A123 Bankrupt, Sells Battery Division—Big Consequences for Fisker, GM, BMW, Others

Most folks whose names don't end with the letters PhD find batteries about as exciting as two-part epoxy. The bankruptcy filing of Massachusetts-based battery manufacturer A123 today, however, is way too important to be boring. A123 manufactures the battery packs for a number of EVs and hybrids on the market in the U.S., plus a pile of Chinese EVs. Here's what happened, and the impacts for BMW, McLaren, GM, Fisker, and the rest of the industry. Fourteen Straight Quarters of Losses A123 has been dropping millions like they were tabs of acid. Money was inhaled through research and development projects and manufacturing overhead. By August 31 of this year, A123 had $376 million in debt—a relatively modest sum in the world of corporate finance, but demanding higher periodic interest payments than the small company could afford. Execs began looking for a buyer during the past few weeks, and a plan to sell the automotive division to a Chinese firm for $465 million was, to put it politely, poorly received by the U.S. government. Sell a very high-tech U.S. firm to the Chinese? This is the sort of deal that would get a governmental nastygram even if there weren't a presidential election just weeks away. Defaulting on a big interest payment this week, A123 said it would be filing for bankruptcy. In came a major (American) supplier called Johnson Controls, waving $125 million. Johnson didn't have any operations that overlap with A123′s, so on paper, adding a major developer and manufacturer of lithium-ion batteries gives Johnson a huge score. As of this morning, papers were filed, a regiment of lawyers retained, and Johnson agreed to lay out $72.5 million of what's called "debtor-in-possession" financing to begin the transaction. Bear in mind that $125 million is less than the $376 million A123 owes; we'll come back to that below. The deal includes two factories in Michigan, a factory in China, all of the products and intellectual property, A123′s chunk of a joint venture with a Chinese carmaker, and all of A123′s contracts. An A123 employee does high-tech stuff Don't Screw With McLaren! A123 supplies the lithium-ion batteries for the Fisker Karma, BMW ActiveHybrids 3 and 5, and upcoming Chevy Spark EV. The lithium-ion starter battery in the McLaren MP4-12C also comes from A123. In the short term, everyone—including the Chinese companies—still gets their battery packs. The debtor-in-possession money keeps the lights on and the employees coming to work in A123′s manufacturing facilities; this is critical, because without it, Johnson Controls strands a number of carmakers and loses necessary revenue. We don't really expect any changes in the medium term either, so long as BMW, GM, and Fisker get their batteries on time and to the appropriate quality standards. With Johnson's industry experience, those are only going to get better. The better question is what happens in the next few years—and whether this will turn out to be a good investment for Johnson. New hybrid cars and EVs are busting out of automakers' floodgates and being purchased at a trickle. Every car company is taking a long look at its current and planned hybrid and EV portfolio and asking, "Don't we need to cancel some of this stuff?" In the foreground, private investors in A123, including General Electric, are going to take a loss to the tune of tens of millions of dollars. Fortunately, GE can swing it, but it's a bitter pill for all. Meanwhile, the company really at risk in the foreground is Fisker. Already a financially shaky company, Fisker has had a close relationship with A123 for years. The battery manufacturer actually invested $23 million in Fisker in 2010, partially taking on Fisker shares for shares in A123. If either company went out completely, it would have doomed the other. Obviously Johnson will continue to supply batteries to Fisker, but whether it will continue to be such a strong partner, we can't say. 2012 Chevrolet Volt vs. 2012 Fisker Karma EcoSport – Comparison Tests 2013 Tesla Model S – First Drive Review Chasing Perfection: 1000 Miles in the McLaren MP4-12C – Feature Automotive Cooties Fisker's previous CEO, Tom LaSorda, described his company as a "political football" because it had received hundreds of millions of dollars in U.S. government loans and became the target of campaign rhetoric. A123, which also borrowed from the feds, will be wearing an even bigger target in the next three weeks. For Mitt Romney, A123 will be a symbol of unholy government participation in the private sector and a punching bag because of the unofficial Republican position that "green" policy is deeply uncool. For Democrats, who initiated the loans, A123 will be a case of—hey, look over there while I run out of the room! All of the negative press about A123, EVs, and green cars will unquestionably have a chilling effect on the market. Already-timid retail consumers might back off for fear that manufacturers could go broke or that the technology isn't ready for primetime. Investors, seeing public reaction and the general frailty of automotive startups and suppliers, could be even less keen to sink hundreds of millions of dollars into companies like A123 or Tesla or anyone else. Read full story » from Car and Driver Blog http://blog.caranddriver.com

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