Biggest Backers Of A123 Systems Are Taxpayers

Venture capitalists and clean tech executives will no doubt watch closely this week to see how A123’s IPO goes — if it happens and it does well, other clean tech companies may be bold enough to follow  — but as taxpayers, you and I have more at stake.

A123 has raised a whopping $600 million in government grants and loans for its rechargeable lithium ion batteries  — over half of it this year. There’s a $249 million Department of Energy grant courtesy of the 2009 American Recovery and Reinvestment Act, and $100 million in refundable tax credits from the Michigan Economic Development Corporation. Both hinge on A123’s plans to create jobs by moving some manufacturing to the U.S.

Private investors, meanwhile, including GE and Conoco Phillips, have kicked in about half that amount — $352 million.

Financial backers are going to have to trust that A123 executives can sustain a strategy that has changed radically in just the last couple of years. In 2006, when A123 began selling batteries, consumers accounted for over 80 percent of its business, according to documents from A123’s road show. (Its biggest customer has been Black & Decker, which buys A123 batteries for its cordless power tools).

Now consumers have dropped to 25 percent of A123’s revenue, while transportation has climbed from 6 percent of revenue in 2007 to 14 percent in 2008 to 60 percent this year.

A123 may well have a bright future — it has plans to supply batteries for Chrysler, General Motors, Better Place, Proctor & Gamble and several other big companies and its batteries will run in smart grids as well as cars. The company expects to have $300 million in cash after the IPO and $16 million in debt, said chief financial officer Mike Rubino on the company’s road show.

But there are several technical and business issues with batteries that have yet to be worked out. Here, for instance, is an excerpt from Menlo Park investor Vinod Khosla’s assessment of A123’s prospects. (Keep in mind that Khosla is pushing his own investment in a different battery startup, Seeo, that’s still in stealth mode):

I think that the traditional approach to lithium ion battery making, such as A123 Systems, is going to be competing in an overheated, nearly-commoditized market and will probably not (I guess never say never!) get down the cost curve in the next 5 years (longer term forecasts are futile because so called experts can make anything they want up — we all know long term we will all be on fusion power). A number of incremental improvements are underway but they will at best offer a 2X improvement in price performance. A123 may be a best in class battery, but it lost out in the GM Volt race to the LGChem battery…”

He goes on for several more paragraphs. Without a 10X improvement in price and performance, Khosla argues, the Indians and Chinese won’t be able to afford battery powered cars and their impact on global warming will be limited.

Will the government’s investments in A123 pay off? As Dan said, A123 has a lot riding on its batteries — but so do we.