Conference paper WCTR 2004
Fuel cells for cars - a competitive analysis
Gian Carle,
Peter Keller,
Alexander Wokaun and
K.W. Axhausen
Arbeitsbericht Verkehrs- und Raumplanung 239
August 2004
Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
Fuel cells for cars - a competitive analysis
Gian Carle, Peter Keller, Alexander Wokaun and K.W. Axhausen
IVT
ETH Hönggerberg, HIL F13.3
CH-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 exchange
membrane (PEM-) fuel cells as an automotive traction system substitute. Porter's competitive
analysis methodology the so-called "five forces model of competitive structure" was used to
develop an overview of possible competitive forces in the newly built 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 favorable competitive position if the five threatening forces
are 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 may
contribute to a break-through for fuel cell technology from the niche-market to the mass-market
in the automotive industry.
Keywords
automotive industry, car industry, competitive advantage, competitive analysis, competitive
strategy, five forces model, Fuel cell, fuel cell car, gas car, hybrid car, Michael E. Porter, PEM
fuel cell
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1.
Introduction
An economic competition evaluation that analyzes the potential for fuel cell use in the motor
vehicle fleet is described in this paper. The research is part of the Alliance for Global
Sustainability (AGS) project, "Role of Innovative Technology for Promoting Sustainable
Mobility" 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 and
evaluates its contribution to sustainable mobility.
First, it presents a transition analysis (change management) for innovative drive systems from
today's status as niche market products to mass-market products. This analysis was completed
by considering fuel cells as substitution products for traditional internal combustion engines
(Carle 2002). The evaluation was guided by the competition analysis technique developed by
Michael Porter (Porter 1998a, 1998b). This technique relies on existing data to estimate
potential 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 for fuel cell traction technology from the niche to the mass
market. This analysis also identifies critical factors that affect both market penetration time
and the rate of product diffusion into the mass market.
2.
Methodology
In 1980 Michael Porter developed a technique for analyzing industrial structure and its
competitive forces (Porter 1998a, 1998b). Porter’s technique is based on the "Five Forces
Model“ illustrated in Figure 1. This model describes an enterprise in relation to its economic
environment.
Figure 1
Porter‘s Five Forces model
Potential new
competitors
Supplier
power
Competition
in the industry
group
Threats of
substitutes
Customer
power
Quelle: Porter (1998a)
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
Using Porter’s model, the fuel cell technology’s position can be characterized as being in an
early phase of strategic planning for the market penetration. That analysis answers the
following 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 efficiently
introduce fuel cells into the industry?
The competitive position of an industrial enterprise depends on five competition forces. These
competitive 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 combustion
engines such as compressed natural gas (cng) engines).
•
Competition within the fuel cell industry (i.e. between different fuel cell
manufacturers).
•
Considering all five competitive forces together provides a good overview of the industry
attractiveness and can help to estimate a further profit potential. This, in turn, can be used to
assess the likelihood that fuel cell technology will be widely adopted in the vehicle
manufacturing industry (since there will only be good profit potential in 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.
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
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) to
generate electrical energy with only water vapor as emissions. Since fuel cells create energy
without harmful emissions they are widely thought to be an ideal technology for use in
vehicles. The most appropriate technology for transport applications is the proton exchange
membrane (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 are
combined together to create a „stack“ for use in applications (like providing power for a
vehicle).
4.
Substitution Conditions
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 tells us 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 it is in the same
basic range as traditional gasoline and diesel engine technology. The automotive industry
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
claims that the cost of fuel cell technology must be in the range of $40-$60 per kW in order to
be competitive. Current costs are much higher and reflect the technical difficulties that exist
with 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 the
following 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 large
number of fuel cell prototypes for the vehicle industry.
Ballard Power Systems (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
commercially, although they have delivered more than 200 different prototype fuel cells to
customers for experimental vehicles. In fact, as of November 2000 Ballard has 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).
Nuvera (www.nuvera.com) is a joint venture between the consulting firm Arthur D. Little’s
fuel cell research department (USA) and DeNora (Italy). Nuvera’s 5 kW PEM fuel cell stacks
are available commercially. Nuvera has also supplied fuel cell prototypes to numerous
customers including: Esoro, Fiat, Scania, MAN, and Neoplan (the latter two are bus
manufacturers).
UTC Fuel Cells is a third company that has experience developing commercially available
fuel cells for vehicles.
Both these companies already have experience developing and producing vehicular PEM fuel
cells. The ability of these companies to enter the market by 2010, a widely accepted goal for
commercialization of vehicular fuel cell technology, will depend on their ability to attract
sufficient capital to develop mass production facilities for vehicular fuel cells. To meet this
ambitious timetable, companies will need to spend at least several hundreds million $ per
year. One early fuel cell industry leader, Ze Tek Power, a former developer, was forced to
declare 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 transport
applications (i.e. the market will be characterized as having high entrance barriers) for two
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
main reasons. First, to be successful fuel cell manufacturers must invest a large amount of
money in research and development of both the product itself as well as the production
process 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 manufacturers
and vehicle manufacturers. Most existing fuel cell manufacturers have allied with vehicle
manufacturers in order to provide access to sales channels. These alliances make it more
difficult for new companies to attain the economies of scale needed to achieve the targeted
cost of $40–$60 per kW fuel cell performance. Without high sales volumes, fuel cell
manufacturers cannot be competitive because they will not be able to reduce product costs
below that of substitution products, such as improved conventional internal combustion
engines.
5.3
Bargaining power of Customers
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 fuel cells, the customers
are 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 vehicle
manufacturers.
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 most
expensive, and the financial risk of developing fuel cell and production technology cannot be
shared with other firms.
Any vehicle manufacturers 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 could change to Option 3 in the future. Honda, Nissan, and GM have taken an approach
that combines options 2 and 3.
From today's perspective, GM, Toyota, Ford, and DaimlerChrysler (as well as other
companies like Honda) have the best chances to introduce the production line made fuel cell
vehicles. Porter calls companies that produce the first production line versions of a new
technology “early movers”.
Research has projected that fuel cell vehicles will not be profitable for at least the first five to
ten years after commercial introduction since the vehicles cannot be sold at a price high
enough 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 are
likely to pursue options 2 or 3.
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
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
base will these fuel cell manufacturers be able to reduce fuel cell production costs to a
competitive 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 the
following 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 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.
5.3.2
Backward Integration
Manufacturers have the choice between purchasing parts for their products or manufacturing
their own parts. This is called the „make or buy“ decision in standard business classes and a
firm 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 to
reduce their dependency on independent fuel cell producers. In contrast, DaimlerChrysler and
Ford 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 to
deliver the hydrogen or methanol they use as fuel. Until such an infrastructure is available, the
market for fuel cell vehicles will be limited to fleet operators such as postal service
companies, local delivery companies, and taxi enterprises. 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 or methanol filling stations.
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
5.4
Threat of Substitute Products
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 expensive or better (or both).
5.4.1
Substitute Products
There are four main competitors to fuel cell vehicles: hybrid vehicles, compressed natural gas
vehicles, 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 city
driving, which is characterized by frequent stop and go activity, while a conventional sparkignition gasoline or diesel engine is used on highways and for charging the battery. Hybrid
vehicles have relatively high costs due to the technology required to connect two traction
systems in the same vehicle, but they are energy efficient and generate low levels of
emissions (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 are used by
fleet 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 powered
vehicle. Natural gas vehicles have been successfully used for decades in numerous countries.
Companies including Volkswagen (VW), BMW, Opel, Volvo, and Fiat offer natural gas
vehicles. Usually these are sold as bifuel vehicles meaning that 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 vehicles. This infrastructure has been slow to develop
in Europe (with the exception of Italy).
Electric powered vehicle
The third competitor with fuel cell technology is the electric powered vehicle. The main
drawback of electric vehicles is their limited range and their high weight with the existing
battery 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 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).
Improved traditional gasoline and diesel engine vehicle
The fourth competitor with fuel cell technology is the improved traditional gasoline and diesel
engine technology. New technology has made it possible to significantly improve both the
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
energy efficiency and emissions levels of existing internal combustion engines. These
improvements 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 diesel
passenger 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, which
use on average 3 liters of gasoline per 100 km, will remain niche products, since they are
relatively expensive.
5.4.2
Competition from Substitution Products
Figure 3 illustrates the concept that fuel cell vehicles will need to compete with other
technologies 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 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 some of them are
much further developed than fuel cell-vehicles and also cost less. However, these competitors
are not locally yet emission-free – with the exception of the electric vehicles- and therefore
count as low emission vehicles in California, while fuel cell vehicles are classified as “zero
emission”.
The traditional internal combustion engine is an established technology with good driving
performance, poor efficiency, and bad emission values (NOx, CO). 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.
As long as fuel cell engines cost over $60/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.
Essays on the costs and benefits of various vehicle technologies (Wengel, et al. 2001) has
shown that for the next 10–15 years it will be less expensive (economically) to achieve the
low tailpipe emission standard (Ultra Low Emission Vehicle or Euro 4-Standard) for gasoline
or diesel vehicles than with fuel cells vehicles. Such facts will significantly delay an early
market diffusion of fuel cell vehicles.
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
Figure 3: Cost development and market penetration of fuel cell cars, principle sketch
Amount of fuel cell cars
Cost
Fuel cell car price
time of market entry
price of substituting
products
Time
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 substitute vehicles are more
expensive than fuel cell vehicles. This will not be the case in the next ten to fifteen years
unless there is a significant increase in the price of oil and natural gas. However, the fuels for
fuel cells which are themselves often generated with carbon-based fuels, also need to be
relatively cheap. Finally, in order to be successful, fuel cell vehicles will require that a
sufficient fueling station network for hydrogen be available.
Compressed natural gas or hydrogen fueled internal combustion engine vehicles are a viable
alternative to fuel cell vehicles for some vehicle manufacturers. Compressed natural gas
vehicles could be, at least during the next 15–30 years, a real alternative to gasoline/diesel
fueled and fuel cell vehicles, since compressed natural gas/hydrogen 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 they must subsidize the fuel at the
beginning. Also a total cost of ownership (TCO) analysis performed for Switzerland has
shown that compressed natural gas vehicles have lower total costs than gasoline/diesel fueled
vehicles (Carle, 2004).
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 4.3 liters per 100 km.
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
A significant advantage most of these alternatives have over fuel cell vehicles is that, with the
exception of natural gas vehicles, they can use the existing fuel infrastructure. Until the fuel
cell vehicle fueling infrastructure problem is solved and the cost per kW is reduced from its
current rate, fuel cell vehicles will not be able to significantly penetrate the mass market for
vehicles.
6.
Conclusions
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 on the market by
2010.
In summary, it can be said that the competitive pressure within the group of fuel cell
manufacturers will increase. Several companies will follow Ballard and attempt to cope with
the strong competition in the mobile fuel cell market.
The transfer costs for vehicle manufacturers to change from one company’s fuel cells to
another company’s fuel cell 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. production of their own fuel cells).
Companies like GM, Honda, and Toyota are already producing 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 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 production
facilities. Second is the fact that 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 higher sales potential, new
entrants will find it difficult to find sufficient fuel cell demand to bring unit prices to an
attractive level.
Nevertheless, analysts expect that large vehicle manufacturers, energy companies, and high
tech companies will continue to invest significant sums of money 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 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 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 or methanol and is only partly true for
compressed natural gas.
On the other side of the argument, the negotiation strength of the suppliers will not be very
high. The materials required for fuel cells, except for platinum ant the proton exchange
membrane, will be widely available, and suppliers that specialize in fuel cell production
machinery will establish themselves in the market, given an appropriate demand.
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Fuel cells for cars – a competitive advantage ________________________________________________ August 2004
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 be able to produce fuel cells
and to be able to compete 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 over 10–15% of the worldwide vehicle market. Although the transfer
costs (the switching from one fuel cell manufacturer to another) of a vehicle manufacturer
will 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 own
production of fuel cells instead of buying the product from a fuel cell manufacturer) and by
offering substitutes (e.g. natural gas vehicles) instead of fuel cell vehicles.
7.
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