Learning to Count in Chinese

This week brought news that a bankruptcy judge has approved the sale of the assets of A123 Systems Inc. to Wanxiang Group of China. This makes me sad – not because I’m a protectionist, afraid of the Chinese – but because of what it symbolizes about the future of energy research and engineering in the United States.

Let’s start with a quick review of A123 Systems. A123 designs and manufactures rechargeable batteries based around lithium nanophosphate technology. In the future, I’m hoping to do more writing about different energy storage technologies, but it’s worth briefly exploring this technology. Lithium nanophosphate is an evolution of traditional lithium iron phosphate batteries. Nanophosphate batteries have a wider state of charge, meaning they’re able to output usable voltage deeper into their discharge cycle. Additionally, they’re more robust across a range of charge/discharge environments and cycles. Finally, they’re relatively safe and resistant to runaway conditions. They’re not exceedingly energy dense (lithium cobalt oxide is better), but for a variety of applications it’s a pretty cool technology.

The A123 technology grew out of research conducted at MIT, and the company principles are MIT researchers. The technology has been used in electric vehicles (the Fisker Karma), high-density energy grid storage, and a variety of industrial applications that benefit from the particulars of this technology.

So, if the technology is relatively robust, why is the company being sliced up by a bankruptcy court in Delaware? A123 certainly had some missteps along their path to commercialization. More fundamentally, as many energy startups have discovered, building a high technology, manufacturing-centric company from scratch is extremely capital intensive. A123 was simply unable to generate enough business quickly enough, and other options for funding did not appear in time.

Ok, a new business didn’t sell enough stuff, so they went away. Pretty normal, right? Heck, most businesses don’t survive. Why get so bent out of shape about this one?

I think the bankruptcy of A123, and the subsequent asset sale, is a canary in the coalmine, a harbinger of things to come.

Green technology, and anything even tangentially related to green technology, has become incredibly politicized. The country experienced a brief flurry of excitement around green technology from 2007 through 2011, spurred in part by a loan program from the Department of Energy. The failure of Solyndra, struggles at other energy startups, and a frigid political climate made the Department of Energy extremely conservative about doling out large loans to green startups. A number of startups that had built assumptions about DOE financing into their business plans suddenly found those resources unavailable.

In the past, these companies may have been able to find more traditional investment through capital markets. Unfortunately, two factors have conspired to make that all but impossible for many of these startups. First, the fallout from the 2008 financial collapse dramatically increased the difficult in finding capital on the scale necessary for these types of endeavors – finding a few million dollars to fund a smartphone app startup with a quick exit strategy is one thing, finding a billion dollars to build a manufacturing pipeline is a bit more difficult.

A far larger long term issue is the dramatic decline in domestic energy costs in the United States, as a result of the increased availability of natural gas from fracking. While the economic argument in favor of green energy was once relatively easy to make, given a bit of hand waving and optimistic projections, the low cost of natural gas has made that argument much more difficult. Because we don’t put a price on carbon in this country, these factors remove much of the economic incentive to invest in green technologies, given a limited opportunity for substantial short-term competitiveness in the domestic energy market.

While I enjoy low energy prices and cool smartphone apps as much as anyone, I’m also aware that the Earth is warming, fossil fuels are being depleted, and world energy use is rising.

As I discussed when writing about Kickstarter, making things is fundamentally difficult. If you think building an espresso machine from scratch is complicated, try building a car. Companies in this space need huge amounts of capital over long timespans, and many of them will fail. Some will fail because they have bad ideas. What worries me is the ones that fail because the ideas haven’t been given enough time or support.

A123 is, I believe, an example of the latter. Proven, working technology, already in the marketplace. An iterative improvement on other proven technology. And, most importantly, a collection of smart scientists and engineers continuing to iterate on future improvements. While we can all hope for massive leaps forward (see lithium-air), the history of successful “innovation” looks much more like A123 than EEStor.

So, A123 went bankrupt, and Wanxiang bid approximately double what Johnson Controls was willing to offer. Some members of Congress have now stepped in with some typical anti-Chinese protectionist arguments, rooted in a distorted understanding of the deal and the technology. While there’ll likely be hearings and protestation, it seems likely that this deal will go through.

The Chinese, like the rest of the world, are operating on a much more realistic understanding of the future energy landscape. It’s laughable to imagine a world in which things like high capacity batteries, photovoltaics, or wind turbines are declining in importance. And yet, we as a nation are choosing to cede our stakes in those technologies to other nations. Once again, this isn’t about protectionism or nationalism, as I have no jingoistic qualms about buying Chinese batteries or Korean solar cells. This is about global competitiveness, economic viability, and maintaining the places we love.

A handful of other “green” companies are on the brink. Fisker is currently scrambling for funding, having seen their future massively disrupted by the suspension of their DOE loans. Tesla, while in a far more robust financial situation, will require large amounts of external capital for the foreseeable future. MiaSole and Solibro have already been sold to China. I’m worried about who’s next.

One thought on “Learning to Count in Chinese

  1. Pingback: Hopped up on Lithium | Discrete Cosine

Leave a Reply