Why A123 Threw Down for Fisker & Who's Next

Battery maker A123Systems and plug-in car startup Fisker Automotive, which announced a new partnership on Thursday, seem like natural dance partners. Each exists as an outsider in an entrenched industry, they’re both gearing up for a ramp up in 2011 and they share one mega backer — the U.S. government.

But as Jason Forcier, VP of Automotive Solutions for A123 put it to us in an interview today, “We’re not a VC company — we’re a battery company.” So why did A123 pledge to invest $23 million in the firm in addition to supplying Fisker its battery systems and collaborating with the startup on its next-gen vehicle? Here’s two reasons: The electric vehicle market is so nascent and filled with incumbents that building up a relatively early stage player could help the battery maker succeed. And cozying up to Fisker as it develops a new plug-in model could provide valuable lessons that may help it win more contracts down the road.

Grow the Market

First off, by putting up the capital for Fisker at this point, A123 can use its status to help the startup raise the additional investment it needs to access the Department of Energy’s conditional loan and hit its production targets (at least 15,000 vehicles per year by 2012 and eventually up to 100,000 units per year), and potentially become a big customer for the battery maker. Forcier told us that A123’s planned investment (a combination of cash and stock) will be part of a much larger fund raising round — more than double A123’s contribution — that’s still in the works. He said part of A123’s thinking in the move was to “help galvanize the round by bringing our reputation to it.”

A123 has generated a lot of excitement on the public markets on the bet that the nascent market for plug-in vehicles will take off, and carry A123 with it. But as it stands now, while A123’s revenue has grown in recent years, it has never turned a profit. So after losing one battery deal (for General Motors’ Chevy Volt) to battery giant LG Chem and seeing another one (for Chrysler’s lineup of electric vehicles, now significantly scaled back) dissolve, A123 has taken a step that could help build demand for its products.

A123 isn’t alone in these circumstances. Ener1, whose subsidiary EnerDel was in the running for the Fisker battery deal, provided Norway’s Think (one of its key customers) with a $5.69 million bridge loan and $30 million line of credit to help keep it afloat.

Fisker does not find itself in the precarious financial circumstances that Think was in when Ener1 threw it a lifeline, but it does need a hefty amount of capital. Fisker spokesperson Russell Datz told us today that A123’s planned investment will help the startup meet the equity requirements of its loan agreement with the Department of Energy.

Close to Home

In addition to financial support, Fisker also needs parts from U.S. suppliers that will allow it to deliver on its performance and production promises (the DOE expects more than 65 percent of the components for the Karma, based on cost, to come from domestic companies). That’s a short list of potential suppliers when you’re looking at batteries for tens of thousands of vehicles — the industry giants do their battery manufacturing mainly in China, South Korea and Japan.

Forcier described Fisker as being “in a bind” late in the third quarter or early in the fourth quarter of 2009, needing to land a supplier “that could meet their standards and ramp-up plan.” A123 will be able to meet Fisker’s 2010 production needs with a prototype assembly line, said Forcier, and a high-volume line will be up and running in Livonia, Mich. by the end of the year to handle larger scale production in 2011 and beyond.

As part of the deal announced Thursday, A123 will also have a chance to get more involved in the process of developing a vehicle start to finish than it has in the past, and potentially more than some competitors are able to do with other automakers. Forcier said working with Fisker on a brand new model designed “from the ground up” to be a relatively affordable plug-in vehicle will provide A123 with lessons about how to cut costs, which it can then use to win deals with other customers.

Who’s Next?

We don’t think that A123 is about to go on a buying spree, snapping up stakes in battery and electric car ventures. But Forcier said the company may make additional investments down the road. Many companies have “great technology, but they’re looking at the path A123 has had to go down,” said Forcier, and seeing that taking promising tech through to commercial scale manufacturing “requires a lot of capital.” A123Systems raised some $200 million or more over the eight years before its blockbuster IPO.

According to Forcier, some of those companies could win A123’s backing (see our list of 20 startups in this space) if their tech can help A123 increase energy density and drive down battery costs.

Related GigaOM Pro report (sub. req’d):How EV Battery Startups Can Cross the Valley of Death

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