German luxury-car maker Audi AG and Korean automaker Hyundai (NASDAQOTH: HYMTF) are teaming up on what could become an important electric-vehicle technology: hydrogen fuel cells.
Under the deal, the two companies -- and their affiliates, including Audi owner Volkswagen AG (NASDAQOTH: VLKAY) and Hyundai partner Kia Motors -- will license key patents to one another and share access to fuel-cell parts, including the parts that Hyundai has developed for its current fuel-cell vehicles.
Here's what we know.
Hyundai has offered a fuel cell-powered version of its Tucson SUV in a few select markets. Its technology is considered fairly advanced. Image source: Hyundai.
What did Audi and Hyundai agree to do?
In separate statements, Audi and Hyundai said that they have agreed to cross-license patents and share access to "non-competitive components" related to hydrogen fuel cells. The two have also agreed to explore other, longer-term opportunities to collaborate on fuel-cell development and manufacturing.
Hyundai has had a fuel-cell vehicle in production for a while, and is in the process of launching a new one, an SUV called the Nexo. Under the deal, Audi -- and through Audi, all of the Volkswagen Group brands -- will now have some access to the fuel-cell technology and components that Hyundai developed for those vehicles.
What are fuel cells and why are they important?
Fuel cells are devices that chemically convert the energy in hydrogen gas to electricity. They're considered clean technology because their only "exhaust" is water vapor. Fuel-cell technology has been around for decades, but it's only recently that the costs have come down enough to potentially make the technology viable for mainstream vehicles.
Automakers are interested in fuel cells because can be used to power electric vehicles in place of a large battery pack. Fuel-cell vehicles are typically lighter in weight than battery-electric vehicles, and they can be "recharged" more quickly: A fuel-cell vehicle's hydrogen tank can be refilled in about the same time that it takes to fill an internal-combustion vehicle's gasoline tank.
It's unlikely that fuel cells will replace batteries in most mainstream consumer vehicles, but the weight and refueling advantages of fuel cells could make them important in some applications: heavy trucks, construction equipment, and first-responder vehicles, for instance.
Several automakers, including Hyundai, Toyota (NYSE: TM), and Honda (NYSE: HMC), have fuel-cell vehicles in limited production now. A few others, including General Motors (NYSE: GM), have said that they plan to bring one or more fuel-cell vehicles to market in the near future. (In fact, Honda and GM formed a fuel-cell joint venture of their own last year.)
Why is Audi doing this deal, rather than VW itself?
Audi has an advanced battery-electric development program under way, and it plans to launch a long-range battery-electric SUV later this year. But at least right now, it doesn't have a fuel-cell vehicle, though it has been working in that direction.
Audi will launch a long-range battery-electric SUV later this year. It hopes to follow that with a fuel cell-powered SUV around 2021. Image source: Audi AG.
Audi is a subsidiary of Volkswagen -- it's part of VW, but its engineering and production operations are somewhat independent of Volkswagen itself. A research and development team within Audi has taken on responsibility for fuel-cell development for the VW Group as a whole. That team has developed six generations of fuel cells over the past several years, though it hasn't yet put any of them into production.
That will change before long. Audi is developing a fuel cell-powered SUV that it plans to put into limited production in about 2021.
What do Audi and Hyundai get out of the deal?
Although the statements from the companies didn't quite spell this out, it's likely that Audi is paying Hyundai for access to its patents and some of its components in the near term. It's very possible that Audi's fuel-cell R&D team ran into a situation in which engineering around Hyundai's patents was more expensive than licensing them.
It's also possible that Audi had developed some technology that Hyundai found helpful. Longer term, if and when both automakers decide to put fuel-cell vehicles into mainstream production, both could benefit from cost reductions by sharing parts and manufacturing.
What does it mean for investors?
For auto investors generally, it's another sign that fuel cells haven't gone away. While battery-electric technology seems likely to be the primary technology for electric vehicles in the future, quite a few automakers seem convinced that fuel cells could still have a role in certain applications -- or at least, convinced enough to continue investing in the technology.
For investors in VW and Hyundai, the deal is a sign that both automakers are working to keep pace with fuel-cell technology, and to be ready if and when it becomes viable for mass-produced vehicles.
While there probably isn't much near-term profit potential here, we can think of deals like this as insurance against disruption -- and that's not a bad thing.
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