Lex Letter from Seoul: hydrogen fuelled rally
Despite the hype, makers including Nikola are many months away from selling a single product
Dear readers,
Imagine an electric car that can be fully charged in less than five minutes. That is the promise of hydrogen fuel cells — though not everyone believes in the concept. Tesla’s Elon Musk has called the technology “mind-bogglingly stupid”. Many analysts agree. It is also years away from commercialisation. But that has not stopped investors from betting big on the sector. A safer route into the hydrogen fuel-car market can be found in Asia.
Both environmental campaigners and industries that operate vast bus and truck fleets have reason to be excited about the promise of green vehicles that produce water as a byproduct. Short refuelling times and longer ranges than battery-powered electric vehicles are major plus points.
In global markets, the highest hopes are being pinned on US electric truckmaker Nikola, whose shares are up 300 per cent this year. Makers of fuel cells that go into vehicles have also attracted new fund inflows, with shares of US-listed Plug Power gaining 250 per cent.
Yet despite the hype, makers including Nikola are many months away from selling a single product — let alone booking a profit. The latest boost to Nikola’s shares has come from a deal to sell a fleet of garbage trucks. But testing for the trucks will not start until 2022, and deliveries not until 2023.
In Asia, Hyundai and Toyota have a head start. The latter’s fuel-cell car Mirai was launched six years ago. An updated version is expected soon. Hyundai’s Nexo, its second-generation fuel-cell car, was launched last year.
The cost of development is steep for technology. But for the two companies, upfront costs have already been invested. Both Hyundai and Toyota have researched and developed fuel-cell cars for well more than a decade.
The pair’s ties with China help too. Beijing wants to boost adoption of fuel-cell vehicles by building hydrogen filling stations. It hopes to see 1m fuel-cell cars in action within the next decade. Hyundai plans to produce them commercially in its Chinese plant to meet the demand. Toyota has joint ventures with local carmakers to develop related technologies.
The biggest risk for investors is the uncertainty of time. How long will it take for the technology to become commercially viable? The market is still relatively small — worth about $2.5bn last year — and not everyone is optimistic about the expected scale of growth.
Nikola has a $15.5bn equity valuation and reported revenue of just $36,000 in the second quarter (made from solar installation services to the executive chairman). Shares have priced in the best scenario. Yet shares of Hyundai and Toyota, which are well hedged against a fuel-cell car flop with their portfolio of traditional petrol-powered cars, trade below book value.
Growing global efforts to reduce emissions and stricter fuel standards in China all point towards a future in which hydrogen-fuel cars have a shot at taking a share of the electric vehicle market currently dominated by battery-powered options.
But if Nikola’s frenzied investors are wrong about the company’s sky-high growth prospects, then Hyundai’s strong battery-powered offering and Toyota’s share in hybrids offer a more balanced exposure to the upside.
Enjoy the rest your week,
June Yoon
Lex writer