass., company as losses continue to grow and competitors execute product launches with fewer glitches.
There's also speculation of a potential sale if the company can't raise enough cash to continue.
A123 executives said that its business model works and that new contracts will boost company viability.
Bad Karma
Days before it announced the hirings, A123 filed a form with the SEC stressing its financial difficulties.
Its troubles stem from failure of its lithium ion batteries. A Karma fitted with an A123 battery failed in March during a test by Consumer Reports. Replacing the defective batteries is expected to cost A123 $66.8 million, including a $15 million inventory charge. The announcement devastated A123's stock price, which hit its lowest mark of 82 cents per share on April 4.
The problem was linked to an incorrect calibration of one automated welding machine in Livonia. The flaw could cause an electrical short, leading to failure of the battery, the company said.
Despite manufacturing problems at its Livonia plant and slow electric vehicle sales, Jason Forcier, vice president of A123's automotive solutions group, said the company's power grid and commercial transportation businesses are "more than offsetting" problems with EV batteries.
A123 gets nearly 40 percent of its revenue from grid energy storage projects and markets such as medical and communications, said A123 spokesman Dan Borgasano. Commercial transportation and passenger vehicles make up the remaining 60 percent.
The company expects the business to move to 50 percent transportation and 50 percent power grid and other markets, Borgasano said.
A123 supplies lithium ion batteries from its Livonia plant to Southern California Edison, Maui Electric Co., Spain's Red Eléctrica Corporación SA and others. Its commercial transportation customers include FedEx Corp. and India-based Tata Motors Ltd.
Maui Electric installed an A123 battery at a substation in the resort community of Wailea. The $2 million battery and controls will supply 1 megawatt-hour of energy storage to reduce peak load by as much as 15 percent, according to a report by Greentech Media Inc.
A123 has 10 commercial transportation projects set for production this year, Michael Lew, senior analyst at New York investment firm Needham & Co., wrote in an analyst note last month.
"However, we believe all these programs are at risk given A123's recent shortcomings, and we would be surprised if customers have not already begun to seek alternate battery suppliers," Lew wrote.
Lew is also skeptical of A123's planned timetable to hit profitability by 2013.
"If I'm an auto manufacturer and see the sorts of issues A123 is having, I may look to another company, one with more experience," Lew said. The quality control "issues were surprising, and there are companies like Johnson Controls and LG Chem that have significant automotive experience coming to market."
Forcier said the company has resolved its quality-control problems and that its automotive unit continues to grow.
In the midst of its manufacturing shortcomings, A123 announced new automotive contracts with Chinese automaker Zhejiang Geely Holding Group, the parent company of Volvo Car Corp. It also announced contracts to supply 12-volt engine start batteries for use in stop-start systems for three European automakers, including McLaren Automotive and an unnamed German automaker that will use the battery in a 2013 model.
A123 also makes batteries for the hybrid versions of the BMW 3 series and 5 series and for the 2013 Chevrolet Spark electric, which A123 will begin supplying in the last quarter of the year.
"In automotive, I think we're still doing very, very well," Forcier said.
A123 also last week debuted a nanophosphate lithium ion technology expected to operate under extreme temperatures, which has been a shortfall of lithium ion batteries for vehicles.
Turnaround or sell
But as it seeks to recover, A123's losses mount in a slow EV market.
A123 finished last quarter, which ended March 31, with a $125 million net loss. Its losses have grown each quarter since going public.
Nissan Motor Co. sold only 12,306 Leaf electric cars in the United States from December 2010 through May.
Slow sales led General Motors to suspend Chevrolet Volt production for four weeks during April and May, and the automaker plans a three-week shutdown this summer at the Detroit-Hamtramck, Mich., plant that assembles the Volt.
Brett Smith, co-director of the manufacturing, engineering and technology group at the Center for Automotive Research in Ann Arbor, Mich., said the transition from "hype to reality" is a challenge for lithium ion battery makers.
"The realistic expectation for volume production remains unknown," he said. "Getting to a point where lithium ion batteries are viable is going to be longer than we've been led to believe, and that's going to be a real problem with a lot of these companies."
The losses have A123 seeking more cash to continue to operate. The recall campaign linked to the defective batteries from its Livonia plant pushed back A123's projections of turning a profit to the second half of 2013, from later this year.
To stop the bleeding, the company last month raised $50 million in senior unsecured convertible notes and warrants from institutional buyers. But the battery maker needs more cash to keep it afloat until it's able to become profitable, or a sale may be imminent, Lew said.
A123 hired advisers last month to evaluate the company's financing options, which could mean it is evaluating potential buyers. The company would not disclose the name of the advisory firm.
Financial options
Lew said A123's Livonia and Romulus operations hold potential value to international battery makers looking for North American manufacturing. The plants could be a good buy for South Korean battery makers, such as SK Holdings, or another international battery supplier, he said.
Forcier said the company will take any offers seriously because it has a fiduciary responsibility to its shareholders, but he would not speculate on any possible deals.
It's unclear whether the U.S. government would weigh in on a deal. A123 received a $249 million grant from the U.S. Department of Energy in 2009. In April, the Department of Energy extended its deadline until December 2014 to use the funds, which were set to expire at year end.
Forcier said A123 and its executives remain bullish on the company's future.
"We seem to have created some interesting press, but the company remains in good shape," he said. "I do believe we'll solve the funding issue, and A123 is in a good position for the future. We've taken a lot of heat over the years, but we're fighters and we'll keep moving forward."
