Saturday, April 30, 2016

We're from the government and we're here to help...

A long, but a true story:

It should be no surprise to anyone that the great majority of the world's battery manufacturing capacity resides in the Far East; upwards of 90% of the world's batteries come out of China, Japan, and South Korea.  Elon Musk's adventure in northern Nevada may change those numbers some, but time will tell.

In 2009, the Department of Energy was fired with the fevered visions of new Secretary of Energy, Steven Chu.  Dr. Chu and Mr. Obama had dreams of a future without fossil fuels and an economy driven by windmills, solar panels, and electric cars...lots and lots of electric cars.  I sat in meetings where DOE bureaucrats predicted, with the dead-serious, stone-faced certainty that only people living in the fantasy world inside the Washington Beltway are capable of, that there would be 15 million electric cars on the road by 2015.  But someone had to make the batteries for all those cars.

Enter Congress, who at the behest of Mr. Obama, passed the ARRA bill (more commonly known as the "stimulus package"), which, among other things, funneled huge amounts of money into the DOE.  The DOE decided they would use some of that money - $2.4 billion dollars worth...that's "billion" with a "b" - to stimulate the moribund and virtually non-existent US battery and electric vehicle industries and the Advanced Battery Manufacturing Initiative came into being.  Under the ABMI, the DOE would pay companies to build battery factories in the United States.  Note that these were not the loan guarantees since made famous by other DOE boondoggles, like Solyndra, these were grants...cash, given to a company without expectation of repayment.  The only constraint on the grant was that the awardee had to match the amount of the grant with private funds.  In effect, the DOE would permit awardees to build a manufacturing plant for half-price.

The ABMI announcement, as might be expected, set off a frenzy of activity.  Joint ventures were formed, start-up companies were started, large corporations began including batteries or battery materials in their strategic development plans, and every battery company ( and a lot of wannabees) in America started writing a proposal.

The selection of awardees was Kabuki theater.  The Federal government cannot dole out $2 billion without the process becoming political.  If you did not propose building your factory in Michigan, you essentially took yourself out of the competition.  A joint venture between Johnson Controls and Saft (a French company) received $229 million to build a plant in Michigan.  LG Chem, a Korean company, received $151 million to build a plant in Michigan.  A123 Systems was the big winner with a $249 million award to build a plant in Livonia, MI.  There were other recipients of all this government largesse, of course, and if you're interested, you can find out more here.

The announcement left most people in the industry scratching their heads.  Money intended to stimulate the US battery industry had been awarded to foreign companies.  However, the award to A123 Systems surprised no one; they had been a DOE pet project for a number of years.  I met with a DOE program manager prior to the ABMI announcement who smiled at me and said, "You know, it was my SBIR grant that got A123 started."  Knowing the founders of A123, I knew this was not entirely true, but it did make clear to me that my company, a competitor, had essentially zero chance of getting funding from a program manager who was obviously bolstering his career by having given "A123 its start".

Upon announcing their awards, the DOE insisted that they were "not picking winners and losers", but in point of fact, that was exactly what they were doing.  The ABMI awards essentially killed any private investment in companies that had not received a grant.  After all, if your technology and talent couldn't pass muster with the DOE, why would anyone want to invest in you...and even if you knew what you were doing, how were you going to compete with companies that just received 9-figure grants from the U.S. government.

With the exception of the few anointed companies, the years that followed the AMBI grants were not kind to the U.S. battery industry.  Bankruptcies among both established and start-up companies were the rule, not the exception.  The founders of my own company were, on several occasions, reduced to loaning the company money to make payroll.  No one was feeling particularly "stimulated" by the DOE's program.

Fast forward to 2016:  The Johnson Controls/Saft JV dissolved with extreme prejudice before they even broke ground on their factory.  LG Chem built their factory, but it's use has been limited to importing cells from South Korea and assembling battery packs.  A123 seemed to be the sole success story; building a plant in Livonia and having a very successful IPO that raised $380 million.  But there was always a no-visible-means-of-support aspect to the company's apparent success and, after building $50 million worth of bad product in their new plant - how do you even do that? - that resulted in a number of fires, primarily in the Fisker Karma electric vehicles they were making batteries for, A123 went into a death spiral.  The company went spectacularly bankrupt and the assets were bought by the Chinese.

The country is still without a commercial battery manufacturing plant and, while Tesla's facility in northern Nevada may change that shortly, it is certainly no thanks to the technocrats at the Department of Energy.

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