By Deepa Seetharaman and Ayesha Rascoe
(Reuters) - Early in 2012 President Barack Obama responded to critics of his multi-billion-dollar green technology initiative by saying he was "not going to cede the wind or the solar or the battery industry to China."
Six months later, he faces that very real possibility for the U.S. car battery industry, a once-high flying sector buttressed by generous federal grants, but struggling with a green car market that has fallen far short of expectations.
A123 Systems Incon Wednesday became the second U.S. government-backed battery maker this year to go overseas for a lifeline - and it turned to China. Auto parts supplier Wanxiang Group will take a controlling interest and invest $450 million in the Massachusetts-based battery maker, which faced running out of cash by the year-end.
Earlier this year, Ener1 Inc, another battery maker that received a government green technology grant, emerged from Chapter 11 bankruptcy under the control of Russian investor Boris Zingarevich. New York-based Ener1 is also a joint-venture partner in China with a Wanxiang subsidiary.
In the past three years, U.S. battery makers, anticipating consumer demand for green cars that never materialized, have over built production capacity, often with government funding.
Electric vehicle and hybrid sales for the first seven months of the year totaled 270,000, representing only 3 percent of total U.S. car sales, according to the green-car website Hybridcars.com.
As part of the 2009 American Recovery and Reinvestment Act's Electric Drive Vehicle Battery and Component Manufacturing Initiative, A123 was awarded a grant of $249.1 million. Ener1 subsidiary EnerDel was awarded $118.5 million to manufacture advanced lithium-ion batteries for electric and hybrid vehicles.
A123 promised to create 38,000 U.S. jobs, including 5,900 at its own plants. A123 said on Thursday it has 1,300 workers.
Theodore O'Neill, a former equities analyst with Wunderlich Securities, said A123 "built a factory that's big enough to meet demand that's probably not going to materialize until 2020 ... They built it much larger than the market turned out to need."
FINDING 'PARTNER' FOR U.S. JOBS
That kind of underperformance provides new fodder for Obama's opponents in the Republican Party with just three months until election day.
Obama has spent months battling critics of the administration's green-tech initiative in the wake of the high-profile bankruptcy of solar-panel maker Solyndra.
"It's not going to be a smooth, easy ride ... Some companies will fail," he said in his State of the Union speech in January.
But tempering expectations has done little to quiet the critics in Washington, who ramped up their attacks on Thursday with the added accusation of putting technology in Chinese hands.
"Once again 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," said Rep. Cliff Stearns. Stearns is a Florida Republican and chairman of the House Energy and Commerce Committee's Subcommittee on Oversight and Investigations.
A123 spokesman Dan Borgasano said on Thursday that, with Wanxiang's bid to take control of the battery company, "our intention is to continue to build in the United States and reach certain job levels. We think we found a partner to help us do that ... I don't think we'll necessarily be making hard and fast job projections."
After it received the DOE grant, Ener1 said in early 2010 that it planned to create 1,400 jobs at its Indianapolis battery plant. Today, the plant employs around 250. The plant was designed to produce battery packs for up to 600,000 hybrid vehicles.
The companies' struggles with over capacity are typical of an industry whose fortunes are tied directly to those of electric and hybrid vehicle manufacturers.
"There was a bit of a rush to put in capacity that really wasn't justified by the events as they turned out," said Tom Gage, president of EV Grid, an infrastructure company based in Palo Alto, California. "In retrospect (the industry) was over-optimistic in terms of projecting the rate of growth for demand for car batteries."
Charles Ebinger, head of the energy security initiative at the Brookings Institution, said controversies surrounding government-backed companies such as A123 will make lawmakers hesitant to support expanded funding of clean energy, especially with federal budget battles looming.
"I think it's going to slow down," Ebinger said. "It's going to be increasingly difficult to argue for subsidies for any sector."
(Reporting by Deepa Seetharaman in Detroit and Ayesha Rascoe in Washington; writing by Paul Lienert; editing by Mary Milliken and Andre Grenon)