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A123 Replacing Batteries That Led to Fisker Karma Shutdown

A123 Systems Inc. said it’s replacing defective battery packs and modules it supplies to customers, including Fisker Automotive Inc., and that the flaw caused a Fisker Karma to shut down in a Consumer Reports test.

A123 has started building replacement modules and expects to begin shipping them to customers this week, the company said in a statement. Replacing the batteries and systems shipped globally from A123’s plant in Livonia, Michigan, will cost about $55 million and will be funded during the next several quarters, the company estimated.

Five customers are potentially affected by the defects, David Vieau, the company’s chief executive officer, told reporters today in a conference call. The root cause of a $107,000 Fisker Karma model shutting down in tests this month by Consumer Reports is associated with A123’s defective batteries, Vieau said, without naming other customers.

“While the initial rapid ramp-up of our Michigan operations to satisfy customer demand has resulted in near-term operational challenges, we are confident in our ability to overcome these issues,” he said on the call.

A123 expects that the cost of replacing the battery systems will “require us to adjust our fundraising strategy,” Vieau said, without elaborating. The company will provide an updated outlook during its next quarterly earnings call, he said.

A123 fell 12 percent to $1.49 at the close in New York, the lowest closing price since its initial public offering in September 2009.

Fisker Tests

Fisker’s plug-in luxury car that Consumer Reports purchased for evaluation shut down after only 180 miles (290 kilometers), the Yonkers, New York-based magazine said March 8.

Fisker will update its “VIP Customer Care Coverage” to include a free battery replacement for affected Karma owners, the Anaheim, California-based company said today in a statement. The program also will extend warranties for customers in North America by 10 months and 10,000 miles, to 60 months and 60,000 miles.

A123 is a Fisker shareholder. The carmaker in December recalled 239 Karmas to fix a hose clamp in the A123 battery pack at risk of leaking coolant, which it said could potentially cause a fire.

The cause of the defects described today was faulty calibration of one of four welding machines in the Michigan plant that caused misalignment of a component in some cells, Vieau said today. The flaw could cause an electrical short, which could result in premature failure of the battery or decrease performance and reduce battery life, he said.

‘Effectively Contaminated’

While the rate of total cells welded by the faulty machine is “a fraction” of the product A123 made in the Michigan plant, the probability is “very high” that a module or pack contains a defect because of the number of cells that go into them, Vieau said.

“We feel that virtually all the product that we produce in this facility has been effectively contaminated by this particular defect,” he said.

A123 received a $249.1 million grant from the Energy Department from a program started in February 2009 that supports the construction of U.S. plants to make batteries for hybrid and electric vehicles.

The company also has a pending application for loans under an Energy Department program to support manufacturing expansion. A123 estimated in its annual report filed March 12 that it may be allowed to borrow up to $233 million from that program.

Government Assistance

A123 also has also used $8.3 million of a $10 million grant from the state of Michigan to support the expansion of its factories in Livonia and Romulus, Michigan, according to the filing.

Fisker said this month it established a team of more than 50 engineers to address quality issues with the Karma. That group traced the cause of the shutdown of the car owned by Consumer Reports to the A123 battery pack, Fisker said in its statement today. Both companies formed groups “to find the actual root cause,” the carmaker said.

Fisker reduced orders of packs from A123 in the fourth quarter of last year to balance parts inventories, the battery maker said in a Nov. 4 statement. A123’s full-year loss widened to $257.7 million, or $2.12 a share, last year from $152.6 million, or $1.46, in 2010, according to a March 8 statement.

The cylindrical cells that A123 makes in China that are used by Bayerische Motoren Werke AG and other customers are not affected by the defect, Vieau said. A123 also supplies batteries for General Motors Co. and Daimler AG.

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