Inspector general: Grant money for battery company not ‘managed effectively’

Noriko Hayashi/BLOOMBERG - An Azapa Co. AZP-LSEV electric vehicle (EV) is displayed behind a screen simulating a map during a demonstration at Automotive World 2013 in Tokyo, Japan, on Friday, Jan. 18, 2013. The Automotive World 2013 trade show ends today.

The Energy Department gave $150 million in economic Recovery Act funds to a battery company, LG Chem Michigan, which has yet to manufacture cells used in any vehicles sold to the public and whose workers passed time watching movies, playing board, card and video games, or volunteering for animal shelters and community groups.

Those are the conclusions of a report released Wednesday by Energy Department Inspector General Gregory H. Friedman, who said the grant to a subsidiary of South Korean giant LG “had not been managed effectively.”

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Friedman said that only three of five planned production lines were complete, that less than half of the expected 440 jobs had been created and that battery production had not yet begun. General Motors, which was expected to buy batteries from the plant in Holland, Mich., is still buying the electric-car batteries from LG Chem in South Korea.

LG Chem Michigan has reimbursed the Energy Department for $842,189 in costs the inspector general found to be “unreasonable and unallowable” for time employees spent working for Habitat for Humanity, animal shelters and outdoor nature centers. Friedman said that those labor costs might have been higher but that, because the company did not keep detailed records, it was hard to quantify the time workers spent on those activities.

News of LG Chem Michigan’s idle workers was first reported by various Michigan newspapers and television stations in October.

The 650,000-square-foot plant — which is also eligible for more than $175 million in tax relief from the state and local governments through 2025 — was supposed to produce lithium-ion batteries to support the manufacture of 60,000 electric vehicles by the end of 2013.

The July 15, 2010, groundbreaking was attended by President Obama and then-Gov. Jennifer Granholm (D), who said Michigan would become the “North American battery capital.”

Obama has spoken often of his desire for the United States to recapture global leadership in clean-energy technologies such as lithium-ion batteries for electric cars. He said in 2010 that the LG Chem Michigan venture was “leading the way in showing how manufacturing jobs are coming right back here to the United States of America” and that by 2012, batteries for the Chevrolet Volt and the electric Ford Focus could be “stamped ‘Made in America.’ ” He said the plant was a “symbol” of where Holland, Michigan and America were going.

Sales of electric vehicles have lagged behind expectations, especially those of Obama, who aimed at having 1 million electric vehicles on the road by the middle of the decade. The Chevy Volt is the best-selling electric vehicle; GM said it sold 30,090 Volts worldwide last year.

For those cars, GM has been buying LG Chem lithium-ion batteries made in South Korea. As a result, LG Chem has put its Michigan workers on rotating furloughs. At its peak, there were 215 jobs there; by the time of the inspector general’s review there were 200.

Friedman’s report sharply criticized the company as well as the Energy Department.

LG Chem blamed its failure to provide GM with batteries made in Michigan on low sales of the Volt, the inspector general wrote. But the report also said that even with the Volt’s lackluster U.S. sales volume, batteries for the car “could have readily been produced by using the then built-out capacity of the Michigan plant.”

In a statement Wednesday, LG Chem said that it was “acutely aware of the disappointment arising from the delays.” A spokesman, Randy Boileau, said: “LG Chem has invested $150 million in this plant as well. It has a significant interest in the long-term success of this facility. It is doing everything it can to find an economically viable way to get commercial production started here.”

Cost overruns are another issue. Even though only three of the five production lines are complete, LG Chem Michigan had used 94 percent of the Energy Department funds, the report said. Finishing the other lines would cost about $44 million, more than the remaining grant funds, the report added. The company had spent $30 million for the installation of equipment, twice as much as budgeted. The report said LG Chem said that the difference “was due to higher than expected labor costs.”

Friedman’s report said LG Chem defended its decision to pay workers doing community activities, explaining that it did not want to lay off people after paying to train them. But the report said that “the cost of business decisions made by LG Chem Michigan should be absorbed by the company, not the U.S. taxpayer.”

LG Chem said Wednesday that it had “established internal safeguards to prevent this from happening again.”

The Energy Department, while agreeing to tougher monitoring, defended its performance overall. In a memorandum to the inspector general’s office, Kathleen B. Hogan, deputy assistant secretary for energy efficiency, said the questionable labor spent on community groups represented just 0.5 percent of Energy Department funds for the project. She said that “emerging technologies and industries often face struggles early on” and that the United States would be poised to benefit from an increase in electric-vehicle sales.

Meanwhile, LG Chem has requested an extension of the May 31 deadline for finishing construction of its plant’s remaining two lines.

Friedman urged the Energy Department to monitor the venture more closely, hold LG Chem Michigan accountable and search for a way to start up battery production in Michigan.

“Unless and until production begins at the Michigan plant, in our opinion, the U.S. taxpayer will garner little benefit from its $143 million investment,” the inspector general said, an amount equal to “at least half of the funding.”

 
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