Earlier this week the great mystery of what is going to happen to A123 Systems, which has been bleeding cash at a clearly unsustainable rate, was answered when it announced that Wanxiang Group Corp. had agreed to invest up to $450 million in exchange for an up to 80% interest in A123 Systems.  Wanxiang is a huge Chinese conglomerate that makes lithium-ion phosphate batteries in China and has an existing joint venture with U.S. battery maker EnerDel.

The deal is ringing alarm bells in Washington.  The U.S. Department of Energy has in the past been more than willing to fund research and development by foreign companies:  LG Chem, Toda America and Saft were major beneficiaries of the battery manufacturing stimulus grants.  But Chinese companies have always been a special case.  Chinese-owned companies have generally had great difficulty licensing DOE-controlled technology and no Chinese-owned company received any money from the battery manufacturing stimulus programs. 

Now that A123 Systems, one of the largest recipients of government-funded battery R&D largesse, may become Chinese-owned, the federal government will have to face the question of whether, and on what terms, Chinese-owned companies will be given access to U.S. battery and advanced materials technology.  Despite the clear challenges that U.S. manufacturing firms have faced in these areas, U.S. battery and advanced materials technology continues to be the best in the world—and the Chinese know it.

The federal government’s hesitance to do business with Chinese firms stems from the uncertain future of the geopolitical relationship between the U.S. and China compounded by the near total paralysis in Washington induced by the upcoming U.S. elections.  This hesitance is unfortunate for two reasons.  First, negative expectations about U.S.-China relations may become self-fulfilling and should be stridently avoided for that reason alone.  But second, and as important, this hesitance is getting in the way of good and productive business opportunities.

The Chinese have something we want (capital and the jobs that will flow from it), and we have something the Chinese want (the best technology in the world).  There is an obvious deal to be made here—and probably many of them.  Responding to uncertainty by making no deals at all is foolish and squanders one of our nation’s greatest resources.

Some would point out that the U.S. has a poor record of earning a return on technologies transferred abroad.  For decades the U.S. willingly tolerated companies from countries whose markets were effectively closed to U.S. goods using U.S.-developed technology to capture large shares of our domestic market and drive U.S. manufacturing firms out of business.  But those were different times, and those things occurred for reasons that seemed good at the time.  There is nothing in the American character that leads us inevitably to make bad business deals.

The challenge today is to rebuild the U.S. manufacturing base and to re-invest in some of our core competences, such as research and development, which have given the U.S. economy its enduring strength.  That rebuilding and reinvestment requires capital, which is in short domestic supply.  If the Chinese can help us solve our problems, we should help them solve theirs.  That is called business, and will be called good business if we do it on the right terms.