Is Ford Taking a Huge Risk in This Battle for the Automotive Industry?
The auto industry has seen its share of battles over the years. From the simple domestic rivalry between Ford and GM , to the industry's epic battle for survival during the credit crisis. Today, a new battle is brewing in the industry in light of our nation's drive to become more fuel efficient. This new battle pits aluminum against lighter weight steel.
There are rumors the next Ford F-150 will have an aluminum body, which would shave off about 700 pounds, or about 15% of its total body weight. The weight loss would be critical for the truck, as well as the Ford brand, to meet the new fuel-efficiency standards. The move is really an effort by Ford to get ahead of the curve as the move would equate to a 25% increase in fuel economy.
Fuel efficiency in the U.S. must reach 54.5 MPG by 2025. To reach this level, weight reduction will be critical, which is where aluminum could come into play. In fact, a recent study emerged that bodes well for aluminum producers like Alcoa , as it concluded that an all-aluminum body could reduce weight in some vehicles by 40%, which would enable MPG efficiency to increase by 14%. This type of initiative could see aluminum usage in autos double from 2008 to 2025. Alcoa sees big potential for its business as the company forecasts 10 times more North American Aluminum Body Sheet content per vehicle (in pounds) by 2025 from 2012 levels (from 14 to 136 pounds).
Both aluminum and steel desperately need the automotive sector's business. Steel has been a longtime supplier to the industry but has given way to aluminum recently due to manufacturers' focus on weight reduction as MPG efficiency standards have increased. While aluminum makes up a small portion of a car's total weight when compared to steel, the figure has grown from nearly nothing in only a few short years.
Steel will always have a place because it's critical for truck frames due to the heavy payloads they support. While Ford did look into an aluminum frame, it decided against the idea because so much more aluminum would be needed that it was cost prohibitive and didn't provide much weight reduction. That's one reason why United States Steel believes it will be a big winner due to its cost structure and ability to produce lighter, stronger steel products. The company is continuously researching and developing new grades and processes to better align with its customers' needs. That's why it believes it can fend off aluminum's assault.
In fact, Ford's chief domestic rival, GM, is taking a much different approach in it has decided to stick with steel for the body of its trucks. Instead, GM is focusing on improving engines and transmissions to reduce fuel consumption. It's also producing two different trucks, one focused on power and towing performance and a second smaller truck which will offer about 20% better gas mileage. While both versions will use aluminum, neither will do so to the extent of Ford.
The choice between aluminum and steel could make or break these two sets of rivals. Ford's decision to cover its next-generation F-150 with aluminum is a big risk, though that does mean its rewards are substantial as well. That could mean big things for investors in Ford's stock.
Ford isn't one to shy away from risks in search of great rewards. The biggest potential reward for automakers these days is capturing sales growth in China, which is already the world's largest auto market - and it's set to grow even bigger in coming years. In a Motley Fool special report, "2 Automakers to Buy for a Surging Chinese Market", we name two global giants poised to reap big gains that could drive big rewards for investors. Are you curious to see if Ford is one of those names? You can find out by reading this report right now for free - just click here for instant access.
The article Is Ford Taking a Huge Risk in This Battle for the Automotive Industry? originally appeared on Fool.com.Matt DiLallo has the following options: Long Jan 2014 $10 Calls on Ford and Short Jan 2014 $10 Puts on Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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.
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