News Story

President Sees Bright Green Future for Battery Jobs; Details Show Reality Still Very Cloudy

On Thursday, President Barack Obama brought Michigan more talk of cutting edge “green” technology and the future jobs he insists it will create.

Obama's visit centered on the Johnson Controls Inc. advanced battery facility in Holland. Two years ago JCI got $299 million in federal stimulus grants to convert a Holland warehouse into an advanced battery plant. This week the Obama administration announced $175 million in new federal grants to "accelerate the development and deployment of advanced vehicle technologies.” JCI is getting a $3 million piece of that funding.

“At a time when Americans are rightly focused on our economy, when Americans are asking about what’s our path forward, all of you here at Johnson Controls are providing a powerful answer,” Obama said. “This is one of the most advanced factories in the world. You’re helping America lead in a growing new industry.”

Obama visited Holland last summer at the opening of a LG Chem advanced battery facility, which is also heavily subsidized with U.S. taxpayer dollars. In a sense, regarding Thursday's appearance, the President had “been there before.” So has Michigan. The years when Jennifer Granholm was Michigan's governor (2003 – 2010) were dominated by the same promises.

Following the President’s previous visit to Michigan to LG Chem, Mackinac Center legislative analyst Jack McHugh commented in Capitol Confidential about the relative impact of the subsidies needed to “purchase” the expected jobs:

Both President Obama and Gov. Granholm boasted at the event that the plant is a sign of "economic recovery." Yet each of the approximately 400 jobs the operation is expected to generate will cost taxpayers $625,000. At this rate, it would cost $5 trillion to provide employment to the approximately 8 million Americans who have lost their jobs in the current downturn. That amount represents almost one-third of the nation's annual gross domestic product.

(The state subsidy alone amounts to $250,000 per job. At this rate, buying back all of the nearly 600,000 jobs lost here since 2003 would cost Michigan taxpayers $150 billion, or almost half the state's total output for a year.)

Meanwhile, the job creation number the news media has most often used for the Johnson Controls facility is that it “will have up to 550 employees” when in full operation. That “will have up to 550” statement was the same foreseen back in 2009. But just a couple of months ago, in May, the home town Holland Sentinel put the JCI facility workforce at the Holland plant at 70. Even more recently a FOX News 17 account had it at 75. The audience at the Obama appearance today was estimated at 400. Apparently that included numerous dignitaries, politicians and JCI employees from other states.

Back in 2009, the $299 million in grants for JCI were part of $2.4 billion in federal stimulus bucks for battery-related projects in Michigan. When Vice President Joe Biden announced the grants he said they would create 19,000 high-paying Michigan jobs.

Thus far the job count has been far below that 19,000 figure. According to a January 2011 account in the Detroit Free Press, all but one of the advanced battery operations in Michigan employ from a couple dozen to 100 or so employees. The exception was A123 Systems which has just reached the 1,000 employee plateau.  But, according to the 2009 press release from when the stimulus dollars were doled out, the company was supposed to employ up to 5,000 in Michigan.

Virtually all of the subsidized advanced battery companies, including A123 Systems, predict they will reach those higher employment marks when the “expected market growth for advanced batteries” really kicks in.

The backdrop for the lower-than-advertised job creation numbers is abysmal sales figures for electric and hybrid autos. In 2010 the auto sales numbers for electrics and hybrids represented just 2.2 percent of the U.S. market. What's more, the road ahead doesn't look brighter for advanced battery autos. Global research institute J.D. Power & Associates has pegged sales of the two types of cars to reach just 7.3 percent worldwide by 2020 – and that would be with continued governmental pressures considered in the calculations.

Earlier this month the President struck a deal with automakers to double fuel efficiency standards for light-duty vehicles to 54.5 mpg by 2025. If those regulations are ever enforced, it would provide stronger incentives to hybridize light duty trucks and to get more battery electric vehicles on the roads. Obama's trip to Michigan was part of his public relations tour to tout the agreement.

Theoretically the new fuel efficiency standards would put more pressure on the U.S. auto market to turn to hybrids and electric cars. This, of course, would make the President’s environmentalist base happier.

However, some auto analysts, such as Henry Payne of the Detroit News and Michigan View, say that domestic automakers may have been willing to go along with the deal because it had more loopholes in it than Swiss cheese. The agreement allows the President to keep his rhetorical stance without the nation suffering the full negative impacts of the policy. Meanwhile, the automakers get to dodge the bullet of forced wholesale conversion to technology that isn't ready yet – and very possibly never will be. But the taxpayer-financed subsidies to domestic automakers may continue.

So now questions are being asked: Should government be betting taxpayer dollars on speculative investments in the first place?

A123 Systems seems to be the closest thing to a success story in lithium-ion battery production. It's the top producer of lithium-ion batteries in North America. A123 Systems is headquartered in Watertown, Massachusetts, but most of its U.S. employees are in Michigan. It announced its 1,000th Michigan employee on July 19 of this year.

Thursday, in an announcement seemingly timed with the President's Michigan visit, General Motors announced a contract under which A123 Systems would produce advanced batteries at its Livonia facility. Neither GM nor A123 Systems disclosed the amount of the contract.

Incorporated in 2001, A123 Systems originally supplied batteries to Black & Decker for consumer products before shifting focus to advanced batteries for motor vehicles. A123 Systems produces a battery with a 10-year life span.  But even with that advantage most of the company's milestones of success seem to have been in the form of government grants not real market in-roads.

The catalyst for starting the company was a $100,000 Department of Energy Small Business Innovation Research grant in 2001. That grant was followed by another subsidy from the department two years later in 2003. In 2006, A123 Systems got a $15 million cost-share contract from the U.S. Advanced Battery Consortium. Along with that contract came an additional $12.5 million in 2008.

As mentioned above, in 2009, at the same time the $299 million federal stimulus grant for JCI was announced, A123 Systems got $249.1 million in stimulus funds.

After getting the $249 million in stimulus grants, A123 Systems secured a $17.3 million loan from the feds in 2010. Meanwhile, A123 Systems was receiving $238 million in state incentives from Michigan through the Michigan Economic Development Corporation 21st Century Jobs Fund. This may not even be an exhaustive list of all the government incentives A123 Systems has received.

The just-announced GM-A123 Systems production contract also comes within the context of federal bailouts for the domestic auto industry and heavy governmental pressure on that industry to invest in battery-powered vehicles – arguably an indirect subsidy.

In spite of its long record of government financing that exceeds a quarter of a billion dollars, A123 Systems has yet to turn a profit. In the first three months of 2011, it lost $53.7 million, with revenue on $18.1 million, compared with a $29-million loss with revenue of $24.5 million in 2010. According to A123 Systems statements, net losses for 2009 were $85.8 million, up from $80.5 million in 2008.

In mid-July, A123 stock (AONE) had fallen 44 percent from its Jan. 1, 2011 level of $5.50 a share. The stock had been tumbling since early 2010, when it traded around $23. This occurred before the overall stock market slump that started in early August. On news of its new contract with GM, the stock jumped 45 percent to $4.59 in early Thursday trading – still below its Jan 1 level.

And What about high-paying job creation?

As of June 1, 2009, A123 Systems had 1,819 employees. Of those, about 317 were located in the U.S. and 1,502 abroad, mostly in China. Of this overall workforce, 227 were in R&D, 31 in sales, 121 in administration and 1,440 in manufacturing.

As recently as this past spring, A123 Systems' employment in Michigan was described as “more than 400” in various news accounts. Since that time the company has done some additional hiring. Its Livonia plant now employs between 775 and 800 workers, and A123 Systems was able to announce its 1000th Michigan employee on July 19.

For perspective, consider supposedly low-tech retail giant WalMart, not a likely recipient of praise and visits from the current administration. Walmart has an estimated $4.3 billion impact on Michigan;s economy. At last count it had 32,211 employees in Michigan. Last year it paid $237.1 million in state sales tax and another $96.8 million in other state and local taxes.

How does Walmart’s workforce compare to high-tech battery production?

The bulk of the A123 Systems employees in Michigan are in the company's manufacturing division. They do things like applying coating to the batteries.

The Center on Globalization Governance and Competitiveness published a case study on A123 Systems in October 2010. That was several months prior to the recent hiring boost for the Livonia facility. According to the analysis, one of the primary factors behind A123 Systems choosing (until recently) to put most of its manufacturing facilities in Asia was the low cost of labor. The case study opined that the company's chances for success would depend on its ability to further cut labor costs while producing a superior product.

The case study notes that the labor market for manufacturing workers in Changzhou, China, where A123 Systems has its hub, has been paying $2.70 per hour. The study notes that costs for comparable labor in Michigan are much higher: $13.50 per hour.

So what wage is A123 Systems now offering for manufacturing labor in Michigan?

Whatever it is, the company has hardly been widely publicizing it. Instead, A123 Systems has described its wages for manufacturing labor as being in line with “second tier” rates. It is not clear whether that $13.50 per hour amount quoted in the A123 case study would be considered within the “second tier” ballpark range - especially with a Michigan workforce starving for jobs.

The average hourly wage for a full time Walmart employee is $12.10.

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.