Fuel cell

Why it makes sense for auto foes to join forces

February 4, 2013: 5:00 AM ET

Fierce competitors like BMW, Toyota, Ford, and Daimler are teaming up to tackle hydrogen fuel-celled cars. It's probably the best choice they could make. Here's why.Yasumori Ihara, director and senior managing officer of Toyota Motor Corp., from left, Takeshi Uchiyamada, vice chairman of Toyota Motor Corp., Herbert Diess, development chief of Bayerische Motoren Werke AG (BMW), and Klaus Froehlich, senior vice president of BMW Group, shake hands as they pose for a photograph during a joint news conference in Nagoya City, Aichi Prefecture, Japan, on Thursday, Jan. 24, 2013.  Toyota Motor Corp., the world's biggest maker of gasoline-electric hybrid vehicles, signed a binding agreement with Bayerische Motoren Werke AG to jointly develop fuel-cell systems for cars. Photographer: Kiyoshi Ota/Bloomberg *** Local Caption *** Yasumori Ihara; Takeshi Uchiyamada; Herbert Diess; Klaus Froehlich

FORTUNE -- It's lovely how a single element can bring several car companies together. Automakers are bonding to make cost-competitive vehicles that run on hydrogen, the upper-leftmost element on the periodic table.

On January 24, BMW and Toyota (TM) announced that they would collaborate to release a hydrogen fuel cell-powered car by 2020. More recently, Daimler, Ford (F), and Nissan one-upped the pair, announcing on January 28 that, together, they would bring a hydrogen fuel cell-powered vehicle to market by 2017.

These companies are fierce competitors, and yet, they are joining forces. It's probably the best choice they could make.

This isn't the first time this has happened in the auto industry. In 2010, Toyota licensed the drivetrain used in its Prius to Mazda, which wanted to incorporate the technology in its own hybrid model.

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Nor will the vehicles that come out of this cooperation be the first ones to run on fuel cells. The fuel cell was developed before the turn of the last century, in 1839 by Sir William Grove. Around that time, a host of cars ran on what we would now consider alternative fuels: electricity, peanut oil, and even steam. The internal combustion engine won out.

Nevertheless, this is the first time that big auto companies are teaming up to bring affordable, fuel cell-powered cars to a mass market that's ready for such products, and it doesn't make much sense to do it alone.

For one, selling cars that run off of hydrogen will take much more than just making them. The entire fuel infrastructure (how gas gets to consumers) will have to change, which is no simple task, given the fact that the entire car fuel delivery system is built around gasoline. When rocking the market this way, "It turns out the technology is often not the biggest challenge," says Eric Olson, senior vice president of advisory services at BSR. "Closely intertwined with the technology is having the conditions, the infrastructure, the policy, and the market preparedness."

Companies can bring a new generation of cars to market more quickly if they collaborate on priming the infrastructure. They can also stay ahead of regulation by teaming up and agreeing on standards themselves. In this case, multiple heads are probably better than one to figure out how exactly the hydrogen fuel cell will interact with the rest of the car, says Peter Adriaens, a civil and environmental engineering professor at the University of Michigan's Ross School of business.

"That's one of the lessons learned from electric vehicle development," Adriaens says. Toyota may have licensed the guts of the hybrid Prius out to other companies, but other car companies have clashed as they tried to use proprietary EV technology to gain a competitive edge.

A competitive tech race is good business in theory, but the market suffers when companies get bogged down when they sue each other for intellectual property violations. For example, electric carmaker Tesla accused collaborator-competitor Fisker of patent infringement back in 2008. A company called Paice won a lawsuit against Totyota in 2010, after having accusing the giant carmaker of stealing a piece of its proprietary hybrid drive system technology. Lawsuits may stifle the competition, but they hinder the rollout of exciting technologies.

Cooperation is hardly easy among fierce auto competitors, especially because these companies will ultimately have to switch tactics again and compete with each other for market share. For it to work, there must be clear parameters on what information they share, Olson says, and participants have to go in with the mindset that they will contribute, not catch a free ride. Also, all parties have to resolve tough intellectual property issues especially when, for instance, the technology creeps into design, as design is a big part of how the companies will ultimately differentiate themselves from their competitors.

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Other industries have done this. "Think of the iPod," says Michael Lenox, a business professor at the University of Virginia's Darden School, "or pick almost any consumer electronic device. It's imbedded with technology that has a variety of intellectual property. Tech companies are all cross-licensing." Conflicts do arise: look at the soured partnership between Apple and Samsung.

But there's evidence that the time is right for car companies to introduce fuel cells. We've seen that some people will pay a premium for green cars, Lenox says. The industry also has much to gain by building vehicles whose only emission is water, he adds. These companies have strong incentives to remove themselves from the regulatory hurdles and consumer ire that have come from strictly producing cars that consume fossil fuels.

These auto makers face big challenges, though. The technology needs perfecting, and they'll need to build an entirely new fuel infrastructure. These are difficult problems and, for now, it's better to make nice and take them on together.

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