What Ford’s New Deal With Alcoa Means For The Company

Ford Motors’ (NYSE:F) F-150 series of trucks is the most important vehicle for the Detroit based company. The series is not only the company’s highest selling vehicle, but also its most profitable. Considering these facts, Ford still decided to shut down the two factories where the trucks are made in order to allow them to retool for the aluminum bodied 2015 version of the F-150. Ford’s sales suffered as a result and so did its profits. Ford invested close to $2 billion in the retooling of its Dearborn and Kansas City factories. But after months of downtime in its factories and a long drawn out release of its new vehicles, sales were down 7% compared to the previous year. ^[1] Over the quarter, F-150 sales were down 50% compared to the previous year according to the company’s management. ^[2] In fact, the company is having a completely atypical year. Normally, most of its profits come in the first half of the year, and the company introduces new models in the second half of the year. However, the company took this decision with the long term in mind.

We have a $15  price estimate for Ford, which is slightly higher than the current market price.

New Deal With Alcoa

Earlier this month, Ford announced a new deal with aluminum giant Alcoa to become the first auto maker to use an advanced aluminum alloy developed by the latter for its cars and trucks. ^[3] The new alloy was developed by a patented process Alcoa calls “Micromill” and is 30% stronger and at least 30% lighter than automotive-grade high-strength steel. ^[4] The alloy also has 40% greater formability than the current standard for the auto industry. ^[4] There are two major advantages of using this alloy in the manufacturing of vehicles:

1) Because the alloy is stronger than high-strength steel, auto makers can use thinner and lighter panels in their vehicles, which will be just as resistant to dents as the current body panels used in Ford’s F-150 trucks.

2) Because of its higher formability, it can be used to make body parts that are currently made from steel, thereby lowering the overall weight of the vehicle and improving its handling significantly.

What It Means For Ford

As regulatory standards regarding fuel economy and pollution standards get more and more stringent, auto makers are having to work extra hard on improving the fuel economy of their fleet. However, this could mean a trade-off between making vehicles more fuel efficient and reducing the quality of handling of the vehicles, which could affect their performance and thereby hurt sales significantly. As a result, any move that gives a company an edge over its competitors on these fronts is good for their sales. Moreover, lighter vehicles offer other advantages than fuel economy, such as the improved towing capacity of Ford’s new F-150 series of trucks.

Customers are pleased with the new version of Ford’s F-150 trucks. After several months of running on low inventory levels, inventories at dealerships are now approaching normal levels and sales of the trucks are growing. In August, F-150 sales grew by 5% on a year-over-year basis, contributing to a 6% overall increase in unit sales for Ford. ^[5]

All this bodes well for Ford, which plans to use the new alloy in manufacturing its 2016 version of the F-150 series of trucks. ^[4] That should also give the company significant insight into the performance of the alloy that the company can leverage in the manufacturing of its other vehicles.

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1. Ford Motor’s (F) CEO Mark Fields Discusses Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 2015 [↩]
2. Ref: 1 [↩]
3. Ford, Alcoa Collaborate on More Formable and Design-Friendly Next-Generation Aluminum Alloys, Alcoa.com, September 2015 [↩]
4. Ref: 2 [↩] [↩] [↩]
5. F-150 sales in August vindicate Ford’s pickup overhaul, Detroit Free Press, September 2015 [↩]