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Inside story of A123 Systems

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For those not aware, A123 Systems will be supplying batteries to Fisker. This article from the LA Times is an interesting read on A123.,0,2186993,full.story

Los Angeles Times said:
BOSTON -- Yet-Ming Chiang relishes his 20-mile drive to work. His hybrid car gets more than 100 miles per gallon, recharges by plugging into a regular wall outlet, and purrs so quietly that it's his favorite place for making important phone calls.

But what makes Chiang's ordinary-looking beige Toyota Prius even more special is that it's powered by a break-through battery he invented himself and is working to turn into the kind of high-tech, green, "Made in America" product that many see as the key to the nation's economic future.

Safer and more long-lasting than conventional lithium-ion car batteries, the 52-year old MIT professor's invention packs 600 cells into a case the size of an airplane carry-on bag. His technology has already transformed the batteries used in many cordless power tools.

So why are Chiang and his company, A123 Systems, having trouble moving to full-scale commercial production and creating thousands of new American jobs with his better mousetrap?

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The answer is a story of both the current obstacles to a rebirth of U.S. manufacturing – and of the tantalizing possibilities if such a rebirth could be achieved.

The obstacles are rooted in the sad history of manufacturing's decline in the United States: 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.

That's why A123 had to give in and build its first plants in China – where the company could move into production quickly to show auto industry customers that it could deliver on future contracts.

"Without question, we would rather have done it all in the U.S.," said Chiang, who left Taiwan as a six-year-old with his family, earned degrees at MIT and has been a materials science professor there since the mid-1980s. "I'm an American citizen," he adds. "We're an American company. It's an American-born technology."

Despite the obstacles, A123 and a handful of other advanced battery producers are building plants in Michigan and other states – thanks massive government support that has offset Wall Street's skepticism. A123 alone is getting a whopping $250 million in aid from Obama's stimulus program as well as tax incentives from Michigan.

A123's first U.S. plant opens in June, in an abandoned brick building near Detroit that once made VHS tapes for Disney.

That achievement is a testament to American inventiveness, still-flourishing entrepreneurism, and a belated conclusion on the part of government that making things in America is critical to the nation's economic future.

For years U.S. manufacturers have complained about Beijing's industrial policies that, among other things, subsidized its export companies. Now, at least for clean-tech industries, Washington is challenging China at its own game, for which American officials make no apology.

"Too often we've done the innovation and we've outsourced the manufacturing," said Matt Rogers, a senior adviser to Secretary of Energy Steven Chu. "That's where A123 becomes important."

Such talk challenges the long-held view that the U.S. economy could continue to prosper even when manufacturing moved overseas, so long as Americans churned out the best research and ideas for high-value products. Recent experience has suggested that big manufacturing complexes devoted to a single industry -- like those in China – act as magnets for research and development facilities too.

Chiang, who wears big silver-rimmed glasses and smiles easily, won an initial $100,000 grant from the Energy Department in late 2001. It helped pay graduate students who, working in an MIT lab on a June night in 2002, suddenly shouted the battery developer's equivalent of eureka -- "Higher power!"

The team was testing nanoscale phosphate materials as a substitute for the cobalt that's used in conventional lithium-ion batteries. The results surprised even Chiang.

"Keep going, keep going," he told his students that night as they logged discharge rates five-to-ten times those of other high-powered lithium-ion batteries. The idea of applying the battery to electric vehicles wasn't far from Chiang's mind; achieving rapid acceleration from a reasonable sized battery was critical for hybrids.

"Gee, what can you really enable if you can do this?" he thought to himself.

Yet going from lab results to commercial products and mass production looked daunting. After all, rechargeable lithium-ion battery technologies were pioneered in the United States in the early 1990s, but their most lucrative application -- for laptops and cell phones -- gave Asian companies a huge advantage because virtually all electronics design and manufacturing had shifted to that part of the world.

Japanese firms such as Sony and Panasonic led early commercial developments in the field. Then South Koreans and China built up such scale and low-cost production capabilities that large American battery makers such as Duracell and Eveready couldn't compete.

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.

Now, A123 has five plants in China, coincidentally located in Chiang's father's hometown of Changzhou, about two hours' drive west of Shanghai. Chiang remembers visiting relatives there a year ago; their village didn't have roads yet.

Where the roads are is Changzhou's industrial zones. Bart Riley, an A123 co-founder and chief technology officer, figures it took about nine months to get a Chinese factory up and running – one-third the time typical for the U.S.

The quicker launch helped A123 make a name for itself through Black & Decker, which in early 2006 began putting A123 batteries in its Dewalt power tools.

Since then, A123 has been supplying batteries and battery systems for New York City buses built by Daimler, among other customers, and the company has agreements to develop products for Chrysler, Navistar and American green-car maker Fisker Automotive.

But in ramping up production in China, A123 paid an immeasurable price, 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."

To stay ahead of such competition, Riley and his R&D staff of 100, made up of young MIT graduates and former scientists at Bell Labs, Polaroid and Duracell, are pushing hard to devise innovations and to drive down costs.

In Michigan, the company is racing to open its first production plant in Livonia, 20 miles west of Detroit. By the end of next year, it expects to have two plants in the area with a workforce of 400, with plans to go up to 2,000, and initial capacity to produce some 30,000 battery systems.

The company's sales reached $91 million last year, and it currently has about 1,700 employees, two-thirds in Asia.

If experts are right, sales of hybrid and electric cars will begin to take off next year, putting at least a million such vehicles on American roads by 2015. First out among U.S. carmakers, General Motors' Chevrolet Volt is slated for release later this year.

After looking at A123, GM went with LG Chem, a South Korean battery maker that is building plants in Michigan but for the short term will be shipping cells made in Korea for the American-made Volt.

The White House, which bailed out the struggling automaker, wasn't happy that GM settled on a foreign battery supplier, but A123 officials candidly admit that LG Chem was farther along in manufacturing readiness.

Even so, U.S. officials see in electric vehicles the opportunity to revive American auto manufacturing. In addition to backing battery makers, Obama's stimulus package awarded millions of dollars to build domestic factories supplying separators and other critical parts for lithium-ion cells.

For battery makers, the need to be close to car-producing customers, hefty shipping costs and the high degree of automation also argue for substantial domestic production over the long haul.

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.

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.
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