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A123 Systems


is experiencing heavy selling volume on Tuesday after Wunderlich Securities analyst Theodore O'Neill downgraded the lithium ion battery maker to a sell.

For some time already the Wunderlich analyst has been skeptical about the expected pace of electrical vehicle adoption and the ramp in the lithium ion battery makers' operations.

Inherent in the A123 Systems downgrade on Monday is Wunderlich's modeling of a slower ramp in the electrical vehicle business in both the U.S. and Europe. As a result, the Wunderlich analyst sees no choice for A123 Systems but to head back to the capital market to raise more money by early 2012 at the latest. The analyst is forecasting a cash balance for A123 Systems of less than $10 million by the end of 2012.

The Wunderlich analyst wrote in his A123 downgrade on Monday, "The major car makers are unsure how U.S. drivers will use electric cars and which option will be most popular is a big unknown, so until then or until the manufacturers are forced to by law, the ramp will be halting and slow. This will lengthen the time it takes for A123Systems to turn profitable and will almost necessitate another capital raise in late 2011 or early 2012."

Wunderlich lowered its A123 Systems price target to $6 from $9.

A123 Systems shares were down 7.5% on Monday morning and its average daily trading volume of 2 million shares had been surpassed in morning trading.

Year-to-date, A123 Systems shares are down 65%.

There has been lots of press garnered of late for electric cars with the debut of the Chevy Volt and the Nissan Leaf. In addition, major fleet buyers representing some of the biggest corporate brands in the U.S. have been talking up electric car purchases.

This fall

General Electric


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announced a five-year electric car fleet purchase plan, beginning with the Chevy Volt. GE is an original financial backer of A123 Systems, though A123 Systems does not have its battery technology in any existing commercial car. The Volt is powered by Asian battery maker Compact Power, an affiliate of LG Chem.

>>GE Volt Purchase: Will it Jolt the Lihtium Battery Market?

The CEO of

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has been among the corporate spokesman for the Electrification Coalition, a lobby group pursuing federal legislation to support the adoption of electric vehicles.

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Yet even with the reams of positive press, the Wunderlich analyst concludes, "no one in the automotive industry knows what buyers are going to want and there are far too many choices. No car company really wants to go first and so we would expect to see this start-stop situation as early adopters try to respond to what they thinkcompetitors are going to do and this will lead to delays and design changes at the last minute. The exception may be the very high end driver, but that's a tiny market."

As for the fleet buyers, Wunderlich's O'Neill writes, "Fleet customers are likely to be early adopters, but it will take years. Fleet customers are already announcing plans to purchase all electric fleets as GE did two weeks ago. But this is likely to take years to complete because the major auto makers aren't committing to significant volume productions anyway. GM is making no more than 5,000 Chevy Volts for 2011, which is fewer than 10 cars for each of the selected 600 dealers. There just aren't enough cars to satisfy a fleet market."

The lithium ion battery makers have been trying to diversify their business away from reliance on electric car adoption. A123 Systems competitor,



, for example, recently signed a deal with Russian's national grid operator.

Yet the Wunderlich analyst doesn't see the grid business as a game-changer. "We do not believe lithium-ion batteries are going to be suitable for full-scale use in the frequency regulation on-grid market. Yes, utilities are testing the technology and it may find some limited applications, but we don't believe the technology is perfected to withstand the volume of charge/discharge cycles required to service the frequency regulation market."

-- Written by Eric Rosenbaum from New York.


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