A123, the U.S. manufacturer of green-tech batteries that received millions in government aid, today announced a “memorandum of understanding” between it and Chinese auto giant Wanxiang. It totals up to $450 million in a bailout of debt purchasing and other cash infusions that would grant Wanxiang 80 percent controlling interest in A123.

“Today’s announcement is the first step toward solidifying a strategic agreement that we believe would remove the uncertainty regarding A123’s financial situation,” said David Vieau, CEO of A123. “A substantial capital investment from Wanxiang would not only provide financial stability to A123 as we continue to grow, but it would also align us with a large, successful global brand in the automotive and cleantech industries.

“Wanxiang has a successful track record of operating in the U.S. with significant employment and commitment to good corporate citizenship,” Vieau added, “and we expect that a strategic agreement with Wanxiang would help enhance our competitive position in the global marketplace, especially in China.”

That competitive position has been eroded by product recalls to customers like Fisker Karma, whose own $529 million Department of Energy loan guarantee was removed early this year.

A123 is a shareholder of Fisker Automotive. Wanxiang is a private company, one of the country’s largest.

“While Wanxiang is private, this deal is about China still having a partially planned economy. Beijing made green technology a state priority, so Wanxiang expects subsidies, even though Chinese consumers haven’t shown any interest in electric cars,” said Heritage’s Derek Scissors, senior research fellow in Asian Studies.

“In effect, A123’s U.S. government grant was the first subsidy for Wanxiang to make batteries in China that no one buys,” he said.

A123 lost nearly $83 million in the second quarter of 2012, on top of a whopping $125 million loss in the first quarter. Losses in 2011 approached $258 million, with cumulative losses since 2007 totaling more than $815 million.

The company has received about half of a $249 million Electric Drive Battery and Manufacturing Initiative grant from the Department of Energy and recently gained an additional two years to meet production goals included in the terms of the grant. In addition, A123 received another $14 million in DOE research and development grants.

The ailing company withdrew a separate $233 million Advanced Technology Vehicles Manufacturing loan application from the DOE in May, according to regulatory filings and the company’s own internal presentations.

A123 argued that it did not need the addition ATVM loan due to its prior DOE grant funding, but admitted that given its then-current cash burn rate, the company only had enough to continue operations until November or December 2012.

The company reported a decrease from $113.1 million to $47.7 million in cash on hand in the last quarter.

A123’s first quarter 2012 report illustrated the dire straits facing the company’s ability to continue as a “going concern”:

The above circumstances raise substantial doubt on the Company’s ability to continue as a going concern. Management is taking actions to raise additional capital to fund cash requirements and evaluating other strategic alternatives. The Company is actively engaged in discussions with strategic partners for substantial investments in the Company… Management also continues to seek to reduce cash used in operating and investing activities, including by improving the Company’s gross margins, reducing operating expenses, and reducing working capital. Although the Company’s intent is to improve its operating efficiencies and to obtain additional financing, there is no assurance that the Company will be able to obtain such financing on favorable terms, if at all, or to successfully further reduce costs in such a way that would continue to allow the Company to operate its business.

Details from the announced memorandum of understanding:

Under the proposed terms of the strategic agreement outlined in the MOU, Wanxiang would provide A123 with up to $75 million in initial debt financing under a Senior Secured Bridge Facility, with an initial credit extension of $25 million and $50 million to be funded after the satisfaction of certain closing conditions, and, subsequently, upon satisfaction of certain closing conditions, purchase $200 million aggregate principal amount of A123’s Senior Secured Convertible Notes. The agreement would also include the potential for Wanxiang to invest up to an additional $175 million if it exercises the warrants that would be issued in connection with the Bridge Facility and the Convertible Notes for cash. Incurrence of the remaining $50 million of loans under the Senior Secured Bridge Facility would be subject to the satisfaction of certain approvals and conditions, including receipt of favorable determination from CFIUS and receipt of Chinese government approvals.

A123’s agreement with Wanxiang still needs the signoff from U.S. and Chinese officials.