A123 Systems long troubled year is finally, and unsurprisingly, heading into bankruptcy. Bankruptcy in this case does not mean a complete collapse and disappearance of A123's battery technology, but instead it is a Chapter 11 bankruptcy accompanied by a sale of technology and assets to Johnson Controls. That company already has a business in making lithium-ion batteries, making this a story of consolidation within the lithium battery industry. It also means A123 Systems is backing out of the earlier announced rescue buyout by the Chinese corporation Wanxiang, that was meeting with understandable political pressure.

The problems for A123 began last winter when A123 and Fisker Automotive jointly disclosed problems with battery packs that resulted in Fisker launching a recall to replace those battery packs. Later, A123 disclosed discovery of manufacturing defects in one of its battery pack manufacturing plants, that led to an expensive "field campaign" to replace those packs. The field campaign cost the company $55 million, throwing its financial status into a tizzy. Amid the bad news the company has also had good news, including deals to supply battery packs to SAIC (the Chinese automaker) and Tata (the Indian automaker). Another piece of good news was the Nanophosphate EXT technology that would open new markets to A123 and make their batteries even more compelling. But in June A123 did warn that the company might cease as a going concern, and finally in mid-August the company reached a rescue deal with Wanxiang, the Chinese autoparts maker, who would buy out A123. That deal was contingent on a list of conditions, and as recently as SEC filings yesterday was still in process. This morning, however, news was released that A123 is backing away from the Wanxiang deal and instead agreeing to a packaged bankruptcy and sale of technology and assets to Johnson Control.

To summarize all that, A123's problems stem from two factors. First is quality problems in the company's battery packs, that led to expensive replacement and warranty costs. That alone threw a hand grenade into the middle of the company's financial balance. Second, is the failure of Fisker Automotive to ramp up production of the Fisker Karma and Fisker Atlantic as expected. The Atlantic was originally slated to begin production at the end of this year, which would have put A123 in the position of ramping up battery pack production to supply packs for the Atlantic. Instead, Fisker has had its own litany of problems, the most serious of which was the Dept. of Energy freezing loans to Fisker, that caused Fisker to halt work at the company's factory in Delaware to prepare for manufacturing of the Atlantic. Despite attacks from Republicans, Fisker Automotive is not a 'Loser' but a struggling start-up that is raising an amazing amount of investment capital to replace the frozen Dept of Energy loans and get back on track with production of the Atlantic.

Today the company announced an agreement to sell its automotive business assets to Johnson Controls, in a deal valued at $125 million. To facilitate the deal, A123 Systems filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. Other parties may be able to broker a better deal for A123's assets than Johnson Controls' offer.

"We believe the asset purchase agreement with Johnson Controls, coupled with a Chapter 11 filing, is in the best interests of A123 and its stakeholders at this time. We determined not to move forward with the previously announced Wanxiang agreement as a result of unanticipated and significant challenges to its completion," A123 CEO David Vieau said in a statement, "Since disclosing the Wanxiang agreement, we have simultaneously been evaluating contingencies, and we are pleased that Johnson Controls recognizes the inherent value of our automotive technology and automotive business assets. We are also pleased that we have received indications of interest that recognize the value of our grid and commercial businesses. We are encouraged by the significant interest we have received, as multiple parties have submitted proposals for these businesses. As we move through this transaction process, we expect to continue operating and working with customers and suppliers."

"Our interest in A123 Systems is consistent with our long-term growth strategies and overall commitment to the development of the advanced battery industry," said Alex Molinaroli, president, Johnson Controls Power Solutions. "Requirements for more energy efficient vehicles continue to increase, which is driving automotive manufacturers to pursue new technologies across a broad spectrum of powertrains and associated energy storage solutions. We believe that A123's automotive capabilities are a good complement to our existing portfolio and will further advance Johnson Controls' position as a market leader in this industry."

As part of the deal, Johnson Controls is to purchase A123's automotive business assets, including all of its automotive technology, products and customer contracts as well as its facilities in Livonia and Romulus, Michigan. Additionally it will purchase A123's cathode powder manufacturing facilities in China, and its equity interest in Shanghai Advanced Traction Battery Systems Co., a joint venture with Shanghai Automotive.

A123 has other lines of business including grid electricity storage systems, and Johnson Controls will license back to A123 the technology rights necessary for those businesses. This indicates that A123 Systems intends to re-emerge from bankruptcy and focus on grid storage products.

The advanced battery market is expanding dramatically in the United States and around the world -- from $5 billion in 2010 to nearly $50 billion in 2020, an average annual growth rate of roughly 25 percent. The U.S. Government began loans programs to advanced vehicle technology companies, like A123 Systems, in 2007 or earlier (during the Bush Administration). In the years since, battery packs that used to cost $33,000 cost about $17,000 and are expected to drop to $10,000 by 2015. The price decreases are due to manufacturing volume increases. As costs come down, the market for hybrids and electric vehicles is expected to continue growing.

"Government can help facilitate innovation, but the natural business cycle remains - some failures in any emerging industry are inevitable," says Jay Friedland, Plug In America's legislative director. "Yet, our country is experiencing tremendous success as we electrify transportation. A raft of companies - Johnson Controls, Envia, Saft, GM, and LG Chem among them - are making great strides in driving down battery costs while creating a U.S.-based manufacturing sector for battery technology. This drives down the cost of plug-in vehicles while creating jobs and keeping at home the $1-billion per day we're currently sending overseas for oil, creating a better, safer America."