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Shares in A123 Systems (AONE) jumped 26.5% on Wednesday as General Motors (GM) unveiled the company's new Chevrolet Spark EV microcompact - and of course announced that the car's battery pack will be supplied by the Massachusetts-based A123 (AONE).

The Spark EV is slated to go on sale in the States in 2013. Little detail regarding the supply agreement has been announced beyond the name of the car and the time scales for production. However, Forbes managed to interview a spokesman from the company and had the following to say:

A123 VP Jason Forcier said in an interview with Forbes that the contract is a “major win” for the company. A123 will be providing the full battery system for the Spark, including not just the battery but also associated enclosures, electronics and cooling. The Spark goes into production in 2013; Forcier says the deal should be providing substantial revenue to A123 by 2014. He notes that the company will start producing the batteries for the Spark in its existing facility in Livonia, Michigan, which it also produces batteries for Fisker and Navistar vehicles, but will consider adding more capacity at a second site A123 owns five miles down the road in Romulus, Michigan.

The key sound bite is obviously the expectation of substantial revenue from the agreement by 2014. This is obviously good for A123 and the market responded accordingly on the day.

However, a few points seem worth considering:

  • This agreement is not entirely new to the market. It was in fact announced back in August - more detail here. GM has now simply added the name of the vehicle and a clearer time frame for production.
  • Further announcements from GM since then could be read as suggesting that the company in fact sees its partnership with LG Group as the likely central driving force behind its push on EVs and PHEVs. This of course includes its relationship with battery giant LG Chem, who provides batteries for the Volt. More detail on GM's recently expanded deal with LG Group here.
  • The market is likely to take the view that, at least in the initial stages, sales of pure EVs like the Spark may well grow slowly. Range anxiety remains an issue. GM tested a version of the Spark EV in India with an 80 mile range on one charge. That perhaps provides an idea of what the consumer will be facing.

Overall, Tesla (TSLA) is probably a better bet, given that the company appears to have a good chance of securing a significant niche market for its version of the pure EV, particularly due to the company's unique ability to deliver a 300-mile driving range on one charge. Interestingly, GM's deal with A123 may also focus attention once again on the possibility of the billion dollar deal with Toyota (TM) aired back in August by Tesla founder Elon Musk - more detail here.

The bottom line is that the overall market looks likely to see a good relief rally this month (more detail here) and that is likely to allow this burst of optimism for A123 to run further. Longer-term, however, the realities are not quite so obvious.

Source: A123 Systems: How Supportive Is The Deal On GM's Spark EV?