The Opportunity in Carbon Fiber Car Parts

The Opportunity in Carbon Fiber Car Parts

Carbon fiber car parts could provide important benefits for automakers. It's difficult to make gasoline powered engines significantly more efficient, and electric vehicles typically rely on heavy and expensive battery packs. Weight reduction could provide an easier way to make cars more efficient. A materials company that produces carbon fiber parts could gain share in a major market by helping automakers create lighter vehicles. Carbon fiber companies have noticed this opportunity, which has led them to partner with auto companies.

Mass decompounding
Replacing a steel part with a carbon fiber part can reduce a car's final weight by more than the difference between the two parts. According to the logic of mass decompounding, a lighter car requires a lighter suspension, which requires a smaller motor to accelerate. A series of part replacements could make a car much lighter.

This concept doesn't just affect the car's weight. If the automaker can replace several vehicle parts with smaller substitutes, then it could mean higher margins or a more price-competitive vehicle, which could be a major selling point for the carbon fiber companies.

The weight difference between a carbon fiber part and a standard steel part could increase in the future. The Department of Energy funds research on several lightweight materials, and carbon fiber composites could potentially provide more weight savings than other materials. Carbon fiber composites could eventually provide 50%-70% mass reduction, although the 30%-70% range for magnesium and the 30%-60% range for aluminum also show promise.

The carbon fiber market
Both the overall carbon fiber market and the market for carbon fiber in automobiles are expected to grow rapidly. The total demand for carbon fiber is expected to rise from 52,560 metric tonnes in 2013 to 102,460 metric tonnes in 2020. This figure includes all sources of demand for carbon fiber, including wind turbines and lightweight airplanes, and would entail a 10% compound annual growth rate.

Currently, the demand for carbon fiber in automobiles makes up a small fraction of the total market. Auto industry demand is expected to rise from 2,700 metric tonnes in 2011 to 5,600 metric tonnes in 2020, an 8.4% compound annual growth rate.

Carbon fiber is still relatively expensive to use in cars, so this growth rate could increase if technological breakthroughs make carbon fiber cheaper. Other estimates forecast higher demand for carbon fiber in the auto industry. An industry researcher predicted that demand could rise to 9,300 tons, or about 8,400 metric tonnes, by 2019.

Industry consolidation
A major acquisition just changed the landscape in the carbon fiber sector. The Japanese industrial conglomerate Toray Industries has just bought Zoltek for $584 million. With this deal, the industry has become more consolidated; indeed, the Zoltek acquisition follows another purchase by Toray Industries. In July, Toray Industries bought 20% of Plasan Carbon Composites, which makes carbon fiber reinforced auto parts. Zoltek announced that it was working with auto companies in its last earnings release before the acquisition, so Toray Industries has now bought two companies involved with the carbon fiber auto parts industry this year.

I thought that Zoltek presented a compelling investment opportunity, even at its high price, because of the potential of carbon fiber technology in the auto industry and other sectors. It looks like Toray Industries agreed with me, and this Japanese industrial conglomerate looks like it is clearly the leader in the carbon fiber industry right now. With that said, there may still be another opportunity to invest in this technology. Hexcel has also been working on carbon fiber auto parts.

The composite maker
Hexcel is primarily an aerospace company, so demand from airplane manufacturers like Boeing and Airbus drives this company's sales. An airplane can contain a lot more carbon fiber than a car, and airplane manufacturers can afford higher material prices than auto manufacturers. Hexcel provides carbon fiber parts for the 787 Dreamliner, although Toray Industries also supplies carbon fiber parts for this airplane. With that said, auto manufacturers have been adding Hexcel's materials to their vehicles.

Carbon fiber parts already appear in high-end supercars, such as Lamborghinis. Both the Murcielago and the Aventador include composite parts made by Hexcel. Lightweight parts can help a supercar accelerate very quickly and achieve other impressive feats. Of course, these cars aren't sold in large quantities.

Hexcel recently announced that its carbon fiber materials appear in the roof of the BMW M6 Gran Coupe. Although this vehicle model is new, this partnership has a longer history. BMW first asked Hexcel to make roofs for their cars 10 years ago. BMW also uses carbon fiber to produce the i3 electric vehicle, although the company formed a partnership with the SGL Group to work on this project. This mass-produced model shows that carbon fiber cars can be price competitive with more mainstream vehicles, as its price tag is below $50,000.

Hexcel has already demonstrated that carbon fiber parts can make a car perform better. The BMW i3 shows that carbon fiber parts can be cheap enough for mass production. Toray's acquisitions also bolster the case for investing in this market, as this conglomerate seems confident about the industry. Prices may need to come down further for wider adoption, but Hexcel will benefit from sales to companies like Boeing in the meantime. Note that Hexcel is highly regarded among Fools (it has a five-star CAPS rating), and a forward P/E of 18 is not that high for a company that owns a disruptive technology. Carbon fiber auto parts provide another reason for confidence in Hexcel's performance over the long term.

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