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DOE Inspector General review finds automotive Li-ion battery maker LG Chem Michigan misused Recovery Act funds; DOE management, low market demand contributory
15 February 2013
A review by the US Department of Energy (DOE) Office of the Inspector General (OIG) has found that Li-ion battery maker LG Chem Michigan misused funds awarded to it under the American Recovery and Reinvestment Act of 2009 (Recovery Act).
The OIG review found that LG Chem Michigan inappropriately claimed and was reimbursed for labor charges incurred by a variety employees for activities that did not benefit the project. As a result, up to about $842,000 in reimbursements for labor charges were questioned. The review also found that work performed under the grant to LG Chem Michigan had not been managed effectively. Despite the expenditures of $142 million in Recovery Act funds, LG Chem Michigan had not yet achieved the objectives outlined in its DOE-approved project plan. Among the objectives was the production of enough battery cells annually to equip 60,000 electric vehicles by the end of 2013, with assembly beginning in 2012.
The OIG review found that:
Even though the facility had produced a large number of test cells, the plant had yet to manufacture battery cells that could be used in electric vehicles sold to the public.
Only about 60% of the production capacity set forth in the grant agreement was constructed even though nearly $142 of $151 million (94%) of DOE’s share of project funds had been spent. LG Chem Michigan officials estimated that DOE’s 50% share of the cost to complete the five production lines called for by the grant agreement would be $22 million, an amount that would significantly exceed the remaining funds available under the grant award.
These same officials noted, however, that they had no plans to complete the remaining lines unless demand improved dramatically. We found that LG Chem Michigan had significantly underestimated labor costs and that this was a primary cause of its inability to complete planned construction.
Project documentation prepared to support the grant award indicated that production of battery cells would transition from LG Chem’s South Korean facility to the Michigan plant beginning in 2012, assuming that demand grew as expected. LG Chem Michigan officials indicated that they had not begun production at the facility because demand for the Chevrolet Volt, the US manufactured vehicle for which the plant was to produce battery cells, had not developed as anticipated.
Less than half of the expected number of jobs had been created to support the project. The period of performance for the grant runs through May 2013. Yet, based on progress and current plans of LG Chem Michigan officials at the time of our review, the expected benefits of the project are not likely to be realized within the originally anticipated timeframes.
The problems we identified occurred, in large part, due to grant monitoring issues with LG Chem Michigan and the Department. Notably, LG Chem Michigan did not fully realize the grant’s target goals, and the Department did not always take sufficient action to ensure adequate oversight of project progress and, in turn, protect the taxpayers $142 million investment in the project. For instance, LG Chem Michigan officials told us that they made a decision to delay production of battery cells at the Michigan facility. LG Chem Michigan officials made that decision even though demand for the Chevrolet Volt averaged 1,955 vehicles per month in 2012. That volume could have readily been produced by using the then built-out capacity of the Michigan plant.
...until the shift in production takes place or some alternative use for the plant is developed, US taxpayers will receive little direct benefit from a plant for which they provided up to half of the funding.
...We acknowledge that company officials were faced with difficult choices, with lack of demand for the product being at the core of LG Chem Michigan’s problem. Yet, the basic question for Federal grant administrators, in our opinion, was whether grant funding should have continued or suspended once it became clear that: (i) all the promised production lines could not be completed within budget; and, (ii) LG Chem Michigan would continue to fill US demand with battery cells made in South Korea.—OIG special report
The review was instigated by a complaint charging that employees at the Michigan facility had little work to do and were spending time volunteering at local non-profit organizations, playing games and watching movies at the expense of the Federal government and taxpayers. The OIG said that the DOE’s Chief of Staff and its General Counsel had also raised similar concerns.
The problems identified occurred, in large part, due to grant monitoring issues with LG Chem Michigan and DOE, the review found. In response, DOE concurred with the recommendations and indicated that corrective action had been taken and/or has been initiated to address the issues identified.
Funding background. In February 2010, LG Chem Michigan Inc. (LG Chem Michigan), formerly Compact Power, Inc., was awarded more than $150 million in Recovery Act funding to help construct a $304-million automotive Li-ion battery cell manufacturing plant in Holland, Michigan. As part of this process, LG Chem Michigan was also eligible to receive more than $175 million in tax relief from the State and local governments through 2025.
The DOE Vehicle Technologies Program received $2.4 billion under the American Recovery and Reinvestment Act of 2009 (Recovery Act) to help develop and deploy efficient and environmentally friendly highway transportation technologies to reduce US dependence on foreign oil and provide greater energy security.
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