A123 Bankruptcy, Clooney and Hubris

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10/17/2012

A123 Bankruptcy, Clooney and Hubris

Lara Hoffmans, Contributor

The list of failed firms who received a Department of Energy green-energy subsidy got a bit longer as lithium ion battery maker A123 filed for bankruptcy Tuesday.

A bit of backstory: Since its founding in 2001, A123 turned a profit of negative $1 billion. To keep it afloat, it was granted a $249 million (tax-payer funded) DOE grant in 2009 and another $125 million in tax credits from the state of Michigan. To ensure there was a market for A123’s batteries, American taxpayers (some of them unwittingly, some unwillingly) gave Fisker Automotive a $529 million loan to make cars that would use said batteries.

Despite this masterful planning, A123 only got to spend $132 million of its DOE grant before waving the white flag. Now, it appears Johnson Controls (who got a $299 million DOE grant) will buy A123’s remaining assets and massage it through bankruptcy.

What evil forces are afoot here, causing so many DOE-subsidized green-energy firms to fail? No doubt, politicians will blame, among other things, subsidized competition from China. (They never seem to tire of calling the kettle black.)

But the real culprit is basic economics. Even with government largesse, electric cars aren’t yet economic. As much as politicians who, King Canute-like, believe they can control the economy wish it weren’t so, petroleum products remain cheap and plentiful—as do the cars they fuel. (Even true in California, though its politicians are doing their best to make gas prices there radically higher.) The federal government gives electric car buyers a (taxpayer funded) $7,500 tax credit, but the premium above a gas-guzzler is still an additional $10,000. That may be fine for Brad Pitt and George Clooney, but the rest of us may do the math and find better uses for that 10 grand. (Not to mention the sticky question of how the heck you dispose of those darn toxic batteries.)

Electric cars may very well be the future! Or, the future may be cars powered by (now, very cheap and extraordinarily plentiful and really rather environmentally clean) natural gas. Or powered by grass clipping or coal or French fries or wishful thinking. Or some combination of electric, natural gas and wishful thinking. Sure, you always have early adopters willing to pay a premium (Clooney!). But to get to the point where a critical mass of people want to buy a car powered by something other than petrol, it has to make basic economic sense.

I can’t predict what energy source will be vast and (relatively) cheap 10, 20 or 50 years from now. But nor can any politician. By picking winners and losers (well, mostly losers, lately) the government displays a worrisome amount of hubris. Not to mention they’re reallocating capital to companies that couldn’t attract investors on their own (possibly for good reason).

The end result typically isn’t wildly profitable, innovative firms. It’s very often bankrupt shells only good for harvesting (taxpayer funded) tax losses. (Ahem, Solyndra.) Which isn’t particularly a great return on a (taxpayer funded) investment.