Transport Reviews, Vol. 25, No.

6, 739–760, November 2005

Opportunities and Risks during the Introduction of Fuel

Cell Cars

GIAN CARLE*, K. W. AXHAUSEN*, ALEXANDER WOKAUN** and

PETER KELLER*
*IVT, Zurich, Switzerland; **Paul Scherrer Institut, Villigen, Switzerland
Taylor and Francis Ltd
TTRV_A_138939.sgm

(Received 4 February 2005; revised 31 August 2005; accepted 31 August 2005)

Transport
10.1080/01441640500389562
0144-1647
Original
Taylor
02005
00
IVT,
GianCarle
carle@ivt.baug.ethz.ch
000002005
ETH
&Article
Francis
Reviews
HönggerbergHIL
(print)/1464-5327F13.3CH-8093ZurichSwitzerland
(online)

ABSTRACT Specific competitive conditions will decide the successful introduction of

proton exchange membrane fuel cells as the core of an automotive traction system.
Michael Porter’s competitive analysis methodology, the ‘five forces model of competitive
structure’, was used in the first part of the paper to develop an overview of the competitive
forces in the fuel cell industry. Porter’s model places emphasis on external factors by
examining the nature of the market environment. A company is considered to be in a
favourable competitive position if the five threatening forces are not too strong. The five
forces are potential new competitors, supplier power, customer power, competition in the
industry group and the threat of substitutes. The second part gives an overview of success
factors that may contribute to a breakthrough of fuel cell technology from niche market to
mass market in the automotive industry. This analysis also identifies critical factors that
affect both market penetration time and the rate of product diffusion into the mass market.
Several fuel cell manufacturers such as Ballard Power Systems, Nuvera and United
Technologies Fuel Cells will enter the competitive fuel cell market. Customers will have a
high degree of bargaining power as they will merge to a few big companies and will
threaten the fuel cell companies with a possible backward integration. The high sum to be
invested into research, into development and production methods will lead to high market
entrance barriers. A strong competition comes from the possible substitution goods.
Although the fuel cell is, in principle, an ideal energy source without local carbon dioxide
emission, substitution goods such as further developed gasoline and diesel engines, hybrid
and compressed natural gas vehicles will have medium-term competitive advantages.

Introduction
The transportation sector generates roughly 26% of total worldwide carbon diox-
ide (CO2) emissions (International Energy Agency, 2000). Given rising concerns
over fossil fuel consumption and CO2 production by passenger cars, the
automotive industry and governments are evaluating strategies for sustainable
mobility. According to the World Business Council for Sustainable Development

Correspondence Address: Gian Carle, IVT, ETH Hönggerberg, HIL F13.3, CH-8093 Zurich, Switzerland.
Email: gian.carle@alumni.ethz.ch

0144-1647 print/1464-5327 online/05/060739-22 © 2005 Taylor & Francis

DOI: 10.1080/01441640500389562
740 Gian Carle et al.

(2001), sustainable mobility is the ability to meet society’s need to move freely,
gain access, communicate, trade and establish relationships without sacrificing
other essential human or ecological values, today or in the future.
In order to realize the goal of sustainable mobility, the triple ‘S’ principle
(Saving, Shifting and Smoothing) is applicable (Keller, 1997). Saving reduces the
need for transportation through strategies such as better land-use planning.
Shifting refers to encouraging people to use a less harmful means of transport.
Smoothing refers to reducing the impact of transport on environment, economy
and society by implementing improved technology to reduce greenhouse gas
emissions per unit of transport activity.
One important smoothing strategy is to increase the market acceptance of
more energy-efficient cars. The European Communities (2001) believes there is
great promise in the development of a new generation of hybrid electric cars (an
electric motor coupled with an internal combustion engine), cars fuelled by
compressed natural gas (CNG) and, in the longer-term, cars powered by hydro-
gen fuel cells. However, the European Commission (2005) also believes there are
major technological challenges ahead, most prominently for fuel cell technology.
Competition and fuel cell innovation will be key determinants for the viability
and strength of Europe’s automobile industry. In order to provide a preliminary
assessment on the fuel cell industry competitiveness, the authors analysed the
competitiveness of this technology, which is still in a research and development
(R&D) phase.
Two key aspects of hydrogen fuel cell vehicles are well researched. Well-to-
wheel analysis of fuel cell cars (Ahlvik and Brandberg, 2001; Choudhury et al., 2002;
Wokaun et al., 2004) has been well studied. The production of hydrogen, packaging
of hydrogen and delivery of hydrogen (Wokaun et al., 2004; Bossel et al., 2005) is
also very well documented. Therefore, this paper focuses on a third aspect: the
competitive analysis of fuel cell for the passenger car industry. The objective is to
describe the specific competitive conditions that will determine the successful
introduction of fuel cell vehicles. Fuel cell vehicles may smooth the impact of trans-
port as they are less polluting and may (in the long-term) be run on renewable fuels.
The research described herein is part of the Alliance for Global Sustainability
(AGS) project ‘Role of Innovative Technology for Promoting Sustainable
Mobility’ being undertaken at the MIT, Cambridge, MA; at the Paul Scherrer
Institut, Villigen, Switzerland, and at the Swiss Federal Institute of Technology,
Zurich, Switzerland (Wokaun and Brändli, 2001).
This paper presents a transition analysis for mobile fuel cell systems from
today’s status as niche product to mass-market product. This analysis considers
fuel cells as substitute for traditional internal combustion engines (Carle, 2002).
The evaluation was guided by the competition analysis technique developed by
Michael Porter (Porter, 1998a, b), which relies on existing data to estimate poten-
tial competitive forces in future markets.
The second part of the paper describes the factors necessary for fuel cells to
become widely used in vehicle traction systems. In other words, it describes the
success factors that will contribute to a breakthrough in fuel cell traction technol-
ogy from niche to mass market. This analysis also identifies critical factors that
affect both market penetration time and the rate of product diffusion into the
mass market. In this context the following five research questions are of interest:

● What is the competitive market power of fuel cell manufacturers?

 Opportunities and Risks during the Introduction of Fuel Cell Cars 741

● Is there a threat of new competitors entering the market, i.e. new fuel cell
manufacturers?
● Do the fuel cell customers have market power?
● How serious is the threat of substitute products, i.e. other alternatives to tradi-
tional internal combustion engines such as CNG engines?
● How strong will competition be within the fuel cell industry, i.e. between
different fuel cell manufacturers?

Automotive Fuel Cell Technology

Fuel cells combine hydrogen (from a fuel source) and oxygen (from the atmo-
sphere) to generate electrical energy with only water vapour as the emission.
Fuel cells are electrochemical energy converters that convert chemical energy
into electricity. Heat is a part of the energy produced in this energy conversion
process. The advantage of fuel cell is that far more electrical energy is produced
in the process than heat. The simplified formula of the reaction in a fuel cell is as
follows:

H 2 + 1 2 O 2 = H 2 O + electrical energy + heat.

Fuel cells are grouped according to the kind of electrolyte they use. The electro-
lyte plays a major role as it allows a specific ionic conduction of electrical charge.
Five different fuel cells exist:

● Alkaline fuel cells (AFC).

● Molten carbonate fuel cells (MCFC).
● Phosphoric acid fuel cells (PAFC).
● Solid oxide fuel cells (SOFC).
● Proton exchange membrane (PEM) fuel cells.

Since fuel cells convert energy without harmful emissions at their point of use,
they are widely thought to be an ideal technology for use in vehicles. A single fuel
cell generates a limited amount of electrical power, so many individual fuel cells
are combined into a ‘stack’ for use in applications, such as providing power for a
vehicle. The most appropriate technology for transport applications is the PEM
fuel cell. It is considered to be appropriate for transportation applications because
of its low operating temperature. Therefore, the vehicle industry has focused on
PEM technology.
The electrolyte of a proton exchange fuel cell is its membrane, a perfluorosul-
fonic acid polymer film, of which the best known is the Nafion membrane by Du
Pont. However, Dow Chemical Co., Asahi Chemical Co., and Chloride Engineers
as well as others also produce PEMs.

Methods
In 1980, Porter developed a technique for analysing industrial structure and their
competitive forces (Porter, 1998a, b). His technique is based on the ‘Five Forces
742 Gian Carle et al.

Potential new
competitors

Competition
Supplier Threats of
in the industry
power substitutes
group

Customer
power

Figure 1. Five Forces Model of competition based on Porter (1998b).

Model’ (figure 1), which describes an enterprise in relation to its economic

environment.
Analysis based on the Five Forces Model answers the following questions:
Figure 1 Five Forces Model of competition based on Porter (1998b)

● Is the automotive industry group financially attractive for introducing the fuel
cells?
● How can knowledge of the competitive advantages be used to introduce fuel
cells into the industry most efficiently?

The competitive position of any industrial enterprise depends on five

competition forces. The competitive forces for the fuel cell industry are shown in
Figure 2:

● Supplier power, i.e. companies producing the membrane.

● Potential new competitors, i.e. new fuel cell manufacturers.
● Customer power, i.e. fuel cell customers.
● Threat of substitutes, i.e. alternatives to traditional internal combustion
engines such as CNG engines.
● Competition in the fuel cell industry group, i.e. between different fuel cell
manufacturers.

Porter’s model was modified for the fuel cell industry by adding three additional
Figure 2 Porter’s Five Forces Model applied to the fuel cell industry for transport applications. The companies named are meant as examples; the list is incomplete

forces: infrastructure and fuel; government policy; and investments. Infrastructure

and fuel are crucial factors for the successful market penetration of hydrogen, as
the chicken-and-egg problem has to be solved. As the whole industry is still in an
early phase of R&D, a considerable amount of financial resources has to be
invested. However, clear government policies (i.e. a CO2 tax) for a successful
market penetration of fuel cell cars are needed.
Considering all seven competitive forces together provides a good overview of
the attractiveness for the industry and can help one estimate its future profit
 Opportunities and Risks during the Introduction of Fuel Cell Cars 743

Potential new
fuel and competitors:
private and
infrastructure: Energy Partners, H-Power, public
ExxonMobile, Shell Mitsubishi Electric,
+ BP Plug Power, investment
Proton Motor Fuel Cell,
Siemens,
Honda, Renault and Peugeot

Supplier power: Competition Cutomer power:

supplier of platinum, mem-
brane, bipolar plates
companies like Dupont,
J. Matthey
in the industry:
Ballard, Nuvera and United
Technologies Fuel Cell
(Toyota and GM)
Honda, GM, Toyota, Ford,
DaimlerChrysler, Volkswagen,
Renault, Peugeot, Hyundai

government Threats of
policy substitutes: Legend:
natural gas cars,lpg cars, very strong competition
hybrid cars, electric battery cars,
optimized petrol- and diesel average competition
cars
strong dependency

Figure 2. Porter’s Five Forces Model applied to the fuel cell industry for transport applications. The
companies named are meant as examples; the list is incomplete.

potential. This, in turn, can be used to assess the likelihood that fuel cell technol-
ogy will be widely adopted in the vehicle manufacturing industry (since there
will only be a good profit potential for the industry if the technology is widely
adopted).
It is currently impossible to perform a complete and precise competition
analysis for fuel cell technology because fuel cells are not yet available as an
assembly line product for the vehicle market. Therefore, this study assesses
market direction and competition forces.

Vehicular Fuel Cell Industry Competitive Analysis

The Five Forces diagram aims to provide a systematic overview of the forces that
shape an organization’s competitive environment. In order to draw a final conclu-
sion, the forces according to Porter are described below.

Competition in the Industry

Fuel cell manufacturers. The companies active in PEM fuel cell R&D can be
grouped into three categories:

● Companies that have developed and tested prototypes of fuel cells for
vehicles.
744 Gian Carle et al.

● Companies that have developed and tested fuel cell prototypes for other
applications (other types of fuel cells such as SOFC, MCFC, etc.).
● Companies that belong or are otherwise related to an automotive company.

Ballard Power Systems, Nuvera and UTC Fuel Cells are three companies that
have developed and tested a large number of fuel cell prototypes for the vehicle
industry.
Ballard (http://www.ballard.com) is perhaps the best-known manufacturer of
fuel cells. DaimlerChrysler and Ford own a considerable amount of Ballard stock
and are partners in the development process. So far, Ballard has only sold its 1.5
kW PEM fuel cell and its NEXA RM stationary fuel cell power generator commer-
cially, although it may have delivered more than 200 different prototype fuel cells
to customers for experimental vehicles (Anon., 2003b). In fact, as of November 2000,
Ballard had supplied fuel cells for 11 of the 14 test cars in the California Fuel Cell
Partnership Program (a major fuel cell field test started in November 2000) and
more than 50% of the announced demonstration fleets under the US hydrogen econ-
omy initiative (Ballard Power, 2004). In addition, Ballard equipped 40 Mercedes
Citaro buses with 205 kW fuel cell stacks that were delivered for a demonstration
project to ten different European cities. The company’s leadership in fuel cell tech-
nology is evident by a strong intellectual property portfolio (Table 1).
During the fuel cell enthusiasm between 1998 and 2000, Ballard’s share price
reached US$145.00. At the end of December 2004, its share price fell to US$6.30. In
1998, Ballard promised to have a mass production fuel cell at a competitive price
by 2003/04 on the market. It was not able to meet its goal, which will take another
decade to reach.
US/Italian-based Nuvera (http://www.nuvera.com) is a joint venture between
the consulting firm Arthur D. Little’s fuel cell research department (USA) and
DeNora (Italy). Nuvera Fuel Cells has unveiled in autumn 2003 its H2e fuel cell
power module, a hydrogen-fuelled 5 kW system. The company’s metallic bipolar,
automotive fuel cell stack technology has been integrated by Centro Ricerche Fiat
(CRF) into two of Fiat’s latest-generation hydrogen-powered prototype cars
(Anon., 2003a). Nuvera Fuel Cells has reached agreement with French automaker
Renault to strengthen their partnership and continue their collaborative efforts in
fuel cell R&D. Nuvera’s 5 kW PEM fuel cell stacks are available commercially.
Nuvera has also supplied fuel cell prototypes to numerous other customers
including Esoro, Scania, MAN and Neoplan (the latter two are bus manufactur-
ers). Their intellectual property stock is weaker in comparison with its competitor
(Table 1).
UTC Fuel Cells (http://www.utcfuelcells.com) is the third company that has
experience developing commercial fuel cells for vehicles. Japanese automaker

Table 1. Number of patents registered

Number of
Company patents

Ballard 680
UTC Fuel Cells 143
Nuvera 46

Source: European Patent Office (2004).

 Opportunities and Risks during the Introduction of Fuel Cell Cars 745

Nissan Motor Co., Korea’s Hyundai Motor Co. and UTC Fuel Cells in Connecticut,
USA, have signed an agreement to develop PEM fuel cell technology jointly for
automotive applications (Anon., 2003c). UTC has been working with Hyundai
since 2000, when they introduced the first Hyundai Santa Fe fuel cell SUV. Under
previous agreements six prototype vehicles were produced. In partnership with
BMW since 1999, UTC Fuel Cells has developed and delivered a PEM fuel cell
auxiliary power unit (APU) (UTC Fuel Cells, 2004).
These companies already have experience developing and producing vehicular
PEM fuel cells. The ability of these companies to enter the market by 2015, a
widely accepted goal for commercialization of vehicular fuel cell technology, will
depend on their ability to attract sufficient capital for further R&D as well as for
the mass production facilities for vehicular fuel cells. To meet this ambitious time-
table, companies will need to spend at least several hundreds million US dollars/
year. One early fuel cell industry leader, Zevco, a former developer, was forced to
declare bankruptcy in 2001 since it was unable to meet this high spending level
(Deutscher Wasserstoff-Verband e.V., 2001).
To support R&D, the Bush Administration started in 2003 a US$1.7 billion
initiative to enable commercially available cars by 2020 (US Department of
Energy Efficiency and Renewable Energy, 2003). From 2004 to 2015, the European
Union will support R&D for the hydrogen economy with €2.8 billion (Commis-
sion of the European Communities, 2003).

Cost. The biggest problem for fuel cell technology today is its high cost.
According to a personal communication with Mr Poschmann, head of
DaimlerChrysler’s fuel cell project, a 1 kW PEM fuel cell costs (in 2004) around
€5000. Lipman et al. (2004) estimated the actual cost for a PEM fuel cell at €3000–
4000/1 kW PEM fuel cell.
The cost of a fuel cell system includes the costs of the fuel cell, the fuel proces-
sor (if any), the system of auxiliaries and assembly. Cost reduction possibilities
depend on the economies of scale, economies of scope, learning effect, product
design, material choices, platform strategies and material utilization optimiza-
tion, and production process development. There is a large potential for cost
reduction exists in the following areas:

● Reducing the platinum content of the fuel cell.

● Lowering the cost of the PEM membrane.
● Lowering the cost of the bipolar plate.
● Lower the cost of auxiliaries by customization and functional integration.

Table 2 shows the cost share of the different parts of a fuel cell. The membrane
electrode assembly is the most expensive part of a fuel cell and the heart of a PEM
fuel cell. It is made of a proton-conducting polymer membrane (such as Nafion)
with two gas diffusions electrodes (an anode and a cathode). The cost factors
within the membrane electrode assembly are the membrane as well as the
platinum needed as a catalyst at the anode and cathode. The platinum price is a
significant factor in the economics of the fuel cell system. Platinum makes up to
20% of the total system cost at present loadings and fuel cell performance
(Arthur D. Little, 2000; Tsuchiya and Kobayashi, 2004). Other important cost
factors are the production and the material of the bipolar plate. These bipolar
plates link the different fuel cells within a fuel cell stack.
746 Gian Carle et al.

Table 2. Approximate cost shares of different parts in a fuel cell stack

Fuel cell components Cost share (%)

Membrane electrode assembly 30

Bipolar plates (material) 17
Bipolar plates (handling) 20
Assembly 13
Endplates and small parts 6
Testing 6
Seals 5
Gas diffusion layer 3

Sources: Wengel and Schirrmeister (2001), Garche et al. (2004).

Ballard is well positioned to reduce the cost of vehicular fuel cells since it has the
most experience developing PEM fuel cell technology and can rely on significant
financial backing from its major shareholders DaimlerChrysler and Ford. There is
room in the market for other firms, although the barriers to entry are high.

Government Policy
Government policies play an important role in supporting new technologies such
as fuel cells. Tax incentives for buyers of fuel cell cars may help to compensate for
their higher prices. The VEL2 (Stettler, 2004) project in Switzerland shows that
only with tax incentives and subsidies will cars with alternative traction systems
be purchased. Incentives and subsidies for fuel cell cars will be critical at the
beginning of market penetration as fuel cell cars will be more expensive.

Potential New Competitors

It will be difficult for new competitors to enter the fuel cell for transport applica-
tions market. The market will be characterized as having high entrance barriers
for two main reasons. First, to be successful fuel cell manufacturers must invest a
large amount of money in R&D of both the product itself as well as in the produc-
tion process needed for efficient mass production. For example, the Ballard–Ford–
DaimlerChrysler alliance has already spent several billion US dollars in fuel cell
development (Van den Hoed, 2004).
A second entrance barrier is created by the existing alliances between fuel cell
manufacturers and vehicle manufacturers. Most existing fuel cell manufacturers
have allied with vehicle manufacturers in order to access sales channels. These alli-
ances make it more difficult for new companies to attain the economies of scale
needed to achieve the targeted cost of US$30–60/kW fuel cell performance (Ogden
et al., 2004). Without high sales volumes, fuel cell manufacturers cannot be compet-
itive because they will not be able to reduce product costs below that of substitution
products, such as improved conventional internal combustion engines.

Customer Power
The third factor in Porter’s competition analysis is the strength of customers in
negotiations with suppliers (new technology developers). In the case of vehicular
 Opportunities and Risks during the Introduction of Fuel Cell Cars 747

fuel cells, the customers are vehicle manufacturers. Vehicle manufacturers have
the following four options for obtaining fuel cells:

(1) Cooperate with the Ballard–Ford–DaimlerChrysler alliance.

(2) Produce fuel cells themselves either individually or in alliances with other
vehicle manufacturers.
(3) Produce fuel cells with a fuel cell manufacturer other than Ballard.
(4) Purchase fuel cells for their fuel cell vehicles.

Car manufacturers have the choice between purchasing parts for their products
or manufacturing their own parts. This is called the ‘make or buy’ decision, and a
firm that decides to make its own parts is said to be ‘backward integrated’. Option
2 is an example of a backward integration.
Backward integration is actually being pursued by GM, Honda and Toyota for
fuel cells in order to reduce their dependency on independent fuel cell producers.
In contrast, DaimlerChrysler and Ford are jointly developing their fuel cells with
Ballard.
For auto manufacturers that are not part of the Ballard alliance, option 2 is the
most expensive as the financial risk of developing fuel cell and production tech-
nology cannot be shared with other firms.
Any vehicle manufacturer hoping to join DaimlerChrysler as one of the first
companies offering a production line fuel cell vehicle must choose option 2.
Toyota has chosen option 2, but it might change to option 4 in the future. Honda,
Nissan and GM have taken an approach that combines options 2 and 4. From
today’s perspective, GM, Toyota, Ford and DaimlerChrysler (as well as other
companies such as Honda) have the best chances to introduce production line-
made fuel cell vehicles. Porter calls companies that produce the first production
line versions of a new technology ‘early movers’.
It is currently assumed that fuel cell vehicles will not be profitable for at least
the first 5–10 years after commercial introduction since the vehicles cannot be sold
at a price high enough to cover R&D 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 are likely to pursue options 2 or 4. Fuel cell
manufacturers not associated with the big four vehicle manufacturers must win
customers from the other large vehicle manufacturers to be successful. Only with
a large sales base will these fuel cell manufacturers be able to reduce fuel cell
production costs to the competitive level of US$30–60/kW (Table 6).
Sudden commercial changes, such as fuel cell component price drops and oil
price rises, may lead to a change in the options. After a certain introduction phase
where a fuel cell company may be tied to a specific car alliance, the fuel cell
company will try to enlarge their market to sell their product to different car
producer, leading to higher production quantities.
By comparing the registered patents (Table 3) and the strategy followed so far,
it can be concluded that all companies that have registered a high number of patents
belong to the groups 2 (producing fuel cells themselves) or 3 (purchasing fuel cells).

Fuel and Infrastructure

A critical factor for fuel cell vehicles is development of an infrastructure to deliver
the hydrogen. Methanol as a fuel will not be discussed, as it is not considered
748 Gian Carle et al.

Table 3. Amount of patents registered containing the term ‘fuel cell’ in the title
or abstract of patents registered in Europe
Number of
Company patents

Volkswagen 0
Fiat 2
Peugeot 23
Mazda 30
Ford Motor Co. 34
BMW 50
Hyundai Motor Co. 61
Renault 72
DaimlerChrysler 87
GM 106
Toyota Motor Co. 896
Nissan Motor Co. 958
Honda Motor Co. 1390

Source: European Patent Office (2004).

anymore as a feasible fuel option (Cropper, 2003, 2004). Until a hydrogen

infrastructure is available, the market for fuel cell vehicles will be limited to fleet
operators such as postal service companies, local delivery companies, public
transport buses and taxi enterprises (Joyce, 2002). However, the fleet market is
considerable and is ideally suited to fuel cell vehicles, since fleets have a central
infrastructure that could be easily provided with hydrogen filling stations. The
supply of hydrogen has three steps (production, storage and transport), which
will be discussed below.

Fuel production. Hydrogen is only an energy carrier. It is the lightest gas, eight
times lighter than methane. It is also the most common atom on our planet.
However, it almost never exists in elemental form.
There are several ways of producing hydrogen. The most promising ones are as
follows:

● Electrolysis of water to hydrogen at the fuelling station or offsite at a produc-

tion plant.
● Synthesis gas production from steam reforming or partial oxidation of a fossil
fuel at the fuelling station or offsite at a production plant.

In the energy-intensive electrolysis process, electrical energy is used to split water

molecules into hydrogen and oxygen. The electrical energy can come from any
electricity production plants such as nuclear, wind, hydroelectric energy or other
renewable energy source. When using renewable fuels the full fuel chain will low
in equivalent CO2 emissions (Table 4). According to Stromberger (2004), the
estimated cost for 1 kWh of hydrogen from electrolysis would be between €0.07
and 0.16 (Table 2) and, therefore, currently two-and-a-half to eight times more
expensive than gasoline, which costs €0.02–0.03/kWh. In the electrolysis process
around 23% of the electrical energy is lost (Röder, 2001; Stromberger, 2004).
 Opportunities and Risks during the Introduction of Fuel Cell Cars 749

Table 4. Estimated production cost of compressed hydrogen in comparison with

delivered petrol (including feedstock preparation, distribution by pipelines,
compression, electrolysis, electricity for electrolysis, gasification and gas for the
steam reforming process, respectively)
Steam reforming Electrolysis of Gasification of Gasoline
of natural gas water biomass reforming

Pretax price/kWh (€) 0.05–0.07 0.07–0.16 0.04–0.07 0.06–0.07

Carbon dioxide 310–362 0–609 50–59 98–183
emissions (g/kWh)

Sources: Röder (2001); Ragwitz et al. (2003); Ernst & Young (2003); Hirschberg (2004); Ogden et al.
(2004); Stromberger (2004).

The preferred process for producing hydrogen is steam reforming of natural gas.
Steam reforming of methane is currently the cheapest and therefore the most
common way to manufacture hydrogen (Farrell et al., 2003). However, CO2 is
released in the steam reforming process as the general reforming process formula is:

CH 4 + 2H 2 O => 4 H 2 + CO 2

According to Ragwitz et al. (2003), Ogden et al. (2004) and Stromberger (2004),
the estimated cost of 1 kWh steam reformed hydrogen is around €0.05–0.07,
assuming an efficiency rate of 85%. Stream-reformed hydrogen is currently maxi-
mal three-and-a-half times more expensive than gasoline.
Other future possibilities are gasification of biomass and the production of
hydrogen by microorganisms and thermochemical water splitting by heat from a
nuclear reactor or solar heat (Ragwitz et al., 2003). As these options are in an early
R&D phase, a cost estimation and an evaluation regarding the released CO2 is not
possible.
Table 4 shows that hydrogen as a fuel will be much more expensive than the
current gasoline. For the next 20 years, not only the car itself will be more expen-
sive than a car with an internal combustion or diesel engine, but also the energy
carrier to run the car.
It will take a long time to replace the existing passenger cars, especially if using
hydrogen produced with renewable energy. Generating electricity with solar
power, for example, remains five to ten times more expensive than doing so with
a coal-fired plant (Service, 2004). Oswald and Oswald (2004) calculate that 96 000
new wind turbines (3 MW each) or 100 new nuclear power stations (1200 MW
each) would be needed in the UK to produce enough hydrogen to run all the
vehicles. As transportation (including passenger cars, trucks, ships and air traffic)
accounts for one-third of a country’s energy demand in Europe, and up to 40% in
the USA, the replacement of imported oil by another source requires new capacity
corresponding to its fraction.
As the oil companies are developing their future business, they are starting to
enter the hydrogen business. Shell established Shell Renewables in 1997 and Shell
Hydrogen in 1999; BP/Amoco is investing a considerable amount in renewables;
and ChevronTexaco has purchased a 20% stake in Energy Conversion Devices, a
750 Gian Carle et al.

company that has a fuel cell department. ExxonMobil is involved in the California
Fuel Cell Partnership and started a US$100 million research initiative. Its research
team is predominantly looking at onboard gasoline processing for fuel cell
vehicles (ExxonMobil, 2001; Cropper, 2004). Total is exploring hydrogen fuel cell
technology through a number of programmes and is carrying out research on
using gasoline in fuel cells, but it is also looking into other fuels including
hydrogen (Total, 2004) is a partner in the Hydrogen Competence Center in Berlin,
which comprises demonstration areas and a pilot hydrogen station that will
supply captive public transportation fleets. Total is also working with Renault to
determine the viability of reforming conventional fuels in onboard power
generation applications.

Storage. The storage and transportation of hydrogen is a major problem as hydro-

gen has a very low density. As hydrogen contains per volume an amount of
energy, equivalent to three-eighths of natural gas, hydrogen has to be stored
under pressure or by liquefying it at −253°C, which uses an additional amount of
energy. To store enough hydrogen to drive 400–500 km, hydrogen will be a major
challenge. New tanks that store hydrogen at 700 bar are available. A 700 bar steel
or carbon composite tank may store around 60–70% more hydrogen than a 350
bar with the same internal storage dimensions (Anon., 2004). Because of the real
gas properties of hydrogen, compression of hydrogen is limited at high pressure
(Herbst, 2000). Therefore, it is not possible to store the double amount of hydro-
gen at double pressure. A 700 bar tank needs around eight times the volume of a
current gas tank to store the equivalent amount of energy (Service, 2004).
Further storage possibilities are carbon nanotubes and metal hydrides. For a
commercial product further fundamental research on these two options is still
needed.

Distribution. Hydrogen production in centralized plants requires a pipeline

network or the use of trucks for local distribution.
Hydrogen pipelines already exist today. They are built at chemical plants to
connect one production site to another. Older methane pipelines cannot be used
for hydrogen transportation because of different reasons such as diffusion losses,
the weakness of materials and seals, and incompatibility of compressor lubrica-
tion with hydrogen. Setting up a new hydrogen pipeline infrastructure will cost
an enormous amount of money. As the requirements are much higher than for
CNG, a 1-m hydrogen pipeline will cost more than the €500 needed in Switzer-
land for 1 m of low-pressure natural gas pipeline (Carle, 2004).
The transport of hydrogen by truck to a hydrogen filling station will play a
major role in an introduction phase as it will take a long time and will cost an
enormous amount of money to build a hydrogen pipeline network.
To overcome the chicken-and-egg problem, hydrogen filling stations are
needed. These look like normal petrol filling stations. However, in addition to a
normal petrol filling stations, the following installations are needed:

● Electrolysers to produce a gaseous hydrogen out of water or a reformer to

reform natural gas into hydrogen if the hydrogen is not transported to the
filling station.
● Gas compression systems to compress the hydrogen to 350 or 700 bar.
● Hydrogen storage systems to keep it at the intended pressure.
 Opportunities and Risks during the Introduction of Fuel Cell Cars 751

The Reykjavik hydrogen station in Iceland cost approximately €1 million due to

the additional equipment including the specific design and in-situ technical solu-
tions (Maack and Skulason, 2005). A study by the European Union considers
investment costs of around €1 million (Kampet et al., 2003). However, with the
learning curve effect and the economics of scale, price should drop over time.

Threats of Substitutes
Which conditions must be fulfilled in order to have automobile manufacturers
adopt fuel cell technology as a substitute for existing (or alternative) technology?
Fuel cell technology is a substitute for traditional gasoline and diesel internal
combustion engines. Basic economic theory states that substitutes will only be
adopted when they are cost competitive with the original good. In other words, fuel
cell technology will not be adopted unless the performance, price and infrastructure
needed are in the same range as traditional gasoline and diesel engine technology.
Porter’s fourth factor for the evaluation of competitiveness of new technology is
the threat of substitute products. This means identifying whether there are other
products that could substitute for the new technology that would be less expen-
sive or better (or both).

Substitute products
There are five main competitors to fuel cell vehicles: hybrid vehicles, CNG vehi-
cles, liquefied petroleum gas (LPG) cars, and optimized gasoline and diesel vehi-
cles. Each is outlined below.

Hybrid cars. Today’s parallel hybrid cars use two engines. A battery-powered
electric motor is used in city driving, 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. Hybrid vehicles have a relatively high
cost due to the technology required to connect two traction systems in the same
vehicle, but they are energy efficient (Table 5) and generate low levels of emis-
sions (Verband der Automobilindustrie e.V., 2002).
Several vehicle manufacturers are currently producing hybrid vehicles and
others are testing them. Hybrid cars are manufactured by Toyota, Honda, Nissan
and Mitsubishi and are used by fleet operators in Japan, while the Toyota Prius,
Honda Civic IMA (both Japan, Europe, USA) and Honda Insight (Japan, USA) are
available commercially. Toyota announced that it will introduce one or two
hybrid models a year until all its high-volume cars and trucks are covered
(Healey, 2003). According to Toyota Switzerland (personal communication, 2005)
and Honda Motor Europe Ltd (personal communication, 2004), by 2004 around
15 000 hybrid cars are circulation in Europe and around 270 000 hybrid cars were
sold worldwide.

Compressed natural gas vehicles. The second competitor is the CNG-powered

vehicle. CNG cars are relatively inexpensive to produce and operate, and emit in
the use phase around 15–20% less CO2 than a conventional gasoline car.
However, the development and market introduction of efficient hybrid natural
gas cars emitting around 70–90 g CO2/km compared with the 197 g CO2/km that
an average Swiss car emits during the use phase (Blessing and Schick, 2003) as
 752

Table 5. Tank-to-wheel fuel consumption, well-to-wheel energy consumption and well-to-wheel greenhouse gas emissions for
different European compact class vehicles
Improved Traditional
Gian Carle et al.

Compressed Liquefied Electric traditional gasoline and

Hybrid natural gas petroleum power gasoline engine Hydrogen fuel diesel engine
vehicle vehicle gas vehicle vehicle vehicle cell vehicle vehicle

Tank-to-wheel fuel consumption (litres gas 5.5 7 8.5–10.0 7.5 3.5 7.99
equivalent/100 km)
Well-to-wheel energy consumption (MJ/km) 2.0–2.5 2.0–3.2 2.0–3.2 0.5–1.1 2.75 1.5–2.7 3.0–3.7
Well-to-wheel greenhouse gas emissions (g 105–178 120–198 135–215 0–121 130–160 96–140 170–270
carbon dioxide equivalent/km) (European Union
natural gas mix)
Overall vehicle efficiency (%) 25 19 16 60 20 35 17–19

Sources: Gribben (2000); Weiss et al. (2000); Choudhury et al. (2002); e’mobile (2002); The Energy Saving Trust (2002); The Joint Research Centre of European Commission
and the European Council for Automotive R&D (2003); Hekkert et al. (2005).
 Opportunities and Risks during the Introduction of Fuel Cell Cars 753

well as super-efficient CNG cars will take some more years. Natural gas vehicles
have been successfully used for decades in numerous countries, especially in Italy
(400 000 CNG cars) and Argentina (1.3 million). Companies including
Volkswagen, Opel, Volvo, DaimlerChrysler, Ford and Fiat offer CNG vehicles in
Europe. Usually, these are sold as bifuel vehicles, meaning they can be driven
with either gasoline or natural gas. A problem with natural gas vehicles is that
they require a separate infrastructure to deliver natural gas to the vehicles. This
infrastructure has been slow to develop in Europe (with the exception of Italy). In
Europe there are about 1400 fuelling stations, mainly in Italy and Germany, with
the highest density/km2 being in Switzerland. Worldwide, 3.7 million CNG cars
circulate, which may refuel at about 7700 natural gas refuelling stations
(International Association for Natural Gas Vehicles, 2005). However, in Europe,
only 5% of these CNG cars are manufactured by the original equipment manufac-
turers (OEMs) such as Volkswagen, Opel, Volvo, DaimlerChrysler, Ford and Fiat.
Worldwide, the OEM share is much smaller. The remaining 95% are converted
gasoline cars that often may not reach Euro I or II emissions standards.

Liquefied petroleum gas vehicles. LPG (propane, butane and their mixtures) is a
hydrocarbon that can be liquefied under relatively low pressure. In liquid form, it
takes only 1/260 of its gaseous volume. LPG is a by-product of the oil refinery. It
can be stored relatively easily, has good anti-knock properties and burns rela-
tively cleanly. Vehicles with LPG emit approximately 50% less carbon monoxide,
40% less hydrocarbons and 35% less nitrogen oxides (NOx) compared with gaso-
line vehicles (Cleaner Drive, 2003). However, the CO2 emissions of an LPG car in
the use phase are around 15% worse compared with a CNG car, and the NOx
emissions are 20% higher than for CNG cars. The well-to-wheel CO2 benefit of an
LPG car is typically around 11% compared with a petrol car and zero compared
with diesel cars (The Energy Saving Trust, 2002).
A very large quantity of LPG is flared on the oil fields as well as in refineries
around the world as it is a by-product of producing oil, gasoline and diesel.
Instead of flaring LPG, it could be better used as an energy carrier to power the
cars. Besides some inconveniences, for instance the prohibition of LPG vehicles in
underground parking and the smaller luggage space if the cylinders are not
mounted under floor, it is already a reasonable alternative.
Worldwide, approximately 9 million vehicles with LPG run on the streets.
Algeria, Bulgaria, China, Russia and South Korea are important markets for
LPG vehicles. In Western Europe, the major markets for LPG cars are the UK,
Italy and France. Roughly 2.8 million LPG cars are registered in Europe
(Deutscher Verband Flüssiggas e.V., 2003). Converting a car fuelled by gasoline
to CNG is technically comparable with converting it to LPG. All the big car
producers such as Renault, Opel, Ford, GM, DaimlerChrysler, Toyota, Mitsub-
ishi, Volvo, Peugeot, Fiat, Isuzu and Nissan offer LPG cars. These are around
€2000 more expensive than a diesel car and around €3500 more expensive than
a gasoline car.

Electric-powered vehicle. The fourth competitor with fuel cell technology is the
electric-powered vehicle with a high efficiency (Table 5). The main drawback of
electric vehicles is their limited range and their high weight given the existing
battery technology. Most electric vehicles are limited to fewer than 160 km
between recharging, which takes several hours. Electric vehicles are also
754 Gian Carle et al.

relatively expensive, although their benefits, no local emissions or engine noise,

are significant enough to have created a commercial market. As with natural gas
vehicles, electric vehicles are popular with fleet operators, especially for vehicles
that remain in the same general area (e.g. local mail delivery). According to
F. Vergels (European Association for Battery, Hybrid and Fuel Cell Electric
Vehicles, personal communication, 2004) the there were 22 000 electric vehicle on
European streets in 2004.

Improved traditional gasoline and diesel engine vehicle. The fifth competitor is the
improved traditional gasoline and diesel engine technology. New technology has
made it possible to improve significantly both the energy efficiency and emissions
levels of internal combustion engines. These improvements include variable
valve control, cylinder disconnection, fuel direct injection, particle filters and NOx
reduction catalysts for diesel cars. In addition, cars can be lighter and have a
lower drag and tire friction. In the long-term it is possible to reduce fuel
consumption for conventional gasoline or diesel passenger cars by 40–50%, with
an efficiency improvement between 17 and 23% (Geschka & Partner
Unternehmensberatung, 2002). However, super-efficient vehicles such as the
Volkswagen Lupo and the Audi A2, which use on average 3 litres of gasoline/100
km, will remain niche products, since they are relatively expensive. Only 7% of all
sold Lupos are delivered to their customers as 3 litre (diesel/100 km) versions,
and 4% of the Audi A2 are the super-efficient version. In addition, Volkswagen
announced it will stop the production of these cars (Madslien, 2002).

Competition from substitutes. Figure 3 shows the concept that fuel cell vehicles
will need to compete with other technologies in the race for commercial success.
Fuel cell systems feature a high efficiency, produce no local emissions and do not
Cost

Amount of fuel cell cars

Fuel cell car price

time of market entry

price of competing
products

Time
Figure 3. Schematic showing cost development and market penetration of fuel cell cars.
 Opportunities and Risks during the Introduction of Fuel Cell Cars 755

generate engine noise. The competition, as outlined above, also has certain
strengths. This section discusses the factors influencing competition from
substitute products on the vehicular fuel cell industry.
Competition from the above-mentioned vehicle types will be strong because
Figure 3 Schematic showing cost development and market penetration of fuel cell cars

some of them are much further developed than fuel cell vehicles, cost less and
also have a well-developed infrastructure. However, these competitors are not
locally emission-free—with the exception of the electric vehicles—and therefore
count as only low-emission vehicles in California, while fuel cell vehicles are
classified as ‘zero emission’ (California Air Resource Board, 2004).
The traditional internal combustion engine is an established and cheap technol-
ogy (Table 6) with good driving performance, poor efficiency and high emission
values (NOx, CO2). In the mid-term, tailpipe emissions for gasoline or diesel
engines can be reduced for a much lower cost than for any of the new vehicle
technologies; however, very significant improvement of the traditional internal
combustion engine will be difficult to achieve.
The automotive industry claims that the cost of fuel cell technology must be in
the range €40–60/kW in order to be competitive. Current costs are according to
T. Poschmann (personal communication, 2004), Lipman et al. (2004) and Ogden
et al. (2004) at around €3000–5000/kW and they reflect the technical difficulties
that exist with respect to fuel cell production (Wengel and Schirrmeister, 2001).
As long as fuel cell engines cost over €70/kW (with subsidies) and gasoline/
diesel prices do not at least double, the gasoline and diesel engine will continue to
play a dominant role in the vehicle market (Table 6).
Research on the costs and benefits of various vehicle technologies (Wengel and
Schirrmeister, 2001) has shown that for the next 10–15 years it will be less expen-
sive (economically) to achieve the low tailpipe emission standard (Ultra Low
Emission Vehicle or Euro 4-Standard) with gasoline or diesel vehicles than with
fuel cells vehicles. Such facts will significantly delay the early market diffusion of
fuel cell vehicles.
As shown in Figure 3, with ‘business-as-usual’ economics and policies, fuel cell
vehicles will only be able to establish themselves in the mass market if the
competing vehicles are more expensive than fuel cell vehicles. This will not be the
case in the next 15 years unless there is a significant increase in the price of oil and
natural gas and a significant price reduction of fuel cell cars. However, the fuels

Table 6. Estimated costs of different drive trains (before tax/kW)

H2 proton
exchange
Current membrane fuel Hydrogen
gasoline cell (2004 proton exchange
internal Gasoline Compressed estimate) membrane fuel
combustion parallel natural gas Electric powered with cell (goal for
engine car hybrid car battery car hydrogen 2020–25)

Per kW (€) 30–40 60 60–80 300–500 3000–5000 50–70

Sources: The Joint Research Centre of European Commission and the European Council for Automotive
R&D (2003); Ogden et al. (2004); Service (2004); and Suppes (2005) and based on the Swiss sales price
differences of a Citroën Saxo Electric, a Citroën Saxo 1.1i Furio, a Citroën Berlingo Electric, a Citroën
Berlingo Familiale 1.4i X, a Fiat Multipla Bipower SX, a Fiat Multipla 1.6 SX, an Opel Zafira 1.6 CNG
and an Opel Zafira 1.6i.
756 Gian Carle et al.

Table 7. Total cost of ownership by year and kilometre cost of different drive trains
for Switzerland, including tax (€) with an estimated 12 847 km/year (Swiss average)
Compressed
Petrol car Diesel car natural gas car Hybrid car Battery car

Car used for Fiat Multipla Fiat Multipla Fiat Multipla Toyota Prius Citroën Saxo
calculation 1.6 SX 1.9 JTD Bipower SX electric
Total cost of 7400 7544 7210 8253 9000
ownership
Cost/km 0.58 0.59 0.56 0.64 0.70

Source: Carle (2004).

for fuel cells, which are often generated from carbon-based fuels, also need to be
relatively cheap. Finally, to be successful, fuel cell vehicles will require that a
sufficient fuelling station network for hydrogen is available. At least 10–20% of
the refuelling stations need to offer hydrogen to be able to ramp up the market
penetration (Lyon, 2002).
CNG or hydrogen-fuelled internal combustion engine vehicles are a viable
alternative to fuel cell vehicles for some vehicle manufacturers. CNG vehicles
could be, at least during the next 15–30 years, a real alternative to gasoline/diesel
fuelled and fuel cell vehicles, since CNG vehicles are relatively inexpensive to
produce and operate. Operating costs are especially low given the natural gas
industry’s determination to promote these vehicles, even if it must subsidise the
fuel at the beginning. Also, a total cost of ownership analysis performed for
Switzerland has shown that CNG vehicles have lower total costs than gasoline/
diesel fuelled vehicles (Table 7).
Hybrid vehicles are another reasonable alternative to fuel cell vehicles during
the next 15–30 years. Hybrid vehicles still consume relatively large amounts of
fuel. The Toyota Prius uses approximately 4.8 litres/100 km (US Department of
Energy, 2004). In addition, a hybrid car is around 10% more expensive per km
than a petrol car and 14% more expensive than a natural gas vehicle, as natural
gas costs in Switzerland 40–50% less than petrol (Table 6).
A significant advantage most of these alternatives have over fuel cell vehicles
is, with the exception of natural gas vehicles, their use of the existing fuel
infrastructure. Until the fuel cell vehicle fuelling infrastructure problem is solved
and the cost/kW is reduced from its current rate, fuel cell vehicles will not
significantly penetrate the mass market for vehicles.

Conclusions
How strong will competition be within the fuel cell industry (i.e. between differ-
ent fuel cell manufacturers)? Technical development in the fuel cell market for
transport applications has slowed since the euphoric 1990s. No longer do people
speak of a fuel cell vehicle being commercially marketed before 2005. Industry
analysts now expect to see fuel cell vehicles in niche markets by 2015.
In summary, it can be said that the competitive pressure within the group of
fuel cell manufacturers will increase. Several companies will follow Ballard,
Nuvera and UTC and attempt to cope with the strong competition in the mobile
fuel cell market.
 Opportunities and Risks during the Introduction of Fuel Cell Cars 757

The transfer costs for vehicle manufacturers to change from one company’s fuel
cells to another’s will initially be very high since the fuel cell manufacturers have
not agreed upon any standards. This lack of standards explains why some vehicle
manufacturers are considering backwards integration (i.e. the production of their
own fuel cells). Companies such as GM, Honda and Toyota are already produc-
ing their own fuel cells. Fuel cell manufacturers do not have the option to win the
contest by simply lowering price because the cost of materials will remain 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 production facilities. Second, fuel cell manufacturers must
produce a large number of fuel cells in order to reach the economies of scale
needed to reduce fuel cell cost significantly enough to compete in the market.
However, most existing fuel cell manufacturers already have established alliances
with vehicle manufacturers to achieve high sales potentials. New entrants will
find it difficult to solicit sufficient fuel cell demand to bring unit prices to an
attractive level.
Nevertheless, analysts expect that large vehicle manufacturers, energy compa-
nies and high-tech companies will continue to invest significant sums in fuel cell
technology during 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 substi-
tution goods. Fuel cells are in principle an ideal energy source without local CO2
production. However, together with hybrid and natural gas vehicles, further
developed gasoline and diesel engines 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, an infrastructure that does not yet exist for hydrogen and is
only partly available for CNG. Currently, there are worldwide just a handful of
demonstration hydrogen filing stations. Until there is a dense network where
about every third filling station is offering hydrogen, a large amount of invested
money has to be spent. Additional hydrogen production plants have to be
installed and pipelines connecting the plants and the big cities have to built. Not
only the infrastructure is a problem, but also the way of producing hydrogen will
cause political debate. If hydrogen is produced based on non-renewable energy
sources, the emitted CO2 has to be sequestrated; if hydrogen is produced out of
renewable energy, it will be about ten times more expensive than gasoline.
On the other side, the negotiation strength of the suppliers will not be very
high. The materials required for fuel cells, except for platinum and the PEM, will
be widely available, and suppliers that specialize in fuel cell production machin-
ery will establish themselves in the market, given an appropriate demand.
The forward integration, the development of fuel cells by their suppliers, is
unlikely to take place. This is the result of not having the necessary know-how to
produce fuel cells and compete with the fuel cell production companies. On the
contrary, the negotiation strength of the customers is high, because the customers
(the vehicle companies) will continue to concentrate by merging into a few large
companies, which may each cover about 10–15% of the worldwide vehicle
market. Although the transfer costs (the switching from one fuel cell manufac-
turer to another) of a vehicle manufacturer will initially be high, vehicle manufac-
turers will be able to exercise a strong market power. They can threaten the fuel
cell manufacturers with backward integration (their own production of fuel cells
758 Gian Carle et al.

instead of buying the product from a fuel cell manufacturer) and by offering
substitutes (e.g. CNG vehicles) instead of fuel cell vehicles.

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