News Story

Experts Say State Battery-Plant Subsidy Is a “Risky Venture”

The governor and others are suggesting that a $383 million government-subsidized battery plant for Livonia will jump start the state's struggling economy and create jobs. This is likely a highly exaggerated claim, according to two University of Michigan experts familiar with the battery industry.

But while the U of M experts still see some merit in the project, the chief lobbyist for Michigan's small businesses says it exposes Michigan's job providers to more bad economic and tax policies.

Peter Adriaens, the Professor of Entrepreneurship at the Ross School of Business at the University of Michigan, says that the worthwhile investment is that the A123 Systems plant could become a piece of a bigger movement that makes the Detroit area the "hub of innovation" for batteries.

"If the hope is manufacturing and jobs, good luck," Adriaens said. "The political objective might not necessarily be met."

Adriaens said countries such as Korea, Germany and China are already ahead of Michigan in the energy storage business. The hope for Michigan is that the innovative battery products that people buy are developed in this state.

But that's not going to be easy, according to Thomas P. Lyon, director of the Erb Institute for Global Sustainable Enterprise at the University of Michigan. 

In May of 2009, Lyon was involved in a report about the creation of a "plug-in electric vehicle industry cluster" in Michigan. The idea would turn back the clock to when the big three automakers ruled the car industry from Detroit. Except, this time it would be done with batteries leading the way.

The key is creating a market "cluster" where there is a shared interaction between universities, research and developers that create a "critical mass of firms and skilled employees that work together," Lyon said.

Without that, he says the A123 Systems plant in Livonia "will not be sustainable."

Lyon says that "clustering" has been successful in Boston and the Silicon Valley.

Michigan doesn't have a recent history of that cooperative culture in Michigan.

Both Lyon and Adriaens called the A123 plant a risky venture.

"We got a lot of subsidies. It may be risky for the Feds," Lyon said. "That should greatly reduce our worries whether this is a risk to the state. We have a nice opportunity that has been handed to us."

In a filing with the SEC, the company stated: "We have never been profitable. ...We have a history of losses, and we may be unable to achieve or sustain profitability."

The company was founded in 2001 and announced its lithium-ion battery system in 2005. Since then, A123 states that it had net losses of $31 million in 2007, $80.5 million in 2008, and $86.6 million for 2009. Furthermore, it had negative cash flow of $56.1 million in 2007, $76 million in 2008 and $114.7 million in 2009.

Adriaens said it is not unusual for a start-up technological company to lose money the first five years.

Through the Michigan Economic Development Corporation, the company defended its financial statements.

Michael Shore, spokesman for the MEDC, sent an email with A123's responses to the comments in the financial statements that drew attention to the lack of profitability. Shore's email says that the comments were made to "err on the side of caution."

The company said it has spent a lot of money on early investments on infrastructure processes and systems that have to be in place prior to the product being made. It also stated that the manufacturing capacity by the end of 2011 will allow for $450 million to $550 million in annual revenue.

The A123 plant is getting almost $134 million from the state and $249 million from the federal government.

Charlie Owens, state director of the National Federation of Independent Businesses, said the state shouldn't be risking taxpayer dollars.

"Is this the role of government to risk taxpayer money on this kind of very high risk start up venture? The answer is, 'No.' " Owens said. "The only way you can attract a new business to this state is to insulate it from the tax and business climate that this administration has created and that every other business has to suffer under.

"The state should be trying to create a business and tax environment where all businesses can succeed, not just the ones they are enamored with."

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.