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Battery Maker A123 Faces a Fight for Survival

A second recall of its batteries calls the company’s future into question.
March 26, 2012

The bad news continues for A123 Systems. The company announced this morning that a defect in some of its battery cells could affect all of the battery packs produced by its new factory in Livonia, Michigan. It estimates that it will cost $55 million to replace these faulty packs.

The company, which makes lithium-ion batteries for vehicles, backup power systems, and electricity grid storage, has been burning through cash for a variety of reasons—its production capacity is much too large for the demand for its products, it had poor yields at its factories last year, and sales of electric vehicles have been slow. The latest blow would appear to put the company’s future in peril.

A123 says it has enough money to cover the cost of the replacements. But its financial situation does not look good. For a company of A123’s size, $55 million is a large amount—the company brought in only $139 million in revenue all of last year.

A123 Systems had $187 million in cash at the end of 2011, considerably less than the $258 million it lost last year. A123 had planned to cut its expenses in half this year and raise more money to stay afloat. The company says the recall was an unanticipated expense that will “require us to adjust our fund-raising strategy.”

The battery defect is the result of an improperly calibrated welding machine at A123’s factory in Livonia. This led to a slight misalignment of electrical connections, which in turn caused an electrical short when stacks of cells were pressed together to make battery packs.

Not all of the cells produced at the factory had the fault—the three other welding machines at the factory were operating properly. But bad cells could have ended up in any of the company’s complete battery packs, some of which contain hundreds of cells, so A123 will replace all of the packs made at that factory. In a call to investors today, David Vieau, A123’s CEO, said, “Virtually all of the products at this facility have been effectively contaminated by this particular defect.”

A123 discovered the problem after some of its battery packs failed in the field. Earlier this month, Consumer Reports said a car using A123’s battery—the Fisker Automotive Karma—broke down after a few preliminary tests. It said the battery was at fault, and that some other customers were having similar problems.

The company says the problem is the result of its rapid scale-up of cell production to meet anticipated demand for battery-powered cars. Much of that demand failed to materialize after Fisker Automotive, its largest customer, was slow to bring its plug-in hybrid electric sedan to market. That forced A123 Systems to lay off workers, and the company fell short of its revenue targets.

Late last year, A123 recalled battery packs for the Karma for another reason—an improperly placed hose clamp, which caused coolant to leak. The leaked coolant could cause a short circuit.

If A123 can survive until next year, its revenue may look better, since it has numerous production contracts that are expected to start late this year or next year. But that revenue will still depend on how many people decide to buy battery-powered cars, and so far, sales of electric cars have been lower than expected. Even then, the company must lower the cost of manufacturing to make a profit—it currently loses money on every battery pack it makes.

A123 says that packs made from cells produced at other facilities aren’t affected. The recall will impact four A123 customers in addition to Fisker Automotive, but A123 isn’t saying which.

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