A123 to replace defective battery packs

DETROIT Mon Mar 26, 2012 12:52pm EDT

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DETROIT (Reuters) - A123 Systems AONE.O is replacing lithium-ion battery modules and packs that could fail due to a manufacturing defect, a problem that recently led to the high-profile shutdown of the Fisker Karma luxury sedan during testing by Consumer Reports.

A123, whose shares fell 14 percent on Monday, said it discovered defects in some certain cells made at its plant in Livonia, Michigan, that Chief Executive David Vieau said can "result in premature failure of the battery module or pack, including a decrease in performance and reduced battery life."

The company, which developed as a start-up at the Massachusetts Institute of Technology, has begun building replacement modules and packs, and expects to begin shipping them to five affected corporate customers this week, he told reporters on a conference call on Monday.

A123 expects the replacement to cost about $55 million and that it will be funded over the next several quarters. Vieau added the company had sufficient liquidity for the campaign but the situation would likely lead to the adjustment of A123's fundraising strategy. He declined to say how many modules or packs were being replaced.

Vieau said A123 was unaware of any accidents or injuries related to the defect and said the defect did not create a safety issue. However, he acknowledged the defect led the Karma electric car to shut down on March 7 during testing by widely followed consumer magazine Consumer Reports.

In addition to the battery replacement program, Fisker improved its vehicle warranty after A123 discovered the defect, boosting coverage by 10 months and 10,000 miles according to a spokesman.

The start-up automaker said it has been working closely with A123 since the battery issue occurred at Consumer Reports and Fisker CEO Tom LaSorda subsequently visited the A123 plant in Michigan. Fisker also plans to upgrade its vehicle software, with a release planned in the next few days.

A123's problems were another blow for the electric-vehicle industry still in its infancy and struggling with bad publicity. Last fall, U.S. safety regulators opened a probe into the safety of the batteries in General Motors Co's Chevrolet Volt plug-in electric car. A123 does not make those batteries.

The probe was subsequently closed and no defect was found, but it hurt Volt sales. GM has idled the Michigan plant that builds the car for five weeks due to weak demand.

Other smaller start-ups in the electric-vehicle sector have closed or filed for bankruptcy due to lack of funding. A123 posted a wider-than-expected fourth-quarter loss this month after Fisker, one of its largest customers, cut battery orders.

President Barack Obama's administration has been a strong proponent of electric vehicles and set a goal of getting 1 million battery-powered vehicles on the road by 2015.

But since the bankruptcy of Solyndra, a solar panel maker that received $535 million in U.S. loan guarantees, federal support for advanced vehicle technology programs has ground to a halt. Industry officials and analysts point to tightened U.S. Department of Energy requirements in the face of withering criticism from Republicans about the Obama administration's generosity for anything related to green technology.

"There is absolutely no time to have battery problems," A123's Vieau said. "This is a new industry with a new technology that's in the process of a learning curve. It's expected that in this environment, there will be challenges.

"We're going to weather those," he added.

A small number of A123's battery packs in the field experienced a malfunction and the company subsequently discovered one of four automated welding machines at the Michigan plant was not correctly calibrated, Vieau said. The problem caused a misalignment of a certain part in some prismatic battery cells that could lead to an electrical short.

The replacement program does not affect cells made with the other three welding machines in the Michigan plant or those built in other A123 plants, he said. Chinese plants that builds a different type of cylindrical cell used by such customers as BMW (BMWG.DE) also were not affected.

Shares of A123 were down 14.3 percent to $1.46 in afternoon trading on Nasdaq.

(Additional reporting by Kartick Jagtap in Bangalore; Editing by Unnikrishnan Nair and Tim Dobbyn)

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