How about this for a fit?
09/26 01:50
General Motors May Bet Billions on Unproven Fuel-Cell Engines
By John Lippert
Detroit, Sept. 26 (Bloomberg) -- Richard Wagoner, chief executive officer of General Motors Corp., is nearing what he calls one of the biggest decisions of his career.
He must determine whether to propel GM, the world's largest automaker, into the production of vehicles powered by fuel cells -- batterylike devices that combine hydrogen and oxygen to make electricity.
The cost, $500 million for the initial rollout in 2008, would swell to billions of dollars annually if Wagoner chooses to mass-produce the new models.
Wagoner, 49, is already spending $300 million-$400 million every year to study fuel cells, and he defends the investment as crucial to GM's future.
``People say, `How can you afford to spend so much on fuel cells?' and I say, `How can you afford not to?''' Wagoner says from his seat in a Gulfstream V executive jet soaring over California's Central Valley.
Wagoner says he has an overarching motive for promoting fuel cell vehicles: The fact that they produce no harmful emissions would help his company become a leader in reducing greenhouse gases that, according to an August report by the World Bank, are warming the Earth's climate and disrupting economic development.
The GM boss also must win his fuel cell bet if he's to boost GM's profit margin, which reached 3.2 percent in North America during the first half of this year. That's well short of the 5 percent he says he has to have to provide a respectable return for shareholders.
`The Brass Ring'
He says fuel cells could make the difference down the road, and some industry analysts agree. ``This is the brass ring,'' says William Pochiluk, an analyst at AutomotiveCompass LLC, a market research company in West Chester, Pennsylvania. ``It's General Motors' single best chance to capture market share.''
The company earned $1.52 billion on first-half sales of $94.6 billion -- after earning $714 million on sales of $88.8 billion in the year-earlier period -- as U.S. sales of the Chevrolet TrailBlazer sport-utility vehicle and other trucks rose 16.3 percent.
Wagoner captured 28.1 percent of U.S. vehicle sales in 2001, thereby stabilizing GM's market share after four decades of decline, in part by announcing 0 percent financing bargains one week after the Sept. 11 terrorist attacks.
GM shares closed at $39.57 on Sept. 25, down 18.6 percent so far in 2002 compared with a 26.9 percent drop in the Standard & Poor's 500 Index.
Unfunded Liability
Among the reasons investors aren't flocking to GM shares: Wagoner's unfunded U.S. pension liability could approach $16 billion by year's end. Also, after 2004 money-losing Fiat SpA may exercise its option to force Wagoner to buy the 80 percent of Fiat Auto he doesn't already own. That could cost GM $4 billion.
There's a substantial downside risk to a big push into fuel cells as well. If consumers don't buy the new models in large numbers, GM could lose the war in the low-emission field to Toyota Motor Corp. and Honda Motor Co. Think of the decade-long, Betamax v. VHS battle for primacy in videocassette recorder technology.
The Japanese automakers are downplaying fuel cells in favor of other technologies that reduce pollution. They're turning out hybrid vehicles that use gasoline and electric motors operating in tandem.
And Toyota and Honda have a head start in the market: They sell such vehicles in the U.S. now, while GM won't be introducing its fuel cell models for at least six years.
`Start From Scratch'
So far, the GM boss hasn't blinked. ``Wagoner sees fuel cells as a way to redefine what a modern vehicle means: to throw out the blueprint and start from scratch,'' says Chris Struve, a Fitch Ratings analyst in Chicago. ``He wants to destroy the technological leadership of Honda and Toyota.''
And he has his supporters. ``General Motors is doing fuel cells the right way,'' says Dan Poole, assistant director of research at National City Wealth Management, which owned 260,344 GM shares in September. ``They want to be the leader, but they don't want to be so far ahead that the market might go away as technologies or government regulations change.''
Whatever Wagoner decides, suppliers, distributors, competitors and customers will feel the economic ripples.
`A Huge Impact'
`General Motors is a major force in the American economy,'' says Geoffrey Ballard, chairman of General Hydrogen Corp., a Richmond, British Columbia-based company that's developing ways to make hydrogen for vehicles as well as ways to use and store it. ``When they decide to do something, they have a huge impact on what's possible.''
Fuel cell technology does provide certain compelling advantages: The cells produce only heat and water as by-products, and they run on hydrogen that can be manufactured from dozens of sources, including solar power and natural gas.
Because of that, they'd reduce tailpipe emissions -- and many nations' overdependence on Mideast oil. ``This is one of those things where General Motors cannot afford not to be in the leadership,'' Wagoner says.
There are hurdles to overcome: Under the technology now on the drawing board, a mass-produced fuel cell propulsion system for a U.S. family car would cost $37,500, or about 10 times more than an internal combustion engine, says Larry Burns, GM's vice president of research.
Easy Refueling
Nobody knows how to store enough hydrogen on board to give vehicles the range and easy refueling that customers want. The technology isn't familiar enough to generate support for massive regulatory changes.
Today, many U.S. states don't allow cars with hydrogen tanks to be parked in residential garages.
In the face of all that, some industry analysts question whether Wagoner will ever take the plunge.
Paul Lancaster, vice president of finance at Ballard Power Systems Inc. -- a Burnaby, British Columbia-based company that's making fuel cells for DaimlerChrysler AG, Ford Motor Co., Nissan Motor Co. and Honda -- points out that while GM issues lots of press releases, it hasn't delivered a single fuel cell vehicle to a single customer. ``Talk is cheap,'' says Lancaster.
Toyota started building Prius hybrid compacts five years ago. The Prius travels 52 miles on a gallon of gas in the city, or 73 percent farther than a Corolla. Toyota officials say they could sell 300,000 such vehicles annually by 2005.
Civic Compacts
Honda is selling 2,000 hybrid Civic compacts in the U.S. every month, and it's making money doing so, says Ben Knight, vice president of Honda R&D Americas Inc.
``General Motors has done as much fuel cell research as anybody, but when it comes to taking research out of the laboratory and commercializing it, they've been very slow,'' says Daniel Sperling, a professor of transportation at the University of California, Davis.
Another reason the skeptics question Wagoner's resolve is GM's failed experiment with an electric car called the EV-1. The model required overnight recharging to travel 150 miles, or half the range of internal combustion cars.
GM spent $1 billion to produce 700 EV-1s before Wagoner, then GM's chief operating officer, pulled the plug in 1999.
Backup Batteries
Wagoner says he concluded at the time that hybrids, with their twin motors and expensive backup batteries, make more economic sense for Tokyo's stop-and-go driving and $4-per-gallon gasoline than for U.S. driving patterns.
He says he decided to favor fuel cells instead because their performance could have broad customer appeal.
Wagoner says he hopes President George W. Bush will become a personal advocate for fuel cells, like Dwight Eisenhower was for highways and John Kennedy for moon rockets.
Such advocacy makes sense in part, in Wagoner's view, because it would allow Bush to position himself as the president who liberated the U.S. from Mideast oil. ``We had some discussions, and I think there's some interest,'' Wagoner says.
U.S. Energy Secretary Spencer Abraham says the federal government is promoting fuel cells. ``They're the focal point of our long-term strategy on energy,'' Abraham says.
$8,000 Tax Credit
So far, the administration has limited itself to a research program worth $150 million last year and a proposed tax credit of up to $8,000 for buyers of fuel cell vehicles.
The U.S. military plans to buy 80,000 fuel cell vehicles by 2013, says David Garman, assistant secretary at the U.S. Department of Energy.
Wagoner's competitive nature won't let him pass up such opportunities. He was the 6-foot-4-inch seventh man on Duke University's freshman basketball team in 1971.
Though he gave up college ball after concluding he wouldn't make the National Basketball Association, he had a court built inside his suburban Detroit home so he can scrimmage with his three sons. Colleagues say he's surprisingly self-effacing for the boss of a major international corporation.
``Being CEO was never my objective,'' Wagoner says. ``To survive is an objective these days.''
Jaw of a Pelican
To illustrate his approach on fuel cells, Wagoner grabs a newspaper and draws a curve that slopes down and then up, in a way that resembles the lower jaw of a pelican. The curve represents cumulative cash flow.
To turn the curve upward as soon as possible, Wagoner hopes to invest in fuel cells in small, incremental steps.
``Our challenge is to say, OK, I'm willing to buy that next step for $20 million, $50 million, $100 million, but I don't have to make a call today to spend $2 billion,'' Wagoner says.
Sir William Grove, a British physicist and attorney, tested the first fuel cell in London in 1839.
The heart of today's design is a membrane that allows hydrogen protons to pass through and then redirects electrons, thereby creating electricity.
The membrane looks like a piece of heavy cellophane coated with black ink. Inside a fuel cell stack, hundreds of such membranes are sandwiched between grooved metal plates that direct the flow of hydrogen and oxygen.
Primal Elements
Such primal elements power the Hy-Wire, which, at a cost of $10 million, is GM's most expensive concept car ever.
Technicians built the car inside a cluster of tents and storage trailers at the company's Dudenhofen Test Center, 30 miles southeast of Frankfurt, Germany.
On a mid-August morning at the Dudenhofen test site, when technicians increased the hydrogen and air flow, the test model let off a high-pitched whine like a vacuum cleaner with a clogged pipe. As they used a blue hoist to lower the car's body onto four stationary jacks, it let out a loud crack.
Mohsen Shabana, a 48-year-old Egyptian-born American who is chief engineer, sprang under the body to steady its descent. ``I'm here to make sure we get it all in one piece,'' Shabana says.
The Hy-Wire's fuel cells, hydrogen tanks and electrical controls are held in a flat, 11-inch-thick chassis that looks like a large skateboard.
No Bulky Engine
Because the vehicle has no bulky engine in front, its passenger compartment is bigger than usual. To dramatize such spaciousness, its windshield extends down past the feet of its driver.
The Hy-Wire weighs 4,180 pounds, or as much as most five- passenger luxury sedans. The model is capable of speeds of up to 100 miles per hour and has a range of 60 miles when its 4.4-pound- capacity hydrogen tanks are filled.
For hand-built cars like Hy-Wire, GM spends $7,000 per kilowatt on the fuel cell stack and electric motor, according to Frank Colvin, vice president of fuel cell operations.
By the end of the decade, the company expects to be spending $50 per kilowatt, a cost that would match that of an internal combustion engine, says Research Vice President Burns.
No Transmission
Because the Hy-Wire is also equipped with electric driving controls, it has no transmission, no axle, no exhaust system and no mechanical linkages for steering and brakes.
Compared with today's cars, such vehicles would be easier to manufacture, thereby contributing to lower prices and increased sales in emerging markets like China, Burns says.
They'll also accelerate faster, and they'll be easier for individual owners to customize, which would allow for higher prices to be charged in advanced markets like the U.S., Burns says.
By 2005, GM officials expect to sell fuel cells as a power source to hospitals, data storage companies and food processors that can't afford even momentary lapses in electricity service, says Tim Vail, a former Enron Corp. executive who's now GM's director of distributed generation with the company's fuel-cell activities.
$10 Billion Market
Because fuel cells respond instantly to demands for power and because they don't require backup batteries and exhaust fans like diesel generators, Vail expects GM to grab a big piece of that $10 billion market.
He's identified two companies already active in the market -- Peoria, Illinois-based Caterpillar Inc. and Columbus, Indiana-based Cummins Inc. -- as potential customers.
Spokesmen at both Caterpillar and Cummins say their companies are considering a variety of fuel cell partnerships, including those with GM.
Pochiluk, the AutomotiveCompass analyst, expects global fuel cell vehicle production to reach 1.2 million annually by 2020. By then, GM will have built 17 percent of the world's fuel cell vehicles compared with the 15 percent built by Toyota and the 11 percent built by Ford, he says.
Those predictions are based on the premise of a remarkable change in the distribution system.
Retrofit Filling Stations
In the short run, the easiest way to provide hydrogen for fuel cell vehicles will be to retrofit existing filling stations so they can extract the hydrogen from gasoline, he says.
Retrofitting just one in 10 U.S. filling stations will cost up to $15 billion, which so far nobody has agreed to pay, he says.
Toyota, meanwhile, is planning a major announcement in the next few months about additional hybrids for the U.S., says Bill Reinert, national manager of advanced technology at Toyota Motor Sales USA.
``We're going to set the bar so high, it will be difficult for our competitors to stay with us,'' he says.
Toyota's announcement is a major challenge for Wagoner. ``If Toyota can get everyone to agree that hybrids are good enough, Wagoner won't be able to reshape the industry around fuel cell -- at least not in a time frame that's beneficial to General Motors,'' Fitch's Struve says.
Hybrid Powertrains
As a stopgap measure, GM is thinking of buying hybrid powertrains from Toyota, Burns says. That would be an admission that Wagoner is playing second fiddle on low-emission technology, which he says he considers essential to his company's survival.
Wagoner says he'll be satisfied if GM is building 20,000-50,000 fuel cell vehicles a year and is poised for additional growth by 2012.
Burns is more upbeat, saying the company could be building hundreds of thousands of fuel cells annually by 2010. Fuel cells are likely to be installed first on big vehicles like long- distance freight trucks, he says.
In the end, the appeal of this technology is obvious: Fuel cells differ from internal combustion engines in that they can run backward. In addition to consuming hydrogen to produce electricity, they can consume electricity to produce hydrogen.
As hydrogen storage methods improve, the 50- to 75-kilowatt cars that Americans drive will be able to power the 7- to 10- kilowatt houses in which they live -- or entire villages in China.
Low-Cost Power
Providers of fuel cells will be able to sell low-cost power back to the electricity grids run by big utilities --something that's already starting to happen in California.
As GM becomes a bigger player in the $300 billion market for residential electricity in the U.S., it may spin off some of its nonautomotive fuel cell activities, Wagoner says. He has such dreams.
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