ALTe China EV deal shows the risk of working with Chinese investors; reward is uncertain

The Chinese government’s recently-announced plan to promote the growth of the EV sector http://www.greencarcongress.com/2012/07/china-20120709.html in China has created a risky environment for foreign companies with EV technology.   It has also created a lot of opportunity for such companies.  The saga of U.S. PHEV-drivetrain manufacturer ALTe  www.altellc.com illustrates both the risk and the opportunity.    It should be a cautionary tale for foreign companies that are looking to China to sell or license their technology.

A few days ago I talked with John Thomas, ALTe co-founder, president, and CEO about its recently announced agreement to form a $200 million joint venture in China. http://www.altellc.com/?p=1054  Turns out ALTe had already been stiffed by several Chinese investors by the time it signed the announced agreement.  Thomas is hoping the third time will be the charm for his company.    He related the fascinating saga of how ALTe ended up partnering with a Dubai investor and unnamed Chinese investors to convert medium-duty buses and trucks in PHEVs and hybrids.

On February 13, ALTe signed a letter of intent with a Chinese billionaire it met during Chinese vice president Xi Jinping’s February visit to the U.S., Thomas told me.  http://www.reuters.com/article/2012/02/17/us-china-xi-economy-idUSTRE81G1JY20120217 But those funds failed to materialize by April 13, the agreed-to date, despite a trip to China to confront the investor.  Another Chinese billionaire on Xi’s trip had also expressed an interest in working with ALTe, but he also failed to come through, said Thomas.

Fortunately, ALTe had already been approached by another investor, S. Moody Alavi, managing director of MESA Century New Energy Technology Inc.   Alavi, who has bases in Dubai and Atlanta, was shifting his investment strategy from mostly commodities such as copper to include companies such as ALTe, said Thomas.  So Alavi had a track record and he frequently worked with one of ALTe’s main investor, Simon Ahn of Atlanta, GA.   When the second Chinese investment deal fell through, ALTe jumped on the Alavi offer.  The parties didn’t bother with a letter of intent and the deal was sealed quickly, said Thomas.

The parties in the $200 million joint venture are ALTe, Alavi, and unnamed “private” Chinese investors.  I put private in quotation marks because I’m pretty sure those Chinese investors are actually investment vehicles for the municipal or provincial government where each of the joint venture’s four plants will be built.   One site has been announced, Shunyi, a Beijing suburb which also houses the Daimler-BAIC joint venture, among other companies.  That site will be greenfield, said Thomas.   Two other sites will use existing plants, he said.  The fourth site has not been finalized.

A big part of ALTe’s contribution to the JV is engineering, “essentially a technology license,” said Thomas.  Of the $200 million, $70 million will go to the U.S. to finish the production engineering.  ALTe, based in Auburn Hills, Michigan, will nearly triple its staff to around 150 people, Thomas said.  The JV will do some R&D in China, as well, he said.  The aim is to make a powertrain that can pass U.S. certification so vehicles using it can be exported if and when the JV wants to do that, he said.

A bit of background on ALTe:   ALTe retrofits vehicles that run on gas or diesel with plug-in electric drivetrains.  I attended an ALTe press event in the Los Angeles suburbs in May 2012.  See earlier ChinaEV blog on that event. (Thomas was not at that event and several of the executives who were there have since left ALTe.)  Around the same time, I talked with Simon Ahn,  http://www.ahnlawfirm.com/ the attorney in the Atlanta area who had invested nearly $20 million into ALTe.  He said was impressed with the experienced management, and the “seven million lines of code” that make ALTe’s drivetrain work.  “I saw ALTe technology as something really valuable,” Ahn told me.   ALTe needed more funding, and Thomas told me ALTe was talking to Chinese investors.  Meanwhile, it was getting funding from Chinese and Korean businessmen looking to obtain a U.S. visa, said Thomas. That requires an investment of at least $500,000 in a U.S. company, and job creation.

At that time (i.e. late May), ALTe’s target customers were fleet vehicles at U.S. companies such as PG&E http://www.pge.com/myhome/environment/pge/fleets/ and FritoLay.  http://www.fritolay.com/about-us/press-release-20120810.html A Ford Econoline Doritos delivery van with an ALTe drivetrain was at the event, as was a retrofitted Ford F150 pickup.   ALTe execs said the company was in discussions with Ford Motor Co. about becoming a Qualified Vehicle Modifer.  But that process wasn’t very far along at all, I learned by asking around.  Pacific Gas &Electric was (and is) testing some vehicles with an ALTe drivetrain in its fleet.   In any case, the U.S. projects are on hold now, Thomas told me.  “We are shifting our U.S. plans for range-extended PHEV here back one year to emphasize the China orders first,” he said.  “The entity with funding gets priority.”

Well, I’d say the Alavi group is a pretty good bet but it remains to be seen if the Chinese investors will come through with funding.  It also remains to be seen if China’s central government will wholeheartedly implement the EV sector plan.  ALTe better hope it does – the U.S. company is betting its future on the belief that China’s government will make good on its plan to produce 500,000 BEVs and PHEVs by 2015.    Thomas said he has met with some high-ranking Chinese officials and others and they are through with throwing money at poorly-executed plans.  They are determined to get it right this time, he said.  “They have given hundreds of millions of dollars to (state-owned enterprises) and they have failed,” said Thomas.    “The powerbrokers and money providers have said we are done, we are going with outside stuff.”    But will they actually start producing EVs in volume?

As for how ALTe will compete against the many other foreign companies vying for business in China, Thomas said ALTe is the only one making a complete powertrain system.  Other foreign companies that have Chinese investors, such as Boston Power www.boston-power.com  and Protean Electric www.proteanelectric.com , could potentially be ALTe suppliers.  “We are passing an awful lot of our revenue to component suppliers,” he said.

The agreement says production must begin no later than 12 months from funding.  The Chinese investors are pressuring ALTe to start as soon as possible, said Thomas.  He is trying to explain to them why it takes time to get it right.  “We are trying to balance speed with risk,” he said.  Hope the Chinese funding sticks around long enough for the JV to turn out a world-class vehicle.   I’m not sure it will.