Wall Street Journal 15 March 1998 by Jeffrey All***************************************************
This is not only an opportunity for engine and drive manufacturers to start increasing their awareness, knowledge, and participation in fuel cell and alternative power projects, but it is also an opportunity for smaller firms to begin to anticipate and prepare for the many related smaller items, accessories, and subcomponents that will offer growth opportunities.
One major difficulty with fuel cells in marine applications will be weight. They add a large amount of weight to automotive applications and the ratio of engine weight to total vehicle weight is much lower there.
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BURNABY, British Columbia -- Gasoline in the U.S. is cheaper than bottled water, and demand for fuel-guzzling sport-utility vehicles is soaring. So how is business these days for Firoz Rasul, who is trying to peddle an exotic technology for powering super-clean cars?
It's booming. Ballard Power Systems Inc., of which Mr. Rasul is chief executive officer, is the leading developer of the automotive fuel cell, a device that converts hydrogen into electricity to power a car or truck. Not long ago, the fuel cell was dismissed as an environmentalist's pipe dream that wouldn't be road-ready anytime soon. Now it is the subject of a heavily financed research-and-development race among some of the world's biggest auto makers, several of whom have pledged to roll out commercially viable fuel-cell-powered vehicles within five years.
Five years is tomorrow in the world of auto-product planning. And that means car companies will have to begin deciding as early as this year whether to invest the hundreds of millions of dollars each will need to move fuel-cell vehicles from the lab to the showroom.
DaimlerChrysler AG is expected this year to unveil the latest fuel-cell version of its Mercedes A-Class hatchback, and has vowed to start selling fuel-cell-powered vehicles by 2004. The company plans a major fuel-cell-related announcement by its chairmen Wednesday in Washington. "We're feeling we are out front right now," says Ferdinand Panik, the frizzy-haired director of the company's fuel-cell program in Germany. "But it's a race."
Particularly when it comes to technology. The emergence of the fuel cell as the leading contender to dethrone the extraordinarily hardy, century-old internal-combustion engine is a remarkable turn of events. Not long ago, the auto industry seemed to be pushing the electric car as the vehicle of the green future. Fuel cells were mainly props in advanced technology displays at auto shows, where executives cautioned that the devices were unlikely to be practical for many years.
One-Upmanship
But a combination of regulatory pressure, technical breakthroughs and competitive one-upmanship among the world's major auto makers has steered the fuel cell onto the fast track. DaimlerChrysler and Ford Motor Co. together have invested about $750 million in a partnership with Ballard to develop fuel-cell systems. Meanwhile, General Motors Corp. and Toyota Motor Corp. are discussing their own broad alliance to develop advanced technology including fuel cells. Both now have independent fuel-cell development projects under way.
Yet the talk of alliances masks the true competitiveness of the fuel-cell race. In the past 14 months, Ford, GM, Honda Motor Co., and Bayerische Motoren Werke AG all have said they hope to have fuel-cell vehicles ready by DaimlerChrysler's 2004 deadline.
Ballard's Mr. Rasul, 47 years old, couldn't be more pleased. "Auto companies who used to talk about 2025, then 2020, then 2015, are now talking about 2004," says the engineer-turned-marketer, who grew up in Kenya. "This is in the space of five years."
Fuel-cell technology still must overcome many hurdles before consumers begin seeing vehicles without pistons under the hood. One barrier is price: DaimlerChrysler says the cost of a fuel-cell vehicle today is in the six figures, and Ballard says the cost of manufacturing its fuel cells is still eight to 15 times higher than needed to compete with an internal-combustion engine. But proponents say the cost will drop through the use of less-expensive materials and by switching to volume manufacturing.
Wildly Optimistic?
DaimlerChrysler's Dr. Panik has said he expects the partnership with Ballard and Ford to produce enough fuel-cell systems for 40,000 vehicles by 2004 and 100,000 vehicles by 2006. But many people in the industry think those numbers are wildly optimistic, given the oceans of cheap gasoline in the U.S., the world's biggest auto market. Even some at Ford have doubts about how quickly the car will catch on with consumers. "Who buys the first one?" asks John R. Wallace, Ford's director of alternative-fuel vehicles.
Yet such nagging doubts aren't stopping auto makers from pouring vast sums into fuel-cell development.
"There may be value in being able to claim that you're the first to market with what appears to be the technology that could unseat the internal-combustion engine," says Mark J. Amstock, national environmental-vehicle project manager for Toyota Motor Sales USA, Toyota's U.S. marketing division.
The idea of using fuel cells to power vehicles isn't new. In 1959, a farm-equipment manufacturer harnessed the technology to power a tractor. In 1968, GM unveiled a fuel-cell-powered van. Unfortunately, GM's fuel-cell power plant hogged the van's entire cargo space, and for years automotive fuel-cell research foundered because scientists couldn't figure out how to make the devices small enough to fit neatly into cars.
Fuel cells began getting more attention again in the mid-1990s, as auto makers came under pressure from environmental regulators, particularly in California. In 1990, California mandated that by 2003 fully 10% of cars sold in the state must be essentially pollution-free. As scientists and politicians began sounding alarms about global warming, auto makers realized they had to get serious about alternatives to the carbon-dioxide-spewing internal-combustion engine.
One obvious answer was to build battery-powered electric cars. GM led the way, launching its futuristic, battery-powered EV1 in December 1996 amid enormous fanfare. But consumers balked at the tiny vehicle that could travel only 80 miles between overnight recharging sessions. (That range has since doubled with a new kind of battery.)
Rolling Out the NECar
Daimler-Benz took a different road. In 1994, the Germany luxury-car maker unveiled a Mercedes van dubbed the NECar, for New Electric Car. Powering the prototype were fuel cells Daimler had bought as part of an approximately $19 million order from a then-obscure Canadian company operating out of a warehouse in North Vancouver.
The company was Ballard, and the Daimler order was the biggest it had ever had.
The NECar was far from practical. There was room only for a driver and the fuel-cell system, and tanks of pure hydrogen were mounted inside. Ballard and Daimler went back to the drawing board, and two years later, in May 1996, rolled out another van, the NECar 2. The fuel cell was miniaturized so that the van could seat six people. The new fuel cells not only were much smaller; they also were more powerful than the earlier models.
Fuel cells work by mixing hydrogen with oxygen from the air to produce electricity and, as exhaust, water. A fuel cell looks roughly like an enlarged compact disk in its case; because a single cell can't produce enough electricity to power a car, cells are attached, one atop another, to form "stacks" that resemble columns of CDs. While the NECar 1 needed 12 stacks, the NECar 2 pumped out the same amount of electric power with just two -- a big space -- saver.
Soon after the NECar2 was unveiled, Toyota unveiled a version of its compact RAV4 sport-utility vehicle, powered by a fuel-cell system it had developed itself.
Rivals Take Notice
Other auto makers began to take notice. "You started to see drivable hardware, and that really does gather attention," recalls Robert C. Purcell Jr., GM's executive director of advanced-technology vehicles. "People started gaining confidence that maybe this technology could work."
In April 1997, Daimler agreed to pump about $320 million into Ballard to create a joint venture that would market fuel-cell power trains not just to Daimler, but to other auto makers as well. The rationale: The more fuel cells on the road, the faster the technology would become affordable. Other auto makers began beating a path to Ballard's labs. In December 1997, just six months after it first had met with Ballard, Ford said it would spend about $420 million to buy into the Ballard-Daimler alliance.
"It was an announcement to the industry that there was a technology here that we were very serious about," says Ross P. Witschonke, president of Ecostar Electric Drive Systems Co., created by Ford's investment in the Ballard-Daimler partnership. "$420 million is like doing a car line."
Another turning point came later in 1997, when both Daimler and Toyota introduced prototype vehicles that ran on methanol, which contains hydrogen. Both models illustrated why the auto industry favors fuel-cell vehicles over battery-powered electric cars. While the latest battery versions can travel only about 150 miles on a charge, DaimlerChrysler says its vehicle, called the NECar 3, can go about 250 miles on a tank of methanol; Toyota says its can travel about 310 miles on a tank.
Environmental Compromise
Methanol is emerging as the auto industry's favored fuel-cell fuel. It is an environmental compromise: Although a fuel cell that runs on pure hydrogen produces only water as an exhaust, one that uses methanol also emits carbon dioxide -- though only about half as much as a comparable internal-combustion engine. The problem with hydrogen is that it isn't easily available, is highly combustible and requires big on-board tanks.
A methanol-gasoline mix already is sold at 38 gas stations in California for vehicles with internal-combustion engines that can run on both the methanol brew and conventional gasoline. The methanol industry, which sees fuel-cell automobiles as a potentially huge new market, is talking with auto companies about how it might get large quantities of the liquid fuel to filling stations around the world.
This month, officials from DaimlerChrysler, Ford and GM met in a Ford office near Detroit with representatives of a U.S. methanol-industry trade group to begin hashing out common standards for the composition of methanol that could be used to power fuel cells.
Ballard didn't start off in the fuel-cell business. The company was formed in 1979 by Geoffrey Ballard, a scientist, to research and develop batteries under a contract with the U.S. government. Four years later, the company began developing fuel-cell technology, under a defense contract with the Canadian government.
Made for Racing?
As for Mr. Rasul -- no tree-hugger himself -- he thought a fuel cell was a component of a race car's gas tank before signing on as the company's CEO in 1988, when Mr. Ballard became chairman. Ballard has since grown from 18 employees to about 450. Based on U.S. accounting rules, the company has had a string of annual net losses since going public in 1993 (under Canadian rules, however, it has been profitable for the past two years). For 1998, it posted a net loss of 62.5 million Canadian dollars, or US$40.96 million, on revenue of $C25.1 million, or US$16.45 million. In trading on the Nasdaq market, Ballard closed Friday down 50 cents at $25.50.
Today, Ballard teams of young engineers, many in pony tails, T-shirts and hiking boots, work in a laboratory the size of two football fields. On one end, scientists in a small room brimming with microscopes and beakers tinker with the composition of one of the fuel cell's primary parts, its membrane. The translucent, tan-hued flexible polymer sheet separates a hydrogen molecule's electrons from its protons, so the electrons can produce electricity.
Ballard's customer list now includes most of the auto industry's major players. GM has bought Ballard fuel cells for use in its own research programs. So have Honda, Nissan Motor Co. and Volkswagen AG. Sweden's AB Volvo, whose car operations were just acquired by Ford, has been a customer, too.
With so much top-secret information about future products flowing through Ballard's labs, the company has to take extraordinary measures to ensure that information doesn't leak. Each auto maker's fuel-cell work is overseen by a different Ballard manager; technicians often aren't told what car company's contract they're working on at any given time.
"It's like a black program in the military," says Alfred E. Steck, Ballard's vice president for research and development.
Rising Tensions
Actually, it is more like black programs for several militaries that are planning to wage war on one another. And as the self-imposed deadlines for making crucial decisions on fuel-cell production near, tensions are rising.
The former Chrysler Corp., for example, used to buy fuel-cell technology from Delphi Automotive Systems Corp., the soon-to-be-spun-off unit of GM. But following its merger with Daimler-Benz last year, Chrysler decided not to renew that contract with Delphi, which expired in December.
"It makes absolutely no sense for us to fund a competitor," says Christopher E. Borroni-Bird, DaimlerChrysler's senior manager for technology strategy-planning.
In addition, auto makers are turning up the volume on their competitive claims. In January, Honda's president said he hoped to have a fuel-cell car ready to sell by 2003. Not to be outdone, BMW said last month that it will be the first to put a fuel-cell car on the road -- next year. Unlike the other proposed vehicles, however, BMW's will retain the internal-combustion engine, using fuel cells only to bolster the electrical system for such conveniences as air-conditioning and heating when the ignition is turned off. BMW is buying its fuel cells from a Ballard competitor, International Fuel Cells, a unit of United Technologies Corp. based in South Windsor, Conn.
GM, meanwhile, unveiled a fuel-cell powered Opel minivan last October, then said in December that up to 10% of its Opel cars will be powered by fuel cells by 2010.
"That was something that took us by surprise, frankly," says Philip Pindo Mok, manager of international operations for DaimlerChrysler's fuel-cell project, who nevertheless claims not to be worried. After all, he says, his own company will "be coming out with a commercialization plan by the end of this year."
Copyright © 1999 Dow Jones & Company, Inc.
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