Site Selection for the Fuel Cell Industry: An Outlook for 2008

April 2008

by Justin Sabrsula, AngelouEconomics Project Associate

In our 2008 Outlook series, AE's Justin Sabrsula describes the decisions facing communities and site selectors in this innovative and growing industry.

Fuel cell technologies have finally begun to show commerical promise.

Fuel cell technologies, once the hottest and most-hyped sector of the renewable energy technology market, have finally begun to show promise as commercialized products. Fuel cell technologies are benefiting from years of continued commercialization research, as well as several emerging trends affecting the power, consumer electronics, and transportation markets. As fuel cells and associated technologies move from the lab bench to the production line, fuel cell manufacturers will increasingly focus on how to cheaply produce fuel cells while continue to innovate in their product lines. To best understand how to site fuel cell manufacturing plants and R&D facilities, industry executives should think strategically about expansions as an opportunity to strengthen their core business through attracting and retaining talent and locating close to end-users in the electric utility, consumer electronics, and transportation markets. Industry executives must take care to not be awed by large incentives packages for short-term gains, and understand that in an emerging industry like fuel cells, companies with the best talent and ideas will win long-term while those with cheaper-cost facilities located in areas where employees do not want to live will fall short of success.

What are the origins of the fuel cell industry?

The modern origins of the fuel cell industry date to the space race of the 1950s and 1960s. As part of the Gemini and Apollo programs, NASA and its contractors revised fuel cell technologies to create electricity and water from two readily available rocket fuels, hydrogen and oxygen. Over time, NASA and its contractors expanded their interests in fuel cells in the 1970s and 1980s to other applications, especially in the automotive and stationary power sectors. From this early beginning, a variety of technologies were developed that could run not just on hydrogen and oxygen, but also on hydrogen derived from reformulated fossil fuels such as gasoline or natural gas as well as from biofuels like ethanol and methanol.

According to industry analyst PricewaterhouseCoopers, today there are six primary types of fuel cells that are being developed to meet the needs of various end users. Each technology differs significantly from others, both in size, scope, and power delivery as well as in materials and manufacturing techniques required for production. The generally recognized types of fuel cells include:

• Alkaline Fuel Cells: NASA has used this original type of fuel cell since the 1960s. Current production of alkaline fuel cells focuses on meeting needs across electric utility, power backup, and transportation sectors.

• Direct Liquid Fuel Cells: These fuel cells are primarily being developed as battery replacements for portable consumer electronics, and rely on alcohol-based biofuels as an energy source.

• Direct Methanol Fuel Cells: Similar to Direct Liquid Fuel Cells, Direct Methanol Fuel Cells are also being developed for portable consumer electronics, with a focus on laptop computers and cell phones.

• Molten Carbonate Fuel Cells: These fuel cells operate at extremely high temperatures (600 degrees Celsius and higher) and are being developed for primary electric generation duties as part of combined cycle power plants.

• Proton Exchange Membrane (PEM) Fuel Cells: These fuel cell systems are the primary focus of many companies development efforts, with notable players such as Ballard Power Systems developing PEM systems for Ford. These fuel cells have entered limited production and are primarily in use for transportation, such as in demonstration projects powering buses.

• Solid Oxide Fuel Cells: These fuel cells are designed for small backup power systems or larger primary power systems.

Importantly, manufacturing (and thus site selection) requirements for the six fuel cell types vary greatly. The types of fuel cells that will ultimately be commercialized most quickly, however, depend on the market trends shaping the fuel cell industry.

What trends are shaping the fuel cell industry?

Fuel cells are the least commercialized technology of the major categories of renewable energy production (biofuels, wind power, solar, and fuel cells). However, fuel cell commercialization is proceeding across different markets, each with defining trends that separate companies into several niches. From 2006 to 2007, publicly-traded fuel cell companies, which represent approximately one-third of the total investment in the fuel cells market, increased their revenues by 59% to $416 million, invested $213 million in research and development, increased employment 10% to approximately 3,400 employees industry-wide, while market-capitalization increased 20% to $3.8 billion according to PricewaterhouseCoopers. While the fuel cell industry as a whole has yet to turn a profit, fuel cells are expected to grow from a $1.5 billion per year industry in 2007 to a $15 billion industry in 2017.

This growth is led by a rising recognition of several problems that fuel cells are uniquely designed to fix. With the emergence of global warming as a widely accepted problem in search of solutions, as well as the continued search for a reliable and affordable replacement for the internal combustion engine, fuel cell technologies promise to fill the gap between polluting internal combustion engines and pure electric cars. In addition, fuel cells are finding niche applications in consumer electronics as mobile device makers seek out better ways of powering hungry mobile devices without sacrificing weight or bulk. However, most fuel cell companies remain in research and development and pre-production mode. As companies begin to transition to commercial products in bulk over the next several years, industry executives should be aware of the site selection opportunities for their businesses as they expand out of business incubators and small-scale lab space into more expansive manufacturing and office space. With this transition in mind, the most important site selection factors for the fuel cell industry are presented below.

Site Selection Factors

Fuel cell companies seeking locations for expansion into commercial production are likely to face several obstacles to finding appropriate facilities, including the need to define manufacturing processes and the lack of industry-standard manufacturing space requirements. Site selection for fuel cell companies will continue to vary on a company-by-company basis, but executives should carefully consider several primary categories impacting production cost and talent retention that will be most important to gain strategic advantage in the marketplace, including:

• Financing Structures & Incentive Packages: With the recent uncertainty in the corporate credit markets, the access of available capital has taken on a new importance. States with excellent fuel cell-targeted grant programs and other incentives include the State of Ohio. Ohio has invested more than $60 million in fuel cell companies since 2002, which provides companies with a stable source of financing not subject to the wild swings in the capital markets. On the other end of this spectrum are states that provide tax incentives for fuel cell installation and use by commercial and residential customers. While of no importance to fuel cell companies developing mobile technologies, states like New York that provide rebates for stationary fuel cell installation of up to $1 million for large (greater than 25 kW) systems can help to establish a market for your company’s products.
  

• Quality of Life: As the most important assets of fuel cell companies are intellectual property and their human capital, any site selection process would be remiss if it didn’t consider the retention of key employees and the ability to attract new talent as the company expands.  Engineers and specialized electronics designers whose work enables a company to commercialize their products are particularly in demand. With this in mind, locating in a region with excellent quality of life is perhaps the most important location criterion for fuel cell companies. In particular, certain quality of life characteristics are important to emphasize to attract and retain the best and brightest employees. Paying attention to these characteristics will ensure the successful expansion of your business without leaving behind the employees who make success possible:

• Affordability: Employees make mixed statements about the importance of affordability in choosing their location, but their actions show that affordability of a region, in combination with job opportunities, are increasingly driving employees' location decisions.

 

• Housing: In addition to overall affordability, employees state that housing affordability is not important in choosing a location, but their actions reveal that this is among the most important criteria in determining where to locate, particularly in the aftermath of the housing crash.

 

• Feel of the city: This measure includes not just how “urban” a city feels, but also its climate, diversity, arts and culture, opportunity for recreation, and entertainment and nightlife options. Employees often say that this is the most important factor in their location decision, though perhaps less important than specific job opportunities and affordability.

 

• Transportation: Many recent employees did not cite this factor as an important factor in their location decisions, but their actions indicated that the ease of automobile ownership, extensive and readily accessible public transportation, and short commutes increased employees likelihood of moving to or staying in a particular place.

 

• Strategic Partnerships: Beyond financing and employee retention, industry executives should choose locations where business development relationships are likely to aid expansion and commercialization of technologies. States like Ohio have developed a supply chain database to enable fuel cell companies to quickly source difficult-to-locate components and stay current on the latest improvements in materials technologies. In addition, locating in states with large end-user customers provides quick feedback from customers. Companies building PEM fuel cells often locate close to automakers fuel cell research divisions to ensure that technologies are quickly modified to meet major customers’ needs.

• Sites and Infrastructure: Fuel cell manufacturing facility needs are not very well defined at this point, given the startup nature of the industry. Nevertheless, several identifying features of recent fuel cell manufacturing plants are important for industry leaders to understand:

• Proximity to R&D Centers: Because of the quickly changing technologies involved in commercializing fuel cells, the closer R&D facilities are to manufacturing facilities, the more efficiently changes can be made to products. While some companies co-locate their facilities at one large location, others, like North Carolina-based Microcell located their R&D facilities in the Research Triangle to best retain their workforce, their manufacturing facility is located 100 miles away in Robersonville to minimize labor costs while maintaining proximity for quick production changes.

 

• On-Site Infrastructure: Manufacturing facilities from recent fuel cell expansions have ranged from 25,000 to over 100,000 square feet in size. These facilities have generally been located in flex space with some ability to maintain on-site offices. Other facilities have clean-room capabilities. All of the sites have basic on-site infrastructure, including very reliable electricity connections, available water and sewer capacity, and quick access to multimodal transportation (including railroad spurs in the  case of large, stationary fuel cell products moved by rail car).

Despite these general characteristics for manufacturing and R&D centers, several companies have developed more specialized and innovative manufacturing strategies. MTI Micro, a developer of Direct Methanol Fuel Cells for mobile devices, decided to outsource its manufacturing to Flextronics, an electronics manufacturing services provider. This partnership has allowed MTI Micro to focus on improving its technology while taking advantage of the manufacturing expertise and infrastructure of Flextronics. In contrast to the proximity between R&D Centers and manufacturing facilities enjoyed by most fuel cell companies, MTI Micro’s headquarters is in Albany, New York while Flextronics is utilizing its Product Introduction Center in San Jose, California for manufacturing. As fuel cell companies, particularly those entering the consumer electronics and mobile markets, commercialize their products, agreements of this nature may become more common.

Summary