Chinese takeover of A123 reflects sluggish electric car market

Chevrolet Volt
General Motors

(MoneyWatch) A Chinese company's financial rescue of advanced electric car battery maker A123 Systems reflects the sluggish market for electric cars, along with missteps by the company.

The financial problems at A123 have been worsened this year by the cost of replacing faulty batteries for electric car company Fisker, its biggest client. A123 also is slated to provide batteries for the electric version of General Motors' (GM) upcoming minicar, the Chevrolet Spark.

The $450 million to be invested by Wanxiang, China's largest auto parts company, for 80 percent control of A123 will allow the American company to continue operations. Company executives added that it also would give A123 better entry into the Chinese market, where Wanxiang has an electric car subsidiary. 

"A123 should be able to remain a competitor, but they become a 'Chinese' battery maker instead of a U.S. company," said Michael Omotoso, an analyst with LMC Automotive. "Which is fine if the Chinese market grows the way the Chinese government wants it to grow. I'm not sure how profitable they can be long-term, though."

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A123 has suffered a number setbacks. Batteries assembled at the company's Livonia, Mich., plant had safety issues from leaking coolant. Then a Fisker Karma being tested by Consumer Reports stalled out and could not be driven. When it was determined that the battery was to blame, A123 replaced all the batteries in Fisker vehicles at a cost of $55 million.

A123's problems add to the issues surrounding the federal government's funding for "green" energy initiatives. The company is funded in part through a $249 million grant from the U.S. Department of Energy. Rep. That is complicating the Wanxiang takeover, with Rep. Cliff Stearns, R-Fla., calling on the government to block the Chinese acquisition of a U.S. company backed by federal grants.

More broadly, A123's woes highlight the slow sales of electric cars. Though the Chevrolet Volt (which has a backup gasoline engine) has showna recent uptick in sales, sales of all-electric cars like the Nissan Leaf have been weak. Volt sold 8,817 units in the first half of the year and Leaf 3,148, extremely small numbers in a U.S. market expected to reach 14 million in sales this year.

Omotoso expects the slow adoption of electric batteries to spur consolidation in the sector. "A few years from now, there will only be a handful of independent battery makers," he said. "In fact, many current battery makers are joint ventures between original equipment manufacturers or big suppliers... and a small battery maker. So there is little or no independence for battery makers even with government funding."

The big problem is price, with electric vehicles listing at about $40,000. That differential is too wide over comparable gasoline cars with strong MPG ratings. And the key to that high price is the batteries in electric cars, which range from $12,000 to $15,000 per vehicle. 

Cutting that battery price is crucial to bringing down electric vehicle prices down to affordable levels. In a recent study, consulting firm McKinsey projected that the cost of such batteries could fall by 70 percent by 2025 -- pushed by increasingly stringent government regulations around the world. But lower costs depend on higher volume. And that may be the Catch-22 for automakers at least in the next few years.

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    Jerry Edgerton, author of Car Shopping Made Easy, has been covering the car beat since Detroit companies dominated the U.S. market. The former car columnist for Money magazine and Washington correspondent for Business Week, Edgerton specializes in finding the best deals on wheels and offering advice on making your car last.