Clean Diesel, Hydrogen Fuel Cell, or Electric? Volkswagen Chooses All of the Above

By Markets Fool.com

Thanks to massive expansion and a series of acquisitions, Volkswagen Group AG is one of the largest automakers in the world. But Volkswagen wants to be more than a gas car leader, and is investing big into alternative sources of power.

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But what should investors expect from Volkswagen and the millions of dollars being put into clean-diesel, hydrogen fuel-cell, and electric cars?

Clean diesel
In the United States, diesel cars are well in the minority, accounting for only about 3% of the market last year. But perhaps this should not be a surprise. For many Americans, "diesel cars" conjures up images of autos from the 1980s belching black smoke and smelling like trucks. Furthermore, gasoline in the U.S. is relatively cheap compared to what it costs in Europe, where diesel cars are far more popular.

To a large extent, European automakers, who already have experience working with diesel engines, are now turning to the U.S. with these enginesin hopes of attracting a new market of car buyers. This is a trend taking place at not only Volkswagen Group but also at BMW and Daimler-owned Mercedes-Benz. After all, today's diesels run cleaner than most Americans remember and come with gas mileage comparable to that of many hybrids.

Volkswagen Jetta TDI Clean Diesel. Source: Volkswagen.

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Unlike BMW and Mercedes-Benz, Volkswagen is much better positioned to attack the low end of the auto market with its clean diesel technology, due to its current price position. Currently, Volkswagen makes the Passat, Beetle, and Golf in clean diesel versions for the American market.

But there is potential for expansion here. While diesel sales make up only 3% of the U.S. auto market today, Diesel Technology Forum estimates this will rise to 8%-10% of the market by 2018.

Consumer acceptance appears to be a significant catalyst for growing sales. As more people buy diesel cars, more people will see these cars and recognize that they are not like the diesel cars of the 1980s. Already this has contributed to U.S. diesel car market share rising from about 1% in 2010 to the current 3% level.

Since Volkswagen has already been working with diesel engines for the European market, creating diesel cars for the U.S. does not require developing a new fuel technology but does let Volkswagen tap into a growing market. From this perspective, I see the clean diesel program as a very smart investment on Volkswagen's part, as it provides growth upside with limited development costs.

Besides Volkswagen, investors may also want to consider BMW and Daimler -- since both of these companies have extensive experience in clean diesel cars, it should give them an edge in the American clean diesel market.

Electric
Various types of electric vehicles are being developed across the industry, and Volkswagen is no exception. The automaker is now selling the e-Golf in the U.S. market, where it competes alongside such vehicles as the Nissan Leafand carries a starting price of $35,445.

So far, sales of the Volkswagen e-Golf have been small, with 357 units sold in the U.S.since the car's debut in October last year, and 181 units sold in January 2015.

But the e-Golf is more about developing new technology than trying to immediately sell large numbers of units.

Volkswagen e-Golf. Source: Volkswagen.

This allows Volkswagen to focus on developing EV technology through a small car before taking it to a larger scale with a full product line. However, Volkswagen is developing EV infrastructure in the meantime, showing a longer-term commitment to electric cars. Together with BMW, Volkswagen is planning to build up to 100 DC fast-charging electric car stations in the U.S.

With public EV charging stations much fewer in number than gas stations, building EV infrastructure could be just as important as the EVs themselves. The Volkswagen-BMW EV network gives both automakers a way to compete with the Supercharging network from Tesla Motorsand the California automaker's plans to dominate the EV market. Tesla has used the Supercharging network as a major selling point for its vehicles, and Volkswagen and BMW are eager to remain competitive by developing their own infrastructure.

Even though EVs are contributing a relatively small part of Volkswagen Group's total revenue, the market does have the potential for massive future expansion. By investing in an electric car, Volkswagen can develop its EV technology, and the investment in a charging network keeps the company more competitive with EV rivals such as Tesla.

Hydrogen fuel cell
It's rare to see a hydrogen fuel cell vehicle on the road today, and no manufacturer is selling such vehicles en masse yet. However, several automakers are experimenting with the technology, including Toyota, which plans to release its fuel cell-powered Toyota Mirai in California by mid-2015.

Not wanting to fall behind in this technology, Volkswagen has signed an exclusive agreement with Ballard Power Systems to use one of the company's patented technologies. It appears the technology will be deployed to Volkswagen's Audi brand, where a collaboration with Ballard led to the development of a hydrogen fuel cell-powered Audi A7.

Audi A7 h-tron. Source: Audi.

At this point, it's unclear how fuel cell development will affect Volkswagen financially, but it does appear to be a good strategic move. Volkswagen Group has long competed with General Motors and Toyota for the title of the world's largest automaker, and investing in hydrogen fuel cell vehicles is one way for Volkswagen to counter Toyota's Mirai and GM's fuel cell development and testing program.

With no Volkswagen fuel cell vehicles released yet, development of these vehicles is further behind than its electric vehicles, and much further behind its clean diesel ones. While fuel cell sales are likely to remain small even after their initial release because of the limited number of fuel stations and high initial price, investors should look for Volkswagen's first release of a fuel cell car to gauge development of this technology.

If fuel cell cars do become popular among car buyers, they could begin to take a decent share of the automotive market, and Volkswagen's fuel cell technology could prove advantageous in capturing this market. An important thing to remember here is that fuel cell vehicles do not need to be profitable from the beginning. Companies the size of Volkswagen, Toyota, and GM can afford to lose money on the first released cars in exchange for gathering information necessary to compete in the market in the long term.

New markets
One of the biggest threats facing large companies is companies with new technologies eating their lunch. But Volkswagen is making moves into clean diesel, electric, and hydrogen fuel cell cars to cover its bases on alternative power sources.

Right now, clean diesel is a growing market where Volkswagen's models are already paying off in capturing market share. At the same time, the automaker is developing EV infrastructure and hydrogen fuel cell technology in hopes of capturing market share in these emerging automotive markets.

Investors looking for an automotive company that is taking strategic positions in new technologies should see if Volkswagen is right for their portfolio.

The article Clean Diesel, Hydrogen Fuel Cell, or Electric? Volkswagen Chooses All of the Above originally appeared on Fool.com.

Alexander MacLennan owns shares of Tesla Motors and General Motors Class B and Class C warrants.The Motley Fool recommends General Motors, and Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.