A123 Systems Has a Short Circuit

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It's going to be another disappointing quarter for one of the highest profile battery makers in the market. A123 Systems (Nasdaq: AONE  ) revised revenue guidance for the full year to $165 million to $180 million from a previous guidance of $210 million to $225 million.

This is a long-running trend for A123 Systems, which has come up with excuse after excuse for why customer demand isn't coming in as expected. The bottom line is that the bet the company made on batteries was probably too big and too early.

The partnerships A123 has built are definitely impressive and may pay off eventually. Fisker, GM (NYSE: GM  ) , and Smith Electric have all chosen A123 to provide batteries for their vehicles, but the ramp in demand is slower than expected. Fisker in particular has disappointed A123 time and time again.

The story isn't exclusive to A123 Systems. The build-out of battery capacity began at a fevered pitch when manufacturers began leveraging Department of Energy money to expand. A123 got a $249 million DOE grant and Ener1 got $118.5 million to build capacity in the hope that economies of scale would bring down costs and make electric vehicles more competitive.

But electric vehicles have suffered from a chicken-and-egg conundrum of weak demand and high costs. Costs won't fall until demand picks up and demand won't pick up until costs fall. So Nissan, Ford (NYSE: F  ) , GM, and Fisker make grand presentations of their electric vehicles and watch consumers look at them as novelties instead of a viable alternative to gas-powered vehicles.

Up to this point, Tesla Motors (Nasdaq: TSLA  ) has been the only manufacturer to have demand outpace supply, something that will be put to the test when the Model S is released to a mass audience.

The lower guidance for A123 Systems doesn't come as a huge surprise to those following the industry. I pointed out recently that chasing the mass market is a risky bet for companies like A123 that don't have the balance sheet to make mistakes. Shareholders who have hung on have found that out the hard way.

Right now A123 Systems and Ener1 are against the ropes while smaller rival Valence Technology (Nasdaq: VLNC  ) stays afloat on a smaller production base. A123 will have to see demand pick up soon to fill capacity and considering the constant delays I am starting to wonder if demand will ever pick up.

Interested in reading more about A123 Systems? Click here to add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned and does not own an electric vehicle. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2011, at 1:03 PM, Brettze wrote:

    Battery engineers are sooo st upid!!! Here is why!

    Cars weigh over one and half tons!!! There is not enough in any size of battery to propel heavy vehicles far ... Battery engineers has to focus on electric motorcycles or bicycles which is already selling... This makes more sense to do with two wheels instead of four wheels.

    We can still put batterires in hybrid cars that can be redesgined based on my recent new concept of a hybrid car.

    here is how it works and should...

    We can elimiinate first and second gears in transmissions but keep third and higher gears . Here is why! Batteries cannot go far but batteries can power first and second gears as needed because you dont drive on first and second gears often or long enough to run down batteries. Moreover, batteries can be kept recharged while you are on third gear or higher.

    Electric motors is great as first and second gears only.. Gasoline engines is most efficient on third and higher gears..

    Perfect hybrid!

    Today's hybrids works differently. Chevy Volts is closest to my concept but Chevy Volts doesnt need huge battery pack that takes you 40 miles.. It is not necessary!! Just elminate first and second gears and shrink battery pack to 5 mile range or less. Drop Chevy Volt prices to $25000 from $40,000 which is a LOL price!!

  • Report this Comment On November 10, 2011, at 4:28 PM, QuentLaw06 wrote:

    And I suppose your theory of electric motors having first and second gears qualifies you to call "battery engineers" stupid! First off they are called electrical engineers, and secondly electric motors dont have gears. As an engineer I can tell you that gasoline engines are very inefficient no matter what the gear!

  • Report this Comment On November 18, 2011, at 11:10 PM, Luthielsvoice wrote:

    Will definitely need to build demand for EVs. But that may come this year as oil tests new highs as the world economy tries for another growth spurt. Look for another supply/demand crunch with $200 oil and $5 gasoline before the end of 2012.

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