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China Fuel Cells Market Report

China's Fuel Cells Market is a Long Way Off

Despite funding and support, high costs and the exclusion of adequate distribution channels in China’s newly built energy infrastructure weigh heavily against the emergence of fuel cells. Pity, latent demand would make this the world’s biggest hydrogen market. 

Economic renaissance may flower on technological advance, but it stems from the slow-growing seed of technological discovery. Ancient China’s so-called Four Great Inventions bear testament to this. The science behind the compass, printing press, paper and gunpowder was known for centuries before Song Dynasty engineers put them to use; the vigor of the Middle Kingdom’s first renaissance creating a need for navigation, mass communication, banknotes and defense. As with the rest of the world, the market in China hasn’t found a profitable use for fuel cells yet. Current costs are too high, efficiencies too low, and the infrastructure needed to support its commercialization isn’t in place. But within the scale and diversity of the demand for carbon energy there is an immense, latent need for alternatives. Should the price of hydrogen and fuel cell components approach parity, China’s fuel cells market will become the world’s largest.

A fuel cell is a generator of electrochemical energy. It consists of two reactant gasses (hydrogen and oxygen), conductors (anode, cathode and electrolyte), and a catalyst. Energy conversion starts when a hydrogen molecule at the anode comes into contact with the catalyst, splitting it into two hydrogen atoms which exothermically release their electrons into a DC circuit. The now positively charged hydrogen is attracted to negatively charged oxygen molecules at the cathode. The electrons, having completed their journey are reunited with the reactant molecules at the cathode where a byproduct, water, is formed. The process is free of combustion and is several times more efficient than deriving energy from gasoline.

Workings of PEM Fuel Cell
Workings of PEM Fuel Cell
Source: Department of Energy

The Market-at-a-Glance
Chinese interest in fuel cells can be traced back to programs by the Dalian Institute of Chemical Physics and the Chinese Academy of Sciences (CAS) in the 1960s. Research efforts at the time focused on alkaline fuel cells (AFC), which uses purified hydrogen and an electrolyte made of a potassium hydroxide solution (still used in alkaline batteries). It is unclear how productive this initiative was, but given the country’s academic hiatus in the 1960s and 70s and the lag behind Western fuel cell technology, it is reasonable to assume that progress was halting and reverse engineering high on the agenda.

China’s industrialization in 1980s was fueled by, and created for, the wider availability of technology. In March 1986, Deng Xiaopeng instigated the 863 program (named after its inception date), an initiative to stimulate high-tech industries. Money was later made available from the program to fund fuel cell research and development in universities in Dalian, Wuhan, Shanghai and Beijing. Development continued incrementally through the 1990s when the spate of fuel cell IPOs in North America and Europe raised the prospect that a fuel cells company could profit. Around that time, fuel cell companies were created by the CAS, universities, the Ministry of Science and Technology and other state entities. Private funding followed soon after and the twelve or so Chinese fuel cell suppliers today range from a professor’s part-time project to a foreign-invested concern, focused on competing with the likes of Ballard and Toshiba.

Currently, the only commercially available fuel cell in China is the proton exchange membrane fuel cell (PEMFC). This uses pre-isolated hydrogen and is most suited to portable applications such as road transport. Other types of fuel cells see little light outside of the laboratories of academia and government. These include solid oxide fuel cells (SOFC), suited to stationary applications, and AFC, which is used in China’s nascent space program. Other types of fuel cells such as direct methanol, regenerative, and molten carbonate exist as showpieces only.

There are no major foreign suppliers selling into the China market. Companies like Ballard have worked on local fuel cells projects and others such as Hydrogenics supply hydrogen production equipment. But the selling of fuel cells to the Chinese market is the domain of domestic suppliers. Intellectual property protection is a likely reason for this, so too is the size of the domestic market, valued at only USD 3.2 million. Of those that sell to the domestic market, Dalian Xinyuan Dongli reported the highest revenues. Jiangsu Huayuan, Shanghai Shenli and Shanghai Boneng also report revenues in excess of USD 150,000 (RMB 1m).

Estimated Domestic Market Share – China Fuel Cells
China Fuel Cells Market Share - GCiS
Source: GCiS

PEMFC sales last year generated an estimated USD 16 million for Chinese fuel cell suppliers, of which 80% came from exports to the U.S. and Japan. Educators are the market’s biggest customers; buying upwards of two thirds of all China’s fuel cells for classroom demonstrations and science projects. The auto industry, tipped as the brightest hope for fuel cells in years to come, is a smaller customer in the China market. Despite a conceptual interest from most major car manufacturers and a race by Chinese manufacturers to get an electric car on the market, fuel cells are either being developed in-house or abroad.

Another seemingly promising industry is electric bikes. Around 15 million battery powered bikes were sold in China last year, creating a total market size of 75 million; the world’s largest by a long stretch. Forklift trucks also present an opportunity. Like electric bikes, they require a long steady discharge form their batteries (as opposed to the short burst of energy from a car’s starter battery), which makes them naturally suitable for fuel cells. Other markets for fuel cells in China include back-up power (which has a wide range of applications from ATMs to hospitals, mines, and communications) and consumer products. Although these are small markets at present, suppliers think that in the future, opportunities may equal or exceed those of education.

Perceived Opportunities and Revenue Breakdown – China Fuel Cells
China Fuel Cells Opportunities and Revenue Breakdown - GCiS
Source: GCiS

Adam Smith’s Objections
As with most places, the cost of fuel cells in China is too high to be considered a serious substitute for conventional power sources. The issue is all the more acute in a country where fuel is subsidized by the government and sufficient deposits of lead, lithium and coal exist. Consider the difference in price between a conventional lead-acid bike battery and its fuel cell equivalent. The 240 watt lead-acid cell costs around USD 300 or around USD 1.25 per watt. A 25-stack PEMFC that produces 220 watts costs ten times this amount. The price difference for other applications is similarly high, ranging from six to ten times more for customers wanting hydrogen power.

Fuel cell costs are not just a reflection of the tiny scale on which they are produced but of inherently high raw material costs, namely the platinum catalyst and carbon electrodes. Platinum is considerably more expensive than gold and rarer still in China. Only a handful of companies can refine this precious metal and build a catalyst. Carbon electrodes also require a high degree of precision engineering and must be imported. And Hydrogen, being the least dense substance in the known universe, is expensive both in monetary and carbon terms to isolate and store.

But the biggest impediment to the fuel cell industry is the sunken costs that are in the current energy industry, particularly at the consumer level. The majority of China’s gas stations were built less than a decade ago. The investment that has gone into them has yet to be recouped. Hydrogen, which is more susceptible to ignition than gasoline, would need a specialized storage facility at each station. Each station would also require specialized pumps and dispensing equipment, costing up to USD 5 million each. Add to that the delivery vehicles, storage silos and all the equipment related to them needed to keep hydrogen pure and safe right up to the production plant and it becomes clear that a completely different distribution system is needed.

(Really, Really) Long Term Opportunities
Despite the high cost hurdles the industry must overcome, there are long term opportunities in the market. Firstly, China is committed out of necessity to finding and using alternative energy sources. Electric vehicles, once banned for encroaching on the turf of the automobile, are now encouraged in cities.

There are plans to roll out charging stations in 15 major Chinese cities, where drivers could swap old cells for new in the time it takes to fill a car today. BYD Auto, noted for its investment by Berkshire Hathaway, is commercializing an affordable electric car. If this catches on in China, there will certainly be enough demand for the electron to warrant an automotive power grid. Could fuel cells be placed upstream and power the charging stations?

Like its Song forbears, modern China is enjoying the fruits of mature technology while exploring creative solutions to environmental problems. The 10th Century renaissance produced history’s first green initiative: a reforestation program on the state’s northern boarders. But it didn’t last, because despite its appealing aesthetics and tactical advantage, it didn’t make sense economically. True, the modern day cost per mile driven, hour online, and kilowatt generated is rising while that of the fuel cell is falling. But the gap between the two is so wide that the time taken to reach parity could be measured by the coming and going of dynasties.

 

About GCiS China Strategic Research

GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.

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