Why Did A123 Systems Fail in the EV Industry?

At the dawn of the 21st century, the automotive industry faced a chicken-and-egg problem where the development of electric vehicles (EVs) and their battery manufacturing appeared to be mutually exclusive. It was widely believed that the reluctance of carmakers to produce electric vehicles was partly due to the lack of domestic battery manufacturers, and vice versa. This dependency loop led to a critical turning point in the EV industry, which was heavily influenced by government interventions, such as the American Recovery and Reinvestment Act (ARRA).

The Government's Role in Supporting Battery Manufacturing

Amidst the financial turmoil of 2008, the U.S. government stepped in with significant funding through the ARRA, allocating over $787 billion in stimulus measures. Among these, a substantial portion, approximately $2 billion, was earmarked specifically for building advanced lithium-ion battery factories in the United States. This allocation aimed to support the growth of battery manufacturing in the Midwest, transforming Detroit into a hub for green car technology. The federal government offered dollar-for-dollar matching grants, encouraging companies to invest in domestic battery production.

Key Investors in Battery Factories

Several prominent battery manufacturers received grants to establish their facilities in the Midwest:
- A123 Systems received $249 million to build a factory in Livonia, Michigan
- LG Chem received $151 million to build a factory in Holland, Michigan
- Johnson Controls-Saft received $299 million to build a factory in Holland, Ohio
- Dow Kokam received $161 million to build a factory in Midland, Michigan
- EnerDel received $119 million to build a factory in Indianapolis, Indiana

Together, these investments brought approximately 430,000 battery packs of manufacturing capacity online annually. However, the hype and promises of a green revolution did not translate into immediate demand for electric vehicles.

The Decline of Demand for Electric Vehicles

The reality was that battery-powered cars were not widely adopted, with the notable exception of the Chevrolet Volt. The Volt had an average annual production of about 15,000 units over the last four years. This number is significantly lower than the manufacturing capacity of the Midwest's battery factories. Furthermore, it was revealed that the batteries used in the Volt were not even produced in the LG Chem factory in Michigan, as they were imported from South Korea until 2011.

Implications and Lessons Learned

The lack of demand for electric vehicles, coupled with the proliferation of expensive battery factories, led to inevitable financial struggles for some of these companies. A123 Systems, which received a significant grant, eventually faced liquidation. This underscores the critical importance of aligning investments in new technologies with market demands and the necessity for a clear pathway from research and development to market adoption.

The journey of A123 Systems serves as a cautionary tale for future investments in the battery manufacturing industry. It highlights the complexities of transforming a niche technology into a mainstream consumer product and the potential risks associated with mismatches between public funding and market realities.