Chinese auto firm Wanxiang swoops in to rescue (& own) A123

Ailing battery maker A123 Systems (s AONE) has found a savior and potential acquirer. Chinese auto giant Wanxiang says it plans to invest up to $450 million in A123, in a deal that could eventually see Wanxiang own 80 percent of the firm.  The entire $450 million investment is subject to A123 meeting certain conditions.

The CEO of A123 David Vieau called the news “the first step toward solidifying a strategic agreement that we believe would remove the uncertainty regarding A123’s financial situation.” A123 announced earnings today, too, and for the second quarter lost $82.90 million, up from $55.40 million from the second quarter a year earlier.

A123 has been bleeding cash for months. In the first quarter of this year A123 lost $125 million, more than double the loss from the first quarter of 2011. Revenues are also just trickling in: for the second quarter A123 generated just $16.99 million. That’s less than half of the revenues it generated for the second quarter in 2011.

Part of the problem was that in March A123 announced that it would start replacing battery packs with defective cells made at its Livonia, Mich., factory. That mistake cost the company $51.6 million in warranty costs during the first quarter and another estimated $15.2 million for replacing defective batteries that were in its inventory. A123 had to replace these defective batteries in its electric car maker customer Fisker Automotive’s inaugural cars.

A123 built the factory that made the defective batteries in 2010 with a $249.1 million grant from the federal government. The company went public in 2009, with its shares opening at $17 per share and closing at $20.29 per share on the first day of trading. Today A123 is trading at 0.49 per share.

Expect House Republicans to have a field day now that a Chinese firm will own much of the technology that these U.S. governments funds went into building.

Wanxiang is the largest auto tech company in China and has $13 billion in revenue and more than 45,000 employees. The conglomerate has taken a keen interest in investing in and acquiring cleantech, battery and electric car technology. Wanxiang invested $420 million in GreatPoint Energy to build a large-scale plant in China to convert coal into natural gas, and also backed electric car company Smith Electric Vehicles.

Check out: 10 ways Chinese investors are dominating cleantech