China firm's U.S. investments draw heat

CHICAGO -- A Chinese industrial conglomerate with Chicago-area ties has historically invested a lot like Warren Buffett. It looked for value in aging assets, in some cases providing financial lifelines to hard-hit auto suppliers, saving jobs and injecting life into the decaying Midwest.

But as Wanxiang Group Corp. expands into clean-energy technologies, it faces new scrutiny that threatens to smudge its white-knight reputation.

Wanxiang's agreement this month to invest up to $465 million in A123 Systems Inc., a struggling maker of high-tech batteries, has raised concerns about cash-rich Chinese firms siphoning American innovation for China's benefit.

Wanxiang also has gotten caught in the middle of a simmering political debate about government financing of alternative-energy businesses. A123, based in Waltham, Mass., won a $249.1 million federal grant in 2009 that allowed it to open factories and create hundreds of jobs in Michigan. It also is expected to receive up to $100 million in tax credits from Michigan.

"It appears the Department of Energy and the Obama Administration have failed to secure sensitive taxpayer-funded intellectual property from being transferred to a foreign adversary, which raises serious national security issues," U.S. Rep. Cliff Stearns (R., Florida) said in a statement earlier this month.

Then Republican Sens. Chuck Grassley of Iowa and John Thune of South Dakota sent a letter to Energy Secretary Stephen Chu questioning whether U.S. tax dollars would benefit A123's new Chinese investor. "Billions of U.S. taxpayer dollars have flowed to foreign companies through the Recovery Act, and we are concerned that the recent announcement could lead to even more taxpayer dollars going overseas," the letter said.

The Obama Administration has a difficult decision ahead. If it rejects Wanxiang's investment, A123 could go out of business, resulting in the loss of about 1,200 jobs, including 900 in Michigan.

If it approves the deal, a taxpayer-funded business will fall into the hands of one of China's largest private companies that wants to supply the Chinese market and has outsourced U.S. jobs.

Jen Stutsman, DOE spokesman, said funding will only be allowed to support U.S. manufacturing and jobs. "Because of the administration's investment in the domestic battery industry, we are building fuel-efficient cars here at home, reducing our reliance on foreign oil, and supporting new manufacturing jobs across the country," she said.

The president of Wanxiang's Elgin, Ill.-based U.S. operations is taking the criticism in stride. "This kind of thing doesn't bother us," said Pin Ni, the son-in-law of Wanxiang's founder. "We've been investing in the United States for a long time."

Republicans' concerns have stirred more than election-year politics. Wanxiang's deal, which may give it an 80 percent stake in A123, has stoked a broader debate about U.S. competitiveness and potential consequences of foreign investment in this country.

Michael Dunne, a Hong Kong-based consultant and expert on China's auto industry, wrote an op-ed piece in a Wall Street Journal blog that called Wanxiang "a clever opportunist in the unfolding tragedy of American competitiveness."

Mr. Dunne sees a troubling pattern emerging. "America develops technology -- subsidized with generous tax dollars -- only to see it purloined, borrowed or, in this case, purchased on the cheap by firms from competing nations."

On the other hand, Joseph Sternberg, an editorial writer for The Wall Street Journal Asia, questioned the wisdom of buying struggling Western companies. He wondered if China's buying spree could result in the "world's greatest technological junkyard."

The uproar over the A123 deal contrasts sharply with another deal involving a startup battery company.

Like A123, Ener1 received an Energy Department grant to make lithium-ion batteries for plug-in electric cars. It expanded its plant in Indiana and forged a deal with Think Global, an Elkhart, Ind., maker of electric vehicles.

But in January Ener1 filed for bankruptcy. It emerged a few months later in the control of one of its directors, Russian investor Boris Zingarevich, who provided financing to take the company out of bankruptcy.

Despite Mr. Zingarevich's ties to former Russian President Dmitry Medvedev and Ener1's U.S. military contracts, few questioned whether the Russians were getting valuable technology that could be used against the United States except for Mr. Stearns, head of the House Energy and Commerce Committee's panel on oversight and investigations.

He demanded information from the White House and Department of Energy on Ener1, but political insiders say he backed down under pressure from the Republican Party. A spokesman for Mr. Stearns did not respond to requests for comment.

Michael Grosberg, chief operating officer of Global Technology Systems Inc., a Massachusetts-based maker of industrial and military batteries and energy control systems, contends the Ener1 deal deserves more scrutiny than A123 because of the sensitivity of Ener1 technology and because its batteries are used by U.S. law enforcement and military personnel.

"Ener1 is a situation that all Americans should be concerned with because it does impact national security," said Mr. Grosberg, whose company competes with Ener1. "This is about Russian national interests controlling U.S. technology that's used by soldiers, federal agencies, borders and customs control, Homeland Security, and embassy security. And those battery packs are sophisticated pieces of equipment that have the ability to be compromised."

Wanxiang's growth has been fueled by its auto parts business. In the late 1990s, the firm started gobbling up U.S. companies that could propel Wanxiang into the ranks of world-class auto suppliers.

By the end of 2010, Wanxiang's auto-related business in the United States had 27 plants with about 3,000 employees and $2 billion in sales, Mr. Ni said. The firm has moved some jobs to its low-cost factories in China.

(Powers & Sons LLC, an auto-parts manufacturer in Montpelier, Ohio, has been a subsidiary of Wanxiang America Corp., which is itself a subsidiary of Wangxiang Group, since 2005. Wanxiang America also purchased a unit of Dana Holding Corp. when the Maumee-based firm was in bankruptcy in 2007.)

In the past three years, the company has shifted its U.S. investment focus from autos to alternative energy, such as lithium-ion batteries and solar panels. The growth mirrors its expansion in China, where the government has provided subsidies to develop environmentally friendly energy to keep its massive economy humming while addressing its pollution problem.

Wanxiang's financing is crucial to A123's survival. This spring it disclosed that it was on the verge of failure, after an embarrassing recall of defective battery cells supplied to Fisker Automotive Inc., one of its largest customers.

Founded in 2001 from innovation born in a Massachusetts Institute of Technology lab, A123 had become a darling of the Obama Administration -- part of its plan to develop a domestic battery industry to re-establish America's technical prowess in the auto industry while also creating thousands of jobs.

Michigan wooed A123 with the promise of tax credits and other aid. Up until 2009, the firm was primarily supplying small batteries for power tools, with the majority of its manufacturing in China.

Using some of the DOE funds, A123 opened two plants in Michigan. In 2008, A123 predicted that a robust market for plug-in vehicles would emerge by 2012, with more than 100 models poised to hit showroom floors. That forecast proved to be wildly optimistic.