The High Road
If China steers its auto industry toward hybrids and perhaps hydrogen cars, the world may have no choice but to follow
By Craig Simons
Newsweek International
Sept. 6-13 issue - Yu Zhuoping hasn't taken a vacation in two years. Nor does the 44-year-old take many weekends off. Instead he logs 12-hour days in a soccer-pitch-size laboratory filled with flashing computer screens and disemboweled electric motors. He's trying to build the future—in the form of hydrogen-powered cars that can not only work, but can sell. Since Yu's team of 28 Ph.D.-level scientists and 200 students at Shanghai's Tongji University began the work in 2002, they've come out with two generations of cars—built with Chinese technology.
"That's something that nobody thought we could do," he says, glancing out from under the silver hood of Start II, the project's newest prototype. "Now people say we won't be able to make them marketable. So we'll just keep working."
In China such optimism is par for the course. Beijing is undaunted in its ambitions to become a world leader in hydrogen-fuel-cell-powered cars. The dream is not farfetched. Making hydrogen cars a reality is only partly a matter of coming up with technological breakthroughs. It also involves replacing gasoline filling stations, refineries and internal-combustion engines with hydrogen equivalents. China's relative lack of development may thus be a virtue; the country's leadership has a relatively clean slate upon which to build a hydrogen-car industry, should it choose to do so.
If the technology could be made cost-competitive with fossil fuels—which many analysts predict will happen in the next two decades—hydrogen cars would make sense as a national strategy. By making China the world's biggest market for hydrogen cars, Beijing could attract investment in the latest technology and bootstrap a world-class Chinese auto industry, reducing China's demand for imported oil in the bargain. Of course, there's a sizable industry that is pushing the country in the opposite direction, toward fast growth using quick and dirty conventional technology and fuels—and even fighting against tighter emissions controls than in the West.
Which strategy China chooses stands to have a huge impact on the country—and on the rest of the world. At present, the Middle Kingdom is traversed by relatively few cars—only about 20 million. That amounts to barely eight cars per 1,000 people, which is a far cry from the 100 in Brazil or the 940 in the United States. China is catching up quickly, however. At its current rate of growth, the country will surpass Japan and become the world's second largest auto market by 2011, with annual sales of 5 million cars, says Yale Zhang, a research director for the consulting firm CSM Worldwide. China, already the world's second largest importer of oil, would have to double imports every seven or eight years to keep all these wheels spinning, says James Brock, an energy consultant in Beijing. By steering China toward more fuel-efficient hybrid cars as a precursor to a hydrogen-based auto industry, Beijing would take a giant step toward curbing greenhouse-gas emissions and reducing the worldwide demand for oil. It would also give the big carmakers an incentive to develop similar vehicles for the China market.
A coterie of engineers are working to make that happen. They've got a good deal of support from Beijing, which has pumped nearly $200 million into fuel-cell research in the past two years. (The United States plans to spend $1.7 billion over five years.) Wan Gang, the chief scientist in charge of China's electric-vehicles project, expects funding to increase "several-fold" in coming years. The money has been parceled out to Chinese universities and local industries that have so far produced more than 1,000 patent applications and created a domestic capacity to build hybrid cars and fuel-cell buses. Chinese President Hu Jintao and other top leaders "definitely talk about sustainable growth, energy efficiency and environment-friendly vehicle technology," says David Chen, general manager of GM's Beijing office. And the talk isn't just rhetoric. The government funds a program to develop electric cars, with more than half its $320 million, five-year budget going toward fuel-cell R&D. "The Chinese government," says Wan, "will go to all lengths to make fuel-cell cars work."
Beijing has already begun to create an alternative-energy-vehicle fleet of buses. The central Yangtze port city of Wuhan runs several hybrid buses and, Wan says, city officials are planning to buy more. Beijing's public-transportation armada includes 120 pure-battery buses. Beijing and Shanghai plan to build hydrogen fueling stations next year. That will help them when it comes time to convert the country's 190,000 natural-gas taxis and buses, one of the world's biggest natural-gas fleets, to hydrogen.
State-funded R&D centers are also spinning off for-profit companies that would export hydrogen-technology-based products. Ouyang Minggao, director of China's National Laboratory of Automotive Safety and Energy, also heads the start-up company SinoHytec, launched by Tsinghua University, China's MIT. SinoHytec plans to start building fuel-cell buses, with a plan to sell them by 2010.
If companies like SinoHytec are profitable, they could create a big enough market to drop the price of fuel cells and to finance an infrastructure of hydrogen fueling stations. That, Tongji's Yu says, would make a fuel-cell-vehicle market possible by pushing the price of domestically produced fuel-cell cars down to about $42,000 per automobile. The government, he says, would help out by creating a "favorable marketplace" with incentives for fuel-cell- car buyers. Tongji's for-profit start-up, Shanghai FCV Powertrain, expects to sell 250,000 fuel-cell cars by 2020.
Before that happens, though, China will have to overcome some formidable technical obstacles. Most difficult will be reducing the cost and increasing the life spans of fuel cells themselves. If fuel-cell buses went on the market today, they'd cost at least $1 million and could travel only 200 kilometers between fill-ups. Enough fuel-cell batteries to run a bus would cost roughly $100,000. There's also the problem of storing and transporting hydrogen safely and affordably. Some are skeptical about whether China will be able to pull off the conversion. "In a lab you can show that [the technology] is working in one experiment," says a Western auto executive based in Beijing. "But taking that to selling it at Kmart is a different thing."
China won't have to go it alone, thanks to a bevy of international companies eager to bring new technology to the mainland. GM joint-venture partner Shanghai Automotive Industry is working with Tongji University, and Toyota is considering producing its hybrid car, Prius, on the mainland. Palcan Fuel Cells, one of the world's top manufacturers of hydrogen storage tanks, hopes to partner with Tongji's FCV Powertrain to build fuel-cell scooters for export to Europe. For the moment, Palcan's two China-based manufacturing plants are for export only. But, Canadian-Chinese CEO John Shen says, "In the long term, China will be our top market."
Perhaps the biggest barrier to China's hydrogen strategy is the country's existing auto and fossil-fuel lobby, which has a big stake in the status quo. Despite all the green rhetoric in Beijing, China is building big highways and lining them with gas stations. Although China recently tightened its fuel-economy standards, emissions standards remain lax. Indeed, one of the tragedies of China's pell-mell development is that the country hasn't carefully considered the social costs of its growth model. Rather than encouraging private car ownership, China could have chosen to promote public transit, heavily tax road use and put surcharges on gas to avoid the pitfalls encountered by the United States. Yet so far it hasn't.
In the next few years, China's hydrogen proponents will be pressing their case. Hydrogen, they argue, may be a matter of survival. For one thing, the nation's growing demand for oil poses a national-security risk. Developing a hydrogen-based economy would relieve that pressure. China's growing environmental problems are another argument for developing hydrogen. Rapid growth has made Chinese metropolises some of the world's dirtiest. Car emissions are the No. 1 culprit, and a switch to hydrogen fuel cells—which emit no pollutants—would solve much of the problem.
The most convincing argument may be success. Yu and his team of researchers are due to finish their third-generation prototype of the Start fuel-cell car, built in a Volkswagen Santana body that the company donated, later this year. It will be lighter and more durable than its predecessor, which Yu says will make it "more marketable." After they get that done, they'll turn to Start IV. "We have the spirit to succeed," Yu says. If China does, the whole world will know it.
© 2004 Newsweek, Inc.
URL: http://www.msnbc.msn.com/id/5829986/site/newsweek/
The Gas Misers
Toyota's new hybrid may just be the biggest thing in cars since the combustion engine
By Michael Hastings
Newsweek International
Sept. 6-13 issue - Richard Pearce has turned out his old love, a 1989 Dodge pickup truck. In 2002 the 50-year-old retired soldier and his wife decided to bring a Toyota Prius hybrid back to their Virginia home. They "fell in love with the technology," which uses an electric motor at low speeds and a small engine at high speeds to power the car with a lot less gas. Now a new, 2004 Prius sits in the garage alongside the older model, and the pickup languishes in the driveway, used sparingly to haul garbage to the landfill. Pearce says he'd never think of taking the truck on his 26-mile commute. It gets less than 20 miles a gallon, while the Prius gets 60, so he wouldn't be able to use the special lane Virginia has set up for fuel-efficient cars. "We'll never have anything but a hybrid again," he says.
Pearce's extreme embrace of the Prius was once the stuff of wild dreams for the Toyota engineers who developed the brand. They had hoped the gas-electric hybrid, introduced in Japan in 1997, would become nothing less than a new Corolla or Camry—sedans that made the company's reputation in America. Last year sales of those two models helped push Toyota past Ford to become the world's second largest carmaker, laying huge tire tracks for the unproven Prius to fill. The first hybrids sold at such a high premium over regular sedans that buyers couldn't save enough on fuel to come out ahead—yet were so expensive to make, Toyota took a big loss on each one. While Toyota's engineers made grand statements about the car of the future, its bean counters wondered whether there would ever be a mainstream market for these things.
The answer has caught Toyota off guard. Since October, Toyota has had to increase production of the Prius three times, most dramatically in August when it announced a 50 percent boost for next year to 15,000 vehicles a month worldwide. That's a fraction of its Corolla output, but enough to raise serious questions about whether Toyota innovations are once again leading a major revolution in the American market. While the automaker plans to send most of the new production run to the United States, there are still 22,000 customers on waiting lists for the car. "We didn't know how the consumers would react to this technology," says Don Esmond, a senior vice president and general manager at Toyota. "They've voted for it, they've voted with their dollars."
To be sure, the hybrid phenomenon is still only a ripple in the pool of American gas guzzlers. The highest estimates for the United States predict annual sales of 500,000 hybrid cars by 2009—about 3 percent of the 16.7 million car market. Analysts think that the price of fuel would have to hit $3 a gallon to see bigger sales sooner. Yet already the Prius is the first significant departure from the combustion engine to make any major inroads in the auto industry since Henry Ford invented the Model T in 1908. And major carmakers have learned never to ignore the ambitions of Toyota, arguably the best-run big automobile company in the world, with a reported stock-market value of $107 billion, almost four times more than GM or Ford. "For Toyota," says prominent Japanese car critic and environmental-technology specialist Tadashi Tateuchi, the hybrid car "may well be the key to world domination."
The key to the Prius story is rapidly advancing technology. The original project was launched in 1993 under the code name G21, for 21st Century Generation, with strong backing from Toyota chairman Shoichirou Toyoda, an heir of the founder. When the first Prius was unveiled seven years ago, it was an undersized, underpowered and overpriced experimental box of a car, which competitors felt free to ignore. Most rivals said they would concentrate on fuel cells and other fuel-efficient technology that wouldn't be widely available until 2010. When Toyota introduced the Prius to North America in 2000, it sold only 15,000 cars its first year—a minor hit, but mainly with environmentalists and Hollywood liberals like Leonardo DiCaprio and Cameron Diaz.
Toyota's napping rivals had given it a five- to 10-year technological lead by the time the new Prius came out last October, says Tateuchi. The new model's electric motor was 50 percent more powerful, its interior was almost twice as roomy and its body was designed to look like a futuristic sedan rather than an ecological-science project. The redesign cost Toyota untold millions, and putting that much into a product that "consumers didn't even know they wanted yet," says Esmond, was "a bit of a crapshoot."
The new Prius appears to be moving rapidly out of its green niche. Sales in the United States shot up by 153 percent in the first half of this year, by a whopping 874 percent in Europe; in Japan they increased tenfold. According to Esmond, once skeptical rivals are now jumping on the bandwagon. "I don't want to say they're scrambling, but they are trying to quickly put together their own hybrids," he says.
So far Honda has given Toyota the only competition for the hybrid market with the Civic and the Insight. But the first hybrid SUV, Ford's Escape, hits the streets in September. Nissan recently announced that its hybrid Altima sedan will arrive next year. Later this year Dodge plans to roll out a diesel-electric pickup. GM plans hybrid —models of the GMC Sierra and the Chevy Silverado. Honda plans to unveil a hybridized Accord in the fall. Hyundai says its hybrid will be ready in "the near future." According to CSM Worldwide, a Detroit-based research firm, by 2007 there will be some 22 hybrid options for popular models, including even Hummer's H2.
In America the lust for the largest gas guzzlers seems to be slowly waning. Though SUVs are still the top-selling vehicles, the mix of SUVs is tilting toward smaller models. And because big SUVs have driven the average gas mileage of the American fleet down to 20.4 miles per gallon, its lowest level in two decades, the Big Four automakers risk falling afoul of fuel-efficiency regulations. That's one reason many of the new American hybrid designs are for SUV models. But the bigger reason is Toyota. "We can't just sit here as a major corporation and say, 'Trust us, you'll get a fuel cell from us and in the meantime, we're not doing anything'," says GM vice chair-?man Bob Lutz. "With more and more of our competitors playing the hybrid card, there was just no way we could ignore that."
Europe has been slower to respond. It has already chosen diesel as its cleaner, more efficient fuel, and the diesel market is dominated by German carmakers. Indeed, one reason Toyota pursued hybrids was that it was so far behind in the diesel market. But growing sales of the new Prius could change all that. Lindsay Brooke, an analyst at CSM, says every big car company has to be thinking that "if the Japanese kick-start this thing, you've got to have this technology on the shelf, especially if the fuel price really rises."
The Prius faces two critical turning points before it can be called a true mass-market car. It needs to be profitable, and practical. When Toyota first introduced the Prius, it was reportedly losing $3,000 on each car. The company now says the line is profitable, but analysts aren't convinced. "I know engineers at rival carmakers who've done total teardowns of the Prius—comprehensive, bolt-by-bolt cost analysis," says Brooke. "Toyota is getting close to breaking even," probably within the next five years.
Reaching that point takes longer for the consumer. Most hybrids sell for $2, 000 to $3,000 more than comparable sedans, and drivers would need at least 10 years and 100,000 miles to recoup that much in gas savings, analysts say. But those who say hybrids must narrow that gap to boost sales ignore the power of instant gratification: Richard Pearce says he pays $10 a week in gas, compared with his neighbor's $60.
Last year Toyota launched a U.S. ad campaign pitching the Prius as a big, sexy "real car," not a green techno curiosity. One spot called Prius "the world's biggest hybrid," and showed the universe being sucked into the car's yawning rear hatch. The ad also noted that "you never plug it in"—an attempt to distance the Prius from old electric cars. A Toyota ad this summer billed "mpg" as more peaceful getaways, over a picture of a scantily clad couple on the beach.
It's also worth noting how much attention Toyota is focusing on hybrid technology. Toyota is posting record sales and building a cash reserve of more than $40 billion while other carmakers are struggling. "They could eat a number of other car manufacturers for lunch without even noticing it on their balance sheet," says auto analyst Ryan Tutak at Ducker Worldwide. Yet Toyota has avoided the recent frenzy of industry mergers and instead focused on key models, including hybrids. A hybrid luxury SUV will appear next year and a hybrid Camry in 2006. "Ford and GM have more brands than anyone, but Toyota is piling up the money," says Tutak. "Which horse are you going to bet on?" For Toyota at least, hybrids look like a winner.
With Keith Naughton in Detroit, Masato Kawaguchi in Tokyo and Bureau Reports
© 2004 Newsweek, Inc.
URL: http://www.msnbc.msn.com/id/5830015/site/newsweek/