It might not have the catchiest name, but battery startup A123Systems is having no trouble snagging attention in a notoriously hard-to-enter industry - transportation.

In May, the same month A123 made its hybrid-electric vehicle batteries available for orders, BAE Systems selected its batteries for a hybrid propulsion system in the DaimlerChrysler Orion VII bus. And in August, General Motors picked A123 as one of three companies working to develop batteries for the sporty Chevrolet Volt plug-in hybrid. Unlike regular hybrids, which switch between an electric motor and a gasoline engine, the Volt concept car is propelled by the electric motor alone. The gasoline engine recharges the battery, but never actually drives the car.

These contracts have placed A123 in a coveted position among lithium-ion-battery startups. After the runaway success of the Toyota Prius hybrid, projections for hybrid sales keep growing. And plug-in hybrids, which have plugs that allow their owners to extend their mileage with electricity from the grid, might be the next big thing. But carmakers say those hybrids need much more powerful batteries, in a size small enough to leave room for trunk space. Lithium-ion batteries, which offer the same energy as nickel-metal-hydride batteries with 20 to 30 percent less weight, could be the answer.

But cars require higher voltages than those required by the laptops and phones that lithium-ions power today. That's where startups that make lithium-ion batteries for power tools come in. Like cars, many power tools require higher voltages than phones and laptops. So companies such as A123Systems, which sells batteries to Black & Decker, hope experience with power tools will give them an edge.

A123 claims its technology using tiny phosphate particles (doped nano-phosphate) keeps its lithium-ion batteries from catching fire. The battery also will recharge 90 percent of its capacity in five minutes and weighs in at less than 1 kilogram for a battery that provides 1.5 kilowatts of power, the company says.

Of course, safety and performance aren't the only factors involved. The main reason lithium-ions aren't in cars today is the price, says Thilo Koslowski, lead automotive analyst at Gartner. Currently, plug-in hybrids cost $10,000 to $12,000 on top of the price of a regular hybrid, with most of that chalked to the batteries.

Greentech Media met with CEO David Vieau in A123Systems' offices in Watertown, Mass., to ask what's next.

Q: When do you expect to start producing batteries for hybrids?

A: We've been in development for a long time. We're planning to start production next year, going volume in months.

Q: Are fuel-cell cars a potential threat to A123?

A: From a systems integration standpoint, batteries are fitted in whether it's a fuel cell, an engine or [regenerative braking] coming into the battery. With the Volt, it doesn't matter to us if the source of the fuel is a fuel cell or [an engine] because the car is going to be driven by the battery.

Q: Will fuel cells ever come to the market in a meaningful way?

A: Today they are too expensive overall, but I think costs are going to come down. We could have a fuel cell if [they] become efficient.

Q: A123 talks a lot about the safety of its batteries. But one of the biggest hurdles to commercialization is price. How do you expect to overcome that?

A: Battery prices have dropped 40 percent in the last two years, and the price of systems [to manufacturers] has dropped 50 percent in the last five years.

Q: Will margins have to come down?

A: Margins aren't really hot to begin with; it's not like there's a lot of room. The price will come down as materials are coming down over the next few years. In three to five years - a pretty long window - we're going to see a lot of improvement and system costs will come down as more systems are implemented.

Q: Does A123 face a risk that automakers might stop pursuing this technology, mirroring the "killing" of the electric car?

A: There's enough money being committed today by companies like GM, Continental and LG to show this is a serious effort. But there's still uncertainty; we'd be naïve to think otherwise. It's an issue for sure.

Q: Vinod Khosla of Khosla Ventures says plug-in hybrids don't make sense as a climate-change solution because they are expensive and will take so long to replace a significant chunk of the transportation market (see Ethanol Shmethanol).

A:He's got a point. When you talk about full penetration of the market, you have to think in terms of 15 to 30 years. But if you don't start now, you just delay that process. If we as a people look at this and say, in 15 to 20 years, "We have made a change," wouldn't that be great? I think we can do quite a bit of change in that time.

Q: How will you overcome the expense?

A: In England, where they have $9-a-gallon gas, [plug-in hybrids] economically work. In the U.S. with $3-a-gallon gas, it doesn't make a lot of sense, but from a global standpoint, I think the opportunities are there. But in general, the price of gas is going to go up - it's not going back down - and there's the climate-change problem.

Q: What do you see as your next market beyond cars?

A: We're starting a project on [batteries for] the aircraft engine. Making batteries much lighter in weight improves the efficiency of an aircraft. If you can save 100 pounds on an aircraft, you can really make a difference.

Tags: baesystems, carbattery, chevyvolt, daimlerchrysler, davidvieau, fulecellcars, orionvii, volt