Fuel cell developer Hydrogenics has signed a deal with John Deere to research and develop hydrogen-fuelled commercial vehicles, a market the company feels will be earlier to adopt the environmentally friendly technology than the auto industry.

Under the five-year agreement announced Wednesday, Toronto-based Hydrogenics will collaborate with the American farm and heavy equipment giant on fuel cell development and engineering.

"John Deere has been recognized for a long time as a very innovative company among the Fortune 500 and they're certainly leading the race in the electrification of their platforms and we're very honoured that they picked us after an extensive search of the fuel-cell landscape," Pierre Rivard, president and CEO of Hydrogenics, said in a phone interview.

Financial terms of the agreement were not disclosed, though Rivard said it involves a "minimum threshold" of revenue for Hydrogenics.

The company, whose HyPM modular power cell runs on hydrogen, hopes the R&D deal will see its products move from prototypes to commercial products.

Hydrogen fuel cells generate electricity without combustion by combining hydrogen and air, the only byproducts being heat and water.

Hydrogenics has already collaborated with Deere on one vehicle prototype, the Gator, a small four-wheel vehicle. The new agreement will see the two companies work on a number of new designs to be announced later.

"We learn by doing, and putting a real-life prototype in a customer's hands is the best possible way to iron out all the kinks, find out what deficiencies we need to address, " Rivard said.

"This is a critical milestone to achieve, which is to establish the right positioning with the right players early on in this marketplace."

Building relationships with global companies is key to the success of Canadian fuel-cell developers, said Ron Britton, president of Fuel Cells Canada, an industry association.

"We remain world leaders in a number of areas but we remain with our eye always set on global markets because Canadian markets are not really enough to sustain the industry," Britton said. "We've got to be exporters to be successful."

Hydrogenics also agreed in April to work under a federal government-sponsored initiative with Purolator Courier, owned by Canada Post, to develop and test a fuel-cell-powered delivery vehicle in the Toronto area. Along with the hydrogen fuelling stations that will be needed the project will tackle issues of on-board hydrogen storage.

Through such partnerships, Hydrogenics is positioning itself in the small-commercial-vehicle market and not the fuel-cell industry's holy grail - the general automotive industry.

"We believe there is a better approach, which is not quite as sexy as the mass market of fuel-cell cars or the mass market of consumer products," Rivard said.

"We believe we have to go after the low-hanging fruits first - establish a position, establish a supply chain and improve our design on these early emerging markets."

Although the automotive industry has spent billions developing clean alternatives to fossil fuels, the first practical adopters of fuel cell technology are likely to be operators of small fleets such as golf courses and park maintenance crews whose vehicles return regularly to a central depot.

The first production hydrogen-fuelled cars are expected to roll out between 2010 and 2015, but small industrial vehicles are likely to be the first in common use, Britton said.

"Those kinds of applications are a lot easier to get your head around at the very beginning of this technology development," said Britton.

Automobiles will follow, because it will take decades to develop the roadside infrastructure to service cars that run on anything but gasoline.

But, Britton added, General Motors Corp.'s 17 per cent ownership of Hydrogenics assures "a clear connection to the auto industry built in."

Hydrogenics lost $22 million, which it attributed to increased research and development spending, though its revenue nearly doubled to $32.7 million from $17.5 million in 2002.

In its most recent quarter, Hydrogenics, which reports in U.S. dollars, lost $7.5 million on revenue of $4.1 million, compared with a year-earlier loss of $2.4 million on revenue of $8.4 million. The revenue decline was attributed to fluctuations in test revenues.

Hydrogenics stock (TSX:HYG) gained 29 cents or six per cent to $5.30 Cdn on the TSX Wednesday, after closing at a 52-week low of $5.01 in the previous session. The stock's 52-week high is $9.78.