green@work : Magazine : Back Issues : March/April 2006 : Driving Toward Green

DRIVING TOWARD GREEN

GM's Gamble on Hydrogen
The auto giant looks to fuel cell vehicles to reduce its environmental footprint - and increase its profits.

by Bruce Piasecki and Peter Asmus

Larry Burns is not your typical ecological warrior. After all, he works for one of the largest corporations in the world, in an industry whose products are often fingered by environmentalists as contributing to global climate change and urban smog.

Yet Burns, vice president of research and development for General Motors, is the visionary largely responsible for helping to transform a company that has been viewed as an environmental villain into a leading advocate for the “hydrogen economy”—the long-sought-after chimera of environmentalists that suddenly seems within our reach.

No doubt GM faces an uphill battle as its market share has declined from 33 percent in 1995 to 26 percent in 2005 (see accompanying chart). Furthermore, though still the global leader in sales, GM is in the midst of a major cost-cutting campaign. CEO Rick Wagoner has been focused on revenue growth and reinvigorating GM brands such as Chevrolet and Buick, but huge legacy costs associated with retirement commitments to employees no longer working for the company has limited his options. Proposed cuts in its workforce would drop GM’s worldwide employee totals below 300,000 for the first time since World War II.

Consider the following sobering statistics:

• 30,000 jobs are set to be cut by 2008

• 12 manufacturing facilities will be closed by the same date

• An accumulative 30 percent drop in production capacity between 2000 and 2008

Like Ford—the other Detroit-based U.S. automaker witnessing reduced sales of the SUVs that have provided much of the profit over the past few years—GM’s challenges today stem from their slow response to changing market conditions, according to experts in the auto and financial community. Author Gregg Easterbrook, for example, claims the shift from U.S. to Japanese car makers over the past decade is largely a result of the fact that we all live in a “smaller world” that now demands a greater emphasis on fuel and energy efficiency.

GM’s Hummer is perhaps the ultimate example of this over-reliance upon giantisms and a reluctance to shift gears and offer products that respond to today’s social needs. In response to these criticisms, GM is now working with German automakers DaimlerChrysler AG and BMW AG to develop a simpler hybrid system than Toyota’s. Relying upon this “sisters in innovation” approach, GM is hedging its bets. Though its hybrid system does not offer the same level of fuel savings as the Toyota design, it costs less and is more easily configured into the large SUVs and larger cars that form the bulk of GM brands. While GM is indeed moving into that trendy segment of the auto market, its long-term bet still lies with hydrogen. High gasoline prices have fueled the current hybrid craze, but these same high fuel prices also make hydrogen attractive.

GM actually developed a fuel cell vehicle back in 1966, long before the other major car companies began to look beyond petroleum. Fuel cells operate more or less like a battery and run on hydrogen to create electrical—rather than mechanical—energy. Unlike a battery, fuel cells do not need to be recharged. They will produce electric power as long as there is hydrogen fuel and oxygen (from the air) available. “We discontinued fuel cell research in the seventies and eighties because the technology was not ready for automotive application, and we needed to focus our resources on advancing more conventional automotive technology,” Burns said. He added that when manufacturing pioneer Geoffrey Ballard achieved a breakthrough in fuel cell power density and endurance in the nineties, thereby making fuel cells more practical for automobiles, “we ramped up our fuel cell program again and began to develop our own intellectual property.”

In 2004, GM announced the largest single fuel cell transaction with the Dow Chemical Company, the world’s largest chemical manufacturer and one of the largest producers of hydrogen in the world. Dow was looking for a way to make the best use of an industrial byproduct. Under the terms of the agreement, Dow could eventually use up to 35 megawatts of power generated by 500 GM fuel cells—each capable of generating 80 to 100 kilowatts of electricity—during the commercialization phase of the agreement beginning this year. This agreement allows GM to test its fuel cell prototypes and speed up the commercialization process.

According to Burns, GM is the first major auto company to truly come to grips with the fact that hydrogen and fuel cells are the right combination to not only solve vexing problems with our status quo transportation systems, but also provide a unique opportunity to expand the market for automobiles in the developing world. “Only 12 percent of the people in the world own vehicles,” pointed out Burns. “An attractive way to accelerate growth in the developing countries is to build cars that are affordable, safe, compelling and sustainable from an energy and environmental standpoint. GM believes that fuel cell vehicles are key to revitalizing the auto industry while delivering higher value to our customers—and higher margins to GM.”

Burns summed it up this way: “We want to completely reinvent automobiles, and in doing so reinvent the industry. The only way fuel cell vehicles matter is if they sell in high volumes. The industry sells about 60 million vehicles annually, and there are about 700 million vehicles in the world today. So we need to reach very high levels of sales to make a real difference in reducing petroleum consumption and addressing environmental challenges.”

Another significant advantage is that fuel cells enable revolutionary designs like GM’s Hy-wire concept. Hy-wire contains the fuel cell and other vehicle systems within a “skateboard” chassis that is topped by a body that can be easily interchanged. Thus, the skateboard could provide the same basic architecture for many types of vehicles—sedans, trucks and SUVs—keeping development and manufacturing costs down, Burns said. He added that a vehicle like Hy-wire could also be upgraded through software rather than by hardware changes, boosting its appeal among those cognizant of the importance of durability to their pocketbooks as well as the environment. In GM’s view, the car of the future becomes a platform that can easily incorporate new innovations into its functionality over time.

GM today is devoting the single biggest portion of its research and development budget to fuel cell technology. It has set goals of making fuel cell vehicles commercially viable by 2010 and being the first car company to have a million fuel cell vehicles on the road. Despite critics who contend that the hydrogen economy is fraught with problems—a huge price tag, energy losses in converting electricity to liquid hydrogen fuel, and even some fears of increasing the size of the ozone hole—Burns is unfazed. “I haven’t seen a show-stopper yet,” he declared. “Even developing a hydrogen infrastructure may not be as big of a challenge as we originally believed. Our most recent analyses suggest that an initial infrastructure to fuel hydrogen vehicles across the U.S. could be developed for $10-15 billion.”

Yet challenges remain. GM’s marketing chief Mark LaNeve has wanted to shift the company away from major discounting of its cars, but that practice continues in 2006. The wave of the future, nevertheless, remains with new kinds of innovative cars, including those fueled by hydrogen. Merrill Lynch estimates that the average number of new vehicle launches will rise from the historical average of 35 to 54 annually during the next three years.

If GM can shift the public’s fascination with hybrids to the even more revolutionary step forward epitomized by hydrogen, the company may be able to hold on to its global lead in sales figures. However, GM needs to make more money on the vehicles it sells. In 2004, for example, GM sold its cars for $1 less than the average price tags in 2003. That is not sustainable. Of course, sustainability comes in many forms. By gambling on hydrogen in such a big way, GM is trying to prove that large multi-national corporations are offering better products to address pressing social concerns. But that embracing of environmental and social values in the development of their new products does not guarantee success in today’s increasingly unforgiving global marketplace.