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Tipping Point: A123Systems' Road to the Battery Slam Dunk

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A123-automotive-cellLess than a year after startup A123Systems lost a battle for what could be one of the biggest plug-in vehicle battery supply deals in the country — General Motors’ (s GM) Chevy Volt — the Massachusetts-based company has snagged a $249 million grant from the Department of Energy to help carry out a plan for setting up commercial manufacturing in the United States. It’s the second-largest award for any one project under a program that according to the DOE, “marks the single largest investment in advanced battery technology for hybrid and electric-drive vehicles ever made.”

What makes the difference between a startup that’s too small and inexperienced to win a choice contract with a major automaker (as A123 encountered with GM) or a big government grant (several prominent startups lost out on DOE funds today), and a startup that can hold its own among global companies in a program that rewards experience?

For comparison, let’s look at Sakti3, a Khosla Ventures-funded spin-out from the University of Michigan. Both A123Systems and Sakti3 have won big name backers, hefty support from the state of Michigan, and preliminary deals with GM — A123 provided battery cells for pre-production Chevy Volts, and Sakti3 recently formed a technology partnership with the automaker. Yet one startup come out a big winner, and the other one missed the boat.

According to Lux Research analyst Jacob Grose, Sakti3’s choice to stay in stealth mode for more than a year after its founding, when it’s going up against established public companies in a program tilted in favor of applicants with commercial-scale manufacturing expertise probably didn’t help. “I think Sakti3, despite its Khosla backing, was far too unproven when compared to its competitors to get the DOE backing,” Grose said in an email today. “I think this is a case where the company‚Äôs decision to keep a low profile has backfired.”

By contrast, A123Systems has been detailing strategies, resources and potential risks for over a year now, at least since it filed for an initial public offering. It still hasn’t gone public, but as panelists at the AlwaysOn Summit at Stanford noted last week, “going public is a huge branding event” that does a lot to raise a startup’s profile. While A123Systems is still a small fish in a pond that includes Johnson Controls, LG Chem, Delphi and Saft, the visibility it’s gained, and disclosures it’s been required to provide as part of its move toward an IPO, may have helped its case with the DOE. At the same time, a $249 million vote of confidence from the agency could potentially help A123 accelerate toward its planned public offering.

In this particular program, one of the make-or-break points for A123 was likely it’s commercial manufacturing experience — something Sakti3 has yet to attain. Chevy Volt frontman Bob Lutz explained earlier this year, in describing why GM ended up going with LG Chem for Volt battery cells, “A123 has been specializing mostly in cylindrical cells, which are good with power tools and stuff.” Sure, portable power tools are a far cry from vehicles, but they’re a start.

There’s also the fact that, while GM gave A123 the boot, Chrysler agreed a few months later to have A123 provide lithium-ion battery packs for plug-in versions of its Jeep Wrangler and Patriot, Town & Country minivan, Dodge Circuit EV and Chrysler 200C EV. Given the billions of dollars in bailout financing Chrysler has received from the government, and the $70 million grant that the automaker won today under the DOE program, helping A123 accelerate the buildout of its manufacturing capacity may be a way to help make good on the Chrysler investment.

13 Responses to “Tipping Point: A123Systems' Road to the Battery Slam Dunk”

  1. just thank god the government didn’t waste tax payer money on Boston Power. If they did, it would fund another year of empty promises and press releases only.

  2. Joe Morris, this is exactly how I look at this whole field of grant “aid” To the big fish goes the relief. Ah some pattern here with other recent Gov’t “relief” programs?

    I was not aware there were so many startups I’d love to hear from you on them.

    Someone like 123, with contracts in the pipe vis DoD, needs a bank credit line (repayable loans$) to ramp up productivity, not a gov’t contest grant (free $). IMHO

  3. joemorris

    Sakti3 and A123 are not comparable. A123 has been around for 7 years and has gotten several hundred million dollars in backing. They have 1,600 employees, have raised hundreds of millions of dollars and are the #1 supplier of Li Phosphate in N. America. A123 is not a small company anymore, they are competing with conglomerates with battery divisions that are probably roughly the same size as A123.

    However, their iron phosphate battery technology is not all that great. GM went with a Manganese Spinel. Nissan went with a Manganese Spinel for the recently announced Leaf.

    A123 is not a small fish in the world of high-power batteries. It’s amazing that two major Nickel-Cobalt plays got funded. They are way too expensive and unsafe to make it into more than a few thousand experimental cars.

    All of these players are a decent start but none of them have a battery that will enable real penetration of EV’s. Hopefully the government will fund some next generation battery companies at some point to create a true competitive advantage in the U.S. Subisidizing factories with technologies that can’t compete on their own is a 3rd world economic strategy that midwesterners should be insulted by if there is no support of technological innovation to back it up. Help us start up a midwestern version of Silicon Valley or MIT. Going head to head with Asian companies with no technological differentiation (or maybe worse in this case) is totally pointless. Used battery manufacturing equipment will be really cheap in Michigan in five years if more progress on the technology is not made.

    The most ironic part of Biden’s speech was when he closed by saying that A123 was founded with a small grant from DOE, and then he proceeded to hand out hundreds of millions to large companies. Meanwhile, zero money went to the 20+ smaller battery startups that probably resemble what A123 was like 5-7 years ago more than A123 does today.

    Let’s hope that the next round has some scraps for the smaller companies that will die without it. There were probably 50 startups that burned limited resources applying for this program only to see handouts given to big companies that had already failed to see and act on the opportunity in this space. Any startup that can raise matching VC funds and has a solid technology should have a shot.