Evaluating Toyota's Hydrogen Fuel Cell Car Gamble

NEW YORK (TheStreet) -- There are few subjects as multi-dimensional and complex to analyze as is the prospects for hydrogen fuel cell cars obtaining a meaningful market share of new car sales 10-20 years from now. This article is the second in a series, with other articles to come.

I recently had the opportunity to become one of the first people outside of Toyota (TM) to spend time with the final production version of its hydrogen fuel cell car (look, not drive). It goes on sale in Japan next April, and in California a couple of months thereafter. The price in U.S. has yet to be announced, but in Japan it will be just under $70,000.

Before we get into the broader issues with hydrogen as a fuel, how it compares with gasoline, diesel and battery-electric cars and infrastructure build-out, I need to point out one thing which was not previously well-known: The back seat of this Toyota hydrogen fuel cell car will fit only two people.

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The fact that you can fit only a total of four people in the car will alone prove to be a limiting factor in terms of selling it in California. General Motors (GM) made a similar mistake with the Chevrolet Volt. Many people who considered the Volt rejected it because they want the option, however infrequently used, to fit a fifth person in the car.

The reason Toyota won't fit a fifth person in this new car has only indirectly to do with packaging. Unlike the Volt, there is no overly intrusive "tunnel" making a third back seat passenger difficult. Rather, it has to do with weight concerns: If you engineer a car to hold five people instead of four, you need beefier suspension and more weight in the construction all around. That, in turn, reduces fuel efficiency, and Toyota could not afford that extra weight on the first version of this new type of car. Surely this will change around year 2020 with a new design.

Not that Toyota has any near-term plans for large sales of this first commercially available hydrogen fuel cell car. Production could be as low as 2,500 cars per year. It is a way to test out the broader scaling of the system, learning about real consumer issues. Toyota will then scale the production with an improved car 2020-2024 and then be producing large volumes of a third-generation car starting in 2025.

Basically, the ramp would be something like this: 2,500 cars per year 2015-2019, 10,000 to  100,000 cars per year 2020-2024 and then over one million cars per year 2025 and onwards.

In terms of styling, the Toyota fuel cell hydrogen car looks like a futuristic version of a Camry, or perhaps a longer Prius. It is taller, reflecting the fact that many of the driveline components are fitted in the floor. It is not a "classically beautiful" car, but rather a "Jetsons here we come" car design. Some people will hate it; others will want to been seen in it in order to make a statement.

California fueling stations are now in nine locations, with another similar number being built later in 2014. By the end of 2015, there should be 46 hydrogen stations in California, although some delays are always possible. By 2018 at the latest, there should be 68 and by 2020 at the latest there should be 100.

In contrast to electric cars, hydrogen fuel cell cars can be fueled very quickly. It should be possible to fuel at least 350 miles of range in less than 9 minutes. This comes handy in at least two situations:

1. When you are traveling a long distance, such as between San Francisco and San Diego, you don't have to stop multiple times for perhaps an hour in order to charge a battery. You can fuel just about as fast as gasoline/diesel.

2. If you don't have a garage space with an electric outlet, such as if you live in an apartment building and park on the street, you can fuel your car with ease perhaps once a week, and it will take less than nine minutes.

I am not taking any sides in the religious wars between battery-electric car technology and hydrogen fuel cells. They have complementary characteristics. In an ideal world, they would duke it out in the marketplace without any government subsidies or other skewing of incentives.

One argument we often hear from battery-electric advocates is that hydrogen fuel-cell cars are somehow not as environmentally friendly. They point to hydrogen coming from natural gas, at least in the near term, (It can be made from all sorts of things.)

The average consumer doesn't know or care what hydrogen is or how it is made. The average consumer barely knows what gasoline is or how it is made. How hydrogen is made is completely irrelevant to the issue of whether it will succeed in the marketplace or not.

The consumer cares only about four things:

1. How much does the car cost?

2. How much does the fuel cost?

3. How convenient is it to fuel?

4. What are the reliability issues?

Here are the answers to the four questions:

1. How much does the car cost?

The only thing we know in the U.S. market is what Hyundai charges for its hydrogen fuel cell car. You can only lease it. It is $3,000 up front, and then $500 per month. This includes unlimited fuel. Excluding the unlimited fuel part, the price suggests the equivalent of a $40,000 car. In other words, perhaps too expensive. We will know more as new models are introduced over the next 10 years.

2. How much does the fuel cost?

I have been trying to get this information from all conceivable sources. Nobody can give a straight answer to this other than asserting that it will be equivalent to gasoline, or less. I guess we just have to wait another few months to find out.

3. How convenient is it to fuel?

The "hose" to fuel is a bit more complicated than gasoline/diesel, but apparently it's something you get used to very quickly. The issue is more one of the sheer number and geographic spacing of fueling stations.

Los Angeles is ready to handle a few hundred cars today. By the end of 2015 it should be possible to start selling cars in San Francisco and perhaps San Diego. The major freeway (I-5) will also be connected with three fueling stations around that time.

The bigger fueling issues are:

A) Will 100 stations be enough, even in California? I am not convinced. I think at least 200-300 are needed for mass market acceptance. I imagine that goal will have been reached by 2024.

B) What about outside California? Why would someone in California buy a car that can't be driven outside the state? And I don't mean placing a token station in Las Vegas. I mean covering at least 49 states, perhaps Canada, too. Otherwise, why would I pay more than $15,000 for a car that I can't drive outside California? This is a huge issue with no solution in sight.

4. What are the reliability issues?

I mean this in the broadest sense. It includes cold weather performance, hot weather performance and what happens to the car after 200,000 miles, one million miles. People need to know what to expect in terms long-term costs and other limitations of owning this technology.

Toyota and the other automakers assure us their cars perform flawlessly in extreme climates. However, we don't know much beyond that. Someone needs to provide a realistic long-term assessment here, and compare it to battery-electric cars as well as gasoline/diesel.

When it comes to hydrogen fuel cell cars, I would advise against being too optimistic or too pessimistic. There are so many things we don't know, and so many things that could go wrong and right alike.

The major automakers have been working on a "10-year plan" for alternative fuel vehicles that would end with the 2025 model that will be introduced in 2024. In some cases that "10-year plan" has taken as long as 32 years, if you add about 22 years of development to date. So far, with electric car adoption below 1% despite massive subsidies and incentives, it doesn't look like an impossibility.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates TOYOTA MOTOR CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate TOYOTA MOTOR CORP (TM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, good cash flow from operations, notable return on equity and compelling growth in net income. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 21.8%. Since the same quarter one year prior, revenues rose by 44.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • TOYOTA MOTOR CORP has improved earnings per share by 16.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, TOYOTA MOTOR CORP increased its bottom line by earning $11.17 versus $6.46 in the prior year. This year, the market expects an improvement in earnings ($12.59 versus $11.17).
  • Net operating cash flow has significantly increased by 61.50% to $9,495.00 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 41.62%.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Automobiles industry and the overall market on the basis of return on equity, TOYOTA MOTOR CORP has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • The net income growth from the same quarter one year ago has exceeded that of the Automobiles industry average, but is less than that of the S&P 500. The net income increased by 17.1% when compared to the same quarter one year prior, going from $2,737.00 million to $3,204.00 million.

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