Cash surge, lighter batteries power A123 comeback
Photo credit: DUSTIN WALSH
A123 Systems LLC is in the midst of a recharge.
Over the past five years, the automotive lithium ion battery maker rode a wave of politician hype, projected demand that never materialized and product failures that landed the company in Chapter 11 bankruptcy court.
Despite political opposition, A123 emerged from bankruptcy last year under the ownership of Chinese supplier conglomerate Wanxiang Group Corp., made sweeping business plan changes and is expected to be cash flow positive for the first time in its history this year.
A123 batteries manufactured in two Detroit suburbs are already powering vehicle models such as the BMW 3 series, Chevrolet Spark and McLaren MP4-12C -- and many are being shipped to China as its market evolves. These kinds of contracts are expected to amp up in the next several years.
To improve its position, A123 was forced to rethink everything from its management team to its product lineup.
Most significantly, A123 eased its focus on a singular lithium ion technology to power passenger cars and is emerging as a player in low-voltage lithium ion batteries for weight savings and other mpg-saving technologies.
The new strategy is expected to help the company generate just above a net zero cash flow on revenue of $200 million in 2014, compared to a loss of $100 million in 2013 and $300 million in 2013.
From darkness to light
Under Wanxiang, A123 made sweeping management changes, including the firing of CEO David Vieau and other top executives in January 2013.
A123 spent the past 19 months receiving cash infusions from its new parent, streamlining operations and focusing on the growing market of low-voltage batteries for the micro-hybrid market -- cars that use new technology to generate power such as regenerative braking.
"The story of A123 has been a negative one," CEO Jason Forcier said. "But we've turned a corner, and we're more competitive than we've ever been in a growing market."
Forcier, 42, who took over the CEO job after leading the automotive unit of A123, also serves on the company's board of directors with Pin Ni, CEO of Wanxiang's U.S. subsidiary Wanxiang America Corp. in Elgin, Ill., and Tom Corcoran, an independent turnaround consultant.
A123 is chasing the new market of low-voltage lithium-ion batteries to match demand in the micro-hybrid market space, Forcier said. A123's low-voltage batteries are half the 40-pound weight of a traditional battery, which fits most automakers’ lightweighting strategy. Automakers are asking suppliers to create lighter parts to assist in meeting the fleet fuel economy standard of 54.5 mpg by 2025.
Forcier said A123 is expecting to supply 100,000 low-voltage batteries within the next couple of years. It has current contracts with McLaren Automotive, Ferrari SpA and Daimler AG.
The contracts mark a new battery life for A123, which once was the most talked-about maker of pure electric vehicle batteries in the world before market timing and technical trouble interrupted its progress.
"What we've seen happen is a dramatic shift from a one-size-fits-all approach," Forcier said. "We're no longer focused on chemistries, but on markets, which I think is that's a big change in our thinking."
Low-voltage batteries, often in 12-volt or 48-volt iterations, power portions of vehicle operation, such as starting or regenerative braking, instead of the entire vehicle, i.e., Tesla Model S.
A123 competitors, Johnson Controls Inc. of Milwaukee and LG Chem of South Korea, have also launched low-voltage options.
JCI, which builds lithium ion batteries in Holland, unveiled its micro-hybrid battery system at the North American International Auto Show in January 2013.
"Micro-hybrid systems will be able to support the automotive industry's needs at a much lower cost than hybrid or electric vehicles," the supplier said at the time.
JCI declined to comment for this report.
Last week, LG Chem secured a contract to supply low-voltage batteries to Audi AG's micro-hybrid lineup. The contract is worth "hundreds of millions of dollars," Reuters reported.
LG Chem also operates a lithium ion plant in Holland, which supports the Chevrolet Volt. That plant faced job furloughs in 2012 due to slow demand.
Prabhakar Patil, CEO of LG Chem Power Inc. in Troy, said that supplier is also working to develop 48-volt batteries for the North American micro-hybrid market.
'A better place to compete'
A123's high-voltage lithium ion business continues to supply General Motors Co.'s Chevrolet Spark EV, BMW AG's hybrid 3-, 5- and 7-series vehicles, and to China automaker SAIC Motor Corp. Ltd. It also supplies lithium ion batteries to truck and bus makers Daimler AG and BAE Systems plc.
Michael Lew, head of communications for the National Alliance for Advanced Technology Batteries in Chicago and president of consulting firm Clearer Horizons in New York, said the new A123 is in a better place to compete.
"A123 has fallen from being the industry mouthpiece and are trying to prove themselves against the competition," Lew said. "They are taking what the market is giving them, and the market, for the time being, is responding."
Global revenue from lithium ion batteries from electric vehicles is projected to grow from $5.7 billion in 2014 to $24.1 billion in 2023, with battery-electric vehicles accounting for $15.1 billion, according to a recent report from research firm Navigant Consulting Inc. in Boulder, Colo.
However, the experts have been wrong about projections on electric vehicles in the past -- a contributor to the market implosion in 2012.
No rising phoenix, but a survivor
Founded in 2001 out of materials developed at the Massachusetts Institute of Technology in Cambridge, Mass., A123 spun out of the university in 2005 announcing a new fast-charging lithium-ion battery based on revolutionary chemistries of nano-phosphate materials.
In 2006, the U.S. Advanced Battery Consortium awarded A123, then based in Waltham, Mass., with a $15 million developmental contract for hybrid-electric vehicles. Within two more years, A123 secured funding from General Electric Co. and contracts with BAE Systems, GM and Chrysler Group.
Meanwhile, automotive electrification was consuming the media and political spectrum.
Under U.S. Energy Secretary Steven Chu, the U.S. Department of Energy announced the Advanced Technology Vehicles Manufacturing Loan Program, which was designed to provide $25 billion in direct loans to fund advanced fuel savings technologies, at Ford Motor Co. in December 2008.
Ford, Nissan North America Inc., Tesla Motors Inc., Fisker Automotive Inc., JCI, A123 and others received the loans or grants.
The DOE awarded A123 with a $249 million grant via the American Reinvestment and Recovery Act in 2009. It also received $125 million from Michigan's 21st Century Jobs Fund.
A123 spent $300 million to retrofit a plant in suburban Detroit -- the former home to Technicolor Inc., which vacated the building more than a decade ago.
The plant, the largest lithium ion plant in North America, produced a prismatic cell, a thin lithium ion battery around the size of a license plate, for use in battery packs in plug-in hybrid and electric vehicles. An electric vehicle battery pack requires around 400 cells.
Executives, local and federal executives celebrated the plant's grand opening in 2010 to great fanfare.
Then-Michigan Gov. Jennifer Granholm touted that advanced battery production in the U.S., and predominantly in Michigan, would make up 40 percent of the industry by 2012, thanks in part to investments by the state and the federal government.
President Barack Obama made a surprise call during the event, telling attendees that: "This is about the immersion of a new industry in America."
It was the beginning of a new industry, just one that would have a rocky beginning.
Fewer than 250,000 electric passenger cars have been sold in the U.S. since 2010, according to data collected by electric vehicle news site insideevs.com, despite the president's stated goal of 1 million EVs in the U.S. by 2015.
Patil said the expectations for electric-vehicle adoption were always overstated.
"There was simply too much hype around the rate the volumes would ramp up," he said. "Vehicle electrification is going to take 20 years, just like it did for antilock brakes and other innovations."
Lew said A123 underpriced its competition when it launched, which came back to haunt the battery maker when demand didn't spike.
"The demand never happened and if you're under-pricing, you have to go to the capital markets to finance it," Lew said. "The capital markets weren't lending and a lot of companies went belly up," Lew said.
Turning to Asia
Fueling A123's ongoing destruction was a failure of its lithium-ion batteries: A Fisker Karma plug-in hybrid fitted with an A123 battery failed during an April 2012 test by Consumer Reports. Replacing the defective batteries cost A123 $66.8 million. The announcement devastated A123's stock price, which fell more than 85 percent during the year.
In August of 2012, a prior deal with Wanxiang fell through because A123 ran out of cash before the federal government approved the deal. That agreement would have provided A123 $465 million in financing for an 80 percent stake.
The company filed Chapter 11 bankruptcy on Oct. 16, 2012, with A123 owing millions of dollars to hundreds of debtors, including the suburban Detroit cities of Livonia, Novi and Romulus. At the time, A123 held $376 million in debts with about $459.8 million in assets.
JCI was the stalking horse bidder to acquire A123 assets in the bankruptcy, but it lost out to Wanxiang in an auction. Wanxiang won with a $256.6 million bid for the automotive and grid assets of the supplier.
The deal was met with a critical eye from U.S. Rep. Bill Huizenga of Michigan and other Republican legislators who feared a Chinese owner of U.S.-invested assets. But the deal was ultimately approved, and Wanxiang got to work.
Years later, Forcier said company missteps and government funding, no matter how egregious in appearance, led the company to Michigan and is aiding in its rebirth.
"Without the government funding, we would have never came to Livonia and Romulus," Forcier said. "The lessons learned were tough, but I think they were necessary."
A123 is now hiring again with 30 openings for engineers and other skilled positions, Forcier said. A123 employs 600 in Michigan and 2,500 globally, down from more than 3,000 in 2010.
It also added a fourth shift to its Livonia plant -- which is now producing batteries seven days a week.
A123 is also a year ahead of schedule on its financing deal with parent company Wanxiang by paying back on its capital infusion, Forcier said.
"We're seeing a strong pipeline of new business, which we weren't seeing a year ago," Forcier said. "We're not where we want to be yet, but we're the largest lithium-ion battery maker in Michigan, and we're coming back."
You can reach Dustin Walsh at email@example.com.