Automakers face a daunting regulatory challenge: tough new fuel-economy laws that require them to virtually double their fleetwide average to 54.5 miles per gallon by 2025.
How they’ll get there is still hazy. Tweaking engine performance with things like turbo-chargers, advanced transmissions and start-stop systems might get them to the first milepost, 34.1 mpg fleetwide by 2016. But the steep climb to 54.5 mpg by 2025 looks insurmountable without forcing consumers into high-priced electric cars they don’t want.
What’s a carmaker to do? If you’re
Ford completely overhauled its F-150 pickup for the 2015 model year, replacing the truck’s steel body panels with lightweight aluminum, and shedding 700 pounds in the process. The big question – did it move the needle on fuel economy? – remains unanswered for now. Ford hasn’t released the EPA-estimated mileage yet, but says mpg improved 5 percent to 20 percent. Today’s F-150 averages 19 mpg in combined city/highway driving, but under the new law, it needs to get 30.2 mpg by 2025.
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Still, it was a bold move; many would call it downright risky. The F-150 is Ford’s crown jewel, after all, the best-selling vehicle in America, worth some $30 billion in revenue and 40 percent of Ford’s annual profit. Tough guys who expect their beer cans, not their trucks, to be made of aluminum are wary. So are investors, who fear Ford’s margins will suffer by substituting higher-priced aluminum for relatively low-cost steel.
But a deep dive by FORBES into the economics behind Ford’s multi-billion-dollar gamble suggests the business case for aluminum is less risky than most people think. In fact, it may well turn out to be one of the smartest moves in the company’s 111-year history, establishing a new cost structure and giving Ford a huge lead over competitors, most of which are watching from the sidelines.
Yes, aluminum costs more than steel – at least three times as much – which is why it is typically used only on high-priced cars sold in small numbers. And it requires an entirely different manufacturing process because unlike steel, aluminum bodies can’t be easily welded. They must be riveted and bonded with adhesives, requiring new equipment, processes and suppliers.
The factory changeover has already put a dent in Ford’s finances. The company estimates it will lose 90,000 units of truck production this year while it guts and retools its F-150 factories in Dearborn, Mich., and Kansas City, Mo. At an average transaction price of $40,000, that’s $3.6 billion in lost revenue. Effects of the production ramp-up are likely to linger into early 2015, until both plants are fully operational again.
The Long View
Competitors are scratching their heads, wondering why Ford would choose such an expensive solution to the new regulatory challenge. “I’ve never heard anyone ask for an aluminum truck,” said Bob Hegbloom, president of Ram Trucks, a unit of Fiat Chrysler Automobiles. The Ram 1500 EcoDiesel, introduced earlier this year, is the reigning mileage champ at 28 mpg highway, 23 mpg in combined city/highway driving.
But Ford is looking further out on the horizon, with a plan to switch many of its largest (and most profitable) vehicles to lightweight aluminum. Given the tougher fuel economy rules and the limitations of other solutions, analysts say it’s only a matter of time before other automakers follow suit.
Anyone who has taken on a big home improvement project knows the tradeoff, says Phil Martens, chief executive of aluminum company Novelis. “At what point do you gut it vs. continuing to remodel it?”
Scrap Metal As Jewelry
In fact, Ford has been studying aluminum as an alternative to steel for 20 years. In the mid-1990s, it came very close to introducing an aluminum-bodied Ford Taurus, but the plan was scrapped on fears that consumers would balk at the $500 price differential.
Instead, Jaguar and Land Rover, Ford’s European luxury brands, became the guinea pigs. Jaguar introduced the aluminum XJ in 2003 followed by the XK in 2006, allowing Ford to try out its processes without betting the farm. By the time Ford sold Jaguar-Land Rover to Tata in 2008, the development work was far along. Still, at the price of aluminum, it was hard to justify the business case for a mainstream Ford model.
Alan Mulally brought a different perspective. The former
It was an epiphany of sorts that suddenly changed the business equation. If Ford could maintain its aluminum scrap in pristine condition and sell it back to its suppliers at favorable prices for re-processing, it could put a big chunk of its aluminum outlay back in its pocket.
Novelis, the world’s leading aluminum recycler, helped Ford develop an innovative closed-loop recycling system that FORBES estimates will save the automaker as much as $280 per truck.
Instead of gathering up all the mixed metal scraps in its stamping plants, Ford installed $60 million worth of pneumatic scrap-handling equipment from Ohio Compass Systems that separates the aluminum alloys on conveyors and deposits them in separate containers to avoid contamination by other grades of metal. Every 22 minutes, a trailer full of aluminum is filled and shipped back to Novelis or
It’s a sweet deal. Instead of the usual 15 cents per pound that scrap steel fetches, Ford will receive about $1.00 per pound for its aluminum scrap.
Metal Math
Here is FORBES' math, based on interviews with insiders at Ford, its suppliers, and multiple metal and automotive experts:
Aluminum is about three times lighter than steel. But because Ford had to use thicker sheet to maintain the same strength and handling characteristics of the old steel body, the replacement ratio is closer to 1.7. So Ford has to purchase about 855 pounds of aluminum sheet for each F-150, replacing 1,455 pounds of steel, according to Schultz.
Virgin aluminum prices vary on the London Metal Exchange, but currently run about $2,050 per metric ton, or 93 cents per pound. Add the required “Midwest premium” plus the cost of additional processing to transform it into coils of high-strength aluminum sheet and the total cost is about $2.19 per pound. Automotive steel, on the other hand, costs about 55 cents per pound.
In either case, when body panels are stamped, about one-third of the metal ends up as scrap. Thus, a net 575 pounds of aluminum replaces 975 pounds of steel. The net weight savings of 400 pounds costs Ford an extra $725 per truck.
Here’s where the recycling comes into play. By selling the shredded and segregated scrap back to its suppliers for about $1 per pound, Ford recovers about $280 per truck, narrowing that cost gap considerably.
What about the rest of the equation? Replacing the truck’s steel body panels with aluminum accounts for a little more than half the F-150’s 700-pound weight loss. Aluminum extrusions save an additional 50 pounds and a new high-strength steel frame saves 70 pounds. The rest comes from smaller engines and other lightweight components.
In fact, the switch to an aluminum body created a domino effect that freed Ford to make other once-unthinkable changes to the F-150, like a tiny-but-surprisingly powerful 2.7-liter Ecoboost engine option, smaller brakes and a lighter suspension, all of which were cheaper than previous versions and provided secondary weight benefits that further enhanced fuel economy.
More important, says Ford, there was no tradeoff in performance. The end result is a more efficient truck that’s 700 pounds lighter, and more capable, too, with a towing capacity of up to 12,200 pounds, best in the industry.
Rising Truck Prices
“When you start to peel it back, they’ve done a lot of really good things to de-risk this whole proposition,” says Novelis’ Martens, a former Ford executive.
The question is whether Ford can convince consumers to pay a little more for a more capable and efficient truck. The starting price of the 2015 XL model, $26,615, is less than $400 above the model it replaces, adjusting for new standard equipment. The top-of-the-line Platinum SuperCrew, will cost $52,155, or $3,055 more than its predecessor after adjusting for equipment.
With the success of its existing 3.5-liter Ecoboost V6 (almost 50 percent of all F-150s) Ford has already shown that consumers will pay for improved efficiency and premium features. The average transaction price on the current F-150 is just shy of $40,000. Luckily for Ford, its main rivals, Chevrolet and Ram, have new truck models that are fetching higher prices, too.
If truck prices stay firm, the long-term economics behind the aluminum F-150 could easily work in Ford’s favor.
Ford’s biggest worry, however, is whether its factories can ramp up quickly to an annual rate of 750,000 trucks a year. “Every unit lost, every day production is down for that vehicle, is catastrophic to revenue,” said one former Ford official. “We won’t really know how this plays at Ford until we see their margins a year from now,” added Schultz.
Chief Financial Officer Robert Shanks sought to reassure analysts on a recent conference call. “Everyone knows how profitable the F-150 is to the company…and we expect that to continue going forward. We’ve got lots of things planned on the F-150…that will be very exciting. Consumers are going to respond positively to that. And we expect it to be a huge success for us and to contribute very significantly to the bottom line.”
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