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Why GM and Battery Startup Sakti3 Tied the Knot

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When General Motors (s GM) decided on a supplier for the lithium ion cells in the battery packs for its upcoming Chevy Volt, frontman Bob Lutz explained that the risks involved with working with a startup helped tip the balance in favor of South Korea-based LG Chem. Referring to the runner-up for the contract, Massachusetts-based A123Systems, Lutz said, “A123 is still sort of a startup, they’re still ramping up…LG Chem is just further along.”

Fast-forward four months and GM has just formed a partnership with another startup, Ann Arbor, Mich.-based Sakti3, which has an even shorter track record than A123Systems did when it lost the Volt deal. What’s different this time around?

To start, GM isn’t actually putting any cash on the line with Sakti3, a tight-lipped lithium-ion battery developer funded by Khosla Ventures and headed up by Ann Marie Sastry, who leads energy systems engineering at the University of Michigan. Rather, the two companies plan to share expertise. “We’re bringing vehicle capability and pack capability. Sakti3 is bringing cell expertise,” GM’s Bob Kruse tells the Michigan Business Review.

This is in line with GM’s repeated emphasis on the importance of developing and assembling the battery pack and controls in-house, even while sourcing the cells from an outside supplier.

Beneath all this warm, fuzzy sharing of mutually beneficial knowledge, however, is a political undercurrent. Both Sakti3 and GM are hoping to get a boost from the government, and this week’s partnership could help build their case. GM, still mid-bailout, faces a June 1 deadline to convince President Barack Obama’s automotive task force (which has made it clear it wants to see more fuel sippers and fewer guzzlers in GM’s lineup) of its financial viability. At this point, bankruptcy seems to be the most probable option, CEO Fritz Henderson said this afternoon.

By aligning itself with Sakti3, GM is making a show of its commitment to innovation, plug-in vehicles and bringing cell-making stateside, even if it can’t afford to go all out and invest in the necessary technology, or doesn’t want to commit to working with a newbie supplier like A123Systems. While any major investments by GM are, at best, uncertain at this point, the company said earlier this year that it planned to spend $30 million on an assembly plant for Volt battery packs, compared with the $1.84 billion that A123Systems hopes to spend (with help from the DOE) on a battery factory in southeastern Michigan.

Sakti3 sits on the opposite side of the spectrum from the struggling automaker. Whereas GM has accumulated too much overhead and built up more capacity than it can profitably use, Sakti3 doesn’t yet have the capacity to manufacture batteries at commercial scale. To reach that stage within three years, Sakti3 hopes to get a $15 million grant from the Department of Energy under a $2 billion program created as part of the stimulus package. Called the Electric Drive Battery and Component Manufacturing Initiative, the program is aimed at “supporting the construction (including production capacity increase of current plants), of U.S. based manufacturing plants” for EV batteries and components.

Just as General Electric (s GE) lined up a cohort of lawmakers, state officials and potential customers this week to endorse its plans to build a battery factory in upstate New York with help from the DOE, Sakti3 has rounded up support from Gov. Jennifer Granholm and other Michigan officials for its grant request, due early next week, and gotten commitments for $15 million in matching funds. Having a major automaker on board — even one on the brink of bankruptcy — lets Sakti3 tick off one more box as it builds its case for federal funds.