Investors Embrace A123, But Challenges Lie Ahead

A123 Systems Battery

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The smash hit IPO of lithium ion battery maker A123 Systems is sending waves of euphoria through the clean tech and plug-in car market. Mass.-based A123 Systems is now worth nearly $2 billion—indicating huge investor confidence in the future of electric cars, plug-in hybrids, and the batteries that make them go. Yet, A123 has yet to make a profit and faces significant hurdles to mass commercial success.

In the first day of trading yesterday, A123 Systems rose more than 50 percent to as high as $21.14 before closing at $20.29. The company raised about $380 million, well above its original estimate of a minimum of $250 million.

A123’s success signals that other companies in the space, most notably Tesla Motors, could experience similar success taking the IPO route.

The automotive market for lithium ion batteries is projected to be $32 million in 2009, but will skyrocket to $22 billion by 2015, according to market research sponsored by A123. However, the finance website Seeking Alpha said the increase in the lithium ion market of 68,000 percent in about five years is “pretty ridiculous.” In the first six months of this year, A123 reported $43 million of revenue but lost more than $40 million.

A123 chief executive David Vieau, said, “It’s going to give us the capital that we need to expand the business, and it’s going to provide comfort to our customers.” To succeed, A123 will need to reduce the cost of its batteries, increase production, and overcome fierce competition from larger and more mature Asian battery companies—and to accomplish these goals during one of the toughest auto market in decades. A123 has worked with BMW, Chrysler and General Motors—but lost out on its bid to supply batteries to the Chevy Volt plug-in hybrid to Korea-based LG Chem.

Getting Back to Work

A123 co-founder Yet-Ming Chiang, acknowledged to Reuters that the company faces challenges. “Even though this is a significant event, there is still a lot of work to be done and tomorrow we all get back to work.”

A portion of the money raised in the IPO will be used to match government funding of nearly $250 million granted by the US Department of Energy. Calling A123 “one of the success stories of a high-technology company that was funded with government funds,” US Energy Secretary Steven Chu said that “it’s the model of what we want to happen in the future on a bigger scale.” Michigan pitched in another $100 million in tax credits to A123 to encourage the company to build a factory in the state.

Forbes made a comparison between ethanol stocks that soared after former President George Bush declared the plant-based fuel as the winning transportation alternative—and a potential bubble in electric car-related stocks following the Obama administration’s goal of putting 1 million plug-in cars on the road by 2015. Pacific Ethanol soared to $42 per share in May 2006 and now are worth about 57 cents. VeraSun, an ethanol maker thought to have huge potential a few years ago, is now bankrupt.

Nonetheless, all the conditions for exuberant investing in battery-powered green cars are in place. And the capital needed to shift from 20th century gas-guzzlers to sustainable electric-drive autos is becoming available. Peter Cohan, writing on, said, “It’s too early to conclude that green can earn a profit, it sure has put a lot of green in the pockets of A123’s investors.”

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  • Samie

    There always will be short-term investors but I wonder how many are involved w/ A123. You would think that investors would be willing to let the company mature a bit before they bailout or demand reasonable profits. The comparison to ethanol may not hold in that the movement was more of a short-term scheme than anything else. That may say something about the avg. investor who may not do their homework but people failed to see that any alt. fuel must compete closely with the production of petro. Why investing in battery tech. is different is that unlike another fuel the consumer has a different experience in supplying energy to their vehicle w/ Ethanol or Biofuel you may have one difference in that the engine may be designed to be a flex engine, besides that you have the same type of vehicle & same fueling experience so in the case of fuels for fuels you are investing in the idea that ethanol can be produced cheaper at some point than petro.

    For the battery producers I hope they can penetrate enough of the market to lobby as strong as the petro industries do. Government will play a big role because in the short-term the auto-industry is luke-warm about the idea of EV’s in terms of profits and passing real savings onto consumers. Maybe that is why most auto-manufactures have signed up w/ one battery producer so that there is more of a collected interest. One last thought on Government, if smart reduce incentives for car producers to choice only 1 or 2 battery producers and see that there is no conflict of interest between battery producers, oil companies, & auto manufactures.

  • Russ Finley

    I’ve been using these batteries to power a hybrid electric bike since 2006. Still going strong.

  • perfectapproach

    I’m surprised it took this long for A123 Systems to have an IPO. Look for Cobasys to do the same thing! YOU WANT TO BE PART OF THIS IPO! See what happened with Google when they went public? Batteries are the next financial gold-mine, and if you’ve got money to invest, buy into battery technology.