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No Cheers in Latest China Green Energy War

NEW YORK ( TheStreet) -- American Superconductor (AMSC - Get Report) said it had no choice but to sue Chinese wind giant Sinovel for intellectual property theft, but that doesn't leave investors with much of a choice when it comes to shares of the technology company and former supplier to China's largest wind turbine maker.

American Superconductor announced late on Wednesday that it was suing Sinovel for stealing its intellectual property -- related to the software and electric components it makes that allow Sinovel's wind turbines to connect to the electricity grid. The turbine produces electricity that must be converted for the grid and the software card inside the electrical components facilitates this process. A former employee of an American Superconductor affiliate in Europe was arrested by Austrian law enforcement in July for corporate espionage, essentially for providing a way for Sinovel to hack through the encryption that protects AMSC's source code.

It's the latest twist in a downward spiral of the relationship between the Devens, Mass-based company and its former revenue stalwart Sinovel, which had accounted for as much as 75% of American Superconductor's revenue. The issue started as an inventory backlog at Sinovel, which forced the Chinese company to stop accepting shipments from AMSC, it said. As a result, AMSC had to restate its financials and lower expectations for revenue as it tried to work out a deal with Sinovel.

The issue occurs within the larger context of lower margins for Sinovel in the Chinese wind market where pricing has moved rapidly lower. Sinovel was also reportedly buying more electrical components from an affiliated supplier in China at the time of the AMSC hard stop, a relationship given new light now that the AMSC source code within the more commoditized nuts and bolts of the eletrical component has allegedly been stolen.

However, until AMSC's surprise announcement on Wednesday night alleging corporate espionage and IP theft, Wall Street had hoped AMSC eventually would work out its differences with Sinovel, getting it back to some semblance of a relationship to sell its electrical components that support Sinovel wind turbines, even if it was lower revenue in total, predicated on Sinovel's need to bolster its declining margins.

Suing Sinovel ends that dream, and even if AMSC ultimately recovers cash through a legal settlement, there is no telling how long that could take or what amount of cash a settlement could add to its balance sheet.

If the charges of source code theft are true, AMSC had no choice and its case against Sinovel is a positive step since there was no other steps to take. But all the same, it leaves investors caught between a rock and a hard place. Here are the issues for American Superconductor which mean any bet on AMSC by an investor at this point is a purely speculative play:

When the company announced a work force reduction of 150 employees earlier this year, as part of its attempt to recover from the Sinovel situation, Wunderlich Securities analyst Theodore O'Neill noted the size of the job cuts suggested the Sinovel relationship would be resuscitated. In fact, the analyst said that if Sinovel wasn't coming back as a sales agreement, AMSC would have had to lay off as many as 600 employees.
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