When it Comes To China, Seller Beware If You Want To Get Paid  AMSC's Profits Gone With the Wind  The story about the problems at American Superconductor and its former customer Sinovel keeps getting more and more bizarre. Most amazing so far is the tiny amount of money paid to the AMSC employee who has reportedly pled guilty to the charges that he was bribed to reveal the source code for core electrical components for Sinovel’s wind turbines. The bribe was so small he couldn’t even have bought a low end Mercedes for his troubles.  According to RECharge, “the global source for renewable energy news,” it has now become public that the unnamed “perp” is a Serbian who was employed in the Austrian operation of AMSC known as Windtec. This individual was one of a handful of people who had access to the source code to operate Sinovel’s wind turbines. The article says the code was passed in the first half of this year for the very meager fee of just 15,000 Euros, or about $20,500, for his actions. AMSC has had to write off hundreds of millions in past and present sales to Sinovel which has really put American Superconductor down for the count and it has wiped out hundreds of millions of dollars in market value for AMSC and its shareholders.  Sinovel (SI) represented about 80% of American Superconductors revenues when the Chinese wind turbine manufacturer stopped paying for past shipments that had already been delivered and locked its gates to stop receipt of any further shipments to its facilities in China. AMSC didn’t help itself by continuing to make shipments when it hadn’t been paid for a very long time.  American Superconductor is on a March fiscal year and the stopped payments and delivery refusals occurred just prior to the end of that last quarter of its 2011 fiscal year. The initial round of announcements about the nature and severity of the problems were made public, rather promptly, on April 5th. At that time, AMSC still hoped to resolve the issues with a client that had come to represent the lion’s share of its revenues and its perceived path to profitability after decades of losses.  The developments forced the founder Greg Yurek to resign as Chairman, 10% staff cuts to be enacted, caused the company to be unable to file timely and accurate financial statements for the 2011 year, and when its anticipated earnings crumbled away to losses , the stock to collapse. That led to the filing of many class action lawsuits by the usual vultures who show up in such circumstances, looking for those who might have held the stock and want to become the lead plaintiff. AMSC has also been shown to have had inadequate financial controls by the SEC’s definition. Its proposed acquisition of The Switch Engineering OY has been postponed until September 30th with two more 30 day extensions in the last amended agreement. If the deal doesn’t close, The Switch will retain the 14.2 million Euro break up fee.  American Super had been in a self imposed silence for several weeks while it worked through its issues. It broke its silence in September when it announced theft of its property, the cessation of its relationship with Sinovel and other details. After the initial revelations of the problems and their scale and scope, Dan McGahn was promoted to CEO from President on May 24th and named a member of the Board of Directors effective June 1st. McGahn arrived at AMSC in December 2006 with the goal of finding new markets to enter that would accelerate AMSC’s growth trajectory. American Super has worked hard for years on products for the power grid and in developing high temperature superconducting wire. They are excellent products and would solve many grid problems in the U.S. but nobody here has cared much to do a thing about deploying them. According to a recent press release, McGahn’s “primary initial objective was to establish and operate AMSC China.” It would appear that his success in garnering the Sinovel business was a key in his advancement to SVP and then President and COO in December 2009 when things looked very rosy. While he knows the situation inside and out, he also appears to have been a key victim in Sinovel’s “Big Bamboozle.”  The stock is now down 84% for this year. Yahoo had its stake in Ali Baba diminished in value earlier this year when its Chairman Jack Ma simply decided to move a key asset into another company which he controlled and in which Yahoo had no interest. As everyone rushes headlong into doing business in China, it is clear that you cannot ever be too sophisticated when dealing over there. Sinovel is claiming that the “goods” AMSC was delivering were inferior and didn’t meet requirements of the Chinese Government. Even so, AMSC has filed suit against the arrested employee and Sinovel accusing it of stealing the very code it says was inferior.  It has become the Wild West on that other side of the globe. There is little or no respect for Intellectual Property. Copyrights and patents are ignored. Accounting issues have recently also come into question for many Chinese companies that have bought U.S. shell corporations to simplify the process of going public in the West. Rough and tumble attitudes must be expected. Any American company doing business in China must anticipate the worst even as it hopes for the best in expanded marketing opportunities. As in this example, Seller Beware! Letters of Credit and prepayments are a very good idea if you want to be paid for your goods and services. Without them, you are easily toast. Investors must make stock selections with great care, too.  We own no positions in American Superconductor at this time.  Joan E. Lappin CFA Gramercy Capital Mgt. Corp.
American Superconductor is Down for the Count after an employee of its Austrian subsidiary Windtec sold code secrets for a measly 15,000 Euros, not even enough to buy a low end Mercedes.  Seller beware if you are an American company seeking to do business in China.  There is little respect for Intellectual Property and disregard for patents and copyrights.  Be sure you are paid in advance or ship only against letters of credit.