Technology Strategy for Honda Final Project

Executive Summary The inevitable oil shortage, the accompanying Middle Eastern crisis, and the state of the environment are all issues that are at the forefront of the public mind. Certain companies and products in the automotive space have capitalized on this public awareness by focusing on fuel efficiency, particularly Toyota and its Prius hybrid vehicle. The next technology poised to capture much of the market currently covered by hybrids and other fuel-efficient cars is hydrogen fuel cell powered vehicles. While hybrids and the like simply reduce things like harmful emissions and dependence on imported petroleum, hydrogen power has the ability to completely get rid of them. Hydrogen fuel can be produced from readily available products like natural gas and water, and when utilized in an automotive power application, the only emission is pure water. Honda is in a unique position to take the technological lead in the hydrogen fuel cell market. This is an area of research and development in which Honda has been investing heavily for some time. Their primary project so far has been the FCX Clarity vehicle. This is a hydrogen fuel cell powered car that is currently available for lease to selected residents of southern California. Seeing as the product is already in limited production, the project is rather far along in the development process. It is important for Honda to continue pushing this project forward towards mass production in order not to lose its first mover advantage in this market. Even if the Clarity must enter the market at a significantly higher price than competitors, consumers have shown through their enthusiasm for other environmentally friendly products that they are often willing to pay a higher price to purchase a product they see as promoting their personal values. The FCX Clarity, even selling at a loss, can be an important move in Hondas long-term

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strategy. Its success would pave the way for other complementary projects including the Home Energy Station and possibly a specialized government fleet vehicle, both of which would help recoup the companys huge research investment in the Clarity. Being the first to market with a reliable hydrogen powered vehicle would also cement Hondas reputation as a leader in developing both green technologies and economically efficient vehicles. This is a particularly important point after if missed an opportunity to do this when Toyota jumped to a position of market leadership in hybrid vehicles. Most importantly, however, is the fact that all automakers will eventually be forced to move away from products based around the consumption of petroleum. If Honda can take the lead this early in the development of alternative fuel vehicles, it bodes very well for their prospects of success in the very long term.

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Table of Contents Executive Summary ............................................................................................................ ii Section 0. Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. Section 7. Section 8. Section 9. Section 10. Section 11. Section 12. Section 13. Section 14. Section 15. Introduction - Project Description ................................................................ 1 Company Assessment ................................................................................... 2 Macroeconomic and Social Environment ..................................................... 5 Market/Demand Environment ...................................................................... 6 Technological Environment .......................................................................... 9 Competitive Environment ........................................................................... 13 Technology Intelligence.............................................................................. 14 Strategic Implications of Innovation Success Factors ................................ 17 Product/Market Strategy ............................................................................. 23 Technology/Collaboration Strategy ............................................................ 26 Project Selection/Intellectual Property Strategy ......................................... 29 Project Management Planning .................................................................... 32 Project Valuation and Financing-DCF Modeling ....................................... 35 Project Valuation and Financing-Modeling with Real Options .................. 37 References ................................................................................................... 40 Appendices .................................................................................................. 41

List of Figures Figure 1: Hondas Center of Gravity ............................................................................................. 4 Figure 2: Worldwide Consumption of Petroleum by Region 1984-2009 ...................................... 8 Figure 3: Schematic of a Fuel Cell ...............................................Error! Bookmark not defined. Figure 4: Block Diagram Showing Components in a Fuel Cell Vehicle. .................................... 11 Figure 5: Map of Hondas Competitive Environment ................................................................. 13 Figure 6: ISF Spreadsheet Importance-Advantage Matrix .......................................................... 17 Figure 7: Product-market penetration path for Hydrogen Fuel-Cell Vehicles ............................ 25 Figure 8: Probability of Success for Hondas Potential Projects ................................................. 30 Figure 9: Work Breakdown Structure for Hydrogen Fuel Cell Vehicles .................................... 32 Figure 10: Gantt chart for Hydrogen Fuel Cell Vehicles .............Error! Bookmark not defined.3 Figure 11: Unit Sales for the FCX Clarity, 2013-2020 ................................................................. 36 Figure 12: Cash Flow for the FCX Clarity project, 2013-2020 ...Error! Bookmark not defined. Figure 13: Options space map for three Honda projects............................................................... 38 Figure 14: DCF vs Real Option Analysis ..................................................................................... 39

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Section 0. Introduction - Project Description

Fuel cells have the ability to produce energy through the conversion of a fuel source. Using an electrolyte, these electrochemical cells can generate electricity through the reaction of an oxidant and a fuel. Because hydrogen is an extremely versatile energy carrier, it can be efficiently used to fuel such a reaction. By converting hydrogens chemical energy into electricity, it is possible to produce power up to three times as efficiently as that of traditional combustion reactions. Through the use of hydrogen fuel cells in vehicles, environmentally hazardous carbon emissions would be eliminated and fuel prices would be reduced. Honda Motor Company, Ltd. is currently investing a large amount of its recourses into the research and production of a hydrogen fuel cell powered automobile. Honda is headquartered in Tokyo, Japan and has assets in both the automotive and aviation industries worldwide. This publically traded company is run by CEO Takanobu Ito and Chairman Satoshi Aoki, and produces such products as automobiles, motorcycles, scooters, ATVs, electric generators, water pumps, various lawn and garden equipment, motors, and jet engines. The team consisting of Kyle Cappello, Luke Steensen, and Andy Couch will examine the role fuel cells will have in the creation of Hondas hydrogen powered car. We believe that the advances in fuel cell technology and the progress that has been made with Hondas HES IV home hydrogen production system will assist in making the production of such a car possible. As well, the universal readiness for cleaner and more fuel efficient vehicles, coupled with the United States desire to limit its dependence on foreign oil, will serve as catalysts for the eventual implementation of Hondas hydrogen car. 0.1 Technology Description With global consumption of gasoline increasing every year, and a peak in production occurring sometime in the next 10 years, the price to own and operate an internal combustion engine will steadily increase. At some point this increase will become unacceptable to the average individual consumer. Hydrogen powered vehicles provide an excellent alternative to internal combustion engine driven vehicles. Powered by hydrogen, the most abundant of elements, a vehicle employing a hydrogen fuel cell battery is more efficient than an internal combustion engine and it is clean burning, with water as the only product of operation. 0.2 Company developing the technology Honda, Minato-Ku, Japan, Public Ownership 0.3 Application(s) Hydrogen fuel cell powered vehicles will achieve their primary application in transportation; however the technology can also be extended to uses in power equipment (e.g. lawn mowers).

0.4 Significance The significance of such technology includes reducing global CO2 emissions, lowering the risks of global warming, reducing dependency on fossil fuels, and reducing risk associated with fluctuating gas prices. 0.5 Innovation Success Factors Achieving comparable refueling infrastructure relative to gasoline, making vehicles which can travel as far with one tank as internal combustion engines, getting price of unsubsidized hydrogen fuel comparable to that of gasoline

Section 1. Company Assessment

1.1 Companys business, key customers or markets. Environmental protection has become a growing concern in todays culture. One of the leading causes of environmental decay comes from the immense CO2 emissions from gas powered vehicles. Great strides have been made in an attempt to find ways to reduce the worlds dependency on fossil fuels, thereby decreasing these CO2 emissions and promoting a more stable and healthy environment. For more than a decade, automobile manufacturers have made advancements in finding ways to produce lower emission vehicles. In particular, Honda Motor Company Incorporated has had great success in this area. Headquartered in Tokyo, Japan, Honda is prominent in the fields of both automotive and aviation manufacturing. Currently, Honda is the largest manufacturer of motorcycles and internal combustion engines in the world. As well, the Honda Motor Company currently manufactures many hybrid electric automobiles and automobiles using compressed natural gas and flexible fuel. Honda is the second largest automobile manufacturer in Japan and the fourth largest automobile manufacturer in the United States and commands the market as the sixth overall largest automobile manufacturer in the world. The company yields its highest revenue from North America and has plants in thirteen countries. Hondas biggest competitors are General Motors, Ford, Chrysler, and Toyota, however in 2008 was the only company of the five that reported a yearend sales increase. Hondas main customer base is everyday people who want affordable, fuel efficient and long lasting products. 1.2 Analysts views of company's strengths, weaknesses, and future prospects.

Strengths Honda is one of the worlds largest manufacturers of light vehicles, specifically motorcycles and automobiles. Hondas key strengths include strong growth prospects, diverse product portfolios, extremely sound research and development and geographic diversification. At the end of fiscal year 2009, Honda was trading at a price/earnings (P/E) ratio of 39.87, which was significantly above the S&P 500 companies average of 9.2 (GlobalData). This indicates that Honda may have high growth prospects and that investors are expecting higher growth in the near-future. Hondas strong research and development (R&D) positions allow them to be an industry leader in developing innovative products. Strong R&D activities feed into Hondas large array of products. Honda is confident its broad product portfolio of motorcycles, automobiles, power 2

products and financial services, in combination with its geographic diversification, which includes 396 subsidiaries and 105 affiliates (Datamonitor), gives it an extremely strong market position relative to its primary competitors. Weaknesses Due to global economic downturn, instable currency rates and the lagging automobile market in the United States, Honda has witnessed low financial numbers in fiscal year 2009. The company saw a return on equity of just 3.4%, compared to the S&P 500 average of 12.9%, an operating margin of 1.89% versus an S&P 500 average of 14.7%, and a declining compounded annual growth rate for revenue of 3.72% relative to the S&P 500 average of 11.1% during 2005-2009 (GlobalData). These sluggish financial numbers, in addition to costly product recalls, lapses in product quality, and lower than industry competitor employee productivity spell out major weaknesses for Honda. Opportunities While the past couple of years during the global recession have hit Honda strong, the company is poised to make a roaring comeback. With the increasing outcry for more environmentally conscious vehicles, Honda will experience an ever increasing demand for its light hybrid vehicles. Riding this environmental awareness, Hondas development of Hydrogen powered vehicles will only strengthen Hondas market standing and will solidify Hondas position among its competitors as the most innovative and environmentally conscious. The recovery of the Auto Industry in general and a growing chorus of desire for small and mid-size cars will fuel Honda past its competitors who too strongly rely on large trucks and sport utility vehicle sales for revenue. In addition, emerging opportunities in Asian markets, specifically India and Thailand, where overcrowding and limited space have put a premium on the type of compact engine Honda specializes in, will help to boost Honda for the foreseeable future. Lastly, a growing robotics industry and Hondas superior R&D and engineering capabilities will help to allow Honda innovations to reach a peak inconceivable to its competitors. Self-Analysis Honda acknowledges the need to further achieve global growth mainly by strengthening its already superb small engine technology and making further strides in R&D. Strengthening innovation, creativity and continuing to make quality products crafted to customer specifications are a large part of achieving growth. Continuing to serve as a pioneer in environmental initiatives is also extremely important to Honda. Honda realizes that adverse market conditions can negatively impact growth, especially in concern to the prices for automobiles, motorcycles and power products and the price of fuel worldwide. Honda recognizes an especially strong susceptibility to currency fluctuations and the hedging of currency and interest rate risk exposes Honda to even more risk; however, Honda also is cognizant that future prospects for the company are particularly fortuitous. By strengthening R&D, increasing production efficiency and sales efficiency, improving product quality, continuing to develop and perfect safety technologies, improving on Hondas environment mission, and continuing to enhance Hondas social reputation and communication with the community, Honda is ensured to be an industry leader for years to come.

1.3

Companys technical strengths

1.3.1 Core Competencies Hondas worldwide strategy is based around their automotive and motorcycle industries. They are the largest manufacturer of motorcycles in the world and the second largest automaker in Japan (Hoovers). They also manufacture and market a large number of other products powered by internal combustion engines, including lawnmowers, generators, water pumps, snow blowers, and many more. 1.3.2 Center of Gravity Honda has a center of gravity that is split between product leadership and operational leadership. As one of the worlds leading automakers, the company spends a great deal of resources on research and development, allowing them to be very near the technical forefront in automotive technology. An example of this is the company Blue Energy, a joint venture between Honda Motors and GS Yuasa. Blue Energys purpose is to drive innovation in lithium-ion battery technology, in which Honda is very interested as the future of hybrid vehicles. Another result of being one of the largest automakers is the fact that Honda maintains a vast manufacturing network. Much of their success stems from their ability as a corporation to engineer, manufacture, and deliver their complex goods to consumers in an extremely cost efficient manner. This operational leadership in the industry allows them to offer quality products at a very economical price point, making them attractive to budget minded consumers. Figure 1: Hondas Center of Gravity
Honda Motors Center of Gravity Across Value Disciplines
Product Leadership

Customer Intimacy

Operational Leadership

1.3.3 Position of technology relative to the technological frontier Hydrogen fuel cell cars are a technology that is clearly pacing the industry. They are not yet available for purchase or mass produced, but companies are investing heavily in them and already producing working prototypes. Pending the resolution of certain obstacles, fuel cell technology is poised to take over a sizable share of the automotive market.

1.4 Level of commitment to the technology As a leading automotive manufacturer, Honda continually pushes the envelope of automotive technology. Its size and resources allow it to invest heavily in research and development, much of which has recently focused on green initiatives and reducing the emission of pollutants. With this in mind, Hondas commitment to the development and implementation of hydrogen powered vehicles is extremely high. Honda already offers leasing options for its FCX Clarity model. Hydrogen power is strongly connected to a successful future for Honda and with this realization; commitment to this technology is 100%. 1.5 Strategic implications Hondas unifying strengths lie in supplying their customers with high quality, environmentally conscious products. Hondas dedication to the environment, quality product assurance, global presence, and industry leading internal combustion engine standing make Honda the ideal corporate environment to continue the development of hydrogen powered vehicles. These strengths more than outweigh the challenges of developing infrastructure for hydrogen powered vehicles. Public support is with Honda in the development of hydrogen power and this support will yield large dividends once this technology comes to fruition.

Section 2. Macroeconomic and Social Environment

2.1 Crisis identification There has been an increasing concern for environmental preservation throughout the world. With this environmental awareness comes the need for cleaner vehicle fuel emissions. There is currently a public desire for automobiles that produce cleaner emissions and have better fuel economies. This desire along with the constantly declining abundance of petroleum has created a suitable market for the development and implementation of hydrogen fuel cells and vehicles powered by the energy these fuel cells produce. These fuel cell powered vehicles will not produce any exhaust, thereby combating the problem of harmful fuel emissions. Finally, hydrogen is in great supply and has the potential to be more cost efficient than current fossil fuels. Hydrogen fuel cells have the potential to replace the conventional means of energy production in vehicles. 2.2 Identification of innovation enablers or inhibitors Hydrogen power currently has broad and general support from the public at large. The potential disastrous effects of man-made global warming are factors that energy users can no longer ignore, and with the development of hydrogen powered automobiles, consumers have a viable option for purely clean energy transportation. Hydrogen offers a 20% increase in fuel efficiency, a 30% increase in range, a 40% reduction in the size of batteries and a 50% reduction in the weight of batteries. Current hydrogen technology allows a vehicle to travel 72 miles per one kilogram of hydrogen consumed and this hydrogen costs 5 to 10 dollars (US) per kilogram to manufacture. Hydrogen, as a long term fuel source, is virtually a limitless supply of clean fuel, and government tax credits ($12,000 for the purchase of a hydrogen powered vehicle) and research grants promise a 5

heavy handed force for allowing hydrogen power to one day become part of the solution to petroleum addiction and global warming. Unfortunately, there are still forces aligned against the further development of hydrogen technology. The cost to make a hydrogen powered vehicle ranges from $120,000-140,000 and currently the vehicles can only be leased for 3 years at $600 per month. Facilities to produce hydrogen do not currently have the capacity to supply hydrogen on a large scale for transportation and the refueling infrastructure needs heavy development in order to accommodate a national transportation network for hydrogen powered vehicles. 2.3 Timing The adoption of hydrogen fuel cell vehicles seems most likely to occur within the next 20-25 years. The crisis is clear and the public is well aware of its implications. The technology simply isnt yet to a level of cost efficiency that allows widespread adoption. Either there will be a breakthrough investment in hydrogen infrastructure and efficiency, or the declining supply of oil will put enough upward pressure on its price that it balloons above that of hydrogen. If the investment is not made soon enough, the more dramatic second scenario may well play out. The fact that the public is well aware of this means that as price inflation comes closer and closer to reality, more people will be in favor of making the investment in hydrogen. 2.4 Strategic implications To see the successful implementation of hydrogen power in the coming years, Honda needs to both take an internal and external approach in terms of strategic planning for widespread hydrogen power. Internally, Honda needs to continue the development process for decreasing the price of hydrogen powered vehicles. Improving overall vehicle efficiency and developing new processes for producing large quantities of hydrogen are also concerns of the utmost priority to Honda. Externally, Honda demonstrates a three-fold strategy for promoting hydrogen power. First, Honda must continue to lobby governments for tax incentives for hydrogen power. Honda must also work closely with governments and other corporations to increase infrastructure capacities for hydrogen vehicle transportation. Lastly, Honda must work closely with power suppliers to help with the proliferation of the use of off peak energy in the production of hydrogen by electrolytic methods.

Section 3. Market/Demand Environment

3.1 Primary market for this technology The primary market for Hondas hydrogen fuel cell powered cars consists of two types of consumers. The first type is everyday people who want a cheaper and more efficient means of travel. The second type consists of customers who will buy these vehicles for the purpose of saving the environment by cutting down on harmful vehicle emissions. The second group of consumers wanting a more environmentally friendly means of travel will be the easiest faction to market vehicles powered by hydrogen fuel cells to. In the sense of saving the environment and reducing dependency on foreign oil, a hydrogen

powered car will sell itself. People who already go out of their way to protect the environment, through such actions as recycling and driving smaller cars with better gas mileage, will act similarly for a fuel cell car. Moreover, if these consumers are willing to pay a little extra for cars such as Toyotas Prius, they should have no problem paying extra for a hydrogen powered vehicle produced by Honda. The first group of consumers wanting a cheaper and more efficient means of travel will be slightly harder to market a hydrogen powered car to than the previous group. The marketability of a more efficient means of travel will not be difficult, as inevitably a hydrogen powered vehicle will cut down on fuel prices. However, although drivers would get more miles per dollar spent in fuel, the overall cost of purchasing or leasing one of Hondas hydrogen powered vehicles would be much higher. Currently, a consumer can sign a three year lease for a Toyota Prius at about $450 per month, which works out to roughly to a little over $16,000. On the other hand, Hondas first consumer generation hydrogen powered car has an estimated three year lease of about $600 per month, working out to almost $22,000 for the three year period. That value is $6,000 more than the Prius. Currently, leasing Hondas hydrogen car is not very financially viable. However, if the MSRP to purchase the hydrogen vehicle stays close to the purchase price of a Prius or any other similar hybrid vehicle, then the estimated $12,000 tax credit will make Hondas vehicle much more marketable to the first group of consumers. 3.2 Market size According to the U.S. Department of Transportation Statistical Records Office, there are approximately 62 million registered vehicles in the United States. As well, the Department estimates that there are about 6.4 million unregistered vehicles in the U.S. that are still functioning. However, the initial market for hydrogen powered vehicles should be localized to Americans who currently own and operate hybrid vehicles. According to hybridownersofamerica.org, over half a million Americans currently own hybrid or highly fuel efficient cars. This is the key demographic for Hondas hydrogen powered car. 3.3 Technology's key benefits for this market

The primary benefit of hydrogen power to consumers is a reduction in gasoline consumption and the associated reduction in spending on that gas. Annual spending on gasoline in the United States is estimated at $2,208 ($184 per month) (Paskin 2010). Considering that the median household income in the U.S. in 2007 was $50,233 (Statistical Abstract of the U.S. 2010), gasoline consumption represents 4.4% of a familys total budget, a significant percentage when considered by most. This data was collected with the average price per gallon of gasoline hovering around $2.70 (U.S. Energy Information Administration). When considering the May 2008 average gas price of $4.10 per gallon and when extrapolating to a time when dwindling gas supplies will drive prices even higher, the percentage of a familys income they spend on fuel prices will become unacceptably high. Considering that some analysts see a production peak of petroleum occurring as soon as 2011 (Howden 2007), and with no change in worldwide consumption anticipated, consumption will surpass the markets production of gas, and prices will reach $100 a barrel. As the world pulls from the recession of the past few 7

years, gas consumption will certainly increase, especially in countries such as China and India, and as these countries have limited capacity to meet their own energy demands, they will put more of a demand on the global supply and prices will inevitably increase (see Figure below). The last benefit of hydrogen power will be that nations will reduce their imports on foreign oil, which can sometimes come from volatile regions of the world. Figure 2: Worldwide Consumption of Petroleum by Region 1984-2009

3.4 Pricing customer willingness to pay The price of cars varies widely, depending on many factors. Cheap used cars can be had for a few thousand dollars, while imported sports cars can run up to and well over a quarter of a million dollars. The primary concern for hydrogen vehicles will be how much consumers are willing to spend above a standard gas powered car. Fortunately, this is exactly the situation that hybrid cars have been in for the past few years. Manufacturers normally produce a standard and hybrid version of the same model, with the hybrid version commanding a significant premium. Comparing the MSRPs of hybrids from Ford, Honda, Toyota, and Lexus, they cost an average of 40% more than their standard counterparts. While this is a significant increase, consumers have shown that they are willing to pay it for the benefits that a hybrid car provides. Because hydrogen cars provide all the benefits of hybrids and more, this can safely be used as a measure of how much consumers will be willing to pay for them when they reach the market. 3.5 Triggers and barriers to adopting this technology

Triggers: From a consumer point of view, the adoption of hydrogen powered vehicles will be a pain free and simple process. With increasing gas prices, economies of scale

promising to drive the price of hydrogen vehicles down, and governments offering tax incentives for consumers to buy green vehicles and tax penalties for carbon producers, hydrogen powered vehicles hold quite an advantage over conventional internal combustion engines. Additionally, hydrogen powered vehicles are functionally equivalent to internal combustion engines. Unless a consumer is a mechanic, there will be no learning curve when it comes to adopting hydrogen vehicles. In terms of trialability, Honda already provides leasing and test driving options for hydrogen powered vehicles so that consumers can experience the vehicles for themselves. Lastly, hydrogen vehicles will provide better performance than internal combustion engines because of increased efficiency and zero emissions. Barriers: The primary barrier for the adoption of hydrogen powered vehicles is the lack of infrastructure needed to keep the vehicles running. This barrier represents three challenges. The first is encouraging companies and governments to install refueling infrastructure so that hydrogen powered vehicles are viable high mileage vehicles. The second occurs in the actual production of hydrogen as a fuel source. Honda would need to collaborate with multiple entities to ensure that hydrogen production eventually reaches levels comparable to the production of gasoline. Lastly, maintenance concerns play heavily into deliberations when a consumer is purchasing a vehicle. It is safe to assume the average mechanic in 2010 does not have the technical knowledge necessary to service a hydrogen vehicle. Honda, as part of its lease agreement with consumers who desire to lease hydrogen vehicles, includes maintenance of the vehicles at dealerships. Honda would need to aggressively expand its capacity to service hydrogen vehicles in order to make adoption of the vehicles feasible. 3.6 Strategic implications While the market for hydrogen cars seems to have great potential, it also poses some very distinct challenges. The technology is beneficial enough to capture a considerable market share, but it must first overcome the lack of existing infrastructure. Fuel cell cars have been proven to work and are out on public roads at this very moment. Building the cars themselves is no longer the primary difficulty. The simple fact is that these are cars that need to be refueled, and the hydrogen equivalent of the gas station exists in only a few small corners of the world. The general public will not buy a car that is a hassle to refuel. Hondas primary goal should be to address this issue. Once the infrastructure is in place, demand for the cars will begin to rise. This will allow the manufacturers to begin mass production, harnessing the economy of scale to lower the cost of the technology and cement its success.

Section 4. Technological Environment

4.1 Technology description A typical hydrogen fuel cell consists of two main parts: a membrane electrode assembly (MEA), which itself consists of an electrolytic membrane (ion exchange membrane), an electrode layer, and a diffusion layer, and a separator. The MEA is the powerhouse of the fuel cell. The reaction that generates electricity in the fuel cell occurs in the MEA. Hydrogen (H2) from storage tanks is spilt into hydrogen ions (H+) and electrons (e-) at the

hydrogen electrode. The electrolytic membrane is permeable to hydrogen ions, which diffuse through the membrane and react with oxygen (O2) at the oxygen electrode. The product of this reaction is water, and the electrons generated from the splitting of hydrogen pass through an external circuit, which generates energy used to power any device (car, laptop, etc.) that is connected to the circuit. The electrolytic membrane is made from an ionically conductive polymer layer that becomes charged when exposed to water, which enables the membrane to only be permeable to hydrogen ions. In addition, the electrolytic membrane serves to separate the feed hydrogen and oxygen gas and it functions as an electrical insulator. The electrode layer facilitates the re-oxidation reaction between hydrogen ions and oxygen with the use of a catalyst. The diffusion layer serves to evenly distribute diffused reactive gas over the electrode layer surface. In order to operate a fuel cell effectively, hydrogen and oxygen have to have paths with which to flow through without coming in contact with one another. Also, the generation of electricity in the fuel cell comes with an unavoidable generation of heat, which must be cooled by a coolant. The separator provides the different avenues by which hydrogen, oxygen and coolant can travel in the fuel cell without mixing. Lastly, the separator is an integral path for the electrical current generated by the MEA. Figure 3: Schematic of a Fuel Cell

For large power generation needs, multiple fuel cells are stacked in series, creating a fuel cell stack, abbreviated FC stack in schematic below. Supporting and complementary technologies include:

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Humidification system-water generated by the FC stack is reused to humidify air Power Control Unit-controls electrical systems Fuel cell cooling system-one fuel cell radiator and two drive train radiators are especially designed to cool fuel cell vehicles Drive train-consisting of a drive motor, transmission, and drive shaft Honda ultra-capacitor-delivers high-output assist during startup and acceleration and recovers energy generated from braking High-pressure hydrogen supply system Air supply system Refueling infrastructure

Figure 4: Block Diagram Showing Components in a Fuel Cell Vehicle

4.2 History of the technology from its inception The original thinking behind what is now known as a fuel cell was discovered in 1838 by German scientist Christian Friedrich Schnbein. In accordance with Schnbeins work, the first fuel cell was exhibited in the Philosophical Magazine and Journal of Science by Welsh scientist Sir William Robert Grove in 1839. Over a century later in 1955, General Electric chemist W. Thomas Grubb created a modified fuel cell using sulfonated polystyrene ion-exchange membrane as the electrolyte. The fuel cell was further developed in 1958 when Leonard Niedrach, another General Electric chemist, found a way to deposit platinum onto the membrane of the cell. The platinum was used as a catalyst for the hydrogen oxidation and oxygen reduction reactions. General Electric, along with NASA and McDonnell Aircraft, proceeded to develop this new technology, at the time known as the Grubb-Niedrach fuel cell. The Grubb-Niedrach fuel cell was subsequently used during the development the first commercial use of the fuel cell known as Project Gemini. Finally, in 1959 a 5 kW stationary fuel cell was created by British engineer Francis Thomas Bacon, making way for Harry Ihrig to build a 15kW fuel cell tractor that same year. This tractor was designed 11

for Allis-Chalmers and was taken across the United States to be demonstrated at state fairs and other expos. As well that year, Bacon helped lead a team in the creation of a 5 kW unit powered by fuel cells that had the ability to power a welding machine. Francis Thomas Bacons design was eventually patented a year later and was used to supply electricity and drinking water to the United States space program. Finally, United Technologies Corporation was the first company to actually manufacture a stationary fuel cell system, known as the PureCell 200 for commercial use. The primary use of this system was for use in hospitals and universities, as well as larger office buildings. 4.3 Comparison with alternative technological approaches Before the introduction of Hondas second generation hydrogen fuel cell powered car known as the FCX Clarity, there were many companies that developed similar technologies that made use of the fuel cell. For instance General Motors introduced the HyWire in 2002 and the HydroGen 4 in 2007. Likewise, Hyundai produced the Santa Fe FCEV in 2001 and Tucson FCEV in 2004. Other companies such as Mazda, Nissan, Toyota, Volkswagen, Ford, Chrysler, BMW, and Audi have also developed vehicles that were partially powered by fuel cells; however none of these vehicles were readily available for the consumer market. Although numerous companies have developed low emission and hybrid vehicles, Honda is one of the first to attempt to manufacture a fully hydrogen powered vehicle for consumer use. Currently, vehicles such as the Toyota Prius command the faction of the consumer market of energy efficient personal vehicles. However, if successfully developed and implemented, Hondas hydrogen car has the potential to take over. 4.4 Technological trajectory Before the introduction of Hondas second generation hydrogen fuel cell powered car known as the FCX Clarity, there were many companies that developed similar technologies that made use of the fuel cell. For instance General Motors introduced the HyWire in 2002 and the HydroGen 4 in 2007. Likewise, Hyundai produced the Santa Fe FCEV in 2001 and Tucson FCEV in 2004. Other companies such as Mazda, Nissan, Toyota, Volkswagen, Ford, Chrysler, BMW, and Audi have also developed vehicles that were partially powered by fuel cells; however none of these vehicles were readily available for the consumer market. Although numerous companies have developed low emission and hybrid vehicles, Honda is one of the first to attempt to manufacture a fully hydrogen powered vehicle for consumer use. Currently, vehicles such as the Toyota Prius command the faction of the consumer market of energy efficient personal vehicles. However, if successfully developed and implemented, Hondas hydrogen car has the potential to take over. 4.5 Implications for your technology strategy Hydrogen fuel cells are clearly a technology that the industry is well aware of and has been working on for some time. The widespread research and development on the subject by multiple companies shows that they each see what hydrogen has to offer and have decided that it is a beneficial and commercially viable technology. It also shows that it is only a matter of time before one company or another progresses the technology enough to release a product based on it to the mass market. Honda is currently the closest to

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reaching this goal, with its FCX Clarity already available to be leased to a small number of consumers. This lead is Hondas biggest advantage in the market for hydrogen fuel cells. If the company can maintain its commitment to the technology and keep on its current pace of innovation, it stands to be the first to market by a wide margin.

Section 5. Competitive Environment

5.1 Map of competitive space Figure 5: Map of Hondas Competitive Environment

5.2 Top competitors and basis of competition In the race to develop and produce a consumer brand hydrogen fuel cell powered car, Honda faces competition in two different categories. The first type of competition comes from companies that are currently producing fuel efficient cars, such as hybrids. On this level, Honda is primarily competing with Toyota and Ford. Although there are many other car manufacturers that produce hybrid vehicles, the three aforementioned companies represent the majority of the market. Hondas hydrogen powered vehicle would have to compete against such vehicles as the popular Toyota Prius and hybrid Ford Escape. These hybrid vehicles already have superior gas mileage and cleaner fuel emissions. While in the future a hydrogen powered car will be cheaper to buy and have less expensive fuel prices, for the time being and on initial production, the MSRP of Hondas hydrogen car will be very similar to that of hybrids that are already on the market. However, like Toyota and Ford, Honda already has a line of hybrid vehicles on the market, so the hydrogen car would not be standing alone against the Toyota and Ford

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competition. Honda would be adding its hydrogen car to its already thriving line of energy efficient vehicles. The second type of competition comes from the possibility and probability that other vehicle manufacturing companies will begin to produce their own hydrogen fuel cell cars once Honda begins production of its hydrogen car. The process behind hydrogen fuel cell power is not a secret, and it wouldnt be extremely difficult for other car companies to begin production of their own. Again, Toyota and Ford would eventually be able to produce hydrogen powered cars like Honda and would be competing on an almost identical level. Yet, Honda does have the advantage of possibly producing the first consumer hydrogen car. Honda has already examined and researched other products and services they must put in place if the hydrogen car is to sell. Honda has already begun the creation of public hydrogen refueling stations as well as home refueling stations. 5.3 Projected market share Hondas primary advantage at this point is its leading position on the technology. It is the only company that currently has a product available to the public, even if it is in very small quantities and only in a single location. This is a sign that they are preparing to widen their release and introduce many more markets. As long as they are the only manufacturer with a hydrogen powered car widely available, they will naturally have the entire market share. Over time, however, as more of the overall automobile market moves to hydrogen power and other companies release competing products, the market should take a similar shape to that of the current car market. Honda is currently the seventh automaker in the world based on worldwide sales revenue. This would likely be considerably higher in the hydrogen market, since Honda has already established itself as the market leader. The largest auto manufacturer, Toyota, holds approximately 16.4% of the market. It would be reasonable for Honda to expect at least that large of a share. 5.4 Strategic implications Hondas strategic position with regard to hydrogen vehicles looks extremely promising. Even though Honda currently has the leading position in the auto market for this technology, Honda still has some obstacles to overcome. Looking at the competitive environment for Hondas hydrogen powered vehicle, the largest hurdle is that suitable infrastructure must be developed to support large scale use of hydrogen vehicles. Secondly, hydrogen must become cost competitive with both biofuels and hybrid vehicles. As gasoline prices increase and the cost to make hydrogen vehicles decreases, this second goal will be realized.

Section 6. Technology Intelligence

6.1 Priority issues for intelligence collection We identified hydrogen production, refueling capacity/infrastructure, maintenance, reducing cost, safety, and feasibility as the main issues where further technology intelligence will help.

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6.2 Interview questions Hydrogen production- From your experience working with hydrogen, how soon can you see enough hydrogen being available for mass use of hydrogen powered vehicles? Refueling capacity/Infrastructure-Who do you see providing the majority of the funding necessary to expand the number of hydrogen refueling stations across the country? Do you think that hydrogen production for these cars should be centralized or distributed using systems like Honda's home hydrogen pump? Maintenance-Will it be difficult for your dealership to meet the maintenance demands of mass use of hydrogen powered vehicles? Reducing cost-Do you see research making strides in the reduction of cost in the manufacturing/processing of MEAs so that the overall price of hydrogen powered vehicles can be reduced? Will the government be able to offer tax incentives to help reduce the price of hydrogen powered vehicles? Safety- How safe is it to drive with hydrogen in a vehicle? Do you foresee any safety concerns with having hydrogen creation at home? Feasibility- Do you think that current owners of fuel efficient cars would be willing to make the switch to hydrogen power? What percentage of your custom base currently are customers wanting fuel efficient cars? How willing would you be to add a hydrogen car to your line up? 6.3 Potential sources Steve Brink Crest Honda, Nashville General Manager Email: steve.brink@cresthonda.net 615.256.5656 Dr. Giorgio Rizzoni Director, Center for Automotive Research 930 Kinnear Rd. Columbus, Ohio 43210 Phone: (614) 688-3856 Fax: (614) 688-4111 Email: Rizzoni.1@osu.edu Stephen Yurkovich Distance Education Director, Honda Partnership The Ohio State University 930 Kinnear Rd.

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Columbus, Ohio 43212 Phone: (614) 352-6605 Email: yurkovich.1@osu.edu Dr. Peter Pintauro H. Eugene McBrayer Professor of Chemical Engineering and Chair, Department of Chemical and Biomolecular Engineering Vanderbilt University VU Station B, Box 351604 Nashville, TN 37235-1304 Phone: (615) 343-3878 Fax: (615) 343-7951 Email: peter.pintauro@vanderbilt.edu Dr. Kane Jennings Associate Professor of Chemical and Biomolecular Engineering, Dept. of Chemical and Biomolecular Engineering Vanderbilt University VU Station B, Box 1604 Nashville, TN 37235 Phone: (615) 322-2707 Fax: (615) 343-7951 Email: kane.g.jennings@vanderbilt.edu Jack Cusick Assistant Principal Newport Harbor High School Current FCX Clarity lessee Email: jcusick@nmusd.us Phone: (949) 515-6352 Tim Brown Senior Scientist National Fuel Cell Research Center UC Irvine Tel: 949-824-199 x Fax: 949-824-7423 Email: tmb@nfcrc.uci.edu Stephen Ellis Alternative Fuel Manager American Honda Motor Co. +1.310.781.4451 stephen_ellis@ahm.honda.com 1919 Torrance Blvd Torrance, CA 90501-2746

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Section 7. Strategic Implications of Innovation Success Factors

7.1 Combined ISF Scoresheet Importance-Advantage Matrix After completing the combined ISF score sheet and importance-advantage matrix for Session 7, we have identified the six innovation and success factors that are most important for Hondas hydrogen fuel cell powered car. The following sections discuss the critical factors which include societal readiness, operational leadership, scale economies, access to complements, trialability, and scalability. The rationale and implications of each innovation and success factor will be discussed within each section. Although only the top six factors will be discussed, the graph found below (Figure 6) displays all of the contributing factors. As well, the completed ISF spreadsheet and importance-advantage matrix can be found on the Hydrogen Fuel Cell group page.

Figure 6: ISF Spreadsheet Importance-Advantage Matrix for Hondas Hydrogen Fuel Cell Car

7.2 Strategic implications of top 5-6 ISFs Section 1: Societal Readiness

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Societal Readiness is ranked high on both relative importance and relative advantage on the ISF spreadsheet for Hondas hydrogen fuel cell car, and can be found in Quadrant I (Figure 6). Societal readiness refers to the degree to which any given society is in need or desire of a given product or service. If societal readiness is low, a product or service will have a difficult time getting its foot in the door of a given market. For Hondas hydrogen fuel cell car, societal readiness deals with the extent to which the world needs a more fuel efficient vehicle. The green movement is in full force across the country and across the world. People are being more environmentally conscious than ever and welcome new ways to go about their everyday life in a more efficient and less-polluting manner. Hydrogen fuel cell cars fit right into this new culture. They produce only water a waste product, instead of the myriad toxic chemicals and carbon dioxide given off by conventional internal combustion engines. Their fuel, hydrogen, is one of the most basic and abundant elements on earth. It can be extracted relatively cheaply from water, not having to be imported from countries with questionable political motivations halfway across the world. These things are all huge advantages when presenting fuel cell cars to the general public. Slowly people, and more specifically Americans, are moving away from purchasing larger, gas guzzling vehicles, and are instead buying smaller, more environmentally friendly cars such as hybrids. Clearly consumers want vehicles with low emissions. Similarly, consumers desire lower fuel costs that coincide with owning hybrid and alternative fuel vehicles. Because the United States has been attempting to reduce its dependency on foreign oil, a vehicle that isnt powered by fossil fuels is preferable. Due to the yearn of consumers for cheaper fuel prices, more fuel efficient transportation, a limited dependency on foreign oil, and environmental protection, the societal readiness of Hondas hydrogen car ranks high on the importance and advantage scale and serves as an advantage for the company. Strategic Implications Due to the extent to which society and the general consumer market is ready for a hydrogen powered car, it is important for Honda to streamline the production of its fuel cell car as much as possible. Because people are already buying fuel efficient vehicles, the potential market for a hydrogen powered car already exists. More importantly, Honda must make sure that their technology is mature and reliable enough to live up to the expectations of the public. if they market their new fuel cell car as the savior of the energy crisis, but then it suffers from all kinds of reliability problems or isnt as efficient as they claimed, there could potentially be a huge backfire on the company and a loss of trust on the part of the public. Honda needs to market its hydrogen car to the faction of individuals who already drive fuel efficient vehicles. They need to advertise the car in a way that emphasizes the three areas of environmental protection, fuel efficiency, and low fuel costs. This is the same way in which hybrid vehicles are currently marketed and has proven to be a very successful marketing strategy. However, because hydrogen fuel is a fairly new and revolutionary concept in regard to personal transportation, Honda needs to explain the process behind hydrogen power to some extent through its advertising. Although there is a high societal readiness for a hydrogen powered car, Honda must be

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conscientious to the fact that there is the possibility that consumers might be wary of purchasing a vehicle that is so different from what they are used to. Yet, if implemented and marketed correctly, Hondas hydrogen fuel cell car has the potential to take over the already present market of fuel conscious consumers. Section 2: Operational Leadership Experience Curve Effects Operational Leadership is ranked high on both relative importance and relative advantage on the ISF spreadsheet for Hondas hydrogen fuel cell car, and can be found in Quadrant I (Figure 6). Operational leadership and the experience curve are particularly important factors for fuel cell technology. There really isnt any one that has been successfully mass producing this type of fuel cell for a long period of time. It is definitely a new technology that is fresh out of the research stage. This means that up to this point, the focus has been on proving that the technology is feasible and that it can attain a respectable level of efficiency. During this time, price of production has not been one of the main concerns. Now that these goals have been reached, however, it is important that the price of producing the technology drop significantly from where it has been in the research stage. If this cannot be accomplished, Honda will be condemned to selling the product for a price that is lower than their cost of production, simply to move them of dealership lots. This is obviously not a good situation for the company, which is looking not to lose more money, but to recoup all the money that they spent researching the technology behind these new vehicles. Now that the technology has matured to a level that it is useful in commercial applications, Honda can turn its attention towards lowering their cost of production. Strategic Implications Honda is again uniquely suited to take advantage of this factor. As a company with a huge manufacturing infrastructure and an enormous research and development budget, they certainly have to resources to make hydrogen fuel cells an easily mass produced commodity. While they may not have the specific machinery in place quite yet, they have a good deal of experience and success developing the technology, and they should be able to leverage this when coming up with ways to efficiently mass produce the technology. Once they do, they can take advantage of their worldwide supply chain and network of highly technical employees to drive down the cost of this component of the vehicles. Since they have already driven down the cost of all the other components of the car through their experience with other vehicles, this should leave their hydrogen fuel cell car as a very economical and affordable choice for consumers. When this is coupled with all the other factors previously discussed, Honda stands to be a market leader in alternative fuel vehicles. Section 3: Scale Economies

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Scale Economies is ranked high on relative advantage and low on relative importance on the ISF spreadsheet for Hondas hydrogen fuel cell car, and can be found in Quadrant II (Figure 6). Scale economies refer to the homogeneous nature of the market, where one product essentially fits all customers needs. For Honda, economies of scale play out in the development of fuel cells because fuel cells can be manufactured in the same way to fit in multiple applications. The current FCX Clarity vehicles that Honda leases out are estimated to be worth up to a million dollars each. This is obviously not a feasible price to sell these cars at in the future, so Honda must make an effort to bring the cost of production down. Luckily, this should happen very naturally. Much of the current cost of the cars is in the extensive research and development that has taken place to make them possible. Once the cars are being produced in higher volume, this cost will be spread out over a much larger number of vehicles and cease to be much of an issue. Another factor in the high cost of the current vehicles is that there are only twenty of them that have been produced and leased by select Californians. Compared to Hondas other lines of vehicles, this is an exceptionally tiny number. As Honda begins to ramp up production of these vehicles to a level on par with their other offerings, the cost of producing a single car will begin to drop towards a price point in the same range as other cars. The Clarity shares the vast majority of its parts in common with normal cars and should be able to rely on the same economies of scale that allow them to be sold at very reasonable prices. Strategic Implications Because economies of scale are technically before the proper time to be exploited, Honda must carefully plan how to implement them once the hydrogen economy really takes off. Honda needs to plan to compete in the large scale, homogeneous markets (automobiles, small engine applications, small scale power usage, etc.). This will allow Honda to exploit cost advantages and pursue high volumes of output to take advantage of scale effects. This cost advantage will help Honda to fend off niche competitors who narrowly focus their effort. Although hydrogen fuel cells are a completely new technology, they're still cars and have a huge amount in common with products that Honda is already successfully mass producing. Honda will need to consider one general fuel cell fabrication process, so that a single fuel cell offering (but not necessarily one single fuel cell) will meet the majority of customer needs and expectations. Honda should be sure to leverage the vast amount of resources it has for producing economically priced but high quality cars. The fact that these facilities and processes are already in place should allow Honda to rather seamlessly integrate them into the production of the new vehicles. Section 4: Access to Complements Access to Complements is ranked high on relative importance and low on relative advantage on the ISF spreadsheet for Hondas hydrogen fuel cell car, and can be found in Quadrant IV (Figure 6).

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The category of Access to Complements refers to the ability of a company to produce products that are needed for use with a given technology, in light of what is available to the competition. For Honda, these complements are the products that will be used in conjunction with the hydrogen fuel cell powered car. These complements are centralized to the two categories of public hydrogen refueling stations and personal home hydrogen refueling stations. Without the abundance of refueling stations, Hondas hydrogen car is impractical. According to Plug Powers Chief Marketing Officer Mark Sperry, Before fuel cell vehicles can have any significant market penetration, there will need to be a viable solution to the inevitable refueling question.1 Simply put, there will need to be hydrogen stations all over the country. However, it will not be necessary to have as many hydrogen stations as there are gas stations due to the increased fuel efficiency of hydrogen power. As well, there will also be the need for home refueling stations for these hydrogen cars. It is unlikely that there will be a lot of public hydrogen stations when Hondas hydrogen car is first made available to the public. For this reason it will be necessary for customers to be able to refuel their hydrogen cars at home. Honda will have an advantage over its competition if it is able to produce affordable home refueling stations as well as able to create public hydrogen stations around the country. Strategic Implications Honda has already begun research and development of a home hydrogen refueling station known as the HES IV, which uses a homes existing natural gas supply to produce hydrogen. The HES IV would also be able to heat ones home, in turn reducing CO2 emissions by up to thirty percent. The HES IV would also cut home energy costs in half. The development of this system gives Honda a huge advantage over its competition. Not only does the HES IV make owning a hydrogen powered vehicle more practical, it also serves as a cost effective energy solution for the home. Honda needs to make this product available to the public at the same time it releases its hydrogen fuel cell car. It is also vital for the HES IV system to be affordable for families. If the home refueling station is too expensive, consumers may not feel that it is financially plausible to purchase Hondas hydrogen car. Honda needs to make this system affordable in order to have an advantage over competitors. Aside from the HES IV home hydrogen refueling station, Honda also needs to speed up production of public hydrogen stations. Although it is important to have the ability to refuel at home, a consumer line hydrogen car would not be practical unless there are also public refueling stations spread throughout the country. In order to achieve this, Honda needs to partner with fuel companies. Implementing country wide hydrogen stations is out of the scope of Hondas resources. Therefore, partnering with a hydrogen production company is in Hondas best interest. If Honda improves its home refueling station and figures out a way to set up public refueling stations, it will instantly have an advantage over other its competition. Section 5: Trialability

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Trialability is ranked high on both relative importance and relative advantage on the ISF spreadsheet for Hondas hydrogen fuel cell car, and can be found in Quadrant I (Figure 6). Trialability can be defined as how easily the user can adopt the technology in stages or in trial applications. Before a new technology is released to the public, it is necessary to run trials on a smaller population to ensure a successful final release of the technology. Honda is currently conducting field research with a somewhat prototype version of its hydrogen powered car known as the FCX Clarity. Honda leased the Clarity to a small number of people residing in southern California. Honda will use the results and feedback from the Clarity owners to make improvements before the hydrogen car is released to the general public. It is clear that Honda has a trialability advantage over its competitors as it is already testing its hydrogen vehicle. Strategic Implications Because the FCX Clarity is already being tested, all Honda needs to do is complete the testing phase of the vehicle and generate feedback from the beta testers so it can make improvements on the model. This current testing phase gives Honda a huge advantage over its competitors. While some car companies are still in the research and development stages of the production of a hydrogen car, Honda already has a finished product to test. The testing of the Clarity is going so well that Honda Clarity drive Jack Cusick was quoted saying, Theyre going to have to break into my garage if they think theyre getting this car back in three years.2 On the other hand, in order for this trialability advantage to remain useful, Honda needs to speed up the creation of its HES IV home refueling system and public refueling stations. The hydrogen car will not be marketable without an effective refueling system at home and in public. The refueling stations need to be brought to the testing phase as soon as possible. If Honda gets its refueling stations to a trial phase, coupled with the current Clarity testing, it will generate a significant advantage over other its competition in the race to release of a hydrogen fuel cell car to the public. Section 6: Scalability Hydrogen fuel cells are ranked high on importance and high on advantage for the ISF: Scalability. This means that it is found in Quadrant I (Figure 6) and has a relatively high advantage. For a technology to be considered to have scalability, it must be able to be implemented at different size levels and still maintain peak performance. The technology must be easily scaled to size requirements for different applications. Hydrogen fuel cells possess a large range of applications with concern to scalability. Hydrogen fuel cells can be used in stack formation to power transportation vehicles, off-road vehicles, small engine

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devices such as weed-eaters, lawn mowers, and motorcycles; and fuel cells can be used individually for smaller applications, such as powering small electronics (e.g. laptops). Scalability is an important ISF because Honda already maintains quite a large market of small engine devices and has a relatively significant share of the automotive market. Strategic Implications Hydrogen fuel cells rank high in scalability for Honda because Honda already has products which different size fuel cell stacks could power. Scalability means that Honda needs to insert as many different products as possible into its product line which can be powered by fuel cells. By exploiting such a large array of applications for fuel cells, Honda will be able to start mass production of fuel cells, which will help to drive down unit cost and help to regain initial investments made. Also, by introducing so many products which use fuel cells as power sources, Honda will create quite a formidable barrier to preempt the entry of competition into the environment. It will be difficult for Ford or Toyota to compete with Honda on a size scale when they do not produce motorcycles, lawn mowers, etc. Section 7: Conclusion The above ISFs are by no means an exhaustive list of the important ISFs for the success of hydrogen fuel cells, but these are by far the most critical. Societal readiness, operational leadership, scale economies, access to complements, trialability, and scalability provide a bedrock foundation for Honda to implement a long term strategy for hydrogen power. This strategy and its outcome will lead to feast or famine for Honda as the automobile market transfers from internal combustion to green energy technologies; however, Honda is uniquely positioned to maximally benefit from hydrogen power and emerge as a long term market 800 pound gorilla for hydrogen power.

Section 8. Product/Market Strategy

8.1 Customer Value Proposition Hondas Hydrogen Fuel Cell powered car will give customers the unique experience of personal transportation that not only is fuel efficient and cheap but is environmentally friendly. Unlike standard fossil fuel powered vehicles, the hydrogen powered vehicle is not reliant on foreign oil. Moreover, Hondas hydrogen powered car can drive farther on less fuel, making it cheaper for consumers to commute. 8.2 Profit Model There are a few profit models that Honda could theoretically use to capture the full economic value of hydrogen fuel cell vehicles. The first would be to offer access to hydrogen vehicles through subscription based service. Honda does this currently with the leasing of the FCX Clarity. A second model could be based on the complementary products of hydrogen fuel cell vehicles and Hondas home solar hydrogen generating product. The coupling of these two products would give Honda a large competitive edge over those who do not offer a ready way to refuel hydrogen vehicles. The last and most

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feasible profit model for Honda to use would be the traditional profit model. Because of Hondas proprietary knowledge concerning small engines, scale economies, high entry cost to potential competitors and subsidies from the government for clean emission vehicles, this profit model would allow Honda to glean the most from hydrogen technology. 8.3 Product-market scope The product-market scope for Honda has to be focused on hydrogen availability. Because hydrogen vehicles are an extremely new technology, a new support system must be implemented for them. For example, hydrogen must be readily available to the public for use in these cars. As well, most mechanics will be unfamiliar with the functionality of hydrogen vehicles, so specialty hydrogen car support centers will need to be developed to coincide with these hydrogen cars. 8.4 Product family Hondas Hydrogen car opens the door for a variety of complementary products. Honda is currently in the process of creating a home hydrogen refueling station known as the HES IV. Honda also has the option of implementing public hydrogen refueling stations as a result of the hydrogen car. If the hydrogen car is successful in the consumer market, it can be assumed that Honda will release other hydrogen powered vehicles, such as different models of cars as well as trucks and SUVs. 8.5 Product development process When considering the product development process for hydrogen fuel cell vehicles, Honda would benefit more from a gate review approach in order to more appropriately address potential issues with the technology. Automobiles in general, and especially hydrogen powered vehicles, have a large number of safety regulations and quality standards. The gate review process would allow maximum time for Honda to meet these regulations and standards in a way that is beneficial to the consumer. A rapid prototyping process would not be feasible for Honda with regard to this technology because of the price of an automobile to the consumer, the necessity of the proper functioning of hydrogen vehicles and the aforementioned standards and regulations applying towards automobiles in general. 8.6 Lead user The main group of early adopters for hydrogen fuel cell cars will likely be people active in the environmental awareness movement. To these activists, the pollution-free car is a way to show that they care about the environment and remind others of the importance of reducing pollution. This group will be early adopters because their focus is on the environmental benefits of the car, not necessarily its economic benefit. This is important because at first the product will likely be more expensive than cars based on traditional technologies and the price of hydrogen fuel may still not provide significant savings over the price of gasoline. The lack of pollution, however, is an intrinsic value of the technology, so these people will be willing to pay a premium when the product is initially launched.

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8.7 Intelligence to capture from lead user In the case of this technology, there really isnt very much information that would be useful from the lead users. While their opinions of the car would be useful to designers and engineers of the other components of the car, the switch from internal combustion engine to hydrogen fuel cell should ideally be transparent to the user. They will still interact with their car in the same manner as before, which did not include any direct interaction with drivetrain components. The only time they might experience any difference is if the hydrogen drivetrain turns out to be less reliable and they have to take it in for service. Essentially, the only thing the company should survey lead users on is whether or not the fuel cells have introduced any problems in their experience with the car. 8.8 Product-market penetration path

Figure 7: Product-market penetration path for Hydrogen Fuel-Cell Vehicles Lead users of hydrogen vehicles will be environmentally conscious individuals who see it as a duty to lessen their carbon footprint, without much consideration for the price of the vehicle. Hydrogen vehicles will extend themselves as status items which wealthy individuals will buy instead of luxury internal combustion vehicles. Businesses who are seen as big polluters will adopt hydrogen so as to improve public perception. Finally, once hydrogen vehicles have reached cost parity with internal combustion vehicles, the general consumer, small/large business, and government will purchase so as to have an efficient, cheap, and environmentally conscious vehicle for day-to-day transportation.

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Section 9. Technology/Collaboration Strategy

9.1 Technological Scope

9.1.1 Technologies needed. Honda needs a few main technological domains in order to effectively implement its hydrogen fuel cell powered car. First off, Honda will obviously need a hydrogen powered engine. For this engine, the company has the two options of making the engine inhouse or subcontracting the engine design and construction to a company that primarily makes engines. Honda is a very large corporation, so implementing a hydrogen engine is most likely within the companys scope. On the other hand, hydrogen production is an area that is primarily unfamiliar to Honda. In order for the hydrogen car to be a feasible means of transportation, there must be a way to get hydrogen to fuel the cars. Honda will need to partner with a hydrogen production company to ensure that pure hydrogen is readily available in areas where the hydrogen cars will be used. Finally, there will need to be a way to refuel these hydrogen vehicles from home. Honda is already developing a home refueling system, but it will need to improve that system, or get help from energy companies, in order to finish it in time for the public release of the hydrogen car. 9.1.2 Technological strengths and gaps vs. needs It is definitely within Hondas capabilities to create a hydrogen powered engine. The sheer magnitude of the Honda Corporation and range of products it develops will allow the company to somewhat easily produce the hydrogen engine. As well, Honda has been producing cars throughout its existence, so creating a car around a hydrogen engine would not be difficult. The area that Honda does have a gap in is the production of pure hydrogen for use in these hydrogen cars. Pure hydrogen is an area foreign for Honda, so it will need to outsource this ability. In order to close the gap, the company will need to seek pure hydrogen from external sources. As well, Honda will also need to outsource the aspect of public hydrogen refueling stations to energy based companies. Honda currently does not have the ability to produce large scale hydrogen refueling stations, and overall this ability is far out of the scope of the company. 9.1.3 Pipeline (follow-on) technologies Although Honda is currently developing a home hydrogen refueling station, a more advanced home refueling station will most likely be produced after a couple years of hydrogen cars being on the public market. It is likely that as hydrogen cars begin to take over the automotive market, newer homes will be built with hydrogen refueling stations already in them. Along with home hydrogen refueling, Honda will definitely need to make improvements on its first generation hydrogen engine. The engine of the hydrogen cars initially produced by Honda will probably be simplistic and not very powerful. Overtime the company will need to make great improvements on its engine so that its hydrogen cars can go faster, be more fuel efficient, and generate more power. Although Honda is currently only in the testing phase for a hydrogen powered car, if this car is implemented effectively and becomes popular, the company will most likely eventually produce hydrogen fuel cell powered trucks and other vehicles. The success of the

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hydrogen car will open the doors to a wide range of other hydrogen powered vehicles, such as pickup trucks, eighteen wheelers, airplanes, etc. 9.2 Technology Commercialization Strategy In order to bring hydrogen fuel cell vehicles to market, Honda needs a diverse commercialization strategy that specifically addresses the weaknesses that Honda currently has with regard to hydrogen fuel cell vehicles, namely the mass production of hydrogen as a fuel source and the refueling capacity to keep hydrogen vehicles on the road for extended driving capability. Since Honda already has the infrastructure to mass produce vehicles and fuel cell technology is sufficient for mass commercialization, production and refueling are the two keystone issues that need to be addressed so that hydrogen vehicles can begin to be put on the road in large quantities. In order to address these issues, a hybrid commercialization strategy will be implemented that utilizes internal development, partnering and acquisitions. Internal development will be used in the capacity that Honda already has the ability to manufacture vehicles. A change for hydrogen vehicles for Honda is the introduction of home refueling stations powered by solar energy. In the beginning of consumer use of hydrogen vehicles, Honda will likely be able to produce home refueling stations in house; however, once hydrogen vehicles are in widespread use, Honda will need to outsource this facet of the hydrogen market. This introduces the partnering aspect of the commercialization strategy. For the production of the home refueling station, the partnering aspect will likely take the variation of Honda subcontracting out so that Hondas primary resources can be used for vehicles and marketing. Honda will also be able to use this strategy for the mass production of fuel cell stacks. For hydrogen production and refueling capacity on a large scale, Honda will need to form strategic alliances with utilities and oil companies who already have gasoline infrastructure that could be converted for hydrogen use. The last aspect of the commercialization strategy, acquisitions, is largely a hypothetical one at the moment. Acquisitions will enable Honda to capture innovative technologies that arise in the future that could benefit the overall hydrogen strategy. Examples of a possible acquisition for Honda include companies who develop new fuel cell complementary technologies (membranes, electrodes, etc.) and companies who provide innovative ways to supply large quantities of hydrogen or who develop technologies that improve the home production of hydrogen. Possible examples of these technologies include the biological production of hydrogen by bacteria, integrating hydrogen production into building designs and larger versions of Hondas already developed home generation equipment. The above hybrid commercialization strategy gives Honda a long term competitive advantage in the hydrogen market that will enable Honda to capture a large portion of the automobile market as well. 9.3 Collaboration Strategy

9.3.1 Capabilities sought The primary capabilities Honda should look for from collaborative arrangements are infrastructure technologies. Honda is very capable on its own to produce the vehicle, seeing as this is one of the companys core competencies. It has also shown that it has invested and researched enough that it is capable of producing the hydrogen fuel

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cell components without the help of an outside source. All that remains to accomplish to make sure that the product has a chance to succeed is ensuring that adequate infrastructure is in place. Primarily, this consists of hydrogen production capacity and hydrogen distribution infrastructure. These are definitely not areas of Hondas expertise, and therefore a good project to undertake with the help of a partner. 9.3.2 Prospective partners There are two primary types of companies that Honda should target for infrastructure partnerships. The first is utilities companies, specifically power companies. One of the simplest, most proven ways of generating hydrogen fit for use in fuel cells is electrolysis. This process uses electricity to split the hydrogen and oxygen found in ordinary water. Power companies could divert their excess capacity during off-peak hours and use it to run this process. Instead of having to build brand new facilities, they could just add on the minimal equipment necessary to carry out this process at their current power plants. The shortcoming of these companies, however, is that they really have no distribution infrastructure in place. Their current products are delivered through either wires or pipelines, so they have no need to maintain fleets of trucks or a network of distribution stations. This is where the second type of company, oil companies, would come in very useful. Since the goal of hydrogen is essentially to replace gasoline, it will have much of the same infrastructure requirements that gasoline current does. Oil companies are very experienced in meeting those requirements. They have a sophisticated distribution system to move fuel from the centralized production facilities, and they have a vast network of refueling centers across the world. While there will obviously be some differences in the way gasoline and hydrogen need to be stored and handled, the majority of the infrastructure will be the same. If oil companies can begin integrating hydrogen production and distribution alongside their existing gasoline offerings, the gap in convenience between the two fuel sources would close significantly. Since inconvenience is one of the main things holding back the widespread adoption of hydrogen vehicles, removing this issue would have a huge positive effect on the marketability of the product. 9.3.3 Partnership form The partnership between Honda and these companies would be most closely categorized as a strategic alliance. The companies will not be directly working together to develop a product or technology, but each needs to ensure that the other does its part. If the utilities and oil companies fail to provide an adequate hydrogen infrastructure, Hondas fuel cell offerings will likely fail. Conversely, if Honda fails to develop a desirable and practical hydrogen powered vehicle, no one will purchase them and the new infrastructure will have been a waste of resources. It is important that they both support each other, because they rely on each other for success in the hydrogen market. They will also have to collaborate on industry standards for hydrogen. They can work together to design a standard connection for refueling centers to ensure that everything is always compatible, and they can set the requirements for hydrogen tank pressure and other factors. If the companies can successfully partner and each accomplish their set of tasks, they will help ensure that theyre each successful in the coming hydrogen market.

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Section 10.Project Selection/Intellectual Property Strategy

10.1 Technology projects The first project that is pivotal to Hondas success in the hydrogen vehicle market is the continued development and improvement of Hondas flagship hydrogen car, the FCX Clarity. Projects are currently being conducted by Honda to decrease the overall weight, decrease cost of the fuel stacks, increase durability and lifetime of fuel cell membranes, optimize the Claritys Lithium ion battery, and increasing fuel efficiency of the Clarity. For the purposes of this report, these projects will be lumped together under the banner of continued development and improvement of the FCX Clarity. One of Hondas solutions to the lack of hydrogen infrastructure is a project called the Home Energy Station. Currently in its fourth generation of experimental use, the Home Energy Station is a unit that produces hydrogen from natural gas for use in vehicles like the FCX Clarity. The unit also has a cogeneration feature that allows it to produce electricity and heat water for household use. The combination of a FCX Clarity and Home Energy Station allows a household to reduce CO2 emissions by 30% and running costs by 50% when compared to a gasoline-powered vehicle and grid electricity. This project could also be developed as a supplement to the vehicle for the USPS. If a larger scale version of the Home Energy Station were developed for deployment at post offices across the country, there would be incredible benefits for both the USPS and for Honda. The USPS would have a very convenient way to cheaply refuel their fleet onsite and Honda would be able to tell potential customers that they have a capable hydrogen refueling station in every city in the country. Another project idea for Honda to consider is a specialized mail delivery vehicle for the United States Postal Service. If the government expressed interest in converting their existing fleet to a new model based on fuel cell technology, this would be a wonderful opportunity for Honda. The postal service would be a huge lead user and significantly more forgiving than normal consumers. They would likely sign a multi-year contract for a large number of vehicles and be more concerned with the overall scale economies than the individual user experiences with the vehicles. This means Honda wouldnt have to devote a huge amount of resources to design a luxurious vehicle, but could instead design a relatively simple vehicle to act as a testing platform for their fuel cell drivetrain. Also, the fact that there is a post office in every city in America would be a huge help in the push to expand hydrogen infrastructure across the country. 10.2 Project selection criteria Hondas selection criteria for the three projects started off by considering which ISFs were the most important for the full scale implementation of hydrogen fuel cell vehicles. In considering the essential ISFs, product leadership and access to specialized complements are two important ones to consider, and trialability is one which Honda always needs to keep in mind when developing high quality vehicles. These two ISFs led to the continued development of the FCX Clarity for product leadership and the natural gas home hydrogen generation equipment for access to specialized complements (hydrogen). Second, Honda considered projects that would result in products that are

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natural extensions of Hondas product and process pipeline. Going beyond trucks and SUVs, which Honda has ample capability and operational leadership to produce, more creative project ideas were considered that would allow Honda to address weaknesses in its technology strategy for hydrogen vehicles. This led to the idea for the development of a USPS delivery truck that Honda could contract with the US government to produce. This addresses the trialability ISF and generates an extremely important lead user who has the capacity to influence entire sectors of the automobile market. 10.3 Project scoring The project selection methodology given in the ISF scoresheet for project selection gave an extremely valid scoring of Hondas three potential products for hydrogen vehicles. Using the methodology, the FCX Clarity project ranked the highest, consistent with the need of Honda to fully develop a hydrogen vehicle to consumer expectations and demand. Next, because of the large need for refueling infrastructure, the natural gas generator project is the second most important project for Honda. The specialized mail delivery vehicle for the USPS ranked the lowest in importance because it does not mesh as well with Hondas corporate strategy. Overall Probability of Success

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Proj. 1: FCX Clarity Proj. 2: Natural Gas Proj. 3: Specialized Production Home Energy Station Mail Delivery Vehicle for USPS Project

Figure 8: Probability of Success for Hondas Potential Projects 10.4 Sourcing The FCX Clarity project has been developed in house and should remain that way. Honda is an extremely capable company when it comes to designing vehicles and has nothing to gain by bringing in outside help to do so. They only portion of the car that is not already

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one of their core competencies is the fuel cell, but their huge research and development capabilities have allowed them to take the lead on this technology regardless to whether or not it is a traditional strength of the company. The vehicle for the postal service should be developed in a similar fashion, except possibly with some design input on the part of the postal service. The Home Energy Station is slightly different. Honda has already partnered with a company called Plug Power to help develop this product. Plug Power develops and sells fuel cell alternatives to things like forklift batteries and backup generators. The Home Energy Station is much closer to their center of gravity, which makes them a valuable partner for that project. The combination of their experience with Hondas vast resources should help speed the completion of that project significantly and ensure that the final product is useful and efficient. 10.5 Results By using a project selection methodology that utilizes needed ISFs or ISFs in which Honda excels in, three project ideas were generated that have the capacity to allow Honda to grab a large slice of the hydrogen fuel cell vehicle and hydrogen generating markets. The three projects generated were the FCX Clarity, Natural Gas Home Hydrogen Generation equipment and the USPS hydrogen powered mail delivery vehicle. The only major issue that was not completely addressed was the implementation of a cross country hydrogen refueling infrastructure. However, Hondas strategy does include this issue because by selling trucks to the USPS, hydrogen refueling will be necessary to ensure mail is continually delivered. Since Post Offices reside in nearly all U.S. cities, this avenue provides a perfect incentive for a company to build hydrogen refueling infrastructure across the United States. 10.6 Intellectual property strategy Honda will need to take legal action in order to protect its hydrogen fuel cell powered car and home hydrogen refueling station from imitation. First, Honda will need to patent each individual component of the internal hydrogen energy system of its hydrogen vehicle. Next, the company should patent the car design as a whole, so that the vehicle itself is protected by a wall of patents. In the past, the use of patents with other vehicles and engines has proven very successful for Honda. Honda should continue to use its current patenting techniques with its hydrogen powered car. Hondas home hydrogen refueling station and hydrogen distribution techniques, such as the use of the Unites States Postal Service, is extremely important for the success of hydrogen vehicles as a whole. Maintaining a superior role in these two areas will significantly increase Hondas success. Again, Honda should patent each component of its home refueling system, and then patent the system as a whole, in order to protect the design by a wall of patents in the same way as the hydrogen car design. As well, Honda will need to patent the design and individual components of the USPS truck. If Honda uses patents correctly, the company should be able to maintain its control of the hydrogen vehicle and hydrogen refueling market.

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Section 11.Project Management Planning

11.1 Work Breakdown Structure

Figure 9: Work Breakdown Structure for Hydrogen Fuel Cell Vehicles

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11.2 Project Schedule

11/1/2010 12/31/2010 3/1/2011 4/30/2011 6/29/2011 8/28/2011 10/27/2011 12/26/2011 2/24/2012

Product Trials

HES Lab trials Completed Remaining Consumer ads

Business ads

Figure 10: Gantt chart for Hydrogen Fuel Cell Vehicles Our Gantt chart contains the three main activities necessary to complete our FCX Clarity project. The first is project trials, which have been ongoing for quite some time. The primary goal is to ensure that the car is sufficiently polished that there will be no issues when the car is released to the mass market. Towards this goal, we plan on continuing these trials up to the release date for the mass market. The next portion of the strategy is lab trials of the Home Energy Station. These have also been ongoing for some time, and seeing as the product is in its fourth iteration, we feel as though it should be ready for production within six months. Consumer marketing is the next activity, and we plan on starting this with an ad at the Super Bowl. Honda can afford it and this will guarantee a huge audience for the kickoff of the campaign for public awareness. Marketing to businesses, however, we plan on starting immediately. Large companies who may be interested in a fleet of efficient fuel cell vehicles will be interested in a more long term agreement, and it is not as important to impress them with a flashy TV commercial. Once we complete these four subtasks, we feel that our project will be well on its way to completion. 11.3 Project Budget The FCX Clarity project budget is largely comprised of the materials cost of the fuel cells and the advertising campaign. While the home refueling station is a part of the Clarity project, commercial utilization of the home refueling station is at least 5 years on the horizon and thus is considered as part of the general research and development budget for Honda. Thus, pricing below includes materials for the fuel cell and advertising expenses. The Department of Energys long term goal for hydrogen power is a cost of $35/kW produced. In 2009, DOE estimates put this number at $61/kW. Included in this number is the price of the platinum catalyst and the Nafion based proton exchange membrane. 33

Currently, the platinum represents a cost of $21/kW ($103/g) and the nafion accounts for a large percentage of the rest at $566/m2. The TV and advertising cost data and bullet format below were taken from the Nokia Clarity exemplary example. TV Advertising Duration: 15 weeks (12 weeks of advertisements after 3 weeks of production) Resources: Labor: Production: 2 marketing experts ($50/hr) 1 director ($30/hr) 40, media crew (equipment workers, editors, musicians, actors, designers) ($20/hr) Materials: Run time: $150,000/ national slot/ day Production of advertisement (rent of set, location, etc): $100,000 Cost estimate: Labor: Marketing experts: (2*$50)*40*15 = $60,000 Advertisement director: (1*$30)*40*3 = $3,600 Media crew: (40*$20)*40*3 = $96,000 Material: Run time: ($150,000)*84 = $12.6 Million Production of advertisement: $50,000 Total: $12.91 Million Internet Advertising Duration: 2 weeks for creating the advertisements and contacting sites, followed by 8 weeks of advertising on the websites Resources: Labor: 2 marketing experts ($50/hr) 4 designers ($20/hr) 2 multi-media artists ($30/hr) 2 programmers ($35/hr) Materials: Run time on websites: $60,000/day Cost estimate: Labor: Marketing manager: (2*$50)*40*10 = $40,000 Graphic designers: (4*$20)*40*2 = $6,400 Multi-media artists: (2*$30)*40*2 = $4,800 Programmers: (2*$35)*40*2 = $5,600 Material: Run time: (56*$60,000) = $3.36 Million Total: $3.42 Million

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Section 12.Project Valuation and Financing-DCF Modeling

12.1 Sources of capital Honda Motor Company is an incredibly large company, bringing in over $92 million in annual sales in 2010. One of the benefits of having so much money running through the company is that they have the capability to fund even expensive projects completely in house, and in the case of the FCX Clarity, this seems to be the best choice. Internal funding gives the project much more freedom and eliminates the expense of borrowing money. The Clarity project is also rather far along, so reaching out for some other type of funding really doesnt make sense at this point. 12.2 Pro forma financial statement Data Below is for the years 2013-2022 1. Your unit volume. 294,888 2. Your revenue. $920 million 3. Your industry share. In 2022, Honda will serve ~30% of the Fuel Cell Vehicle Market 4. Your average gross margin. ($30 million) -Clarity Project 5. The net present value (NPV) of your business ($750 million)-Influence from front loading R&D and capital expenses 12.3 Assumptions A variety of factors and situations were assumed when completing the finance pro forma for Hondas hydrogen fuel cell powered car. First, we determined that the hydrogen car would be put on the consumer market in 2015, and will continue to be leased in the trial stages in the preceding years. Second, we assumed that approximately 52,000 hydrogen cars will be initially sold in 2015 with a starting MSRP of 35,000 dollars per vehicle. Using current data, it was determined that the production cost of each hydrogen vehicle will be around 80,000 dollars when launched in 2015. With an experience curve of 10%, the production cost of each vehicle will drop to the 30,000 dollar range within a year, and will decrease further in years following. Next, we assumed that we would have 80% of the hydrogen vehicle market when the hydrogen car is released in 2015. The percent of market served by Honda will most likely drop by about 10% each year until it reaches a level of 30%, where it will level off. Next, we classified the served market as all fuel efficient vehicles. Initially, Hondas hydrogen car will only have one percent of the fuel efficient market. However, over time that percentage will grow to about 30% of the market. Other companies such as Toyota and Ford will begin taking over parts of the fuel efficient market with hydrogen vehicles once Honda releases its vehicle in 2015. Because of Hondas head start in production, trialability, and marketing, the company will retain a higher percentage of the market of hydrogen vehicles than its competitors. Yet over time, companies such as Toyota and Ford will have a similar percentage of the hydrogen vehicle market as Honda. Automobiles, on average, have a service life of approximately eight years, which would also apply to the hydrogen car. In order to make the discussed assumptions more accurate, it would be helpful to have more information in a couple of areas. First, it is necessary to know more about the

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progress of Hondas competitors in their own research and development of hydrogen powered vehicles. Second, further information on the experience curve factor of producing hydrogen vehicles would be helpful in determining the eventual production cost of each hydrogen car. Next, it was very hard to determine how much Honda is still investing in research and development. Because of the sheer size of the company, statistics on Hondas total research and development costs are available, but the costs for specific projects such as the hydrogen car are not. Finally, the use of hydrogen powered vehicles will most likely come with a tax credit from the government. However, because the car has not been fully released to the public, it is very hard to accurately determine this discount. 12.4 Results Based on the Pro Forma model, the FCX Clarity project has a high initial cost to Honda but in the long term meshes well with the overall corporate strategy of Honda. Oil reserves worldwide will eventually not be able to sustain internal combustion engines, and the Clarity project promises to inject a solution to this problem immediately. While fuel cells require a lot of initial capital to get off the ground running, they promise to be a star for Honda that can generate large amounts of revenue for years to come. In order to really see the Clarity project take-off, the cost per unit needs to decrease by approximately 50%. While the two figures below paint a less than desirable short-term picture for the Clarity project, Honda is confident that the long-term benefits will vastly outweigh the short-term losses. New, Aftermarket, and Total Unit Sales
7,000 6,000 5,000 Annual Sales (units) 4,000
New Unit Sales

3,000 2,000 1,000 0 2013 2014 2015 2016 2017 Year 2018 2019

Replacement Sales Total Unit Sales

2020

Figure 11: Unit Sales for the FCX Clarity, 2013-2020

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Annual Net Cash Flow

$0 2013 ($20,000,000) ($40,000,000) ($60,000,000) ($80,000,000) Net Cash Flow ($100,000,000) ($120,000,000) ($140,000,000) ($160,000,000) ($180,000,000) ($200,000,000) Year 2014 2015 2016 2017 2018 2019 2020 2021 2022

Figure 12: Cash Flow for the FCX Clarity project, 2013-2020

Section 13.Project Valuation and Financing-Modeling with Real Options

13.1 Nested projects For Honda to have a successful launch of it hydrogen fuel cell overall strategy, several projects are needed. The first, and the most important, is the FCX Clarity, Hondas fuel cell vehicle. By readjusting current manufacturing capacity and building new plants to build fuel cell stacks and lithium ion batteries, Honda can quickly transition from producing mainly small internal combustion engines to producing fuel cell vehicles. The next two projects are dependent on the success of the Clarity. The second project, the HES IV, Hondas home generation equipment for reforming natural gas to produce hydrogen fuel and heat and power homes, is a pivotal part of implementing Hondas worldwide goals of becoming environmentally sustainable while maintaining the highest possible quality in its products. With the success of the Clarity, consumers will need a ready source of hydrogen to fuel their vehicles, and Honda easily provides that option with the HES IV. Once the two previous projects have been successful, Honda will need to broaden its market scope and provide a base for a network of hydrogen refueling stations to be set up. This is where the third project comes into play, partnering with government entities such as the USPS and local and state law enforcement agencies to design hydrogen vehicles for their use and provide larger versions of the HES IV to generate fuel and serve as a refueling station. The success of this third project will open a large part of the consumer market up to Honda because it will allow people to see that a network of hydrogen refueling stations exist and that the technology works and is of the 37

utmost quality. The success of the second and third projects is strongly contingent on the success of the first project; however, the first project will rely on the second and third to provide revenue back to Honda because Honda will have had to get investments in order to implement the Clarity project. These three projects represent a nested project strategy for Honda that will hopefully lead to long-term entrenchment in the hydrogen market. 13.2 Options space map

Figure 13: Options space map for three Honda projects In the tomato garden above, the FCX Clarity project is in region 3 because it has a negative NPV but an NPVq greater than one. Although this options space map may not appear to be a traditional looking one, with project one being in region 1, this options space map still allows Honda to pursue the projects outlined in 13.1 because nesting the projects allows the success of the first to increase the success of the next two and the revenues from the last two coupled with less operating expenses for the last two allow investments that had to be taken out by Honda for the first project to be paid back. The HES IV project, # 2, has a lower volatility when compared to project 1 and thus is higher up in options space. Finally, the volatility for project 3 increases because of the interaction of Honda with the government, which is not a sure thing depending on the political climate, but this project is still in region 2 because the presumed success of the Clarity project will mean a higher success for the government partnering project.

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13.3 Option value calculation Project 1: FCX Clarity Project 2: HES IV Project 3: Branch out into government organizations NPV S X PVx Time NPVq t Call Value $ 11.3 mil $ 50 mil $ 57 mil $ 44.7 mil 5 years 1.12 0.78 $ 14.7 mil

NPV S X PVx Time NPVq t Call Value

-$ 747 mil $ 89.6 mil $ 100 mil $ 78.4 mil 5 years 1.14 0.78 $ 26.3 mil

NPV S X PVx Time NPVq t Call Value

$ 3.6 mil $ 29.7 $ 20 mil $ 17.3 mil 3 years 1.72 0.61 $ 8.7 mil

Figure 14: DCF vs Real Option Analysis Because all three projects are built on a common technology, the vast majority of the research and development expense is only encountered during the first project. Subsequent projects utilize this technology, but dont have to expend any resources to develop it. Real option analysis models this type of situation more accurately than DCF because it considers the projects as a group instead of looking at the profitability of each individually. The first project on its own would be extremely costly, but the revenues from projects two and three will help offset the extreme initial cost, especially since those projects will have very little upfront research and development costs themselves. the value of the real option of this combination of projects and compare it to the net present value using the DCF model. Tool: Real Option Value Calculator, under Lecture Notes and Files. Describe the assumptions behind the inputs and interpret the results. Incorporate your projects in your technology roadmap. 13.4 Improvement over traditional DCF analysis An enormous value of -732 million dollars is estimated for the total net present value when using only a simple DCF model to examine the projects of producing the FCX Clarity, creating and implementing the HES IV, and branching out into government organizations. However, if these projects are examined from a nested point of view and a

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real option calculation is performed a more realistic net present value can be estimated. Because all three of the projects are built on a common technology, the vast research and development expense is only encountered during the first project. Although the first project on its own if very costly, the revenues of the second and third projects help offset the first projects extreme initial cost. Because the real option analysis considers the three projects as a group, a net present value of 26.3 million dollars is estimated. This real option estimation is an extreme improvement over the standard DCF calculation by over 700 million dollars. Interview with Stephen Yurkovich This week we conducted an interview with Stephen Yurkovich who is the Director of Honda-OSU partnership program and Education Director of the Center for Automotive Research. The goal of the interview was the get some insight into the struggles Honda might face in producing and implementing a hydrogen car. We also sought information on the ability to produce a home refueling station for the hydrogen cars. Aside from talking in general about hydrogen vehicles and fuel efficiency, we asked Stephen Yurkovich two main questions. The first question was what do you see as the primary obstacle or obstacles to the widespread adoption of hydrogen vehicles? Mr. Yurkovich responded by explaining that without certain infrastructure in place, such as home and public refueling stations, a hydrogen car would have a tough time selling. The second main question asked was how might this problem of lack of infrastructure be resolved? Mr. Yurkovich stated that the market for hydrogen vehicles needs to mature as a whole. As well, he explained that a hydrogen powered car would be more widely accepted if Honda was able to effectively implement a home refueling station. Overall, the interview with Stephen Yurkovich was very helpful in expanding our understanding of the problems that Honda currently faces.

Section 14.References
Bluejay, Michael. Transportation Almanac. B.P., PLC. 2010. Statistical Review of World Energy, June. Cunningham, Wayne. 2010. Hondas fuel cell vehicle gets free energy, Cartech Blog. January. Datamonitor. 2010. Honda Motor Co., Ltd. SWOT Analysis. May. Pp. 1-10. Business Source Premier. GlobalData. 2010. Honda Motor Co., Ltd.-Financial and Strategic Analysis Review. September. Pp. 1-33. Onesource Grove, William Robert. "On Voltaic Series and the Combination of Gases by Platinum", Philosophical Magazine and Journal of Science vol. XIV (1839), pp 127-130 Honda FCX Clarity, http://www.hybridcars.com/hydrogen/honda-fcx-clarity-hydrogenhome-refueling.html

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Honda Motor Co., Ltd. 2010. Annual Report 2010 Howden, Daniel. 2007. World oil supplies are set to run out faster than expected, warn Scientists, June. Paskin, Janet. 2010. Our car addiction: Americans spent $5,477 on gas and auto last year. Can we really cut back?, June. Sanger, Kurt, and Kitaura, Takeshi. CEO lays out mid-term environmental plan: Deutsche Bank Group, 2010. Onesource Theyll Have to Break Into My Garage to Take My Honda Clarity Away, http://www.hydrogencarsnow.com/blog2/index.php/hydrogen-cars/theyll-have-to-breakinto-my-garage-to-take-my-honda-clarity-away/ (2010) U.S. Census Bureau. 2010. Statistical Abstract: The National Data Book. U.S. Energy Information Administration. 2010. U.S. Retail Gasoline Prices.

Appendix A: Contact Log Contact Method Date Results Team member Dr. Peter Pintauro Email 10-20-2010 Initial contact was attempted. No response to date. Andy

Contact Method Date Results Team member

Dr. G. Kane Jennings Email 10-20-2010 Initial contact was attempted. No response to date. Andy

Contact Method Date Results Team member

Yann Guillaume Guezennec Email 10-20-2010 Initial contact was attempted. No response to date. Kyle

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Contact Method Date Results Team member

Stephen Yurkovich Email 10-20-2010 Initial contact was attempted. No response to date. Luke

Contact Method Date Results Team member

Kane Jennings In person contact 11-05-2010 Initial contact during course scheduling. Andy

Contact Method Date Results Team member

Kane Jennings In person contact 11-29-10 Interview Conducted, Summary below Andy

Contact Method Date Results Team member

Stephen Yurkovich Email 11-22-2010, over Thanksgiving Break Interview Conducted over Email, Summary below Luke

Contact Method Date Results Team member

Yann Guillaume Guezennec Email 11-29-2010 Interview Conducted over Email, Summary below Kyle Expert Summaries

Stephen Yurkovich- Distance Education Director, Honda Partnership There has been a significant amount of research in recent years on the use of hydrogenpowered fuel cell systems for automotive applications. Virtually every major OEM has developed prototype vehicles, and Honda has even gone into limited production for specific markets and purposes. Nonetheless, it will be a number of years, perhaps even decades, before widespread use of the technology will make its way to market for 42

consumers. The most often-cited reason for this is the lack of infrastructure for hydrogen delivery and storage. That is, until investments are made in infrastructure for hydrogen refueling stations in a big way, vehicles will rely on internal combustion and electrification (battery technology) for advanced propulsion. But there are other reasons fuel cell technology is lagging behind battery technology for energy sources in vehicle propulsion system. For example, there are issues of weight, cost, reliability, applicability in a broad range of climate conditions, and range (relating to on-board hydrogen storage capabilities). Despite these challenges, major OEMs are still expending development dollars and engineering expertise toward the future in fuel cell technology for advanced propulsion. One thing is certain for the next quarter to half century: The solution to diminishing oil supplies and weaning the US from oil dependence will not be focused on any single technology (for example, not fuel cells alone). Rather, the solution will be a combination of several technologies, the most important being electrification of vehicles in hybrids and plug-in hybrids, into which fuel cell technology fits nicely (because, after all, the fuel cell is a power source for an on-board electric traction motor).
Yann Guillaume Guezennec- Professor, Mechanical & Aerospace Engineering, Ohio State

Kyle contacted Dr. Guezennec via e-mail and inquired about his views of the maturity of hydrogen fuel cells for automotive use and the prospects of the technology for the future. He responded that hydrogen fuel cells are actually a very old technology, but sat unused for almost one hundred and fifty years because science had not yet developed the means to effectively utilize them in practice. Fuel cells have shown great promise in recent years, however, which is why nearly every major auto manufacturer has invested in developing the technology for their vehicles. Fuel cells provide exceptionally good efficiency compared to everything else we use for energy conversion in this world, and that is one of the main reasons that many people have thought that fuel cells have the potential to provide a sustainable future. Despite all this promise, there are still some potential issues that need to be considered, with weight and cost being primary among these. Another issue to consider is that hydrogen as a fuel sounds very promising, but the hydrogen economy doesnt exist yet. These obstacles will definitely push back the adoption of hydrogen significantly, but they do not take away from its potential. In sufficient time, hydrogen fuel cell powered cars should prove to be an important part of the future of alternative fuels.
G. Kane Jennings- Professor, Chemical Engineering, Vanderbilt

The Jennings group mainly focuses on how to take fuel cell construction into a new generation. The usual construction of a fuel cell involves spraying the catalyst layer onto the membrane and pressing this together to make good electrical contact between the cathode and the anode. The Jennings group asks the question, Why is this the dominant design for fuel cells and how can the design be changed in such a way that allows for the overall cost of the fuel cell to decrease? They ask, If you design an interface, what would the ideal cathode look like? This area of fuel cell research is a niche that looks at the technical hurdles of fuel cell design in a different way. The researchs goal is to take the expensive catalysts in the fuel cell, which are currently not in ideal contact with the cathode, and utilize nanoporosity to help ramp up the current and amperage. This boosts

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power, reciprocity, reduces cost and decreases the required surface area of the polymer membrane and the amount of catalyst needed. This drastically reduces the cost of a fuel cell. Dr. Jennings sees the capacity to produce hydrogen as the main obstacle to fuel cell commercialization in the market. He also sees production capacity and the expense as obstacles that need to be overcome.

Appendix B: Technology Roadmap

Committed Limited Commitment Uncommitted (but in LRP) Uncommitted and not in LRP

Confidential Proprietary

Committed Limited Commitment Uncommitted (but in LRP) Uncommitted and not in LRP

Confidential Proprietary

44

Committed Limited Commitment Uncommitted (but in LRP) Uncommitted and not in LRP

Confidential Proprietary

Committed Limited Commitment Uncommitted (but in LRP) Uncommitted and not in LRP

Confidential Proprietary

45

Committed Limited Commitment Uncommitted (but in LRP) Uncommitted and not in LRP

Confidential Proprietary

Committed Limited Commitment Uncommitted (but in LRP) Uncommitted and not in LRP

Confidential Proprietary

46

Committed Limited Commitment Uncommitted (but in LRP) Uncommitted and not in LRP

Confidential Proprietary

Committed Limited Commitment Uncommitted (but in LRP) Uncommitted and not in LRP

Confidential Proprietary

47

Committed Limited Commitment Uncommitted (but in LRP) Uncommitted and not in LRP

Confidential Proprietary

48

Appendix C: Pro Formas

FCX Clarity

49

HES IV

50

Government Partnering

51

Appendix D: Real Option Calculation Spreadsheet

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