Inside The Numbers: Why Ford Won’t Lose its Shirt Building The Pricey New … – Forbes

Posted: Monday, November 10, 2014

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 Motor Co., and one-third of your business comes from gas-guzzling pickup trucks, you rip up the formula for your top seller and start over.

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.

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 25 mpg.

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