Keeping Advanced Defense Technology in US Hands: A Challenge in the Period Ahead

By Eric Sterner

Just before Christmas, A123 Systems Inc., best known for receiving “green jobs” funding from the Obama administration, announced that a judge approved a Chinese company’s bid to buy the battery-manufacturing firm’s assets in a bankruptcy auction.

Normally, an offer to take over a bankrupt firm and put its resources to good use would be welcome, but in the case of A123 Systems nothing is so straightforward.

The Wanxiang Group, a large conglomerate with business interests in low-technology manufacturing sectors, automotive supplies, and various services, such as hotel and restaurant management, is attempting to buy A123 and squeeze out U.S. companies who are also interested in the firm.

However, the Massachusetts-based firm is not your typical battery manufacturer; it is a high-technology company researching, developing, and selling high performance batteries and energy storage solutions around the world.

A123’s advanced technologies helped it secure military contracts that eventually led to a partnership with NASA to test the potential of its unique Lithium batteries for space applications and new cooperative work with the Department of Energy.

Its technologies and research caught the eye of the Obama administration, which offered it $249 million in taxpayer grants to work on electric car batteries. To date, A123 has received over $130 million and has clearly established its reputation as a company at the cutting edge of high technology.

China’s interest in A123’s breakthrough technology is of particular concern.

Wanxiang’s purchase of A123 would give it a beachhead in the high-tech American battery industry and place it near the heart of America’s defense sector and long-term national security. This should to be unacceptable.

U.S. military power depends on technical superiority Allowing China to purchase U.S. firms critical to developing advanced technology can only reduce America’s strategic advantage. Particularly galling in this case, is that these technologies were developed, in part, with taxpayer support.

Wanxiang sought to address any concerns by proposing to split A123s defense contracts from its non-defense work and transferring them to a new entity, Navitas Systems. But, according to its website, Navitas Systems was established in 2010 as a woman-owned small business while its senior officials were at yet another firm, MicroSun. Navitas was then reorganized on December 7, 2012, just five days before the court approved the transfer of A123s defense contracts. In other words, Navitas does not have an extensive track record.

It is not enough to transfer defense contracts from one entity to another to satisfy national security concerns.

A123’s intellectual property and technical know-how are critical to national security, regardless of their specific relevance to a particular contract. Navitas may be able to perform beautifully on the transferred defense contracts, but that is irrelevant if the advanced battery technologies developed in cooperation with NASA end up on Chinese military satellites because the underlying capabilities were sold off.

A bipartisan group of nine senators expressed their unease with this potential sale in a letter to the Secretaries of Defense, Energy, Homeland Security, and Treasury, in November. Two more senators sounded the alarm again in a separate letter to Treasury Secretary Timothy Geithner. The Strategic Materials Advisory Council, an independent group concerned with advanced materials and resources and their role in the U.S. defense sector, reiterated these concerns in yet another letter to Geithner.

These issues are beyond the purview of a bankruptcy court. In these instances, the US relies on the Committee on Foreign Investment in the United States (CFIUS). CFIUS reviews the sale of companies to foreign entities to determine whether they will adversely affect national security. If they do, the statute gives the president the authority to prohibit or cancel a sale.

In A123’s case, the firm’s intellectual property and market position would appear to disqualify its sale to a foreign entity. Simply separating its defense contracts is likely inadequate to prevent the transfer of the advanced battery technology that could potentially pose a threat to US national security. Clearly, more issues are in play than the simple sale of a bankrupt battery company to China.

When the president, or his surrogate, makes the final decision on the eventual disposition of A123, he will need to consider multiple factors – not only the need to satisfy A123s creditors, but also the impact on the U.S. defense industry, the long-term effects of transferring high technology to commercial and military competitors, and the possibility that another solution might exist, such as revisiting the bids from U.S. companies that Wanxiang bested.

When national security is at stake, policymakers ought to be predisposed to keep high-tech capabilities in American hands.

Sterner is a Fellow at the George C. Marshall Institute.

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