A123Systems Cozies Up to China's SAIC for Battery Joint Venture

A123Systems (s AONE), the Massachusetts-based battery maker that snagged a big Department of Energy grant and pulled off a successful IPO earlier this year, has just announced a new joint venture in China. Partnering with SAIC Motor — General Motors’ (s GM) partner in the Chinese market — A123 plans to develop, manufacture and sell battery systems for use in a variety of vehicles in China, including hybrid and electric passenger cars, heavy-duty trucks and buses.

Ultimately, A123 hopes this new venture — dubbed Shanghai Advanced Traction Battery Systems Co., or ATBS — will help the company gain a foothold for its lithium-ion battery cells in China. According to this morning’s release, ATBS “will seek to develop business throughout the entire Chinese transportation market and position A123 to strategically gain market share.” The Massachusetts company has a running start: Using cells from A123, ATBS will be the preferential supplier of energy storage systems for all hybrid and electric vehicles manufactured by SAIC, which plans to launch hybrid and plug-in hybrid versions of its Roewe sedans. And in 2012, SAIC plans to roll out an all-electric model.

SAIC Motor — part of the state-owned Shanghai Automotive Industry Corp. —  holds a 51 percent stake in the new venture, while A123 holds the remaining 49 percent. The companies have not disclosed how much they are investing in the project, but today’s announcement comes less than a year after SAIC Motor announced plans to invest 3 billion yuan (about $439 million) over three years to develop hybrid and plug-in hybrid vehicles, as well as parts for the models.

This latest joint venture marks the second step into the Asian market in less than two months for A123, which does its manufacturing primarily in Korea and Changzhou, China (it’s setting up manufacturing in the U.S. with the Department of Energy funds awarded this summer). In October, A123 announced a deal with IHI Corp. for the Japan-based heavy equipment manufacturer to sell the firm’s batteries and battery systems in Japan to automakers and for use in ships, as well as in its power supply systems, starting next year.

Like Japan, the government in China has thrown significant weight behind electric vehicles, aiming to make China the world’s leading producer of electric vehicles and eventually also electric buses. But J.D. Power and Associates analyst Mike Omotoso has told us plug-in vehicles have a tough road ahead for commercial success. “The price of gas needs to go up significantly before there’s more demand for electric vehicles,” he said, “whether in China, here, or anyone else.”

Other analysts have offered more optimistic forecasts. Researchers at the firm Frost & Sullivan predicted this spring that hybrid cars will be truly mass-market in China by 2011 or 2012, and that the country’s fleet will begin a minimum 10-year transition to plug-in hybrids and battery-electric vehicles as early as next year. Given that China could possess an up to 400 billion yuan (about $58 billion) market for electric vehicle batteries by 2030, according to estimates from McKinsey & Co., A123’s could potentially build a hefty business in the country.