When an American professor and his team at MIT developed technology far superior to lithium ion batteries, the company he formed, A123, not only could not get funding to manufacture in the US, they were told it was a really dumb idea to try. So they outsourced manufacturing to China. Now A123 hopes to start manufacturing in Michigan, but can't go against competitors it created in China without federal and Michigan government subsidies. LAT has the story here.
Despite the promise of Chiang's batteries, many in Wall Street and Silicon Valley were incredulous when he and other leaders at A123 asked for capital to build factories in America – Asia, yes, but Michigan, why would you want to?
Even more daunting, virtually all of the world's battery manufacturing industry is now in Asia, where plants can be built faster and supplies and equipment are much easier to get than in the United States. These days, it's hard to find Americans who even know how to build a battery factory.
. . . .
American manufacturing in the last three decades is replete with similar stories. That came across when David Vieau, A123's chief executive, made the rounds seeking capital in Silicon Valley and on Route 128, Boston's version of California's high-tech hub.
"A majority of the people liked the idea of letting someone else make things," said Vieau, sitting in his small non-corner office at A123's headquarters in Watertown, a Boston suburb. "
"In the software-oriented, Internet-age investment environment, [they] suggested you do the thinking and let someone else put together the bricks and mortar."
A123 did attract some early private investors, including Qualcomm and Motorola. But with limited funds, the company felt compelled to launch its manufacturing in Asia. It went to South Korea, home to perhaps today's most advanced lithium-ion manufacturing, to China, which is moving up the technology ladder fast, thanks in large part to foreign companies.
. . . .
But in ramping up production in China, A123 paid an immeasurable price, [A123's CTO] Riley says: Loss of its intellectual property – the ideas and engineering that made its products better."
The company did what it could to slow the technology transfer by breaking down the manufacturing process into steps, Riley said, but "we ended up having to teach these guys how to make our state-of-the-art, world-class batteries...And some of them are [now] competing with us directly."
Next month A123 plans to start manufacturing in an abandoned facility it is refitting near Detroit. Incremental employment is projected to be 400 by the end of 2011, going to 2000 eventually. To subsidize this, A123 is getting a $249 million matching grant from DOE's Electric Drive Vehicle Battery and Component Manufacturing Initiative as well as tax incentives from Michigan. So that's a minimum of $124,500 of government money to "buy" each of these jobs for Americans. Even so, manufacturing in Michigan is going to be a struggle.
Labor, though a small part of the overall costs, still figures into the equation. Average wages for production workers at major suppliers to car makers run about $13.50 an hour in Michigan, will go up for companies that unionize, as A123 and others operating in the state likely will. [Skeptic's note: $13.50 per hour is far below the average US wage for production workers, $18.42.]
By comparison, workers in Changzhou earn about $2.80 an hour, according to the local government figures.
Chiang is betting that America's superior technological capabilities will not only help close cost gaps but force foreign rivals to keep chasing American innovations.
Apart from government policies, he thinks that may be the only way to ensure his company and green-car manufacturing in the United States flourishes.
"It's going to be a fight," he said.
Translation: A123 cannot maintain a technological edge if it doesn't do its own manufacturing because much of innovation involves making improvements in manufacturing processes, and those who control the manufacturing—and are co-located with it—have a great competitive advantage. Read more on the innovation process in this post. The visionary management of A123—and DOE and the State of Michigan—see the strategic importance of local manufacturing, but you can bet the bean counters are upset because manufacturing in China would clearly be more profitable. America would be in a much better position today if the US Government had protected strategically important domestic industries and activities like these instead of giving them away in free trade negotiations and getting not much in return. What naifs we were!
Skeptic
LAT has rerun the same story about A123 again 10 days later, this time on the front page with a different headline. I think LAT is overdoing recycling.
Skeptic
Perhaps an even bigger issue than making improvements in manufacturing processes is the enormous cost and risk of getting an innovation to commercial scale in the first place. Andy Grove, retired CEO of Intel, emphasizes the scaling point here.
Skeptic
It gets worse. Even government subsidies can't keep the jobs at home, according to this NYT report:
BEIJING — Aided by at least $43 million in assistance from the government of Massachusetts and an innovative solar energy technology, Evergreen Solar emerged in the last three years as the third-largest maker of solar panels in the United States.
But now the company is closing its main American factory, laying off the 800 workers by the end of March and shifting production to a joint venture with a Chinese company in central China. Evergreen cited the much higher government support available in China.
Skeptic
There are about 14 million more jobless Americans today than there would be if unemployment were at a normal rate and the economy were humming as it was in 2000. If the US government were going to create 14 million jobs by making grants of the size it did to A123, the total cost would be $1.743 trillion. That's 6% more than the FY2011 federal budget deficit. Of course not all of the 14 million missing jobs were offshored, but wouldn't it be more economical to prevent these jobs from leaving than to buy them back at prices like these?
Skeptic
According to this more recent NYT Magazine report, our innovation posture is even worse than reported above. A123 didn't build the Michigan plant just to prevent loss of the technology to China but to acquire technology that had been developed in Korea. To bring it here, A123 built an exact copy of a Korean plant--in just the way the Asia companies used to acquire US technology.
About 30 minutes northwest of Detroit, just off the Interstate, in Livonia, sits the modern, red brick automotive headquarters of A123 Systems, a beneficiary of about $375 million in federal stimulus funds and matching state grants. A123 provides the cells for a new electric car called the Fisker Karma, as well as various electric bus and truck projects around the world. A123 is also the first large-scale lithium-ion manufacturer whose domestic operations are up and running, though its pedigree is international. Its battery technology was developed at M.I.T., and for the last several years, the company had been making its lithium-ion cells in factories in Korea and China. When I asked Jason Forcier, the head of A123’s automotive division, why the company went to Asia to make its products, Forcier said he had no choice. “That’s where the supply base was,” he said. “That’s where the know-how was — it was nonexistent in the U.S.”
Repatriating a high-tech manufacturing plant to the United States is not simply a matter of hiring the local talent. It requires good-old foreign know-how. “We call it ‘copy exact,’ ” Forcier said. “We bought a company in Korea that had the technology around this type of battery and had developed the manufacturing process there. We basically brought that here, copied it exactly and scaled it up.” A123 also brought a team of six Korean engineers to help transfer the technology to the U.S. and sent a team of Americans to Korea to learn.
The article also reports that State grants bumped the total of government subsidies for A123 up to $375 million. It was reported today in an NYT op ed by Susan Hockfield, president of MIT, that A123 has just recently hired its 1,000th employee. So $375,000 subsidy per new job, or $375 billion for one million new jobs. Another way of looking at the size of these subsidies is that they were large enough to pay 100% of A123's production worker costs and give the company "free" labor for about 12 years. This hardly seems a scalable way to address our unemployment problems.
Both NYT pieces emphasize the tight relationship between manufacturing and innovation and the need to co-locate them. Hockfield, who is also a director of GE, says:
Manufacturers conduct 70 percent of private-sector research and development and employ 64 percent of the nation’s scientists and engineers. But factories abroad attract design and engineering talent; over time, manufacturing off shore leads to innovation off shore. To make matters worse, as the President’s Council of Advisers on Science and Technology recently reported, other nations are investing heavily in manufacturing, while our investments lag.
Skeptic
It was announced today that A123 has filed in bankrupcty to facilitate its agreement to sell its major assets to Johnson Controls for $125 million, a very substantial discount off cost.
WALTHAM, Mass., Oct. 16, 2012 /PRNewswire/ -- A123 Systems, Inc. (Nasdaq: AONE) ("A123" or "the Company"), a developer and manufacturer of advanced Nanophosphate® lithium iron phosphate batteries and systems, today announced that it has entered into an asset purchase agreement with Johnson Controls, Inc. (NYSE: JCI) in a transaction valued at $125 million. Under the terms of the agreement, Johnson Controls plans to acquire A123's automotive business assets, including all of its automotive technology, products and customer contracts; its facilities in Livonia and Romulus, Michigan; its cathode powder manufacturing facilities in China, and A123's equity interest in Shanghai Advanced Traction Battery Systems Co., A123's joint venture with Shanghai Automotive. The asset purchase agreement also includes provisions through which Johnson Controls intends to license back to A123 certain technology for its grid, commercial and government businesses. A123 also continues to engage in active discussions regarding strategic alternatives for its grid, commercial, government and other operations, and has received several indications of interest for these businesses.
PR Newswire (http://s.tt/1qbVN)
NYT has a well-reported story here.
Skeptic
Johnson Controls didn't get the A123 assets. It was outbid by a Chinese company determined to dominate the battery and electric car industries, as reported in NYT December 9. The Chinese company had provided debtor-in-possession financing for A123 and more than doubled the Johnson Controls offer.
According to the deal, Wanxiang would acquire A123’s automotive, electric-grid and commercial business assets, including all of its technology, products, customers, and factories in Michigan, Massachusetts and Missouri, which will continue to operate.
Wanxiang would also take control of A123’s fledgling operations in China, including its interest in a joint battery venture with Shanghai Automotive, the country’s biggest carmaker.