Will DOE’s Fisker Doubts Take Down Its Battery Supplier Too?

A123 logoAfter luxury electric automaker Fisker announced 65 layoffs and a work stoppage from the refurbishment of a former General Motors plant in Delaware earlier this week, NLPC wondered whether its battery supplier and business partner A123 Systems would be harmed also.

Now Wall Street analysts are wondering the same thing, and the beleaguered lenders at the Department of Energy must be deeply concerned about what they will do next. As Forbes reported yesterday, the close ties between the two speculative companies could produce “two Solyndras for the price of one.”

To recap, Fisker is the California company that was awarded a $529 million loan from the Recovery Act, in addition to $9 million from the state of Delaware and $850 million it has raised privately. After it received $193 million from the loan through May 2011, DOE halted payouts because Fisker failed to attain milestones in the delivery of its $102,000 electric sports car, the Karma, which it had been assembling at Valmet Automotive in Finland.

A123 was given more than $249 million (plus $30 million for another project) by DOE to establish two manufacturing plants in the Michigan towns of Livonia and Romulus, where the state promised an additional $135 million in grants and tax credits. A123 has invested at least $20.5 million in cash and stock equity in Fisker, which also happens to be A123’s top customer. As the battery supplier reported to the Securities and Exchange Commission late last year: 

“If Fisker is not successful in raising additional capital necessary to fund its operations, executing on its strategic plan or does not meet the anticipated demand for our products, our revenues and profitability may be materially impacted.”

In December A123 laid off 125 of its employees, attributing much of it to Fisker’s curtailed production in 2011. A123 had expected to deliver batteries for 7,000 Karmas, but faulty wire harnesses in the vehicles reduced Fisker’s production to 1,500 last year, according to Crain’s Detroit Business. Livonia Mayor Jack Kirksey said of A123, “They’ve got this pile of batteries sitting there waiting to be put in cars when they manufacture them.”

Now Wall Street has taken notice. Respected analyst Theodore O’Neill of Wunderlich Securities wrote in a research article yesterday that A123, because of Fisker’s standstill, is facing “a doomsday” scenario. As Forbes reported, O’Neill “reduced his rating on A123 to Sell from Hold, with a new target of 50 cents, down from $3.” A123’s stock price tumbled from $2.32 per share to $1.88 yesterday, the biggest drop in more than two years. Once upon a time it traded at over $20 and was near $10 a year ago, but the company has never made money, suffering net losses of $85.8 million in 2009, $152.6 million in 2010, and $172.8 million through three quarters last year.

O’Neill suspects Fisker may have more than 2,000 finished batteries in inventory, which exceeds the 1,500 total Karmas it produced in 2011. Before the holdup with DOE Fisker had projected the delivery of 15,000 Karmas in 2012, with the less-expensive “Project Nina” ($50,000 per electric vehicle) planned to ramp up at the Delaware plant early in 2013. With the delay waiting for a resolution with DOE on the public funding, even matching last year’s level of production may be a fantasy. And how many batteries will they really need for those cars?

“Fisker has had its Department of Energy funding suspended and because it has become part of an intense political debate, it may never be restored,” O’Neill wrote. “By our estimates, if the Republicans want to create another Solyndra-style bankruptcy or two, all they have to do is permanently delay any further funding of Fisker. In that case, we feel that without a significant bailout from the public equity markets, it would cripple Fisker and create a doomsday for AONE.”

Bloomberg reported Wednesday that Utah Republican Sen. Orrin Hatch introduced a transportation bill amendment that would eliminate the $1.5 billion in the loan program that has yet to be committed. DOE spokesman Damien LaVera, however, did not blame the GOP but explained how the agency was holding Fisker accountable.

“Our loan guarantees have strict conditions in place to protect taxpayers,” LaVera told Bloomberg in an email. “The department only allows the loan to be disbursed as the company meets certain milestones and demonstrates results.”

Intensifying the pressure, watchdog group Judicial Watch on Wednesday filed a Freedom of Information Act lawsuit against DOE because it failed to provide requested documents that pertain to the Fisker loan. Besides the question of the wisdom of the loan, Fisker also has the taint of potential crony venture socialism hanging over it, as investment firm Kleiner Perkins – with wealthy donors to President Obama and many other Democrats as senior partners – heavily vested in Fisker. Former Vice President Al Gore is a Kleiner Perkins partner. 

As for A123, CEO David Vieau is a donor to President Obama and other Democrats, and also helped support the president’s energy and climate legislation by appearing in a promotional video. Perhaps Judicial Watch or House Oversight and Government Reform Committee Chairman Darrell Issa – who has conducted an intense investigation of DOE’s loan guarantee to Solyndra – should inquire about that loan as well.

In November financial analyst Travis Hoium of The Motley Fool, a former research and development engineer, said of A123’s 125 layoffs “The company says the layoffs are temporary, but the way things are going right now, who knows if they’ll ever come back.”

Yesterday, while more sanguine than O’Neill about the battery maker’s prospects, Hoium wrote, “The common theme from A123 Systems over the last two years has been disappointment, a trend that may continue.

“Battery companies have built too much capacity too quickly, betting on electric vehicle adoption,” Hoium added. “That has led to competitor Ener1 filing for bankruptcy and A123’s struggles with unutilized capacity.”

Contrary to many of the forecasts from the media and the Obama administration, there are no signs there will be widespread electric vehicle adoption in the near future. As my NLPC colleague Mark Modica has explained repeatedly, there is no great demand for the Chevy Volt, and failure to hit sales targets for the Nissan Leaf has nothing to do with insufficient production either. The “Field of Dreams” concept promoted by government stimulus-supporters has failed.

Rather, it’s just another example of crony corporatism – redistributing taxpayer resources at its worst – in freefall. Those involved in perpetrating this scam need to be investigated and held accountable.

Paul Chesser is an associate fellow for the National Legal and Policy Center.