China’s purchase of a United States high-technology battery maker will boost Beijing’s military forces and satellites and threaten the security of U.S. electrical power and communications grids, according former national security officials.
The Obama administration is currently reviewing the sale of the bankrupt U.S. company A123, which received an estimated $250 million in taxpayer funding for research, to China’s Wanxiang Group, a company with ties to China’s government.
The Treasury Department-led Committee on Foreign Investment in the United States (CFIUS) is reviewing the sale and, according to people close to the issue, could rule on whether to approve the Chinese purchase as early as the end of the month.
At issue in the sale is the transfer of an advanced battery technology that uses a process involving lithium iron phosphate (LFP) that produces longer battery life and lighter and more stable batteries that can operate in very low and very high temperature environments.
John Young, undersecretary of defense in the George W. Bush administration, said the potential loss of critical technology to China is worrying.
"A123's successful development of very low temperature, high power capability batteries may enable a new generation of military and commercial satellites while also providing greater endurance and capability in other military systems," Young said.
"It is not a surprise that China is aggressively pursuing A123. Beyond the obvious economic loss, the U.S. should be very concerned about the military satellite and vehicle applications of A123 technology as well as the potential use throughout the U.S. power grid and data infrastructure."
A Treasury Department spokeswoman declined to comment on a CFIUS matter under review.
China is currently developing space weapons including anti-satellite missiles, lasers, and other weapons the Pentagon calls "counterspace" systems that would benefit from the U.S. battery technology.
Retired Navy Vice Adm. Barry Costello, former commander of the Navy’s Third Fleet, said he too is concerned that the battery technology will boost China’s military.
Costello said he and other former national security officials are worried about "the continuing migration of technology from the U.S. to China and the potential resulting reliance by the defense sector on Chinese suppliers."
Areas of concern for the retired three-star admiral include China’s growing space warfare capabilities, its cyber warfare capabilities, and its unmanned vehicle development.
"All of those rely on battery power, whether they are underwater, in the air, or above the air," he said.
"From a military perspective as a former fleet commander, that’s what concerns me – the need to rely on a supplier from China with their track record."
Costello said one example was China’s temporary cut off of rare earth minerals exports used in high-tech manufacturing to Japan during a dispute over the Senkaku islands.
The A123 sale "needs to be looked at very carefully in the CFIUS process," he said.
"While I’m a supporter of free trade, I also have been around for 34 years in the Navy and certain issues need very critical review."
The sale of A123 should be rejected unless there are safeguards in place that will assure national security will be protected, Costello said.
A white paper prepared for U.S. government officials and obtained by the Free Beacon states that A123’s advanced lithium ion technology is "critical to military applications."
"A123’s core LFP technology cannot be segregated by application or business sector. A company that has access to the commercial applications will likely find it easy to engineer the defense applications."
The white paper also stated that efforts to separate A123’s sensitive technology from the sale to Wanxiang by selling the defense contracts to the U.S. firm Navitas "will not mitigate the risk associated with the underlying technology."
"In fact, Wanxiang will supply Navitas with cells, cross-license core technology, and share certain physical assets for use in the government/military business," the white paper said.
More than two-dozen members of Congress have opposed the sale. A bipartisan group of nine Senators sent a letter in November to Treasury Secretary Timothy Geithner as well as to the heads of the Defense Department, Energy Department, and Homeland Security.
The Senators urged Treasury to "review this acquisition and sincerely consider any potential harmful consequences that could occur as a result, including any threats to domestic security, innovation leadership, and job creation."
Michigan’s congressional delegation also appealed to Geithner in a letter expressing concern over the pending deal.
"Given the need to preserve the integrity of domestic intellectual property and manufacturing crucial to our national defense and in light of ongoing Chinese attacks on critical infrastructure in the United States, we believe it prudent that CFIUS examine Wanxiang's bid with the utmost scrutiny," the lawmakers said in the November letter.
The letter noted there is "very little publicly available information about the internal structure, governance, and ownership of Wanxiang."
"The extent and nature of Wanxiang's ties to the Chinese government are also unclear, including whether Wanxiang currently provides products or services to the government of China, the Chinese military, or Chinese law enforcement agencies," the letter continued.
Additionally, Sens. John Thune (R., S.D.) and Chuck Grassley (R., Iowa) wrote to Geithner seeking more information on the implications of the sale.
"If Wanxiang successfully acquires A123 during the bankruptcy process, it could gain access to these defense contracts and technology used by multiple branches of the U.S. military," Thune and Grassley wrote in November.
"A123 has also pursued utility-scale grid storage projects that could play an important role in strengthening our nation's electric grid in the near future. These issues should be thoroughly and transparently reviewed to ensure U.S. military and taxpayer interests are protected throughout the process."
A123 employed over 100 scientists and engineers who were working on sensitive materials that would become part of Wanxiang. "This transaction will increase access for the Chinese government, via Wanxiang, to technology that is utilized by the U.S. military and the future U.S. grid network as well as the global automotive industry," the white paper stated.
"If Wanxiang owns A123’s intellectual property, the Chinese government may ultimately control the technology. Consumers, lawmakers, and others should understand that core technology cannot be separated along business lines."
Dean Popps—who served as acting Army assistant secretary for acquisition, logistics, and technology during the Obama administration, and as the former Army chief of technology acquisition for the Bush administration—said the A123 sale would allow Wanxiang to "leapfrog ten years ahead" in development.
"It seems that we’re slowly fire-selling strategic assets in one way or another to the Chinese," Popps said. "We're going to wake up one morning and discover we’re seriously compromised. This isn't about China-bashing or isolationism—we understand we have to trade with each other—but we’re urging the government through CFIUS to be even more careful than it normally is."
The three former officials are members of the private Strategic Materials Advisory Council, a group that is opposing the A123 on national security grounds.
"In many aspects, CFIUS doesn't necessarily fill the bill with how some governments are coming at us," Popps said. "It's no secret that emerging super-powers have a full court press on the U.S. on multiple levels."
The CFIUS committee’s annual report to Congress released in December warned "there is likely a coordinated strategy" by unnamed foreign powers "to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer."
The Wanxiang Group, which has been expanding its U.S. presence for close to two decades, is now a major property owner and employer in the Midwest. It also has close political ties in both its home country and in America.
The Boston Globe reported that former Chicago Mayor Richard Daley, whose brother was chief of staff to President Barack Obama, is a Wanxiang consultant.
"Wanxiang has shown itself a strong corporate citizen with a commitment to supporting local workers and developing the local economy," Daley told the Globe.
Wanxiang Group’s chief executive Lu Guanqiu is a member of the Chinese legislature.
The Chinese firm has defended the sale.
"We think we have structured this transaction to address potential national security concerns expressed during the review of our previous investment agreement with Wanxiang announced in August as well as to address concerns raised by the Department of Energy," A123 Systems president and CEO Dave Vieau previously said in a statement. "We believe this transaction balances those risks with A123′s obligation to act in the best interest of our creditors."
A123 was formed in 2001 to develop and produce advanced lithium-ion batteries using nanophosphate technology once developed by the Massachusetts Institute of Technology.
The company declared bankruptcy in October 2012 and four companies sought to purchase the battery maker. Wanxiang won the bid in an auction in early December, paying $256 million.
Wanxiang agreed to allow the American company Navitas Systems to buy the government business arm of A123 and take its defense contracts for $2.3 million to avoid a battle with the U.S. government over the purchase.
"Navitas will be reliant on Wanxiang for access to key intellectual property, battery cells, facilities, and equipment to complete the DoD contracts," the white paper said.
Additionally, the white paper warned that "the Chinese government is notorious for its control of domestic industries and would likely gain control of A123 's intellectual property."
"By allowing the sale to go through, the U.S. would not only be surrendering access to cutting-edge military-grade technology but would also be allowing China to gain control of the future supply chain, impacting essential military technology," the paper said.
"CFIUS approval of this purchase could have significant negative implications in the future in the form of cyber security risk, compromised military technology, and threats to the nation's power grid."
According to a company brochure, among A123’s current defense contracts are programs for Army "silent watch" low-observable vehicles that use lead-acid batteries for standby and starting power that reduce heat signature and engine noise. The Army’s portable power pack used to support field electronics called "soldier power" is another program. Its batteries are also used on Navy ships to manage electrical power use and reduce the size of power generators.
The advanced batteries also are being used for aerospace applications, including unmanned aerial vehicle batteries.
Regarding power grid and telecommunications, the A123 brochure states:
A123’s control and energy storage systems are key components for power generation and transmission industries for:
• Frequency regulation
• Grid stability
• Energy security to government facilities via micro-grids or back-up storage
• Grid energy storage and back up functionality in emergencies
• Grid reliability to address imbalances from renewable energy sources
The Air Force spent over $4 million for A123 to build prototype lithium ion cell and ultra high power lithium ion batteries between 2005 and 2011.
The Navy spent more than $700,000 on A123’s development of high-range rechargeable devices and alternatives to thermal batteries.
The Army spent $21.8 million on A123 for advanced battery development between 2005 and 2010.
Richard Fisher, a China military affairs specialist, said allowing the sale of A123 to go through would very likely lead to China’s military gaining access to advanced military technology in U.S. Army hybrid military vehicles.
"As the Chinese Communist Party maintains party cells in all Chinese companies, ultimately it can use these companies to advance political or intelligence objectives," Fisher said. "If we ever see the day when all Chinese Communist Party archives are declassified, there is a high probability that many memos would detail larger military objectives surrounding the acquisition of A123."
Former director of national intelligence Dennis Blair stated in a recent opinion article in Politico that if CFIUS approves the sale, it should be allowed.
"There are many sensitive technologies that the United States should protect," Blair stated in Politico. "The manufacture of lithium ion batteries is not one of them."
Blair said he strongly opposed allowing the Chinese telecommunications manufacturer Huawei to buy into the U.S. market when he was DNI.