What impact will this week's A123 Systems' bankruptcy filing have on the future of electric vehicles in the United States? During today's OnPoint, Christi Tezak, managing director of research at ClearView Energy Partners, discusses the fallout from the filing and the deal A123 has made with Johnson Controls to purchase its automotive assets and factories. Tezak also talks about the possible political ramifications of the filing, heading toward the elections.
Monica Trauzzi: Hello and welcome to OnPoint, I'm Monica Trauzzi. Joining me today is Christi Tezak, managing director of research at Clearview Energy Partners. Christi, it's nice to have you on the show.
Christi Tezak: Thanks for having me.
Monica Trauzzi: Christi, battery maker A123 Systems filed for bankruptcy this week, immediately receiving comparisons to Solyndra. A123 was long seen as a very promising recipient of federal loans, so what exactly happened here and what went wrong?
Christi Tezak: Well, I think it's a matter of expectations meeting reality. There was a certain assumption, and we've seen it not just with A123, but across the electric vehicle space in terms of how fast the uptake of this particular product was going to be. GM cut back on the production of the Chevy Volt as well. So if you're looking at a slightly slower deployment schedule, you know, where expectation is out of line with the market response. And I think that that's one of the challenges. But I think different than Solyndra, A123 has a technology and a product that is being really seriously evaluated and used in the automotive industry. The participation of a major vendor to the automotive community in Johnson Controls, doing the debtor and possession financing I think sends an entirely different message. With Solyndra, everybody was sort of always scratching their heads saying, "Gosh, why did DOE do that one?" So I think that sometimes businesses go through a retrenching period when market realities differ from expectations. So I think that in many ways A123 is different.
Monica Trauzzi: So earlier this year, to sort of save face, the company had reached an agreement to sell a majority stake to a Chinese auto parts manufacturer. That fell through. But there are some questions there, because the whole point of this grant program is to support manufacturing in the U.S. and promoting technology in the U.S. And they were essentially going to ship it over to China.
Christi Tezak: Well, Chinese ownership of U.S. assets is something that becomes very problematic in an election year. You've seen it on both sides of the aisle. We've seen very similar pushbacks to Chinese acquisition of assets with Senator Inhofe's very vocal opposition to the Nexen acquisition, even though most of those assets are in Canada, but some of them are here in the U.S. So I think that in some ways there must have been some negative feedback on the CFIUS review and the potential for that succeeding positively that only compounded the issue with potentially offshoring jobs. But I think in some ways it does make you wonder how much easier it was to settle this all up with a U.S. partner, and the political upside and attractiveness of that sort of workout versus seeing a U.S. grant recipient go into basically a Chinese partnership. So I think a little machismo at home.
Monica Trauzzi: Right, and so that U.S. partner is Johnson Controls. They're going to be buying ...
Christi Tezak: They're doing the debtor and possession financing.
Monica Trauzzi: Yes, so they're doing a deal for $125 million. Is Johnson Controls the big winner here?
Christi Tezak: They could be. They are a very sophisticated market player in terms of servicing the auto industry, and that is classic with any emerging company moving into a well-established supply chain, that kind of expertise and leadership can really be constructive and really improve the future prospects of a company. So to take a new technology company like A123 and fold it into the expertise of a family like Johnson Controls, I don't think that it's so much a loss for 123, I think it is definitely additive for Johnson Controls and probably enhances the future for A123.
Monica Trauzzi: So they're going to be buying the automotive assets and factories, what then does this mean for jobs? Are there net losses, net gains?
Christi Tezak: Well, we haven't taken a close look on the granular impacts to a jobs level there. We've been following the growth of the electric vehicle industry more broadly in terms of deployment and how it contributes to potential electricity loads and the overall fuel mix in the country. And I think that senior retrenchment here is not unusual. Like I said, if the vehicle sales are a little bit slower, then it's going to be a challenge to be supporting the niche but growing industry. It's easy to say, well, you can save a lot of money having an electric car, as long as you can afford the car payments that go with it. So we're still in that chicken and egg mode in terms of the industry where this cheaper to run product is more expensive up front. Consumer credit is still tight. A lot of people still feel they're in recession stance. So you don't have people running out and buying cars. And attractive as an electric vehicle may be, it may be beyond the reach of people still, and I think that's impacting it.
Monica Trauzzi: So do you think this story, and then the story we heard of Tesla a couple of weeks ago, that they would be selling as many as eight million shares of their stock to raise money, do all those stories together paint a negative picture for the U.S. consumer, and where does it sort of put the battery industry and the electric vehicle industry?
Christi Tezak: Well, the challenge for the electric vehicle industry is that they're still selling a premium product in what I think is still a recession economy in the eyes of many consumers. I don't have 98 large laying around to go pick up a Tesla. It would be a nice idea, but that's not my first priority. So I think that the uptake of new vehicles is still something that's going to be a challenge for these premium type products. The other thing is, is that it's not always clear that the consumer gets the whole suite of financing. I remember the story a friend of mine told me when she went to go buy a hybrid, because she had taken a job in Baltimore and she was going to buy a gasoline and electric hybrid. The financing was so much better on a conventional gasoline car from the dealer, that even assuming the savings in gas, she was still ahead financially to buy the conventionally fueled vehicle. So when you have limited cars, if they're not necessarily financing them in a way to facilitate it, those are all barriers. Do I think it changes over time? Absolutely. But we have to be realistic on how fast we expect these industries to grow when we have an environment where consumers' credit is still constrained and the consumer is making that decision individually. It's not like pushing a utility into a renewable portfolio standard.
Monica Trauzzi: Let's talk about politics. The A123 story did not make its way into the second presidential debate, why don't you think Governor Romney chose to bring it up in that energy policy discussion that sort of led off the conversation?
Christi Tezak: Not being a campaign strategist, I think perhaps the strategy might have been to focus more on this war of facts. It seems that both campaigns came into this with the intention of arguing that they knew more about the numbers and they had the numbers to prove their point. And I think that the after action fact checking, as we were discussing, of who said what and how the numbers were twisted, was reflective of that. Perhaps it was a concern that A123 wasn't known well enough. Solyndra had been something that had been hashed around and hashed around in the press for about six months prior to it being used as campaign artillery, and I think perhaps maybe while some would say that the bankruptcy filing was inconveniently proximate, it was almost too close, so there wasn't enough time to educate people that it would have been a punch by Governor Romney by identifying one more loser.
Monica Trauzzi: All right, we're going to end it there. Thank you for coming on the show, nice to see you.
Christi Tezak: Thanks, Monica.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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