A123 and Altairnano

If anybody understands what really happened to A123 (NASDAQ:AONE), the once heralded and now bankrupt advanced lithium-ion battery maker, it is the energy mavens at the third annual Advanced Energy Solutions symposium put on by energy storage consultant FullPower, Inc.

"They got way ahead of the market they needed to sell into,” Howard Battery Consulting’s W.F. Howard, an authority on lithium-ion batteries, said. “It was not the lithium-ion technology, it was the business part.”

There may have been another factor working against A123, a dean of energy storage who asked not to be named observed to GTM on the conference sidelines. “The American auto industry chose energy density over safety and lifecycle capacity.” Companies with bigger backing and bigger names won contracts, he said, despite the fact that their batteries are not as safe or as durable.

Energy storage is always, he explained, a choice between power, energy, lifecycle capacity and cost. New companies like A123 and Altairnano (FRA:AWVN) target qualities that will raise brand bankability. Battery industry majors like LG Chem (PINK:LGCLF) and Panasonic (NYSE:PC) produce batteries that store more energy, even at the expense of safety and durability, this widely respected academic and battery expert insisted. But they were chosen over A123 and Altairnano by the world’s vehicle makers because they are already considered bankable.

“A123 was killed off by their own success,” said FullPower Principal Richard Smith. “Being the most successful supplier of batteries for electric vehicles at the wrong economic time cost them.”

Manufacturing, Smith explained, is a capital-intensive business, and ongoing work ties it up, Smith said, speaking from his own experience with Maxwell Technologies and other automotive suppliers.

“A123 had about twice the forecast order from the automotive industry than what was finally purchased. To get those orders, you have to show them you have factory capacity and supplier contracts to produce that volume.” But, Smith said, “all their contracts contain clauses which allow them to shape their order up or down, depending on the actual run rate of their factory. A123 probably would have had a substantial amount of factory capacity and work in progress. And then the orders were cut back, maybe as much as 30 percent to 50 percent.”

As an energy storage industry consultant with an ample roster of clients, Smith said, he hears things. “I have no indication A123 had any technical issues.”

There may have been cost issues, Smith noted. “Their cost curve would have been based on a volume of production. The automotive industry tells you they will buy 50,000 units. If it turns out to be 25,000, they very seldom back up their cost curve very much. So the chances of having any cost relief are slim. Without that volume, A123 could not achieve a positive cash flow.” And it would have become a vicious cycle if A123’s suppliers raised their prices because they were purchasing smaller volumes, he added.

Johnson Controls, Inc. (JCI) purchased the auto assets of A123 for $125 million. “JCI got a twenty cents on the dollar deal,” Smith said. “It is the largest battery manufacturer in the world. Nobody hears much about them because they just pump out 30 million to 40 million lead acid batteries a year and put them in cars all over the world. They really understand the battery business.”