Commentary: Fuel Cells: Japan's Carmakers Are Flooring It

What could Honda (HMC ) and Toyota (TM ) be thinking? On Dec. 2 in Tokyo, they rolled out the world's first commercially available cars running on hydrogen fuel cells. Each one--Honda Motor Co.'s FCX and Toyota Motor Corp.'s FCHV--cost about $1 million to build. The companies are still struggling to line up their first dozen lease customers, even at the giveaway fee of $500 a month that Honda is charging in the U.S. And neither manufacturer expects to see a mass market in this decade. Says Hiroyuki Yoshino, Honda's soft-spoken president and chief executive: "My goal is to build one a month over the next two or three years."

Tokyo's fuel-cell initiative may seem misguided. But in fact, it has all the hallmarks of a farsighted strategy and calls to mind Tokyo's blossoming success in hybrids. Americans are snapping up these fuel-efficient, environmentally friendly cars--in some cases just to say that the U.S. should wean itself from imported oil. Fuel cells could turn out to be a bigger, more important chapter in the same book.

Pricey and unproven as fuel-cell cars may be, the pioneers will earn bragging rights on one urgently important virtue: Instead of burning gas--with all the attendant environmental and geopolitical stigma--the engines in these cars convert hydrogen to electricity. All that leaves the tail pipe is a trickle of H2O. What's more, unlike U.S. rivals, Toyota and Honda are in splendid financial form. They can afford to gamble on futuristic technology to win the lead in the next generation of global automobiles.

Certainly there are hurdles, including the high cost of platinum, the catalyst that triggers the electricity-generating chemical reaction. But this isn't the first time the Japanese have faced such challenges. In the 1990s, Honda and Toyota produced the first commercial hybrid cars, with electric motors powering the vehicles at low speeds and a gasoline engine used at higher speeds for recharging the electric battery. In Detroit, hybrids were dismissed at first as an expensive publicity stunt. But since 1997, Toyota has sold about 120,000 of them, and analysts say the business will turn profitable next year. By 2005, Toyota expects to pump out 300,000 annually.

Commentary: Fuel Cells: Japan's Carmakers Are Flooring It

Ford Motor Co. (F ) is outsourcing its hybrid motor from a Toyota affiliate for a 2004 model SUV. Others may follow suit. And all of this could well be a harbinger. "Toyota is setting up a de facto global standard for hybrids, and the same thing can happen with fuel cells," says Koji Endo, an analyst at Credit Suisse First Boston in Tokyo. Indeed, Toyota is adopting the same basic hybrid architecture for its fuel-cell vehicles. "There's a lot of spin-off," says Kiyotaka Hamajima, chief technician for the FCHV.

By sprinting past competitors, Toyota and Honda are clinching deals with the few buyers willing to consider these cars. That could give them a leg up as they expand production and drive down costs. Already, they've upstaged DaimlerChrysler (DCX ), which hoped to be first to market with commercial fuel-cell cars next year.

Detroit, to its credit, is chasing the same technology, with backing from Washington. Ford expects to launch a fuel-cell compact in 2004. And General Motors Corp. (GM ) has three different fuel-cell prototypes on the road-show circuit. True, GM's first commercial models won't be ready until 2010--but that's a strategic decision, the company insists. "There's no way we could enter into a business proposition [now] because of the costs of the technology," says Larry Burns, GM's vice-president for research and development and its chief fuel-cell guru.

Honda's engineer in charge of fuel cells, Yozo Kami, admits it will take at least 10 years to bring sticker prices down to $100,000, the cost of today's most expensive gasoline cars. But both Honda and Toyota can afford the losses up front because they are flush with cash--the fruit of good, long-term bets leading to record sales.

Japan's early-bird strategy in fuel cells is its answer to a chicken-and-egg dilemma: People won't buy them until they're made for sale. Whether car buyers choose vehicles that run solely on hydrogen over comparably priced hybrids or gas engines won't be clear for a decade or more. But if they do, recent history suggests it is Honda or Toyota technology they will be driving home.

By Chester Dawson

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