Ballard Battling to Break Through With Daimler and Ford behind it,Vancouver firm sets fuel cell agenda

BURNABY, BC - Shortly after being hired to run Ballard Power Systems in 1989, white-haired Firoz Rasul delivered a harsh message to the company's small research staff. "If you guys are looking for a Nobel Prize," announced Mr. Rasul, "you are in the wrong place. If you are looking to make a lot of money, you are in the right place."

That statement heralded an important cultural shift at Ballard. No longer would the startup fuel-cell company be a laid-back research and development house subsisting solely on government contracts. Rather, it would evolve into a more entrepreneurial firm looking to bring cutting-edge products to market.

Today tiny Ballard, with 350 employees operating out of a modest suburban office park near Vancouver, is one of the world's hottest high-tech companies. The Canadian company is widely acknowledged as the world leader in automotive fuel-cell technology, considered the best long-term bet to supplant the internal combustion (IC) engine.

"Ballard is the clear leader in auto fuel-cells," says Sandy Thomas, research director for Directed Technologies, an Arlington, VA, consulting firm that has evaluated the technology for U.S. automakers.

The company was founded in 1979 by Geoffrey Ballard, a dual U.S.-Canadian citizen whose father had worked on the Manhattan Project that produced the atomic bomb during World War II. The Harvard-educated Ballard did military and energy research for the U.S. government for a decade, including a stint as research director of the Office of Energy Conservation.

The firm conducted research into rechargeable lithium-batteries. By the early 1980s, it began focusing on fuel cells - with funding from the Canadian government. By 1987, the founder and his team of 40 scientists, using new materials and techniques, recorded a dramatic four-fold increase in fuel cell power density. The firm has continued to make steady improvements since.

Its front-running position is underscored by stock market reaction, on-going road tests and strategic partnerships with both automakers and utility companies seeking opportunities for cleaner power generation.

Ballard, which went public in 1993 at about $6 a share, is a Wall Street high flier. It now trades on the NASDAQ at more than $70 a share, down slightly from its all-time high of $82 reached last year. Despite never reporting a profit and not expecting to do so for three more years, Ballard has a market capitalization of more than $1.7 billion, a measure of its investors' high expectations.

Ballard did report net income of $10.9 million for the third-quarter of 1997. But that largely reflected a one-time $19.4 million gain on its investment in DBB Fuel Cell Engines, a new company formed by Ballard and Daimler. Still, Ballard Power Systems' accumulated loss for the first nine months of last year was $27.9 million. Year-end results were not released before WAW's deadline.

The main reason investors aren't troubled by the lack of earnings is that Ballard is the only company that has put fuel-cell vehicles on public roads. Last fall Ballard delivered three fuel-cell buses to the Chicago Transit Authority. If the buses perform as hoped, CTA officials say the city eventually could convert its entire 2,000-bus fleet to fuel cells.

Most importantly, Ballard in 1997 attracted significant investments from auto giants Daimler-Benz AG, parent of Mercedes-Benz, and Ford Motor Co. The three partners together are investing nearly $1 billion in joint fuel-cell research that could lead to mass production of fuel-cell vehicles by 2004.

"Ballard has the best road map to solve technology, packaging and cost problems," says Gary Heffernan, Ford's corporate technology manager.

There are still skeptics who are quick to note that the automotive landscape is filled with promising technologies that stalled. They say fuel cells must overcome massive cost, infrastructure and technological hurdles, as well as continuing improvements in today's IC engines.

But as government regulation and worldwide pressure increases to reduce auto pollutants and greenhouse gas emissions, major automakers are gearing up research into fuel cells as never before.

Compared to IC engines, fuel cells are elegantly simple. They also are cleaner and more efficient. They use hydrogen and oxygen in the presence of a catalyst to create electricity. There is no combustion, and the only emission is water vapor.

The basic fuel cell was created nearly 160 years ago. They were used in the U.S. space program as early as the 1960s, but their cost and size made them impractical for wider use.

Ballard's aim is to become the automaking equivalent of Intel, the Silicon Valley company whose microprocessors power most personal computers. It doesn't aspire to replace today's automakers, but partner with them to get Ballard fuel cells under the hoods of as many cars and trucks as possible.

"For us to be successful, we have to be the standard," says Mr. Rasul.

What surprises some is that a company of Ballard's modest size could be on the verge of turning transportation technology on its head in the 21st century.

Ballard has dedicated the last 15 years and $200 million to perfecting fuel cells. Experts say it is Ballard's single-minded dedication to fuel cells that gives it an edge over others who have dispersed their resources and energies into a number of promising alternative-vehicle technologies.

Mr. Ballard, who recently retired as chairman for health reasons, decided the company needed an experienced management team to raise capital, attract key partners and commercialize the technology.

That led him to hire Mr. Rasul - Indian-born, raised in Uganda and educated in Europe and Canada - as president and chief executive officer. In 1993, the company went public and signed key contracts with Daimler and General Motors Corp. Today it is working with nine of the world's largest automakers.

Ballard faces formidable competition from a handful of rivals, including big names such as Toyota, Allied Signal, Siemens and United Technologies. Analysts, however, say Ballard has a three- to four-year lead on its competitors. The company already has obtained nearly 100 fuel-cell related patents and has nearly 100 more pending, thus raising the cost of entry for other battery developers.

Ballard specializes in proton-exchange membrane fuel cells, regarded as the best for autos. They also have potential applications for small stationary units, such as those providing power to hospitals. The units are compact, operate at low temperatures and use no toxic liquids like some other fuel cells.

Proponents argue that fuel cells combine the best attributes of advanced batteries and IC engines without the problems of either. A fuel cell vehicle using pure hydrogen is a true zero-emissions vehicle. It emits no hydrocarbons or carbon dioxide, the chief suspect as the cause of global warming.

Fuel cells are 2.5 to 3 times more efficient than today's automobile engines and have similar range to gasoline-powered vehicles. Like battery-powered electric vehicles, fuel-cell cars are quiet and utilize fewer moving parts, increasing reliability and durability. They can go from 0 to 60 mph (96 km/h) in 10 to 12 seconds, similar to average gasoline-powered vehicles.

Ballard's biggest challenge is lowering costs. Today a fuel-cell engine costs about $35,000, more than 15 times that of a conventional IC engine. Costs should fall with technological refinements and mass production, experts say.

"Fuel cell costs are coming down quickly," says Peter Rosenfeld, Chrysler Corp.'s director of advanced technical planning.

Ballard already has reduced fuel cell costs by about 80% since 1990. Most have come through new materials technology, such as figuring out how to reduce the use of high-cost platinum by 90%. Platinum is the catalytic material that coats the two electrodes found at the fuel cell's core.

Robert Chewning, an analyst for Morgan Stanley, estimates Ballard fuel-cell engines will cost $10,625 in 2000, $5,625 by 2005 and $3,375 by 2010. Current IC engines range in cost between $1,500 and $4,000.

Fuel cell development is being aided by their potential to propel or power locomotives, submarines and portable computers.

Most important, fuel cells are seen as viable stationary power sources that can create electricity for utility power plants or distributed power for homes, office and remote locations. Utility deregulation is spurring fuel-cell development by opening up competition from alternative energy providers.

Even as fuel cells advance, commercialization could hinge not on the technology, cost or regulation as much as infrastructure - the supply and distribution of the hydrogen or hydrogen-rich fuels. Some automakers are exploring development of fuel-cell engines that use an on-board reformer to process methanol or gasoline into hydrogen. Ballard says it is fuel-neutral and will build stacks for different engine systems.

Despite these issues, the world's automakers are pushing forward on fuel-cell development. Toyota, Chrysler and GM all are viewed as strong potential players.

But Ford and D-B have created the biggest stir by their global alliance with Ballard. Ford said in December that it would invest $420 million for a 15% interest in Ballard. D-B earlier put in $325 million, and holds 20%.

The partners say their alliance is one of technology-sharing and not a joint development venture. Ford and D-B will share their expertise but separately design and produce fuel-cell vehicles. Ultimately, the partners hope to sell complete fuel-cell engines to other automakers.

Ford is working on a fuel-cell version of its P2000 advanced technology vehicle.

D-B already has shown three generations of fuel-cell cars and a bus. In September it displayed a fuel-cell car based on the Mercedes-Benz A-Class subcompact sedan. The vehicle uses methanol to produce hydrogen.

Mr. Rasul admits there are risks if fuel cells are pushed to market too soon. But Ballard's partners have deep pockets and global manufacturing and marketing networks.

"The fuel-cell has the potential to have as big an impact as the microprocessor," says Mr. Rasul. "It could be ubiquitous in 20, 30, 40 or 50 years."

- Donald W. Nauss is Detroit bureau chief of The Los Angeles Times