Ouyang Minggao, a professor at Tsinghua University in Beijing - China's equivalent of the Massachusetts Institute of Techology - and the director of China's National Laboratory of Automotive Safety and Energy, believes China has an edge, given its cheap and abundant research labor pool. He hopes China will be able to make breakthroughs in fuel-cell technology faster than developed countries, and enable such buses and cars to become a viable commercial option sooner.

"Now (the development of fuel-cell technology) is still labor intensive and Western high-tech labor still has a very high price. But we have the advantage of very low labor costs," Ouyang told Dow Jones Newswires in a recent interview.

Despite the advances made so far, the high cost of producing fuel cells as well as hydrogen remains a formidable barrier for any country aspiring to adopt the technology, experts point out.

Ouyang said China can now produce prototype fuel cells at about half the cost of those made in "foreign countries," and the cost could go as low as one- eighth. However, he didn't provide any specific figures.

Fuel cells, a type of battery that runs on hydrogen, are increasingly viewed as the ultimate long-term solution for powering vehicles, being not only environmentally friendly but helping to reduce reliance on crude oil. This makes fuel-cell vehicles an attractive option in China, as the country struggles with soaring oil consumption - with attendant heavy fuel costs given surgging oil prices - and suffers pollution effects from the rapid expansion of vehicles on the road in recent years.

Ouyang says China is also able to mass-produce cheaper buses. In China, a regular bus costs between $30,000 and $50,000, he said. In comparison, the cost could run up to 10 times that amount in the U.S., according to industry officials. That would be the scenario for fuel-cell buses as well, but no exact figures were available from industry officials.

DaimlerChrysler AG (DCX) is also planning to test fuel-cell buses next year in Beijing. Ouyang didn't say how much DaimlerChrysler's three vehicles cost, only that they were "very expensive."

Fuel-Cell Buses May Be Commercially Viable By 2010

Should the road trials for China-made fuel-cell buses go smoothly next year, Ouyang said he expects the buses could become commercially viable by 2010.

However, he doesn't see commercial fuel-cell cars being available until 2020 at the earliest, because more research and preparation for commercial readiness is required, such as setting up refueling stations for example.

Some industry experts believe that China's relatively low vehicle penetration to date and its relatively underdeveloped network of highways could make it easier for the country to build up an infrastructure for hydrogen refueling stations, compared with developed nations where a conventional working structure has long been established.

Given the long-term nature of fuel-cell technology, Ouyang said natural gas and diesel could be two main energy options for China in the meantime.

At present, there are more than 2,000 natural gas buses on the roads in Beijing, and given the relatively cheap natural gas availability in China, other cities are likely to follow suit, he said.

As for diesel, recent advances in technology mean that "no-emission" diesel engines will be introduced soon, he noted. China already has diesel buses that meet Euro 3 emission standards, a standard that will be imposed on Beijing next year, he added.

Ouyang hopes the use of diesel will become more widespread for cars as well as buses. Contrary to diesel's "dirty image," modern diesel-engine cars use between 10% and 25% less fuel than comparable-sized gasoline-engine cars, and are just as clean, if not cleaner, in some aspects, according to engine and auto experts.

"I think in three to five years, we will have a large-scale diesel market in China. Of course, this depends on the government's energy policy," he said.

China has long been considering imposing a fuel tax, and that may happen sooner than later, given soaring global oil prices.

"If the fuel tax is implemented, diesel car sales will go up very quickly...I think it will be implemented very soon," Ouyang said.