A123 says funding from China's Wanxiang will preserve U.S. jobs
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A123 CEO David Vieau: "This is a step toward financing the company so we can continue on that mission." |
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A123 Systems Inc.'s CEO said the company's financial rescue by China's largest auto-parts maker will preserve U.S. jobs, after the agreement drew criticism from a member of Congress.
A123, a maker of lithium ion batteries for electric cars, may get financing worth as much as $450 million from Wanxiang Group Corp.
The deal that may give Wanxiang an 80 percent stake in Waltham, Mass.-based A123, recipient of a $249 million federal grant for U.S. factory construction in 2009, is opposed by Representative Cliff Stearns, a Florida Republican.
The federal funds "can only be used for building factories in North America and the creation of jobs, and that's what's been done," David Vieau, A123's president and CEO, said in an interview Thursday. "This is a step toward financing the company so we can continue on that mission."
The possibility of A123 being bought by a Chinese company may fuel further political debate over government financing of alternative-energy and transportation businesses.
Federal grants and loans to companies including A123, Fisker Automotive Inc. and Tesla Motors Inc. have drawn scrutiny from congressional Republicans following the September 2011 bankruptcy filing of solar-panel maker Solyndra LLC two years after getting a $535 million loan guarantee from the U.S. Energy Department.
Stearns, author of a pending bill intended to prevent more situations like Solyndra's, said Wednesday that A123's financing arrangement with Wanxiang raises possible security concerns.
"It appears the Department of Energy and the Obama administration have failed to secure sensitive taxpayer funded intellectual property from being transferred to a foreign adversary," Stearns said in an e-mailed statement.
'Growing concern'
"There is definitely a growing concern about foreign-controlled or owned companies attempting to gain a foothold into our supply chain in the United States," Stearns said. "We need to make sure the federal government isn't an unwitting accomplice to the theft of our own national secrets by providing them with multimillion-dollar government grants and loans."
A123, which has posted at least 12 straight quarterly losses, needed a financial lifeline after struggling with costs from a recall of batteries for plug-in hybrid luxury carmaker Fisker.
A political debate over the Wanxiang agreement is inevitable, according to Michael Lew, an analyst at Needham & Co. in New York.
"If you already have lawmakers talking, you can pretty much assume how it's going to play out," said Lew, who recommends holding A123 shares.
Michigan factory
More important than the ownership is where the work gets done, said Lew.
A123 has a factory in Livonia, Mich. The company also has a contract to supply batteries for General Motors' Spark electric car; BMW AG's BMW 5 Series hybrid sedan; and rechargeable and hybrid cars from China's SAIC Motor Corp.
"What's important is, even if it's owned by the Chinese, that the jobs are here and the manufacturing is performed in the United States," Lew said. "That's ultimately the goal -- job creation or at least an industry fostering and helping the economic climate here in the states."
A123 rose 23 percent to 61 cents at the close Thursday in New York trading, after gaining 6.4 percent Wednesday following the deal with Hangzhou, China-based Wanxiang.
The stock has fallen 62 percent this year as the costs from the recall prompted A123 to pursue additional fundraising.
Political challenges
Stearns's opposition highlights the challenges Chinese companies face when expanding in the United States.
A123, which calls itself the U.S. leader in advanced batteries, used the Energy Department's funds to build the Michigan factory that made the flawed Fisker packs.
"I'd be less than honest if I said I didn't expect some of that," Vieau said of criticism of the Wanxiang agreement. "The optics on it allow you to look at it and say, 'A Chinese company is buying into an American company that has received support for developing factories in North America,'" he said. The accord is "a good thing for our company, for our investors and for our stakeholders who are involved in the company to get a stronger balance sheet."
The funds A123 received from the Energy Department can only be used for its U.S. operations, said Amy Brundage, a White House spokeswoman.
DOE grant
"Under the terms of the grant agreement, the company can only use funding to support U.S. manufacturing facilities," Brundage said Wednesday. "Any changes to the scope of the grant would have to be approved by DOE, and DOE would not approve any changes that allowed the grant money to be used for anything other than investment in the manufacturing facilities here in the U.S. or U.S. jobs."
A123 had "engagement" with the Energy Department before concluding the Wanxiang deal and continues that, Vieau said.
Wanxiang would give A123 as much as $75 million in debt financing under the terms of the nonbinding agreement, A123 said in a statement Wednesday.
Wanxiang may also buy $200 million of senior secured convertible notes and invest $175 million by exercising warrants, which could be converted for shares representing a stake of about 80 percent.
"It does imply that they could become the majority owner at the end of this deal," Vieau said. "The implication is that they would have access to how we make batteries. But we're a commercial maker of batteries, and frankly 98 percent of the battery industry today is owned, operated and controlled by companies that are operating out of Korea, Japan or Taiwan and China."
Wanxiang has been expanding in the United States.
It said in February that it would invest $25 million in Kansas City, Missouri-based Smith Electric Vehicles Corp., an A123 customer.
Access to China
A123 said in March it would need to adjust its fundraising plans because of the $55 million cost of recalling Fisker Karma battery packs that have misaligned hose clamps.
The Wanxiang funding would provide financial stability to A123 in the near term and improve A123's prospects for boosting business in China and other global markets, Vieau said.
"This is a global industry that we're involved in," he said. "If we're going to be a player at large scale, we need a stronger balance sheet and a partner to do it."
Bob Lutz, GM's former vice chairman who oversaw the Detroit-based company's development of plug-in Volt sedans, was also critical of A123's announcement.
"Superior battery chemistry, which was to be a U.S. competitive advantage, is now theirs," Lutz said in reference to the Wanxiang deal in a blog post on Forbes.com. "But why are we surprised? The Chinese have all the money in the world, and if they ever called the loans they have out to the U.S., the global economy would stop, and our nation would be in foreclosure."
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