NEW YORK (TheStreet) -- In a presentation to the JPMorgan conference in New York Tuesday, Toyota's (TM) U.S. boss, Bob Carter, made an important disclosure regarding the price of fuel for its upcoming hydrogen fuel cell car.
The purpose of this article is to compare this cost to a gasoline car today.
The range of Toyota’s first hydrogen fuel cell car, to be made available in Southern California starting in the middle of 2015, is 300 miles. Toyota says that it will initially cost $50 to fully fuel the car for its 300 mile capacity. Then, longer-term, it would cost $30.
By "longer-term" I understand from Toyota that it means at least five to 10 years into the future, perhaps longer. How does this compare to Toyota’s own gasoline cars today?
In my view, the most relevant comparable gasoline car is the Prius. Why? First of all, it fits five people instead of the four that Toyota’s initial hydrogen fuel cell car will fit. Secondly, it has a large and very flexible luggage space, where the rear seat can be folded for superb usability. At this point we do not know if the hydrogen car’s back seat can be folded.
Some have argued that the more relevant object of comparison is the Camry hybrid. I disagree. The Camry is not really any bigger on the inside, and besides we are comparing it with a car that fits only four people -- not five. In terms of luggage space, the Camry hybrid is also compromised by the battery placement and is in any case not as well-shaped as the Prius, which is a practical hatchback.
The Prius yields approximately 50 miles per gallon, which millions of Prius drivers have confirmed in real-world driving. Older versions of the Prius yielded more like 45 mpg.
To travel 300 miles, it therefore takes six gallons in the Prius. The gasoline price today is approximately $4 per gallon. This means $24 in total.
In other words, Toyota’s hydrogen car is approximately half as cost-efficient as today’s Prius today -- $50 for 300 miles, vs. $24. A decade or so into the future, it would be only 20% less cost-efficient, costing "only" $30.
Phrased differently, Toyota’s hydrogen car has the cost efficiency of a 25-mpg car today, but with a falling hydrogen fuel price will be the equivalent of a 42-mpg car at some point in the distant future.
If the fuel isn’t any cheaper -- indeed twice as expensive today -- will the car be any cheaper? We don’t know because Toyota has not announced prices yet.
A Prius costs the average American $960 per year to run in terms of fuel -- 12,000 miles at 50 mpg and $4 per gallon. Toyota’s hydrogen car would cost just over twice that amount -- $2,000. How much less would you need to pay for the privilege of paying twice as much for fuel, or approximately $1,000 extra per year?
There is no exact answer to this, but Toyota could probably get away by charging as much as $15,000 for the hydrogen car, in terms of the point where a consumer might be interested given the rationale of the economics. Somehow I don’t think Toyota’s hydrogen car will be anywhere near $15,000. It might be $30,000 or $50,000 or somewhere in-between. The price in Japan, with their taxes included and more expensive market in general, is closer to $69,000.
I have no idea who would want to buy a car with fuel costs twice as high as the Prius, while paying an up-front premium to the Prius. It would have to be at least $10,000 less, not tens of thousands more.
Obviously there is a way to make up for this fuel cost disadvantage. Theoretically, the car could be nicer to drive than other cars. It’s pretty clear that it will drive better than a regular gasoline car because the hydrogen car is basically an electric car -- except with a very small battery and two hydrogen tanks instead.
However, it would not have any drive quality advantage over an electric car. The first iteration will not even accelerate as quickly as the more popular electric cars today.
In principle, a hydrogen car combines the smooth operation of an electric car, with the refueling convenience of a regular gasoline car -- 300 miles in less than four minutes. Given that the fuel will be twice as expensive as it would be driving a Toyota Prius, people had better appreciate this electric car-like smoothness!
In addition, as was already well-known, hydrogen faces a massive infrastructure build-out hurdle. Tens of thousands of stations are necessary, possibile hundreds of thousands world-wide. The point of this article is simply this: To what end? If the fuel, even at the end of the rainbow -- a decade or two from now -- will only be at par with gasoline, why bother?
Seeing as this doesn’t make any sense from the consumer’s standpoint, you know what this means: If people don’t want to pay the full freight of this new product, we are going to end up with massive taxpayer subsidies for a long time, or other drivers will be de-facto taxed as the automakers cross-subsidize the hydrogen products.
Perhaps hydrogen is the solution for more than a decade into the future. Between now and then, however, I don’t see any rational automaker voluntarily wasting billions on rolling out a product that will be twice as expensive in terms of fuel alone, as its current very popular and proven product -- in this case the Prius.
If there were ever a case that clearly shows that the government needs to stop telling companies what products to make, this is it. Automakers should be allowed to build and sell whatever products they want, people should be allowed to buy whatever they want, and there should be no subsidies or taxes in any direction.
Now, if you, my fellow taxpayers, are willing to subsidize me to the tune of a few tens of thousands of dollars and hydrogen fueling stations become as convenient as gasoline, I will happily buy one. I have no doubt the hydrogen cars will be very nice to drive. I might even send you a thank-you letter, assuming you will be the one paying for all of it.
Hold onto your wallets -- and your purses -- Mr. and Mrs. America. The people driving these cars won’t be paying their full cost.
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, compelling growth in net income, attractive valuation levels and good cash flow from operations. 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 23.5%. 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 ($12.61 versus $11.17).
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Automobiles industry average. 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.
- 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 31.26%.
- You can view the full analysis from the report here: TM Ratings Report
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.