A123 looks to China cell JV for boost. Big market beats intellectual property protection

Battery maker A123 Systems Inc. www.a123systems.com just can’t catch a break.  A Fisker plug-in hybrid electric vehicle powered by an A123 battery died while being driven by someone from Consumer Reports.  A123 had to issue a recall.  http://tinyurl.com/c25wadx Talk about bad luck!

In China, however, A123 hopes its luck will be better.  Last week, the battery maker announced it would establish a second joint venture in China with SAIC Motor Co.  http://tinyurl.com/d2o8kat  The new JV will produce battery cells in China. Let’s face it, the lure of the China market is just too strong to pass up even if it means losing a little intellectual property in the progress.

I talked to Jason Forcier, vice president of the Automotive Solutions Group at A123 Systems, about the new joint venture. He was pretty gracious given that I raked him over the coals regarding his remark about the China market last time I interviewed him (see China-EV of April 18, 2011 for full context).  But hey, I was sort of right. The Chinese government did have to back pedal on its hugely optimistic targets for EV production and sales. Unlike the U.S. government, however, China’s government consistently supports the EV sector. A123 has taken note.

“We continue to be very bullish on the (China) market,” Forcier said.  “There is strong government support.

“The China market is still pushing ahead more than we are seeing in Europe and North America,” he added.  “We still see a lot of activity around plug-in hybrids and even BEVs.”

Forcier is still bullish on the China market.

The first A123/SAIC joint venture was established in 2009.  http://tinyurl.com/cmnao2d Advanced Traction Battery Systems, as it is known, produces lithium-ion battery packs using cylindrical prismatic cells imported from the U.S.  The new joint venture will produce A123’s 20Ah flat prismatic cells.  “We see a big demand for flat cells in China,” said Forcier.  “A lot of programs will be migrating from cylindrical to flat because the density is better.”   The two companies are still talking terms; they hope to have the agreement hammered out by September, 2012.

I asked if the new venture would become part of ATBS. The more likely scenario, said Forcier, is that ATBS will become part of the new venture.  “The capital required to do the cell is much greater,” he said.

A123 will send its latest technology to China, said Forcier.  Of course, what is state-of-the-art right now might not be when a model actually goes into production two or three years down the road.  So the agreement also includes future cells, said Forcier.  “The market isn’t accepting older technology,” he said.  “There is no way you are going to win business (in China) with battery technology that is a generation or two old.”

Why didn’t A123 just start producing cells in China back when it established its first joint venture with SAIC?  Trust was an issue, it seems. Now that A123 has worked with SAIC www.saicmotor.com for a few years, “as we get more comfortable with the relationship, we are willing to take our partnership to the next level,” said Forcier.  In any case, he claims that the main intellectual property in the cell is the cathode powder, and that will still come from A123 in the U.S.

Okay, but I bet that like many U.S. companies A123 is willing to give up some intellectual property for a piece of the China market.  SAIC has turned out to be good at generating business for A123 in China.  Naturally,  A123 will supply battery systems for SAIC’s electric car programs. That includes the Roewe 750 hybrid sedan, the Roewe 550 plug-in hybrid sedan, and the Roewe e50 battery electric vehicle.

The ATBS joint venture has also been awarded several other programs in China, said Forcier (Warning: He is very fond of the word “significant.”)  On the commercial side, A123 has gotten production contracts in China through ATBS, though they haven’t been publically disclosed, said Forcier.  One might be Shanghai Sunwin Bus Corp.  http://tinyurl.com/82ngeya SAIC owns half of Sunwin and Volvo Bus Corp. owns the other half.  A123 sees. “major activity” in the truck and bus market, said Forcier.  “SAIC has played a significant role in helping us land new business,” he said.  “We expect significant revenue growth.”

Forcier gives a lot of credit to the business development team at ATBS. The team’s first “significant win” is the just-announced agreement to supply complete battery packs to Geely Automobile’s plug-in-hybrid electric vehicle program, http://tinyurl.com/7twk7sf  which is expected to launch in 2014.  “We weren’t the ones who went out and won the business,” said Forcier.  “This is the first big win without one of the parents holding their hand.”

Suppliers in China used to tell me Geely http://www.geely.com/english/index.html was merciless at pushing the price down. “Geely won’t pay for a decent part,” as one supplier put it. I asked Forcier if ATBS had to take a haircut on pricing to get the Geely contract.  He didn’t say yes, but he also didn’t say no. “Is there any automotive company in the world that doesn’t push the price down?” said Forcier. He added that the price was competitive, with a decent margin, defined as anything between 15% and 20%.  I’ll wager A123/ATBS also has its eye on supplying future Geely EV programs.  A123 is likely also interested in supplying Volvo programs in China (Geely owns Volvo).   So it was probably willing to settle for slim margins. Alas, slim margins are like tax cuts. Once to you give them, it’s hard to take them away.

A123 may also bring in business to the new battery venture. It is supplying battery packs from its Michigan plant for the General Motors Spark battery electric vehicle due to launch in some states in the U.S. in 2013.  http://tinyurl.com/6h3mdm4  A123 expects the Spark BEV to also be sold in China, said Forcier.  “We might have multiple sites” from which to supply the program, he said.