Friday, May 27, 2005

The future is… now?!

In a recent Forbes article, GM restated its goal of producing a hydrogen-based car at the same price point as today’s average car by the end of the decade. George Jetson, here we come! But before we reach into our pocketbook and start saving the environment one mile after another, we need to evaluate the reality of this initiative. Is this technology for real? If so, will we drive these cars and where will we fill them up?

First, we need to realize that fuels cells are not something new. Identified back in the 1800’s, they were considered an improbable device until the 1960’s when NASA began using them in the space program. But unlike so many computer related technologies, fuel cells have not progressed much over the last 20 years. GM says this is all changing.

GM first announced their intentions back in October of 2002 when a Wired article revealed to the world their billion-dollar gamble. Since that time, DOW Chemical announced their involvement in using a GM fuel cell to generate a portion of the electricity requirements for one of DOW’s Texas operations. Encouraging to be sure, this is a far cry from the complete overhaul of the century old petroleum based auto industry. But let’s say for the sake of argument that GM can overcome the technical issues of storing hydrogen, fuel cell life and the costs of production. How does GM’s strategy stand up to other auto manufacturers?

All of the other auto manufacturers are spending some R&D on hydrogen vehicles. But they do not see potential for 20-30 years. In the meantime, hybrids and alternate fuel systems are their focus. GM will be the only buyer in the market for purely hydrogen vehicles components for upwards of 10 years. The positive side of this story is that GM will have strong bargaining power with the suppliers once they have invested in hydrogen vehicles technology. The negative side is that many suppliers will have no incentives to start investing in developing components for an uncertain market with only one costumer. Going alone GM could capture huge profits if successful, but they will have to bear the risk of most of the required investments in any step of the Supply Chain.

Another factor in the success of this strategy will be the complimentary products and services needed to support a hydrogen-based vehicle. First and foremost is the production of hydrogen as well as the distribution. Current hydrogen production is nowhere near the volume needed to support the transportation needs of the American economy. In the case of DOW Chemical above, DOW produces and stores hydrogen as a part of their business. It is unlikely that many of GM’s customers will have the same capability to leverage. Service industries will also have to change to support an entirely new vehicle platform. What incentives are there for these industries to develop and / or change?

That brings in the role of government. Today there are state and federal tax incentives to get buyers to purchase hybrid cars. This may help on the purchase side, but what about infrastructure? If the market demand is composed of even 1 million autos in 2010, will any of the large petroleum distributors be interested in developing a nationwide network for hydrogen distribution? A recent study estimated the cost of building such a network throughout Europe could cost as little as $4.6 billion. Clearly the costs to develop the United States will be more. How much will the ruling party in 2010 be willing to spend to make this a reality? Politically, they would be helping to save the environment. On the other hand, they’re using public funds to subsidize large corporations and the few elite who are able to purchase these cars.

But, let’s say a distribution system is developed. What would be the adoption in 2nd and 3rd world countries? At a time when rivals in the industry are looking for ways to sell their cars abroad to growing markets, this car would most likely only be viable in the US, Europe and a few other small 1st world markets for at least a decade. Fortunately, GM is continuing to invest in their current lines of business through continued introduction of new models across their collection of brands. Will there be any complimentary technologies from the hydrogen effort that can enhance future conventional models? Only time will tell.

Is this a worthwhile endeavor? Will GM’s investment ever return a profit? The risks against success seem huge. There’s the development of the technology to cost efficiently power a car; the ability to store an effective quantity of hydrogen onboard; hydrogen production and distribution capabilities and ultimately consumer adoption. History is littered with technologies that were superior to the competition, and yet were never embraced by the market. A first mover advantage is rarely the sole key to success, yet this is what GM appears to be betting on. Is a hydrogen only based car really the best option? What about hybrids? Imagine driving your company down a curvy road vs. speeding through a hairpin turn. With a gamble this big, one really needs to expect a large payoff. But in this case, the payoff could be decades away. That gives the competition plenty of time to develop their response and build on the work GM has done.

To be true, we would love to see the vision of a hydrogen economy become a reality. Cleaner fuels for transportation (remember, the production of hydrogen is not without its dirty side) would help relieve the issue of smog and could reduce the consumption of fossil fuels. But at what cost? A billion here and a billion there? GM is already fighting for market share along with its survival. Let’s hope GM will be successful and that they will be able to gain some of the profits generated by their efforts to help the world. But for right now, we’re not betting on it.

Rafael Calderon, Jay Geiger, Joan Gelpi

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