Ailing A123 Systems Strikes Deal with Chinese Investor

As its losses deepen, A123 Systems is reaching out to
China for a new financial lifeline.

Under the terms of a new non-binding memorandum of
understanding, the electric vehicle battery maker could receive up to $450
million from China’s largest automotive components supplier Wanxiang Group
Corporation.

A123, which makes advanced lithium-ion technologies,
supplies batteries to Fisker Automotive and GM’s Spark electric
cars and it also provides its technology for energy storage. The recipient of a
$249 million grant from the U.S. Department of Energy back in August 2009, the company
is facing an investor class action lawsuit and was part of the battery
recall earlier this year. With the mainstream electric vehicle market
stuck in neutral, it has struggled to keep manufacturing costs down. 

Its net losses widened to $82.9 million in the second
quarter, compared with $55.4 million a year ago. Q2 revenue was just $17
million, off 53% from a year ago.

"Today’s announcement is the first step toward
solidifying a strategic agreement that we believe would remove the uncertainty
regarding A123’s financial situation," says David Vieau, the CEO of A123.
"A substantial capital investment from Wanxiang would not only provide
financial stability to A123 as we continue to grow, but it would also align us
with a large successful global brand in the automotive and cleantech
industries."

The agreement calls for Wanxiang to provide A123 with
initial debt financing of $75 million, followed by extensions of $25 million
and $50 million if certain conditions are met. The memorandum also outlines
conditions for purchases of senior secured convertible notes, a transaction
that is subject to government and shareholder approval. 

Wanxiang’s total capital investment under the financing
outlined in the agreement would be approximately $450 million. 

Wanxiang is one of China’s largest privately owned
companies, with more than $13 billion in revenue. It employs 3,000 people in
the US. 

"A123 offers industry-leading technologies for
vehicle electrification and grid-scale energy storage, as well as strong
manufacturing and systems engineering capabilities in Michigan and
Massachusetts," says Weiding Lu, CEO of Wanxiang Group. "We think
this creates important synergies with Wanxiang, which has been involved in this
field for 12 years and has strong R&D and manufacturing capabilities in
China, especially as we continue to expand on our strategy of investing in the
automotive and cleantech industries in the US." 

During the second quarter, A123 Systems announced new
breakthrough technology called Nanophosphate EXT that improves the capacity and
capability of its electric vehicle batteries in extreme temperature conditions.
Battery technologies typically experience reduced performance at very high or
very low temperatures. It has signed its first production customer for the
technology and expects to ship it in the first half of 2013. 

Also during the quarter, A123 expanded its relationship
with BAE Systems, which already uses its technology for nearly 3,000 hybrid
buses worldwide.