Chinese Company Wins Auction for Taxpayer-Backed A123 Systems

A123 logoThe auction for the assets and business of green stimulus recipient A123 Systems has been won by Chinese auto parts manufacturer Wanxiang Group, which aggressively sought the electric vehicle battery maker at least since the summer.

The successful bid – reported to be about $260 million – follows weeks of warnings by the U.S. government, congressmen and a group of former military and other leaders that transfer of the Massachusetts-based company would compromise American jobs, technology and security. The auction attempts to address some of those concerns, as Wanxiang was not awarded any of A123’s contracts with the U.S. Department of Defense. Instead the company’s “government business,” including all its military contracts, was awarded to Illinois-based Navitas Systems.

“We think we have structured this transaction to address potential national security concerns expressed during the review of our previous investment agreement with Wanxiang announced in August as well as to address concerns raised by the Department of Energy,” said David Vieau, A123’s CEO. “We believe this transaction balances those risks with A123’s obligation to act in the best interest of our creditors.”

But the interests of A123’s shareholders were not looked after. Many were made to believe that the electric vehicle battery industry held great promise, legitimized by the huge “investments” of other peoples’ (taxpayers’) money by the government. In the case of A123 that amounted to $249 million to refurbish two plants in Michigan for battery production, another $30 million as a subcontractor for another stimulus-funded wind energy storage project, and various other grants and contracts by state and federal governments.

“We are on the verge of a new Industrial Revolution and I believe it will revolve around the greatest untapped opportunity of our time, clean energy,” said Energy Secretary Stephen Chu in September 2010, shortly after the opening of A123’s Livonia, Mich. plant. “It is time for America to get into the clean energy race and play to win — and that is exactly what A123 Systems is doing in Michigan.”

The government not only distorts the free market via corporate socialism (“picking winners and losers” is the popular colloquialism) simply through the redistribution of coercively obtained revenues, but it also sends signals to private investors that its endorsement of an industry and its specific businesses are worthwhile bets. But in the world of economically naive Chu, such activity leads to Utopia.

“A123 Systems is a perfect example of what’s possible when the private sector, government, and academia work together,” he said in 2010.

Solyndra, Abound Solar, and Beacon Power are other examples. And in the electric vehicle and associated battery “industries” (don’t they have to be industrious to be an “industry?”), bankrupt Ener1 is another. Other unsuccessful stimulus stories that highlight “what’s possible” when government interferes with the free market include troubled Fisker Automotive and Smith Electric Vehicles. Meanwhile Nissan quietly canceled the grand opening of its manufacturing plant for the all-electric Leaf, General Motors shut down production lines for the Chevy Volt for weeks, and Ford has tried not to sell its Focus Electric.

Perhaps the most laughable example of failed government make-work is LG Chem. In late October WOOD-TV in Grand Rapids, Mich., reported the LG Chem factory in Holland, Mich. – with $151 million from a Department of Energy Recovery Act grant and $100 million from Wolverine State taxpayers – had “yet to ship out a single battery.” Instead workers spent their time playing games, reading magazines, watching movies or helping charities like Habitat for Humanity – that is, when they weren’t ‘off-duty’ on their cyclical furloughs.

So the Obama administration’s boasts about jobs and economic improvement from “stimulation” of the electric vehicle sector is a joke. Regardless of what company takes over for A123, the net job growth will be nil, plug-in cars will still be largely ignored, and the result will be another “alternative” business that exists only as a money grab from taxpayer resources – one that Wanxiang Group will expect to be sustained.

As for the other concerns about the A123 sales – technology and security – Tennessee Republican Rep. Marsha Blackburn, the new vice chairman of the House Energy and Commerce Committee, is not convinced that the separation between military contracts and the rest of the company’s business solves the problem.

“A123 Systems also works hand-in-hand with U.S. power plants on energy storage and efficiency improvements,” Blackburn wrote in The Hill. “Its products and technology serve the telecommunications markets through battery backup systems that support telecommunications controllers and Internet servers, transceiver stations and central hubs. Allowing Wanxiang to acquire this company’s technology could leave us vulnerable to cyber attacks.”

As Blackburn indicated, there are ways around an explicit delivery of business, technology and know-how to the Chinese. Before A123 declared bankruptcy, Vieau had a deal in place with Wanxiang for $465 million that would have turned over 80-percent ownership that was conditioned upon A123 retaining its government incentives, keeping its listing on the NASDAQ (which has now been lost), and perhaps most importantly, preserving its research and development team.

Now that the fire sale price to Wanxiang is $260 million, what accounts for that $205 million drop in value (as the Chinese perceived it)? A123 announced that the purchase amount is less than the amount it owes its creditors, so its stock has no value. That alone could account for the difference, so it’s not far-fetched to believe that Wanxiang believes the biggest worth of A123 remains in the head knowledge of its scientists and engineers who will now report to them.

The bankruptcy court and the Committee for Foreign Investment in the United States must still approve the deal. It seems unlikely the undiscerning court will stand in the way, as a judge already approved at least $3.5 million in bonuses for the A123 executives who ran the company into this situation. Treasury Secretary Timothy Geithner, who oversees the CFIUS, has not responded to letters from other congressmen and the Strategic Materials Advisory Council about his intentions.

Regardless of what happens with Wanxiang, however, the scrutiny of A123 should not end. Someone decided to give this bumbler hundreds of millions of dollars in public money, and this dark deal needs some sunlight.

Paul Chesser is an associate fellow for the National Legal and Policy Center and publishes, an aggregator of North Carolina news.