A123's joint venture with SAIC would build complete vehicle traction battery systems for hybrid electric, pure electric passenger vehicles, and heavy-duty truck and buses in China.

"This is a major commitment to the Chinese market," said Jason Forcier, who leads A123's automotive division, in an interview. "We are looking to be basically the market leader in China, both in the truck and passenger car market."

Following the news of the announcement, shares of the Watertown, Massachusetts-based company, which debuted on the Nasdaq stock exchange in September, closed up 6 percent at $19.40.

The venture, called Shanghai Advanced Traction Battery Systems Co, would be owned 51 percent by SAIC and 49 percent by A123 Systems, according to the companies.

Forcier said the Chinese bus market was an attractive segment for the company in the short term, given the government support for electricity-powered buses.

The passenger car market was much more lucrative in the long term, he added.

Forcier said A123 Systems is expanding its presence in Europe and in discussions with companies in India.

A123, which won a $249.1 million grant in August from the U.S. Department of Energy, will start production at its first U.S. battery plant in mid-2010.

The automotive market for lithium-ion batteries, mostly found in mobile phones and computer laptops, is projected to be $32 million in 2009 but is expected to skyrocket to $22 billion in 2015, according to A123's prospectus.

Every major global automaker has plans to bring electric vehicles to the market in the next two to three years.

Forcier said bringing down the cost of battery systems is the major challenge going forward.

"Cost is the real driver in this market," Forcier said, adding that he is confident A123 will be successful in bringing down the cost of batteries by as much as 35 percent in the next few years.

Analysts estimate that cost of battery systems for electric vehicles or plug-in hybrids can range from about $8,000 to $15,000.

A123, founded by scientists linked to the Massachusetts Institute of Technology (MIT), is currently working with German luxury carmakers BMW and Daimler, U.S. automaker Chrysler and France-based Renault ( RNSDY.PK - news - people ). It also has relationships with suppliers like Delphi ( DPHI.PK - news - people ) and Magna Steyr.

The new venture of A123 with SAIC has been awarded a contract to supply battery systems for SAIC's plug-in hybrid vehicle program.

SAIC had plans for a hybrid Roewe 750 sedan and a plug-in hybrid version of the Roewe 550, which could cut fuel consumption by 20 percent and 50 percent respectively. Both models would utilize A123 battery cells.

The Chinese carmaker planned to launch electric vehicles for sale in 2012.