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As A123 Fails, Overcapacity Remains in Battery Market

Dave Hurst — October 17, 2012

For those in the cleantech industry, the news that lithium ion battery manufacturer A123 has declared bankruptcy was disappointing, but hardly surprising.  A123 has been in a tailspin for the last 9 months or so.  Innovation in battery technology and the growth of the plug-in electric vehicle (PEV) market literally couldn’t come fast enough for A123.

In essence, A123’s narrow customer base and its failure to grab one of the few available high-volume battery contracts in the transportation market, combined with an expensive recall, drove it to bankruptcy.  The company’s largest program, Fisker’s Karma battery, has proven to be a money loser for A123 because of manufacturing defects that resulted in a recall, which cost the company $55 million (the total Fisker contract generated about $42 million in revenue for A123 in 2011).  A123 produced batteries for a handful of other automotive manufacturers, including BMW hybrids and Smith Electric Vehicles, but these were both very small contracts, and Smith has some financial issues of their own.

The battery market has an overcapacity of production for current demand, particularly in transportation.  The total estimated transportation market is expected to consume just under 1 megawatt-hour (MWh) of battery capacity in North America this year, and nearly 3 MWh globally.  The stationary energy storage market is expected to reach 33.6 MW.  A123’s battery cell production capacity in the United States is 360 MWh.  A123’s largest domestic competitors, Johnson Controls (JCI) and LG Chem, both have capacity that is similar in size or slightly larger.  These plants are all dramatically underutilized.

In a proposed deal, JCI would purchase A123’s automotive business, including the manufacturing facilities.  On the face of it, this makes sense because JCI is a large automotive supplier working to develop prismatic Li-ion cells, which A123 has already launched.  Additionally, A123’s newest product, the Nanophosphate EXT Li-ion, is specifically targeted at the stop-start vehicle market, an area of strength for JCI’s advanced lead-acid products.  This move would give JCI a jump on their prismatic development.  However, it does not solve the underlying problem – too much capacity chasing, too little demand.  How JCI will fill this new combined capacity is not immediately clear.  I suspect JCI’s interest in A123’s transportation products is mostly driven by the acquisition of technology, clients, and perhaps some of A123’s cell component manufacturing.  In my opinion, JCI would likely need to do some consolidation of its own, including closing one of the two Li-ion plants it would own.

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