Waltham, Massachusetts-based electric car battery manufacturer A123 Systems Inc. filed for Chapter 11 bankruptcy protection Tuesday, The Wall Street Journal reported.  The company's collapse has been called a setback for the Obama administration's efforts to foster a domestic market for electric vehicles running on U.S.-built batteries.

Established in 2001, A123 had a strong start, with a market value that was at one time more than $2 billion. It successfully raised more than $350 million in venture capital and received federal government clean energy grants worth nearly $250 million. 

But it hit a spate of difficulties since its 2009 IPO, including a defective car battery recall last December and a steady decline in stock prices that culminated in being delisted by NASDAQ following 30 days of shares trading below $1.

Things started to look up when A123 struck a $465 million bail out deal this summer with China's biggest auto parts maker Wanxiang Group, comprising loans and bonds that could be converted into an 80 percent stake.

Although A123 scrapped the deal with the bankruptcy, Bloomberg reported Wednesday that Wanxiang Group may still pursue taking over the company, since Wanxiang's structured the deal to protect itself against A123's potential bankruptcy.  By some kind of weird fluke, the bankruptcy actually makes the company more attractive to Wanxiang.

"Bankruptcy court is like a filter that lets a dirty big boy covered with mud go through it and turn himself into a clean boy," said Ni Pin, Wanxiang's president of U.S. operations in a telephone interview with Bloomberg Wednesday.

A123 had agreed to sell its auto-parts assets to its main competitor, Milwaukee-based Johnson Controls, at a deal valued at $125 million, though the price could rise at auction, as reported by The WSJ.

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