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A123 Systems to spend $55 million replacing defective battery packs

A123 Systems announced today company engineers had found a manufacturing flaw requiring the company replace, costing the company $55 million, a large number of nanophosphate lithium ion battery packs manufactured by the company for five electric vehicle manufacturers.

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A123 Systems announced this morning the company had discovered a manufacturing flaw in prismatic format nanophosphate lithium battery cells. The flaw affects electric vehicles from five unnamed manufacturers, and the company is starting a "field campaign" to replace affected battery packs. The campaign is expected to cost the company $55 million in warranty charges and affects five unnamed electric vehicle manufacturers.

The manufacturing flaw was found late last week by A123 Systems engineers who were diagnosing a failure in a battery pack received from a customer. The company's procedure in such cases is to run a forensic analysis to determine the root cause of the failure, then determine how pervasive the problem is. In this case the problem was found to have a significant impact affecting a large number of battery packs. The company chose to take action quickly, and transparently, because of the scale of the problem.

In a conference call this morning David Vieau, CEO of A123 Systems, said “Recently, A123 has discovered that some prismatic cells made in our Livonia facility may contain a defect which can result in premature failure of a battery pack or module that includes a defective cell. We have isolated the root cause of the defective cells and we are confident that we have pinpointed the source of the defect and corrected it. As a result of engineering analysis and testing, we believe this is not a safety issue, and we have determined the root cause and have taken corrective actions."

Company engineers discovered that one of the four battery tab welding machines at the company's Livonia Michigan facility was incorrectly calibrated. This led to a manufacturing defect in a small number of the cells assembled by that machine. The flaw created a mechanical issue that could puncture the battery cell, leading to short circuits and a variety of problems. Quality checks did not discover the flaw until the cells were manufactured into battery packs, installed in vehicles, and put into field use. The company has no reports of damage in the field, and Vieau claims this does not create a safety issue. This is the most expensive sort of failure to correct, when the flaw is discovered by a customer in the field rather than by quality teams at the respective manufacturers.

The flaw affected only prismatic cells, the Nanophosphate AMP20M1HD-A, manufactured at the company's Livonia factory. Prismatic cells manufactured at A123's other facilities were not affected, nor were cylindrical cells manufactured in China for A123 Systems. Vieau stressed repeatedly during the conference call that this is not an issue with the underlying cell technology, but instead that it's a manufacturing issue.

A123 Systems assembles AMP20M1HD-A cells into modules (Nanophosphate AMP20 Energy Modules) that are assembled into complete battery packs. The "field campaign" process will replace battery packs and modules affected by this flaw, whose cells come from the Livonia facility. The campaign is expected to take several quarters to complete.

This is the latest in a string of manufacturing problems being faced by A123 Systems. In December a flaw in hose clamp's in battery packs sold to Fisker Automotive was found, leading Fisker to institute a recall of the Karma plug-in hybrid car to replace battery packs. This flaw is unrelated to the hose clamp problem, because battery pack assembly is performed at a different facility than the cell manufacturing plant in Livonia.

As if to answer concern about the string of problems, the FAQ published by A123 explains: "A123 has made hundreds of thousands of high-quality prismatic cells at another facility, so while the initial rapid ramp up of our Michigan operations to satisfy customer demand has resulted in near-term operational challenges, we are confident that our experience in making prismatic cells will enable us to overcome these challenges and continue making products that meet customer expectations."

A123 management says the company has liquidity to handle this large charge on the balance sheet. However it will affect the company's "fund-raising strategy," with more on that to be discussed soon. The company is already being financially challenged because of problems at Fisker Automotive. The company is in discussion with engineering and business teams in affected customer companies, and the focus is on customer support.

The five vehicle manufacturers affected by this issue were not named. Vieau did specifically say that BMW, and several other manufacturers, are not affected because those battery packs are made from A123's cylindrical cells.

Vieau continued, “In parallel with this field campaign, as we have discussed previously, we continue to implement actions that we believe will improve operations and minimize the possibility of quality issues going forward. This includes hiring a Chief Operating Officer, Ed Kopkowski, who has more than 25 years of global management and operational leadership in improving quality and reducing costs.”

Vieau closed the conference call saying that while company staff was disappointed and frustrated by this issue, but that they have an unwavering commitment to growing A123 Systems, and that "we continue to believe we have an innovative technology that's helping to solve some of the most pressing issues of our time right now," and that they will "put full resources behind fixing this issue" and that A123 Systems has a bright future ahead.

UPDATE: Fisker Automotive announced it was one of the automakers affected by the A123 Systems battery pack replacement program. A123 Systems will be replacing all affected battery packs in Fisker Karma automobiles. Additionally Karma owners in North American will receive a full vehicle warranty extension from 50 months/50,000 miles to 60 months/60,000 miles. Additionally, European Karma owners will receive a full vehicle warranty extension from from 48 months/100,000 km to 60 months/100,000 km.

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