fuel cells for cars - a competitive analysis - eth...

Conference paper WCTR 2004

Fuel cells for cars - a competitive analysis

Gian Carle,Peter Keller,Alexander Wokaun andK.W. Axhausen

Arbeitsbericht Verkehrs- und Raumplanung 239 August 2004

Fuel cells for cars – a competitive advantage ________________________________________________ August 2004

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Fuel cells for cars - a competitive analysis

Gian Carle, Peter Keller, Alexander Wokaun and K.W. Axhausen

IVTETH Hönggerberg, HIL F13.3CH-8093 Zurich

Phone: +41 1 633 37 93

Fax: +41 1 633 37 93

e-Mail: [email protected]

Abstract

Specific competitive conditions will decide on the successful introduction of proton exchangemembrane (PEM-) fuel cells as an automotive traction system substitute. Porter's competitiveanalysis methodology the so-called "five forces model of competitive structure" was used todevelop an overview of possible competitive forces in the newly built fuel cell industry. Porter'smodel places emphasis on external factors by examining the nature of the market environment.A company is considered to be in a favorable competitive position if the five threatening forcesare not too strong. The five forces are threat of market entrants, the power of suppliers,competitive rivalry in market, power of buyers and the threat of substitute products.

The second part of the presentation will give an overview of some success factors that maycontribute to a break-through for fuel cell technology from the niche-market to the mass-marketin the automotive industry.

Keywordsautomotive industry, car industry, competitive advantage, competitive analysis, competitivestrategy, five forces model, Fuel cell, fuel cell car, gas car, hybrid car, Michael E. Porter, PEMfuel cell


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1. Introduction

An economic competition evaluation that analyzes the potential for fuel cell use in the motorvehicle fleet is described in this paper. The research is part of the Alliance for GlobalSustainability (AGS) project, "Role of Innovative Technology for Promoting SustainableMobility" being completed at the MIT, PSI and at the Swiss Federal Institute of Technology.The full project estimates the future structure of an innovative drive system vehicle fleet andevaluates its contribution to sustainable mobility.

First, it presents a transition analysis (change management) for innovative drive systems fromtoday's status as niche market products to mass-market products. This analysis was completedby considering fuel cells as substitution products for traditional internal combustion engines(Carle 2002). The evaluation was guided by the competition analysis technique developed byMichael Porter (Porter 1998a, 1998b). This technique relies on existing data to estimatepotential competitive forces in future markets.

The second part of the paper describes the factors necessary for fuel cells to become widelyused in vehicle traction systems. In other words it describes the success factors that willcontribute to a breakthrough for fuel cell traction technology from the niche to the massmarket. This analysis also identifies critical factors that affect both market penetration timeand the rate of product diffusion into the mass market.

2. Methodology

In 1980 Michael Porter developed a technique for analyzing industrial structure and itscompetitive forces (Porter 1998a, 1998b). Porter’s technique is based on the "Five ForcesModel“ illustrated in Figure 1. This model describes an enterprise in relation to its economicenvironment.

Figure 1 Porter‘s Five Forces model

Potential newcompetitors

Supplier power

Threats of substitutes

Customerpower

Competitionin the industrygroup

Quelle: Porter (1998a)


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Using Porter’s model, the fuel cell technology’s position can be characterized as being in anearly phase of strategic planning for the market penetration. That analysis answers thefollowing questions:

• Is the automotive industry group financially attractive by introducing the fuel cells?

• How can the knowledge of the competitive advantages be used to most efficientlyintroduce fuel cells into the industry?

The competitive position of an industrial enterprise depends on five competition forces. Thesecompetitive forces for the fuel cell industry are illustrated in Figure 2. They are:

• Competitive market power of fuel cell manufacturers

• Threat of new competitors entering the market (i.e. new fuel cell manufacturers)

• Competitive market power of fuel cell customers

• Threat of substitute products (i.e. other alternatives to traditional internal combustionengines such as compressed natural gas (cng) engines).

• Competition within the fuel cell industry (i.e. between different fuel cellmanufacturers).

•

Considering all five competitive forces together provides a good overview of the industryattractiveness and can help to estimate a further profit potential. This, in turn, can be used toassess the likelihood that fuel cell technology will be widely adopted in the vehiclemanufacturing industry (since there will only be good profit potential in the industry if thetechnology is widely adopted).

It is currently impossible to perform a complete and precise competition analysis for fuel celltechnology because fuel cells are not yet available as an assembly line product for the vehiclemarket. Therefore, this study assesses market direction and competition forces.


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Figure 2: Porter‘s Five Forces model applied to the fuel cell industry for transport applications

3. Automotive Fuel Cell Technology

Fuel cells combine hydrogen (from a fuel source) and oxygen (from the atmosphere) togenerate electrical energy with only water vapor as emissions. Since fuel cells create energywithout harmful emissions they are widely thought to be an ideal technology for use invehicles. The most appropriate technology for transport applications is the proton exchangemembrane (PEM) fuel cell. Therefore, the vehicle industry has focused on PEM technology.Individual fuel cells only generate a small amount of energy so many individual fuel cells arecombined together to create a „stack“ for use in applications (like providing power for avehicle).

4. Substitution Conditions

Which conditions must be fulfilled in order to have automobile manufacturers adopt fuel celltechnology as a substitute for existing (or alternative) technology? Fuel cell technology is asubstitute for traditional gasoline and diesel internal combustion engines. Basic economictheory tells us that substitutes will only be adopted when they are cost competitive with theoriginal good. In other words fuel cell technology will not be adopted unless it is in the samebasic range as traditional gasoline and diesel engine technology. The automotive industry


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claims that the cost of fuel cell technology must be in the range of $40-$60 per kW in order tobe competitive. Current costs are much higher and reflect the technical difficulties that existwith respect to fuel cell production (Wengel 2001).

5. Vehicular Fuel Cell Industry Competitive Analysis

5.1 Bargaining power of fuel cell manufacturers

The companies active in PEM fuel cell research and development can be grouped in thefollowing three categories:

• Companies that have developed and tested prototypes of fuel cells for vehicles.• Companies that have developed and tested fuel cell prototypes for other applications

(other type of fuel cells like SOFC, MCFC,…)• Companies, which belong to, or are otherwise related to, an automotive company.

Ballard Power Systems and Nuvera are two companies that have developed and tested a largenumber of fuel cell prototypes for the vehicle industry.

Ballard Power Systems (www.ballard.com) is perhaps the best-known manufacturer of fuelcells. DaimlerChrysler and Ford own a considerable amount of Ballard stock and are partnersin the development process. So far, Ballard has only sold its 1.5 kW PEM fuel cellcommercially, although they have delivered more than 200 different prototype fuel cells tocustomers for experimental vehicles. In fact, as of November 2000 Ballard has supplied fuelcells for 11 of the 14 test cars in the California Fuel Cell Partnership Program (a major fuelcell field test started in November 2000).

Nuvera (www.nuvera.com) is a joint venture between the consulting firm Arthur D. Little’sfuel cell research department (USA) and DeNora (Italy). Nuvera’s 5 kW PEM fuel cell stacksare available commercially. Nuvera has also supplied fuel cell prototypes to numerouscustomers including: Esoro, Fiat, Scania, MAN, and Neoplan (the latter two are busmanufacturers).

UTC Fuel Cells is a third company that has experience developing commercially availablefuel cells for vehicles.

Both these companies already have experience developing and producing vehicular PEM fuelcells. The ability of these companies to enter the market by 2010, a widely accepted goal forcommercialization of vehicular fuel cell technology, will depend on their ability to attractsufficient capital to develop mass production facilities for vehicular fuel cells. To meet thisambitious timetable, companies will need to spend at least several hundreds million $ peryear. One early fuel cell industry leader, Ze Tek Power, a former developer, was forced todeclare bankruptcy in 2001 since it was unable to meet this high spending level.

5.2 Threat of New Competitors Entering the Market

It will be difficult for new competitors to enter the market of fuel cell for transportapplications (i.e. the market will be characterized as having high entrance barriers) for two


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main reasons. First, to be successful fuel cell manufacturers must invest a large amount ofmoney in research and development of both the product itself as well as the productionprocess needed for efficient mass production. For example, the Ballard – Ford –DaimlerChrysler alliance has already invested more than $1 billion in fuel cell development.A second entrance barrier is created by the existing alliances between fuel cell manufacturersand vehicle manufacturers. Most existing fuel cell manufacturers have allied with vehiclemanufacturers in order to provide access to sales channels. These alliances make it moredifficult for new companies to attain the economies of scale needed to achieve the targetedcost of $40–$60 per kW fuel cell performance. Without high sales volumes, fuel cellmanufacturers cannot be competitive because they will not be able to reduce product costsbelow that of substitution products, such as improved conventional internal combustionengines.

5.3 Bargaining power of Customers

The third factor in Porter’s Competition Analysis is the strength of customers in negotiationswith suppliers (new technology developers). In the case of vehicular fuel cells, the customersare vehicle manufacturers.

Vehicle manufacturers have the following four options for obtaining fuel cells:1. Cooperate with the Ballard-DaimlerChrysler-Ford alliance.

2. Produce fuel cells either individually or in alliances with other vehiclemanufacturers.

3. Purchase fuel cells for their fuel cell vehicles.

4. Produce fuel cells with a fuel cell manufacturer other than Ballard.

For auto manufacturers that are not part of the Ballard alliance, Option 2 is the mostexpensive, and the financial risk of developing fuel cell and production technology cannot beshared with other firms.

Any vehicle manufacturers hoping to join DaimlerChrysler as one of the first companiesoffering a production line fuel cell vehicle, must choose Option 2. Toyota has chosen Option2; but could change to Option 3 in the future. Honda, Nissan, and GM have taken an approachthat combines options 2 and 3.From today's perspective, GM, Toyota, Ford, and DaimlerChrysler (as well as othercompanies like Honda) have the best chances to introduce the production line made fuel cellvehicles. Porter calls companies that produce the first production line versions of a newtechnology “early movers”.

Research has projected that fuel cell vehicles will not be profitable for at least the first five toten years after commercial introduction since the vehicles cannot be sold at a price highenough to cover costs. Given this lack of profitability, Nissan, Peugeot, Renault, Hyundai,and Volkswagen are expected to enter the market a few years after the early movers. They arelikely to pursue options 2 or 3.

Fuel cell manufacturers not associated with the big four vehicle manufacturers must wincustomers from the other large vehicle manufacturers to be successful. Only with a large sales


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base will these fuel cell manufacturers be able to reduce fuel cell production costs to acompetitive level ($40-60/kW).

5.3.1 Cost

The biggest problem for fuel cell technology today is the high cost of producing fuel cells.This will be reduced in the future due to increased levels of production (economies of scale)and adoption of platform strategy.

The expenses of a fuel cell system include the costs of the fuel cell, the fuel processor (if any)and the assembly. The biggest potential for cost reduction in the fuel cell industry is in thefollowing areas:

• Reducing the platinum content of fuel cell.

• Lowering the cost of the PEM membrane.

• Lowering the cost of the bipolar plate.

• Lower cost of auxiliaries by customization and functional integration.

Ballard Power Systems is well positioned for reducing the cost of vehicular fuel cells since ithas the most experience developing PEM fuel cell technology and can rely on significantfinancial backing from its major shareholders DaimlerChrysler and Ford. There is room in themarket for other firms, although the barriers to entry are high.

5.3.2 Backward Integration

Manufacturers have the choice between purchasing parts for their products or manufacturingtheir own parts. This is called the „make or buy“ decision in standard business classes and afirm that decides to make its own parts is said to be „backward integrated“. Options 2 and 3,above, are both examples of backward integration.

Backward integration is being used by GM, Honda, and Toyota for fuel cells in order toreduce their dependency on independent fuel cell producers. In contrast, DaimlerChrysler andFord are jointly developing their fuel cells with Ballard.

5.3.3 Infrastructure

A critical factor in the market for fuel cell vehicles is development of an infrastructure todeliver the hydrogen or methanol they use as fuel. Until such an infrastructure is available, themarket for fuel cell vehicles will be limited to fleet operators such as postal servicecompanies, local delivery companies, and taxi enterprises. However, the fleet market isconsiderable and is ideally suited to fuel cell vehicles, since fleets have a central infrastructurethat could be easily provided with hydrogen or methanol filling stations.


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5.4 Threat of Substitute Products

Porter’s fourth factor for the evaluation of competitiveness of new technology is the threat ofsubstitute products. This means identifying whether there are other products that couldsubstitute for the new technology that would be less expensive or better (or both).

5.4.1 Substitute Products

There are four main competitors to fuel cell vehicles: hybrid vehicles, compressed natural gasvehicles, and optimized gasoline and diesel vehicles. Each is outlined below.

Hybrid cars:

Today's parallel hybrid cars use two engines. A battery-powered electric motor is used in citydriving, which is characterized by frequent stop and go activity, while a conventional spark-ignition gasoline or diesel engine is used on highways and for charging the battery. Hybridvehicles have relatively high costs due to the technology required to connect two tractionsystems in the same vehicle, but they are energy efficient and generate low levels ofemissions (Verband der Automobilindustrie e. V. (2002)).

Several vehicle manufacturers are currently producing hybrid vehicles and others are testingthem. Hybrid cars are manufactured by Toyota, Honda, Nissan and Mitsubishi are used byfleet operators in Japan while the Toyota Prius (Japan, Europe, USA), Honda Civic IMA(Japan, USA and Europe) and Honda Insight (Japan, USA) are available commercially.

Compressed natural gas vehicle

The second competitor with fuel cell technology is the compressed natural gas poweredvehicle. Natural gas vehicles have been successfully used for decades in numerous countries.Companies including Volkswagen (VW), BMW, Opel, Volvo, and Fiat offer natural gasvehicles. Usually these are sold as bifuel vehicles meaning that they can be driven with eithergasoline or natural gas. A problem with natural gas vehicles is that they require a separateinfrastructure to deliver natural gas to vehicles. This infrastructure has been slow to developin Europe (with the exception of Italy).

Electric powered vehicle

The third competitor with fuel cell technology is the electric powered vehicle. The maindrawback of electric vehicles is their limited range and their high weight with the existingbattery technology. Most electric vehicles are limited to less than 160 km between recharging,which often recharging takes several hours. Electric vehicles are also relatively expensive,although their benefits, no local emissions or engine noise, are significant enough to havecreated a commercial market. As with natural gas vehicles, electric vehicles are popular withfleet operators, especially for vehicles that remain in the same general area (e.g. local maildelivery).

Improved traditional gasoline and diesel engine vehicle

The fourth competitor with fuel cell technology is the improved traditional gasoline and dieselengine technology. New technology has made it possible to significantly improve both the


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energy efficiency and emissions levels of existing internal combustion engines. Theseimprovements include variable valve control, cylinder disconnection, and fuel direct injection.In the long term it is possible to reduce fuel consumption for conventional gasoline or dieselpassenger cars by 40-50%, with an efficiency improvement by 2005 between 17% and 23%(Geschka 2002). However, super efficient vehicles like the VW Lupo and the Audi A2, whichuse on average 3 liters of gasoline per 100 km, will remain niche products, since they arerelatively expensive.

5.4.2 Competition from Substitution Products

Figure 3 illustrates the concept that fuel cell vehicles will need to compete with othertechnologies in the race for commercial success. Fuel cell systems feature high efficiency,produce no local emissions, and do not generate engine noise. Its competition, as outlinedabove also has certain strengths. This section discusses the factors influencing competitionfrom substitute products on the vehicular fuel cell industry.

Competition from the above-mentioned vehicle types will be strong because some of them aremuch further developed than fuel cell-vehicles and also cost less. However, these competitorsare not locally yet emission-free – with the exception of the electric vehicles- and thereforecount as low emission vehicles in California, while fuel cell vehicles are classified as “zeroemission”.

The traditional internal combustion engine is an established technology with good drivingperformance, poor efficiency, and bad emission values (NOx, CO). In the mid-term tailpipeemissions for gasoline or diesel engines can be reduced for a much lower cost than for any ofthe new vehicle technologies; however very significant improvement of the traditionalinternal combustion engine will be difficult to achieve.

As long as fuel cell engines cost over $60/kW (with subsidies) and gasoline/diesel prices donot at least double, the gasoline and diesel engine will continue to play a dominant role in thevehicle market.

Essays on the costs and benefits of various vehicle technologies (Wengel, et al. 2001) hasshown that for the next 10–15 years it will be less expensive (economically) to achieve thelow tailpipe emission standard (Ultra Low Emission Vehicle or Euro 4-Standard) for gasolineor diesel vehicles than with fuel cells vehicles. Such facts will significantly delay an earlymarket diffusion of fuel cell vehicles.


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Figure 3: Cost development and market penetration of fuel cell cars, principle sketch

Co

st

Time

Fuel cell car priceFuel cell car price

price of substitutingprice of substitutingproductsproducts

time of market entrytime of market entry

Am

ou

nt o

f fuel cell cars

Am

ou

nt o

f fuel cell cars

As shown in Figure 3, with “business as usual” economics and policies, fuel cell vehicles willonly be able to establish themselves in the mass market if the substitute vehicles are moreexpensive than fuel cell vehicles. This will not be the case in the next ten to fifteen yearsunless there is a significant increase in the price of oil and natural gas. However, the fuels forfuel cells which are themselves often generated with carbon-based fuels, also need to berelatively cheap. Finally, in order to be successful, fuel cell vehicles will require that asufficient fueling station network for hydrogen be available.

Compressed natural gas or hydrogen fueled internal combustion engine vehicles are a viablealternative to fuel cell vehicles for some vehicle manufacturers. Compressed natural gasvehicles could be, at least during the next 15–30 years, a real alternative to gasoline/dieselfueled and fuel cell vehicles, since compressed natural gas/hydrogen vehicles are relativelyinexpensive to produce and operate. Operating costs are especially low given the natural gasindustry’s determination to promote these vehicles even if they must subsidize the fuel at thebeginning. Also a total cost of ownership (TCO) analysis performed for Switzerland hasshown that compressed natural gas vehicles have lower total costs than gasoline/diesel fueledvehicles (Carle, 2004).

Hybrid vehicles are another reasonable alternative to fuel cell vehicles during the next 15–30years. Hybrid vehicles still consume relatively large amounts of fuel, the Toyota Prius usesapproximately 4.3 liters per 100 km.


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A significant advantage most of these alternatives have over fuel cell vehicles is that, with theexception of natural gas vehicles, they can use the existing fuel infrastructure. Until the fuelcell vehicle fueling infrastructure problem is solved and the cost per kW is reduced from itscurrent rate, fuel cell vehicles will not be able to significantly penetrate the mass market forvehicles.

6. Conclusions

Technical development in the fuel cell market for transport applications has slowed since theeuphoric 1990s. No longer do people speak of a fuel cell vehicle being commerciallymarketed before 2005. Industry analysts now expect to see fuel cell vehicles on the market by2010.

In summary, it can be said that the competitive pressure within the group of fuel cellmanufacturers will increase. Several companies will follow Ballard and attempt to cope withthe strong competition in the mobile fuel cell market.

The transfer costs for vehicle manufacturers to change from one company’s fuel cells toanother company’s fuel cell will initially be very high since the fuel cell manufacturers havenot agreed upon any standards. This lack of standards explains why some vehiclemanufacturers are considering backwards integration (i.e. production of their own fuel cells).Companies like GM, Honda, and Toyota are already producing their own fuel cells. Fuel cellmanufacturers do not have the option to win the contest by simply lowering price, because thecost of materials will remain too high.

The entry barriers for the vehicular fuel cell market will be very high for two reasons. First,fuel cell manufacturers must invest enormous sums in research, development, and productionfacilities. Second is the fact that fuel cell manufacturers must produce a large number of fuelcells in order to reach the economies of scale needed to reduce fuel cell cost significantlyenough to compete in the market. However most existing fuel cell manufacturers already haveestablished alliances with vehicle manufacturers to achieve higher sales potential, newentrants will find it difficult to find sufficient fuel cell demand to bring unit prices to anattractive level.Nevertheless, analysts expect that large vehicle manufacturers, energy companies, and hightech companies will continue to invest significant sums of money in fuel cell technologyduring the next few years in order to have the ability to offer fuel cell vehicles in the future.In addition, fuel cell vehicles face strong competition from the possible substitution goods.Fuel cells are in principle an ideal energy source without local carbon dioxide production.However, together with hybrid and natural gas vehicles, further developed gasoline and dieselengines will be a substitute option with better possibilities in the medium-term. Moreover,such substitute goods can rely on an existing well- developed filling station infrastructure, aninfrastructure that does not yet exist for hydrogen or methanol and is only partly true forcompressed natural gas.

On the other side of the argument, the negotiation strength of the suppliers will not be veryhigh. The materials required for fuel cells, except for platinum ant the proton exchangemembrane, will be widely available, and suppliers that specialize in fuel cell productionmachinery will establish themselves in the market, given an appropriate demand.


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The forward integration, the development of fuel cells by their suppliers is unlikely to takeplace. This is the result of not having the necessary know-how to be able to produce fuel cellsand to be able to compete the fuel cell production companies.

On the contrary, the negotiation strength of the customers is high, because the customers (thevehicle companies) will continue to concentrate by merging into a few large companies,which may each cover over 10–15% of the worldwide vehicle market. Although the transfercosts (the switching from one fuel cell manufacturer to another) of a vehicle manufacturerwill be high at initially, vehicle manufacturers will be able to exercise a strong market power.They can threaten the fuel cell manufacturers with backward integration (their ownproduction of fuel cells instead of buying the product from a fuel cell manufacturer) and byoffering substitutes (e.g. natural gas vehicles) instead of fuel cell vehicles.

7. Literature

Carle, G., 2002. Brennstoffzellen für den Automobilbau im Wettbewerb, Swiss FederalInstitute of Technology, IVT, Zurich.

Carle, G., 2004. Erdgasfahrzeuge im Wettbewerb, internal report, Swiss Federal Institute ofTechnology, IVT, Zurich.

Geschka, 2002. Die Brennstoffzelle als Fahrzeugantrieb - Situation, Perspektiven bis 2010,Konsequenzen - Ein Szenario-Roadmap-Studie, Geschka, Darmstadt.

Grahl K., 2000. Ökonomische Systemanalyse zum Antrieb von Personenwagen mit Polymer-Elektrolyt-Brennstoffzellen unter Verwendung neuer Kraftstoffe, dissertation.de, Berlin

Porter, M. E., 1998a. Competitive strategy techniques for analyzing industries andcompetitors, The Free Press, New York.

Porter, M. E., 1998b. Competitive advantage creating and sustaining superior performance,The Free Press, New York.

Verband der Automobilindustrie e. V., 2002. Alternative Antriebssysteme, Verband derAutomobilindustrie e. V. (VDA), (Downloadable from website http://www.vda.de/de/service/jahresbericht/auto2002/auto+umwelt/u_27.html.

Wengel, Jürgen and Schirrmeister, Elna, 2001. Innovationsprozess vom Verbrennungsmotorzur Brennstoffzelle, Chancen und Risiken für die badenwürttembergische Industrie,Frauenhofer Institut für Systemtechnik und Innovationsforschung (ISI), Karlsruhe.

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