A123: Another Test For China’s U.S. Expansion Plans
The pending auction of the battery business of A123 Systems, Inc. (OTC Markets: “AONEQ”) will present yet another test for the U.S. expansion plans of Chinese companies interested in becoming global players. On October 16, A123, a Massachusetts-based company that designs, develops, manufactures, and sells rechargeable lithium-ion batteries and energy storage systems, filed for bankruptcy protection. A bankruptcy court hearing to consider approving a sale of the company’s assets is set for December 11.
Founded in 2001, A123 has lost a total of $690 million since inception. Despite the fact that A123 has been hemorrhaging cash, Wanxiang Group Corp., one of China’s largest parts makers, offered a $465 million rescue package in August to gain access to A123’s battery technology. Unfortunately, the Wanxiang deal fell apart when A123 was unable to meet certain conditions of the agreement. Nonetheless, Wanxiang remains interested in acquiring A123’s assets, and last week, the company received approval from China’s Commerce Ministry to go forward with a deal.
Wanxiang faces several obstacles in its bid for A123’s assets, however. First it must successfully compete with other bidders in the upcoming auction for the company’s assets. Johnson Controls Inc. (NYSE: “JCI”), a $42 billion sales U.S. auto parts maker has already offered $125 million for A123’s automotive assets. Second, any purchase by Wanxiang must be approved by the Committee on Foreign Investment in the United States (CFIUS), a U.S. inter-agency panel that vets foreign deals for security concerns, and some lawmakers have already raised concerns about the deal, saying that it will transfer valuable U.S. taxpayer funded intellectual property to a foreign adversary. In a letter to Treasury Secretary Timothy Geithner, Energy Secretary Steven Chu and other top cabinet officers, a bipartisan group of eight senators and one senator-elect called on CFIUS to consider any “potentially harmful consequences that could occur as a result” of a sale to Wanxiang.
At issue is the fact that A123 was awarded a $249 million grant by the Obama administration, as well as the fact that A123’s battery technology is used by the military and to support the U.S. electrical grid. A123 has had two contracts worth a total of more than $4 million to develop batteries for the Air Force, and approximately $130 million of the Department of Energy grant was taken down before the company filed for bankruptcy. “The transfer of assets, technology and intellectual property, developed with American tax dollars, to a foreign company would be irresponsible,” the letter from the Senators said.
Political resistance to a potential Wanxiang deal for A123 comes on the heels of security concerns that have been raised by lawmakers and the Obama Administration over Chinese expansion into the United States in two other industries: wind energy and telecommunications equipment.
In late September, President Barack Obama blocked a privately-owned Chinese company from building wind turbines close to a Navy military site in Oregon due to national security concerns. Ralls Corp, which had been installing wind turbine generators made in China by Sany Heavy Industry Co., Ltd. (Shanghai: “600031.SS”), has four wind farm projects that are within or in the vicinity of restricted air space at a naval weapons systems training facility, according to the Obama administration. The last time a president formally blocked a deal on national security grounds was in 1990 when then-President George H.W. Bush stopped a Chinese aero-technology company from acquiring a U.S. manufacturing firm.
In October, the House Intelligence Committee released a report on “national security threats posed by Chinese telecommunications companies of Huawei and ZTE.” Employee-owned Huawei Technologies Co. Ltd. is the world’s second-biggest maker of routers, switches and other telecommunications equipment, and ZTE Corp. (HKSE: “0763.HK”), its smaller rival, ranks fifth. Both Huawei and ZTE are based in Shenzhen, China and are rapidly becoming “dominant global players” in the telecommunications market, the report said. It noted that telecoms are intertwined with computerized controls for electric power grids; banking and finance systems; gas, oil and water systems; and rail and shipping.
The House Intelligence Committee report said that the U.S. government should prevent acquisitions or mergers by Huawei and ZTE, and that government agencies and contractors should cease using equipment made by the companies. “Huawei and ZTE seek to expand in the United States, but as a result of our investigation, we do not have the confidence that these two companies with their ties to the Chinese government can be trusted with infrastructure of such critical importance,” the committee’s chairman, Michigan Republican Mike Rogers, said.
Whether or not the objections being raised by the Obama Administration and the nation’s lawmakers in these three instances represent serious security risks to the United States is a subject unto itself. Whatever the risks, political opposition to the expansion of Chinese companies into the United States will have two medium term effects. First, it will strain the Sino-U.S. relationship, just as China undergoes a leadership change. Second, it will drive Chinese investment towards Europe and other parts of the world where the political attitude towards Chinese expansion and investment is seen to be more friendly.